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Advance pricing agreements - a strategic tool in global transfer pricing management.


The Internal Revenue Service's Advance Pricing Agreement (APA) Program was established in March 1991 to avoid transfer pricing disputes by entering into prospective agreements with taxpayers regarding their transfer pricing. In the 17 years of its existence, the APA Program has completed nearly 800 APAs and has evolved into the forum of choice for the most challenging transfer pricing issues. (1) The IRS completed 81 APAs during 2007, (2) and had an inventory of 249 APAs pending at various stages of development as of December 31, 2007. (3) Based on numerous public comments by taxpayers, practitioners, and tax officials from other countries, the APA process has been generally effective. (4)

Historically, taxpayers have chosen to pursue APAs to avoid transfer pricing uncertainty and freedom from exposure to double tax and penalties. More recently, U.S.-based multinational corporations have been motivated to pursue APAs to achieve certainty for financial reporting purposes. Further, greatly increased global enforcement efforts have encouraged both U.S.-based and non-U.S. based MNCs to pursue APAs to avoid examinations, or develop a representative arm's-length outcome on a fact pattern repeated in other countries (e.g., negotiate a bilateral APA for the MNC's distribution transactions that are similarly structured in other countries). The increase in demand for APAs is also reflected in the increased number of countries that have established APA programs--34 at current count. (5)

This article presents a comprehensive review of all aspects of the IRS APA process. Section II describes APAs and the IRS APA Program. Section III discusses taxpayer motivation to seek an APA. Section IV provides a detailed explanation of the IRS APA process, from considering whether to pursue an APA through APA renewal, including the roles of the participants.

APAs and the APA Program

A. APAs Generally

APAs are intended to resolve transfer pricing issues before they arise. An APA is an agreement between a taxpayer and the IRS in advance of the taxpayer transactions, in which the parties set forth the best transfer pricing method (TPM) to use for purposes of calculating and allocating the taxable income which arises as a result of the specified transactions. APAs help ensure that the taxpayer satisfies the requirements of section 482 of the Internal Revenue Code. Among other things, the APA formalizes an agreement to the facts surrounding the transactions to which it will apply, the TPM, the taxable years to which the APA will apply, and an arm's-length range of results.

B. Unilateral/Bilateral APAs

APAs may involve agreements with one or more foreign competent authorities under applicable income tax treaties. Such APAs are referred to as "bilateral" or "multilateral," as opposed to "unilateral" APAs that involve agreement only between the IRS and the taxpayer. Initially, only 50 percent of all APAs were bilateral; current statistics indicate that bilateral APA requests constitute more than 84 percent of the APA inventory. (6)

When mutual agreement procedures are available with respect to the foreign countries involved, the taxpayer must show sufficient justification for seeking a unilateral APA. (7) Although a unilateral APA with the United States may provide protection from U.S.-initiated adjustments and penalties, it provides no protection from foreign-initiated adjustments. The bilateral approach creates efficiency by involving both competent authorities in the negotiation from the outset. By working simultaneously with both tax authorities, taxpayers can remain involved in the process and assist the governments to reach an appropriate solution to the taxpayer's transfer pricing issues.

C. Rollback to Resolve Prior Tax Years

A"rollback" (i.e., application of the TPM developed in an APA to prior tax years not covered by the APA) is an effective means of addressing unresolved tax issues. It is IRS policy that, whenever feasible, the TPM used in the APA should be used to resolve transfer pricing issues for prior taxable years. (8) The IRS deems rollback appropriate where the business and economic conditions in the rollback years are consistent with those of the APA years. Rollback contemplates application of the TPM, comparable selection criteria, and financial adjustments to the rollback years, but not necessarily the application of the arm's-length range developed in the APA. The taxpayer may request a rollback at any time before completion of APA negotiations. Even without a taxpayer request, the IRS may determine that the approach agreed to in an APA should be applied to prior years. (9)

In seeking a bilateral APA, the taxpayer can resolve its open transfer pricing issues with all countries involved in a transaction. The IRS will consider a taxpayer rollback request of a bilateral APA to years under examination, as a request for accelerated competent authority assistance. (10) It will treat a rollback request of a bilateral APA to years before Appeals as a request for simultaneous Appeals competent authority consideration. (11) In either circumstance, the taxpayer resolves all of its transfer pricing issues in one forum on an accelerated basis.

Motivation to Seek an APA

The IRS established the APA process as a common-sense alternative to prolonged, expensive litigation, previously seen as the primary method for resolving transfer pricing disputes. The APA process provides a number of substantial benefits to taxpayers.

A. Certainty

The most important benefit provided by the APA process is certainty of tax treatment. This certainty extends to:

* Freedom from U.S. penalty;

* Freedom from U.S. adjustment;

* Adequacy of U.S. documentation;

* Freedom from double tax; Freedom from a finding of "material weakness" in internal controls; and

* Freedom from an uncertain tax provision.

The costs of transfer pricing uncertainty have risen dramatically in recent years. As transfer pricing examination activity in the United States has increased, the likelihood of a sustained adjustment and penalty have increased. The same is now true in other countries. Furthermore, Sarbanes-Oxley (12) and FIN 48 (13) compliance has created financial reporting exposure if the tax reporting for transfer pricing issues is not reliable. In combination, these developments have substantially increased the value of the certainty obtainable through the APA process.

In the APA process, the taxpayer and the IRS agree upon facts, the TPM, and an arm's-length range of results. If the taxpayer complies with the terms and conditions of the APA, the IRS will regard the results of the taxpayer's TPM as satisfying the arm's-length standard. (14) Further, any examination of transactions covered by the APA is limited to establishing the taxpayer's compliance with the APA. (15) Therefore, compliance with an APA protects taxpayers from transfer pricing adjustments and penalties.

An APA also addresses a taxpayer's uncertainty regarding transfer pricing recordkeeping. (16) Without an APA, a taxpayer may feel compelled to retain documentation that analyzes all possible TPMs to be certain of compliance with recordkeeping requirements and establish that its pricing approach complies with the arm's-length standard and best method rule, no matter which method the IRS may seek to impose. After the taxpayer and the IRS sign an APA, the taxpayer may realize immediate recordkeeping reductions because it is only required to support the TPM agreed to in the APA.

Another area of uncertainty that can be addressed through the APA process is the taxpayer's exposure to inconsistent treatment in other countries and the attendant risk of double taxation. (17) This certainty can only be provided through a bilateral APA. Therefore, it is not surprising that more than half of the completed APAs have been bilateral agreements and 84 percent of all pending APAs are bilateral in approach. (18)

B. Taxpayer Involvement in Competent Authority Negotiations

All U.S. income tax treaties contain a Mutual Agreement Provision (MAP) sometimes referred to as the "competent authority process" that encourages negotiations between the competent authorities to resolve disputes arising under the treaty, including transfer pricing disputes. (19) Taxpayers facing a proposed IRS transfer pricing adjustment may seek competent authority assistance to eliminate double taxation arising from a transfer pricing adjustment in a country that maintains an income tax treaty with the United States. (20) The MAP, essentially a government-to-government negotiation, provides the taxpayer with only a limited opportunity to present its views to the competent authorities.

In contrast, a bilateral APA allows taxpayers to actively participate in the development of the U.S. negotiating position. Even though the taxpayer is not present during the actual negotiations between the U.S. and foreign competent authorities, taxpayers remain in contact with both for purposes of assisting in the factual development of the case and providing the taxpayer's viewpoint regarding the TPMs and adjustments discussed.

The bilateral negotiation of an APA often takes less time than the MAP resolution of double tax cases for a number of reasons. First, in most countries, APA cases may be scheduled for negotiation without adherence to the quarterly or semiannual schedule for double tax cases. Second, the taxpayer prepares a well-documented APA request that includes nearly all information necessary to negotiate the case to its bilateral conclusion. Taxpayer involvement helps eliminate factual questions and misunderstandings. Third, the prospective nature of the APA case means that neither country will be required to give up revenue already received from the taxpayer. Thus, neither country is required to back away from adjustments its examiners spent substantial time and money to develop, except in the case where the taxpayer requests rollback of the APA approach to resolve prior tax years. In a case where rollback is considered, the prospective APA years are resolved first, and then rollback is considered.

C. Time and Cost Savings over a Transfer Pricing Examination Defense

Transfer pricing examinations are time consuming and expensive. During the examination, the IRS will use a variety of tools to obtain information from, and about, the taxpayer. It will request extensive information about the taxpayer and the related parties involved in transactions with the taxpayer. To the extent the taxpayer's responses fail to satisfy the IRS, it may issue formal document requests, summonses, designated summonses, and requests under section 6038A(e) to obtain information from foreign affiliates on summonses issued through the U.S. taxpayer. The IRS's use of some or all of these tools requires the taxpayer to expend significant time and money providing the IRS with great quantities of information, only some of which will ultimately be relevant to the taxpayer's transfer pricing issues.

Transfer pricing disputes involve complex factual and economic issues that require the application of subjective judgment. Poor communication with regard to subjective determinations can easily lead to confusion and hostility. Combining the confrontational approach inherent in an examination with poor communication can result in a bitter impasse between the IRS and the taxpayer.

The APA process is designed to avoid the confrontation inherent in an examination. Rather than beginning with a wide-ranging factual examination followed by aggressive pursuit of the largest possible adjustment, the APA process begins with the taxpayer describing its relevant operations and proposed transfer pricing methodology. The parties discuss areas that require factual development and agree on necessary information. The taxpayer and the IRS agree on a TPM, comparable companies, and adjustments. By focusing taxpayer and IRS efforts on the relevant facts and an appropriate methodology, the APA process minimizes the information that must be analyzed by both the taxpayer and the IRS. By doing so, the negotiations focus on the determination of an appropriate TPM and range of arm's-length results, rather than on a desired tax result. This cooperative approach can produce significant cost savings to both taxpayers and the IRS.

The APA process generally takes less time to complete than a transfer pricing examination and administrative review. An examination can last three to four years, with complex examinations continuing for longer periods. If the dispute leads to litigation, the matter may take over fifteen years to reach resolution. (21) In contrast, the IRS has set a goal of concluding unilateral APAs within 12 months, and also agreeing on the U.S. competent authority negotiating position for bilateral APAs within 12 months. (22) Although the APA Program has not been overly successful in meeting these goals, the time necessary to reach a unilateral APA was 16 months and the time to develop the U.S. competent authority negotiating position for a bilateral APA was 17 months in 2007. (23)

D. No need to update comparables during APA

An additional incentive for entering into an APA is the elimination of the need to annually update the comparability data used in preparing the taxpayer's transfer pricing penalty documentation. As previously discussed, taxpayers are generally required to maintain contemporaneous documentation to support their transfer prices. In preparing this documentation, taxpayers may, if their facts and circumstances have not materially changed, rely on a prior year's transfer pricing study. They must verify, however, that the comparable companies used in the report remain comparable, update the financial data of the comparable companies, perform all of the adjustments made in the initial report, and compare the results to the taxpayer's results for the year--a costly and time-consuming process.

An APA generally eliminates the need for comparable updates. (24) The APA generally sets a range of results for the entire term of the APA, usually five years. Rather than forcing taxpayers to annually update data from the comparable entities, the taxpayer need only compare its results to the range of results required by the APA. The cost of gathering and comparing the taxpayer's internal data to the range required by the APA is a fraction of the cost of annually updating transfer pricing documentation reports.

E. Rollback to Resolve Prior Tax Years

In some cases, the prospect of rolling back an APA-developed TPM to resolve prior tax years provides the greatest incentive for seeking an APA. Rolling back an APA to tax years under examination provides a cost-effective way to resolve an ongoing transfer pricing dispute. Taxpayers can resolve all open tax years as well as five prospective tax years in a single negotiation. For example, if XYZ Corporation's transfer pricing determinations are being examined for tax years 2003-2005 and the 2006 tax return is filed but not yet examined, XYZ could potentially negotiate an APA to cover tax years 2007-2011 and roll back the approach to resolve all the other open years, both those under examination and those not yet under examination. (25)

The APA Process

Revenue Procedure 2006-9 sets forth the procedures for obtaining an APA. (26) The APA process is designed to allow the IRS and a taxpayer to reach agreement on the best method and the proper application of the best method to the taxpayer's specific facts and circumstances. Taxpayers and the IRS reach prospective agreement regarding transfer pricing issues through a series of negotiations. For unilateral APAs, successful negotiations result in a binding agreement on the facts, a TPM, and a range of results. For bilateral APAs, successful negotiations result in an agreement on the same issues between the involved tax authorities.

The APA process can be broken down into five phases.

* Preparation and APA strategy;

* Pre-filing conference;

* Preparing and filing the APA request;

* Evaluating, negotiating, and drafting the APA; and

* Administration and renewal.

As the parties proceed through these phases, the discussions evolve from a general discussion of the taxpayer's industry and business to the specific transactions in question, through negotiations regarding the appropriate TPM and selection of comparable companies and adjustments to drafting, administering, and renewing the agreement.

A. Overall APA Strategy

1. Determine Taxpayer Goals for APA Process Taxpayers approach the APA process with a variety of goals. These goals overlap somewhat with the benefits of an APA, but the goals are more taxpayer-specific. To best achieve those goals, the goals must be identified and then ranked, bearing in mind that some taxpayer goals may be at odds with the government's goals. The following are some of the more common taxpayer goals for the APA process:
   Certainty. The APA process gives the taxpayer certainty from
   a number of tax and financial reporting perspectives.

   Simplicity of method. Simplicity of method may be an important
   goal for a taxpayer with multiple types and directions
   of cross-border transactions. If the taxpayer can demonstrate
   that a simplified approach produces results similar to those
   produced under a more sophisticated approach, governments
   will generally agree to the simplified approach.

   Speed. Many taxpayers are interested in an APA to avoid years
   of uncertainty while opposing governments examine and contest
   their transfer pricing determinations. The APA process
   was specifically designed to achieve a faster resolution than
   the successive examination, appeals, and competent authority
   processes. Taxpayers interested in a swift resolution should be
   clear with the IRS at the first meeting.

   Relief from double taxation. If the transfer pricing issue involves
   two industrialized countries, the tax differential is usually
   relatively small when compared to the risk of double taxation.
   The taxpayer is often actually indifferent about which
   country taxes the income, as long as that income is only taxed
   once. This "stakeholder" approach is understood by the governments,
   allowing the taxpayer to function almost as a neutral
   fact-finder for the involved governments.

   Specific tax result. Some taxpayers wish to achieve a specific
   tax result through an APA. This goal may be driven by a non-tax
   goal (e.g., repatriate all appropriate profits to the parent
   corporation, management compensation requirements), an interest
   in moving all appropriate income to a low tax jurisdiction,
   or to utilize expiring net operating losses. Governments
   generally resist specific tax results as a goal of APA
   negotiations, so obtaining this result is only possible if the
   taxpayer can clearly demonstrate the correctness of the desired

   Rehabilitate exam relationship. Because of the large dollar
   amounts at issue in transfer pricing disputes and the essentially
   factual nature of the issue, transfer pricing examinations
   have often produced bitter disagreements. The APA process
   has sometimes been used to rehabilitate the examination
   relationship through the cooperative APA process.

   Time and cost savings. Effective communication, narrowly-defined
   information disclosure, and the non-adversarial nature
   of the APA process produce time and cost savings for both
   the taxpayer and the IRS. The APA process greatly reduces the
   time spent by the IRS auditing and investigating transfer pricing

Any number of these goals may provide the incentive for the taxpayer to seek an APA. A clear understanding of the relative importance of goals and their impact on the negotiations will allow more effective preparation for the APA process.

2. The Taxpayer's APA Team

The APA process involves a series of negotiations between experts from different disciplines (legal, tax, accounting, economics) who possess varying degrees of familiarity with the taxpayer's facts. To establish credibility for the taxpayer's position and avoid confusion regarding the taxpayer's position on various points, it is important to clearly establish specific responsibility and authority within the taxpayer's APA team. The taxpayer's APA team usually includes both in-house personnel and outside representatives, depending on the capabilities and availability of in-house personnel.

Lead Negotiator: The lead negotiator is the general spokesperson and coordinator for the taxpayer's APA team. The lead negotiator delegates responsibility for specific issues to members of the taxpayer's APA team, but bears overall responsibility for the taxpayer's negotiating position. Because of the importance of knowledge about the APA process, the lead negotiator is often an outside representative with experience in the APA process.
   Tax Professional: Often, the lead negotiator also functions as the
   tax professional in the negotiations. The tax professional may be
   separate from the lead negotiator, based upon the complexity of the
   issues and the lead negotiator's familiarity with the taxpayer's

   Economic Professional: Generally, the responsibility for developing
   and defending the functional and risk analysis, the selection of
   the TPM, the selection of the comparables, and the adjustments to
   the comparables rests with the economic professional. Frequently,
   the economic professional is a Ph.D. economist with a solid
   background in transfer pricing and the industry involved and the
   strong communication skills necessary to explain complicated
   economic issues to non-economists.

   Factual Expert: The factual expert is responsible for educating the
   IRS APA team regarding the taxpayer's industry, organization, and
   transactions. In addition, the factual expert often obtains the
   information necessary to respond to subsequent factual inquires
   made by the IRS APA team. The factual expert generally is an
   in-house tax professional familiar with the transfer pricing
   decisions and the business reasons supporting those decisions.

3. The APA Negotiations

The negotiating approach employed in the APA process differs greatly from the adversarial approach often associated with the IRS examination process. The APA process employs a principled negotiation approach that requires a more open, cooperative style and requires more preparation than does an adversarial negotiation. The IRS's and taxpayer's APA teams are expected to take reasonable positions supported by objective standards. The taxpayer's APA team must be open to and respond to the IRS APA team's concerns and viewpoints. Ultimately, the APA approach is more efficient than the adversarial approach because information is more readily shared. The taxpayer's transfer pricing study forms the foundation for APA negotiations. The taxpayer's goal is to reach agreement with the IRS regarding an appropriate TPM and adjusted comparables.

4. Preparation of the Transfer Pricing Study

The transfer pricing study performed for an APA generally requires the same effort and expertise required in a "best method" study to support a taxpayer's transfer pricing determinations outside of the APA process. In fact, should the taxpayer and the IRS fail to conclude an APA, the transfer pricing study can, with minor adjustments, be used as documentation for the reasonableness of the taxpayer's transfer pricing determinations.

Where it is clear that the pricing methodology itself is expected to be the subject of considerable negotiations, it may not be advisable to complete the transfer pricing study before preliminary discussions with the IRS APA team. Instead, the taxpayer may wish to present a proposed methodology at a pre-filing conference (PFC) to ascertain the acceptability of that method to the IRS. In this way, a taxpayer can begin the APA process with a proposed methodology without the expense of defensively analyzing all other methods.

5. The Pre-Filing Conference

Before formally requesting an APA, a taxpayer may request one or more PFCs to explore, informally, the suitability of an APA for its own situation. These conferences clarify the information required by the IRS in considering the APA request. Discussions generally center on the taxpayer's business operations, past transfer pricing practices, and potential problems with the APA process. At the PFC, the taxpayer or its representative presents a proposed transfer pricing methodology and proposed parameters for the agreement, including the term of the APA, the parties to the APA, the transactions and businesses to be covered, and supporting documents. The IRS APA team needs to fully understand the facts to be able to give guidance that can speed the APA process. Taxpayers should take advantage of the PFC conference to determine what specific information should be included in their formal APA request.

a. PFC Submission

Before the PFC, the taxpayer provides APA officials with a written document outlining the issues to be discussed. As the PFC submission is usually the IRS APA team's first contact with the taxpayer, the taxpayer should treat the PFC submission as an important opportunity to make a favorable first impression. The PFC submission should be written in a non-adversarial fashion. It should explain the taxpayer's industry, corporate organization, transactions, and covered transactions. It should also set out the proposed TPM (and historic TPM, if different), the term of the proposed APA, the terms and conditions of its comparable search, and proposed adjustments. Finally, it should state whether the taxpayer requests a bilateral or uni lateral APA, and whether the taxpayer wishes to request rollback of the agreement to resolve prior tax years.

b. Named v. No-Name Basis

Recognizing that taxpayers may be hesitant to explore the possibility of an APA out of fear that if they do not go forward, their mere exploration of the possibility of an APA may trigger a transfer pricing examination, the IRS permits taxpayers to approach the PFC on a "no-name" or anonymous basis. If the taxpayer has been involved or is currently involved in a difficult transfer pricing examination, there may be some tactical advantage to pursuing the pre-filing conference on a no-name basis. When the taxpayer is not identified, there is no representative of the examination office at the pre-filing conference and the taxpayer can discuss the issues without the potential baggage of the earlier relationship with the examination team.

c. Taxpayer Role

In the PFC, the taxpayer provides an explanation of the relevant facts and proposed TPM. Typically, taxpayers use the PFC submission as a guideline for the PFC. The taxpayer explains the industry, the taxpayer's organization and marketing approach, the proposed covered transactions, proposed TPM (and the previous TPM, if different), comparable selection criteria, and proposed adjustments. Based on this presentation, the taxpayer requests the IRS APA Program's response to the proposed APA and recordkeeping requirements and any concerns or questions.

It is important that the taxpayer be represented at the PFC by persons familiar with the APA process as well as persons who have a command of the taxpayer's facts (generally someone from the taxpayer's organization). If the taxpayer intends to have a no-name PFC, taxpayer personnel may still attend.

d. Government Role

The IRS APA personnel read the PFC submission before the PFC to develop a familiarity with the taxpayer's facts and the proposed APA. The taxpayer's presentation at the conference further familiarizes the IRS APA representatives and allows them to ask general background questions. The IRS representatives can then specifically respond to the taxpayer's proposed APA regarding the acceptability of the TPM, comparable search criteria, adjustments, recordkeeping requirements, competent authority issues, and any other concerns.

6. Preparation and Filing of the APA Request

If the taxpayer decides to pursue an APA, the taxpayer submits a formal APA request, including the proposed TPM and the appropriate user fee. See Table I for information concerning fees.

The proposed TPM must follow the transfer pricing rules (i.e., be based on the arm's-length standard) and produce a range of reliable results. The taxpayer's proposed TPM should be supported by relevant data, including an economic analysis of the industry and the markets and countries to be covered by the APA. If the taxpayer proposes a transaction-based method, the analysis should identify the relevant transactions, the factors affecting comparability, and the necessary adjustments. If the taxpayer proposes a profits-based method, the analysis should identify uncontrolled businesses that are comparable or similar to the taxpayer's business in terms of economic activities performed, assets employed, and the economic costs and risk incurred.

If the PFC was successful, the taxpayer should have a good understanding of the IRS's reaction to the proposed APA and the areas of concern to the APA Program. With this information, the taxpayer can begin finalizing its formal APA request. The request must be filed no later than the filing date of the return for the first taxable year proposed to be covered by the APA. Taxpayers can meet that deadline by submitting the user fee only, but must submit the full request within 120 days. (30) User fees vary based on taxpayer size and a number of other variables. (See Table 1 above.) Each request must include the following information:

* Introductory information regarding the taxpayer;

* Representative financial and tax data of the parties;

* An explanation of the proposed TPM;

* Factual and legal items for all proposed TPMs; Specific items for a Cost Sharing Agreement; and

* Proposal and descriptions of any relevant critical assumptions. (31)

A full checklist of each the requirements needed for a complete APA submission can be found in Appendix A of this article. In addition, the taxpayer must supply any other information appropriate to determining the arm's-length basis of the proposed TPM (e.g., a functional analysis, an economic analysis of the industry, a list of the taxpayer's competitors, and an explanation of any adjustments made to comparables used to develop the proposed TPM). (32) When the APA involves a cost sharing arrangement, the taxpayer must show that it has followed the cost sharing regulations under section 482 and provide the information specifically required for a qualified cost sharing arrangement. (33)

The APA request must include copies of any documents related to the proposed TPM, properly labeled, indexed, and referenced. Any documents submitted in a foreign language must be translated into English. (34) The taxpayer must provide a detailed explanation and analysis of the TPM, and apply it to the three previous taxable years or, if historical data is not available, by projections to three hypothetical future years. If the taxpayer feels that the three-year period is not appropriate, the taxpayer must provide the analysis for what it considers an appropriate date range and explain why it chose the range. (35)

The APA request must propose a set of critical assumptions, the continued existence of which are material to the proposed TPM, (36) and propose a list of items to be included in the annual report filed for each year covered by the APA. (37)

The taxpayer must propose an initial term for the APA. (38) The initial term will vary with the facts of the taxpayer and its industry, but the IRS has generally agreed to a term of five years.

If the APA request seeks bilateral relief, the taxpayer must include a request for competent authority involvement in the APA process and identify the other country or countries that could be involved. (39)

Finally, the APA request must include a perjury statement, (40) signed by the taxpayer or the taxpayer's authorized representative. (4l) User fees, accompanied by an identifying cover letter that includes a justification of the fee amount, must be sent to:

Internal Revenue Service


P.O. Box 7604

Ben Franklin Station

Washington, D.C. 2004442

The fee payment may also be hand delivered to the drop box at the 12th Street entrance of 1111 Constitution Avenue, N.W., Washington, D.C. (43)

The original and eight copies (44) of the APA request must be mailed or delivered to:

Office of Associate Chief Counsel (International)

Advance Pricing Agreement Program

Attn: CC:INTL:APA; MA2-266

1111 Constitution Avenue, N.W.

Washington, D.C. 2022445

The APA Program office is physically located at: 799 9th Street, N.W., Washington, D.C. 20001. (46)

7. Taxpayer Disclosure and Update Obligations

Any information submitted by a taxpayer must be true, correct, and accurate. If the APA Program determines that it needs additional information to analyze the APA request, the APA Program may require the taxpayer to provide the needed information. (47) Additionally, the taxpayer has an obligation to update, on a timely basis, all material facts and information that it submits in connection with an APA request. While a request is pending, and after an APA is executed, a taxpayer is under a continuing duty to timely supplement its disclosures if the information provided in connection with an APA request was false, incorrect, or incomplete in a material manner. (48) If the taxpayer discovers such an error or omission after the APA is executed, the taxpayer must disclose the error or omission in its next-filed annual report. (49)

While the APA request is pending, the taxpayer should be prepared to update the financial data for the selected comparables as new or revised data becomes available. (50) For example, if a taxable year is completed while the request is pending, the taxpayer should be prepared to update its APA submission by demonstrating the application of the proposed TPM to the taxpayer's actual financial results for that year. (51)

Failure by a taxpayer to provide all materials required in its APA request, or requested by the APA Program while the request is pending, can cause significant delays in case processing and may result in rejection of the APA. (52)

8. Evaluation, Negotiation, and Drafting

Within 45 days after the APA Program receives the formal APA request, the IRS assembles a multi-functional team to evaluate the taxpayer's proposal. (53) Within 60 days after receipt of the request, the IRS APA team is expected to meet with the taxpayer to agree on a case plan. Generally, the IRS APA team uses this first post-filing meeting to advise the taxpayer of its remaining concerns and questions. The parties discuss these concerns and questions and agree on the additional information to be provided. After the APA team receives the additional information from the taxpayer, it evaluates the information, focusing on determining the appropriate transfer pricing methodology and an acceptable range of results. The parties then attempt to reach an informal agreement on the taxpayer's request, followed by a formal agreement. The time needed for conclusion of the APA process depends on the scope and complexity of the case. Currently, the average time to reach an APA agreement is 34 months from the date of the APA request. (54)

a. Role of IRS Personnel

The function of the APA Team is the following: (1) for a bilateral APA, to develop, in consultation with the taxpayer and consistent with sound tax administration, a competent authority negotiating position that it can recommend for approval; and (2) for a unilateral APA, to make best efforts, consistent with sound tax administration, to develop an APA that the APA Program can recommend for approval by the Associate Chief Counsel (International). (55) The roles of the team members are, as follows:

Team Leader: The IRS Team Leader serves both to coordinate the LRS's negotiating efforts and to set the tone of the negotiations. Team leader's generally come from the staff of the IRS APA Program, have extensive transfer pricing experience. They work to coordinate the activities of the other IRS team members and to focus the negotiations on resolving the issues necessary to reach an agreement, applying the best method principles and a principled negotiation approach.

IRS Economist: The IRS economist is responsible for reviewing and critiquing the functional and risk analysis, the comparabies selection and adjustments, and the TPM proposed by the taxpayer. The IRS economist frequently suggests modifications to the selection and adjustments of the taxpayer's proposed comparables. Occasionally, the economist will suggest changes in the TPM; however, this can generally be avoided if the PFC was both thorough and candid.

IRS Examination Team: The IRS APA team generally includes the international examiner that would otherwise conduct an examination of the taxpayer. If the taxpayer is currently undergoing a transfer pricing examination, the international examiner comes from the examination team conducting the transfer pricing examination. In addition, when the taxpayer is subject to a transfer pricing examination, the IRS field team may include the IRS examination Team Coordinator and others from the examination team with knowledge of the taxpayer, the taxpayer's operations, and its related party transactions. The IRS field team assists other IRS team members to obtain a thorough understanding of the taxpayer's operations and activities, understand the taxpayer's functions, risks, and activities with regard to the transactions under consideration, and evaluate the impact of a rollback of the APA TPM on the years under examination.

Competent Authority Analyst: Bilateral APA negotiations with the IRS result in an agreed initial negotiating position to be used by the U.S. competent authority with the foreign competent authority. Therefore, when a taxpayer requests a bilateral APA, the IRS APA team includes a competent authority analyst as a representative of the LMSB (International). The competent authority analyst advises the international examiner and other members of the IRS APA team, as well as the taxpayer's APA team, of positions likely to be acceptable to the foreign competent authority in the negotiations with the United States. The IRS's and taxpayer's APA teams use this information to develop an initial negotiating position for the United States that has the greatest likelihood of success, taking into account the concerns of the foreign tax administration.

b. Issue/Industry Coordination Teams

The IRS APA Program has created formal Issue/Industry Coordination Teams to specialize in specific issues and industries. One of the primary goals of each team is to improve consistency in negotiating cases. The teams are, as follows:

* Autos and Auto Parts;

* Pharmaceuticals and Medical Devices;

* Cost Sharing;

* Financial Products; and,

* Semiconductors.

c. APA Case Plan

The APA case plan, adopted by the APA Program, is meant to ensure that APA cases proceed in a timely fashion. The APA procedures require the taxpayer and the IRS APA teams to agree on a case plan during their initial meeting. (56) The case plan will be signed by both an APA manager and an authorized official of the taxpayen (57) The case plan should identify the questions raised by the IRS during its initial review of the APA request along with a schedule for resolving each issue. (58) Generally, the case plan should reflect an agreement between the taxpayer and the IRS on the scope and nature of any additional information that will be required to resolve the identified issues. (59) This provides the taxpayer with the opportunity to negotiate with the IRS regarding the information to be provided, in many cases limiting such information to only that necessary to resolve the issue.

The case plan should include firm dates for certain events or "milestones" such as the submission of the additional information by the taxpayer, the evaluation of the information by the IRS, the negotiation of the APA agreement or competent authority negotiating position, and the presentation of the agreement to the Associate Chief Counsel (International) for approval. (60) Since the APA teams come from various divisions within the IRS, and the taxpayer's APA team has outside professionals dealing with other matters, the initial case plan should set forth the dates and locations of future meetings to permit individuals to fit the meetings in their schedules. (61)

To encourage compliance with the schedule, the APA procedures provide for the involvement of the APA Program Director when either the taxpayer or the IRS fails to meet their respective deadlines. For the taxpayer, failure to meet its obligations under the case plan can result in the IRS treating the APA request as withdrawn. (62) Failure of the IRS team to meet its obligations may result in the involvement of IRS District and Regional supervisors. (63) To preserve flexibility, as circumstances warrant, the APA Team and the taxpayer may amend the case plan by, for example, adjusting milestone dates through a written mutual agreement. (64) If a case is not completed by the date specified in the operative case plan, the APA Team Leader and the taxpayer must submit to the APA Director a joint status report (or separate reports in the event of disagreement) explaining the substantive or procedural matters causing the delay and how the parties propose to resolve the outstanding matters. (65) If the case is not completed by the new target date, APA Program management will hold a status conference, with the purpose of reaching agreement on how the case will be resolved. (66) The Associate Chief Counsel (International) may participate if the case is not resolved satisfactorily in a timely manner. (67) As a practical matter, taxpayers seldom fail to meet the case deadlines and they appreciate the ability to encourage the IRS to reach closure on preliminary issues.

d. Working Groups

Issues that arise in APA negotiations generally fall into one of three categories: procedural factual, or economic. Occasionally, the development of one or more issues within a category requires indepth study by persons from both the IRS's and taxpayer's APA team, but not necessarily all of the APA team members from both sides. In this situation, the involvement of all team members in the discussions can hinder, rather than assist, in the prompt resolution of the issue. To efficiently resolve such issues, APA teams often form "working groups" to deal with those issues. The working groups generally consist of specialists in a particular issue and the working groups do not have the authority to bind their respective team. Rather, if the working groups achieve tentative resolution of the issues, the tentative resolution will be presented to the full APA teams for approval.

Most commonly, economic working groups have been formed to focus on economic issues such as propriety of selection criteria for comparables and adjustments to the comparables. Working groups have also been used, however, to develop issues such as allocation of overhead expenses between different product lines. The ability of working groups to segregate and achieve tentative resolution of preliminary issues without full involvement of the APA teams improves the efficiency of the APA process. This is particularly true for large APA cases.

e. Critical Assumptions

The taxpayer requesting an APA must propose critical assumptions to support the APA. Critical assumptions are facts, the continued existence of which is material to the outcome of the TPM. (68) Critical assumptions could include the taxpayer's mode of conducting business, business structure, business volume, or market share.

Although taxpayers are required to include proposed critical assumptions in their APA request, as a practical matter, most critical assumptions are drafted during the final APA negotiations when the parties, who may have differing factual expectations, are attempting to find agreement. For example, if the IRS were concerned that large currency fluctuations could affect the taxpayer's results and the taxpayer did not believe that large fluctuations would occur, the taxpayer could agree to a critical assumption that currency values remain within a particular range. On the other hand, a taxpayer concerned about the effect of anticipated new technology on existing products could request a critical assumption that would allow the taxpayer to revise downward the profit expectations on transactions regarding products that are suddenly obsolete.

f. Competent Authority Negotiations

When a taxpayer requests a bilateral APA, the IRS assigns a competent authority analyst to participate in the APA negotiations. Assuming the negotiations between the taxpayer's APA team and the IRS APA team have been successful, the final stage of a bilateral APA consists of the competent authority negotiations. The involvement of a U.S. competent authority analyst throughout the APA process should ensure that the U.S. negotiating position takes into account positions maintained by the foreign tax authority. (69) In addition, the IRS competent authority staff maintains contact with the foreign competent authority so that both the U.S. and foreign competent authorities will have developed a simultaneous understanding of the APA request, including the relevant facts and the proposed TPM. (70) Finally, the taxpayer's foreign affiliate should keep the foreign competent authority advised of the U.S. APA negotiations and their progress, and forward to the taxpayer's APA team the concerns of the foreign tax authority. If these coordination activities have gone well, the final competent authority negotiations should go smoothly and relatively quickly.

Taxpayers have, at times, expressed concern that confidential information provided to the IRS may not receive adequate protection if shared with a foreign tax administration during bilateral APA competent authority negotiations. To address this concern, the APA procedures provide for the negotiation of a mechanism to permit the verification of information by the foreign competent authority, without the disclosure of sensitive confidential data such as trade secrets. (71)

Competent authority negotiations remain government-to-government negotiations and do not permit direct taxpayer involvement. The competent authority analysts, however, generally meet with the taxpayer to obtain information and listen to the taxpayer's position on issues. These meetings can be helpful to both the taxpayer and the competent authority analyst--the taxpayer remains involved in the process and the competent authority analyst has access to taxpayer information.

When the U.S. and foreign competent authorities conclude their negotiations, their agreement is presented to the taxpayer. Although the taxpayer has the option to reject the agreement reached by the competent authorities, rejection of the agreement would expose the taxpayer to certain double taxation. Further, if the taxpayer has maintained contact with both the U.S. and foreign competent authorities, and the initial negotiating position developed by the taxpayer and IRS's APA negotiating agreement considered the likely position of the foreign tax authorities, the ultimate agreement reached by the competent authorities should be acceptable to the taxpayer.

Bilateral APA negotiations are not limited to the terms of the TPM. Additional issues include exchanges of information between tax authorities on issues such as subsequent modifications, cancellations, revocations or renewals of the APA, rollback of the TPM to resolve transfer pricing issues in prior years, evaluations of the annual reports, and examinations of the taxpayer's compliance with the terms and conditions of the APA. Bilateral APAs may require simultaneous filing of annual reports with the IRS and the foreign tax administration. (72)

g. Drafting the APA

The IRS uses a streamlined APA "boilerplate" model form. (73) The revised boilerplate results in an APA contract of approximately 5 pages and appendices setting forth the TPM and critical assumptions, rather than previous models which produced APAs that exceeded 30 pages. (74) This streamlined model APA should also reduce prolonged additional negotiations in the drafting process.

9. Administration and Renewal

a. The APA Annual Report

Once the APA has been completed, certain administrative procedures must be followed including the filing of an annual report that demonstrates: (1) the taxpayer's good faith compliance with the terms and conditions of the APA; (2) the calculation of compensating adjustments; and (3) compliance with any critical assumptions. (75) Also, the annual report must identify any material information submitted while the APA request was pending that the taxpayer subsequently discovered during the taxable year to be false, incorrect, or incomplete. (76)

Taxpayers must submit an original annual report and four copies to the IRS APA office 90 days after the due date, including extensions, of its return for the year in question or 90 days after the effective date of the APA, whichever is later. (77) In addition, the taxpayer must maintain books and records sufficient to enable the IRS to examine the taxpayer's compliance with the APA. Although this may appear to be a significant undertaking, it is less involved than preparing a transfer pricing penalty documentation update.

Generally, the taxpayer will represent in the annual report that its activities have not materially changed from those described to the IRS during the APA negotiations, and that the critical assumptions continue to be met. The taxpayer will then apply the TPM to its results for the year in question and compare those results to the results required by the APA, make any necessary adjustments, and reflect the computations and adjustments in a report provided to the IRS. The IRS APA office reviews the annual reports, contacting taxpayers only if it requires additional information. (78)

b. Compensating Adjustments

If a taxpayer's results for a year covered by an APA do not come within the range of results called for in the APA, the APA may require that taxpayer make a compensating adjustment to move its results to a point within the agreed range of results. (79) The taxpayer should reflect the compensating adjustments on its timely filed return, with extensions, return for the period in question. (80) If the taxpayer is unable to make the compensating adjustments on its original return for the period, the taxpayer must reflect the adjustments on an amended return filed within 120 days of the due date, with extensions, of the return for the period in question, as well as in the annual report. (81) In addition, to the extent the APA covers years for which the taxpayer filed a return before the APA was executed, the taxpayer must file amended returns reflecting any necessary compensating adjustments within 120 days of entering into the APA. (82)

Compensating adjustments are deemed to have been made on the last day of the tax year to which the adjustment applies. The adjusted figures, taking into account the compensating adjustments, will then be used for all U.S. income tax purposes. If the taxpayer makes a good faith effort to comply with the TPM in order to avoid a compensating adjustment and timely pays the compensating adjustments, then the compensating adjustment:

* Will be considered in determining required estimated tax installments;

* Will not be considered in determining whether the taxpayer is subject to failure to pay penalties under I.R.C. [section][section] 6651 and 6655; (83) and,

* Will not accrue interest to the extent that the taxpayer established a receivable or payable established to settle the compensating adjustment. (84)

Taxpayers may also face "subsequent compensating adjustments" when normal or routine adjustments are made by the taxpayer or the IRS. These adjustments may arise, for example, from the correction of computational errors. Such subsequent compensating adjustments will be subject to generally applicable Code provisions relating to assessments, collection, and refunds of tax, as well as Rev. Proc. 99-32. (85)

c. Examination

One advantage of an APA is the protection it provides against an in-depth transfer pricing examination and corresponding transfer pricing adjustment. The existence of an APA does not prevent an examination per se, but it does limit any examination of the transactions covered by the APA to the following areas:

* Whether the taxpayer has complied, in good faith, with the terms and conditions of the APA;

* Whether the material representations in the APA and annual reports remain valid and accurately describe the taxpayer's operations;

* Whether the supporting data and computations used in applying the TPM were correct in all material respects;

* Whether the critical assumptions underlying the APA remain valid; and

* Whether the taxpayer consistently applied the TPM and met the critical assumptions. (86)

If the examination discloses that any of these elements are not satisfied, the District Director advises the Associate Chief Counsel (International) who then must determine whether to continue to apply the APA, revoke the APA, or seek a revision of the APA. (87)

Any other audit adjustments not involving the interpretation of the TPM that affect the determination or computation of the operating results under the APA, can be made without affecting the validity of the APA. If agreed by the taxpayer, the corresponding adjustment to the transfer pricing is made through an additional compensating adjustment and treated as a subsequent compensating adjustment. Taxpayers have the right to challenge the proposed adjustments using normal administrative and judicial procedures. (88)

d. Recordkeeping

Generally, taxpayers are required to maintain books and records sufficient to establish the correctness of their returns. In the APA context, taxpayers must maintain records sufficient to demonstrate their compliance with the terms and conditions of the APA. As part of APA negotiations, the taxpayer and the IRS may agree to the documents that the taxpayer must maintain to demonstrate compliance. (89) If requested during an examination, the taxpayer must produce the agreed-upon records within 30 days of the request. (90)

e. Revocation, Cancellation, or Revision of an APA

Fraud, malfeasance, or disregard on the part of the taxpayer involving material facts (91) set forth in the APA request, submissions made during the APA negotiations, or in the annual report, or lack of good faith compliance with the terms or conditions of an APA can lead to IRS revocation of the APA. The IRS can revoke the APA retroactively to the first day of the first tax year to which the APA applies. Revocation of the APA exposes the taxpayer to a transfer pricing examination, adjustments and penalties for all open years, and the possibility of a limitation or loss of Rev. Proc. 99-32 relief. In addition, in egregious cases, the IRS may deny the taxpayer foreign tax credits under Rev. Rul. 80-231 and unilateral relief under Rev. Proc. 2006-54. (92)

If the level of the taxpayer's misrepresentation, mistake of material fact, failure to state a material fact, or lack of good faith compliance does not rise to the level of fraud, malfeasance, or disregard, the IRS may cancel, rather than revoke, the APA. (93) Generally, the cancellation will be effective as of the beginning of the year in which the misrepresentation, mistake, failure to state a material fact, or non-compliance occurs. (94) The IRS may waive cancellation if the taxpayer can establish good faith and reasonable cause, and agrees to make the adjustments required by the IRS to correct for the misrepresentation, mistake, failure to state a material fact, or noncompliance.

Failure to meet a critical assumption, or changes in a law or treaty that supersedes and conflicts with the APA, may require a revision of the APA. (96) If the IRS and the taxpayer fail to reach an agreement on the revision, the IRS can cancel the APA. Taxpayers must notify the IRS of the failure to meet a critical assumption. (95) If the revision relates to a bilateral APA, the revised APA is submitted by the US competent authority to the foreign competent authority for its agreement with the revisions. The parties can then:

* Agree to continue with the original APA;

* Agree to apply the revised APA on a unilateral basis;

* Modify the revised APA and seek the agreement of the foreign competent authority; or

* Agree to cancel the APA as of an agreed date. (98)

A failure of the IRS and taxpayer to reach an agreement will cause the IRS to cancel the APA. (99)

f. Renewal

A taxpayer may request a renewal by following the same procedures that apply to an initial APA request, updating information and highlighting significant changes. As long as the functions and risks between the parties remain similar to those in the initial APA, the renewal should be granted relatively quickly with little debate or renegotiation. The user fee for a routine renewal ($35,000) is much less than that for the original request ($50,000). (100) Taxpayers are encouraged to file their requests to renew an APA no later than nine months before the end of the term of the existing APA. (101)


The APA Program was established to provide a common sense forum to resolve transfer pricing disputes. In its seventeen years of existence, the APA Program has changed in staff size, popularity, level of procedural formality, and experience. The basic opportunity to achieve transfer pricing certainty in a non-adversarial forum, however, has not changed substantially.

Appendix A

Checklist of Information Required Under Section 4 of Rev. Proc. 2006-9

Rev. Proc.

1. Section 4.03(1) Table of contents

2. Section 4.03(2) The names, addresses, telephone and facsimile numbers, taxpayer identification numbers (if applicable), and both the Standard Industrial Classification (SIC) and the North American Industry Classification System (NAICS) codes reported of the organizations, trades, and businesses engaging in the proposed covered transactions, and the controlling taxpayer of the parties.

3. Section 4.03(3) The controlling taxpayer's industry within LMSB; or if the taxpayer files its tax returns with the Small Business / Self-Employed (SB / SE) Operating Division, a statement to that effect.

4. Section 4.03(4) A properly completed Form 2848 (Power of Attorney and Declaration of Representative) for any person authorized to represent the taxpayer in connection with the request, or a Form 8821 (Tax Information Authorization).

5. Section 4.03(5) A description of the general history of business operations, worldwide organizational structure, ownership, capitalization, financial arrangements, principal businesses, the place or places where such businesses are conducted, and major transaction flows of the parties to the proposed covered transactions. The description must also identify any branches or disregarded entities involved in the proposed covered transactions.

6. Section 4.03(6) A description and analysis of the transactions covered by the APA request, as well as the estimated dollar value of each proposed covered transaction for each year of the proposed term of the APA. A description of how the proposed covered transactions relate to other controlled transactions that the taxpayer does not propose to coven

7. Section 4.03(7) A statement addressing the extent to which the tested party has transactions involving commission sales and ordinary distribution sales (i.e., buying and reselling). If such transactions exist, the taxpayer must propose a TPM to analyze them on a separate or aggregated basis or to exclude one of the two kinds of transactions from the APA.

8. Section 4.03(8) For each party to the proposed covered transactions, a detailed analysis of the functions and economic activities performed; assets employed; economic costs incurred; risks assumed; relevant contractual terms; relevant economic conditions; and relevant non-recognition transactions.

9. Section 4.03(9) Copies of the principal written agreement(s), if any, setting forth the contractual terms for the covered transactions (within the meaning of [section] 1.482-1(d)(3)(ii), including without limitation the form of consideration charged or paid); and an explanation of any significant discrepancy between the applicable written agreements and the economic substance of the covered transactions (including payment form) to date and as proposed for the APA.

10. Section 4.03(10) Representative financial and tax data of the parties to the proposed covered transactions for the last three taxable years (or more years if relevant to the proposed TPM), together with other pertinent data and documents in support of the TPM (e.g., Form 5471, Form 5472, income tax returns, financial statements, annual reports to stockholders, other pertinent U.S. and foreign government filings, existing pricing, distribution, or licensing agreements, marketing and financial studies, documentation prepared in consideration of [section] 6662(e), company-wide accounting procedures, budgets, projections, business plans, and worldwide product line or business segment profitability reports).

11. Section 4.03(11) The functional currency of the parties to the proposed covered transactions and their respective foreign currency exchange risks.

12. Section 4.03(12) The taxable year of each party to the proposed covered transactions.

13. Section 4.03(13) A description of significant financial accounting methods employed by the parties that have a bearing on any proposed TPM.

14. Section 4.03(14) An explanation of any relevant financial and tax accounting differences between the U.S. and the foreign countries.

15. Section 4.03(15) A discussion of any relevant statutory provisions, tax treaties, court decisions, regulations, revenue rulings, or revenue procedures that relate to the appropriateness of the proposed TPM for the requested APA. For cases in which the taxpayer requests a rollback, the discussion should state whether the period of limitations for the rollback years has expired in the U.S. or in foreign countries, and if not, when the periods of limitations do expire.

16. Section 4.03(16) (a) A statement describing all previous and current issues at the examination, Appeals, judicial, or competent authority levels that relate to the proposed TPM, including an explanation of the taxpayer's and the government's positions and any resolution of the issues. (b) If the taxpayer is requesting a rollback that involves any issues relevant to the proposed covered transactions that are unresolved and still under consideration by Appeals, the taxpayer must include with its APA request a waiver of its right to be present during communications between the Appeals Office and the APA Team members. I.e., Waiver of Ex Parte Communication: [Name of taxpayer(s)] agrees to the participation of the Appeals Office in the consideration of this APA request, and hereby waives its right to be present during, or participate in, communications related to the APA request or the proposed covered transactions between the Appeals Office and the APA Team members.

17. Section 4.03(17) A statement describing any APAs with, or rulings by, foreign tax authorities relating to the proposed covered transactions (or any pending requests for such APAs or rulings) and, if requested, copies of such APAs or rulings.

18. Section 4.03(18) An economic analysis or study of the general industry pricing practices and economic functions performed within the markets and geographical areas covered by the APA request.

19. Section 4.03(19) A list of the taxpayer's competitors and a discussion of any uncontrolled transactions, lines of business or types of businesses comparable or similar to those addressed in the request.

20. Section 4.03(20) An explanation of the proposed TPMs, including any method used to convert results from one payment form to another (e.g., to convert from a lump sum to a contingent payment such as a sales-based royalty), and an analysis of why each proposed TPM is the best method within the meaning of [section] 1.482-1(c).

21. Section 4.03(21) A detailed presentation of the research efforts and criteria used to identify and select possible independent comparables. This presentation should include a list of potential comparables and an explanation of why each was either accepted or rejected, or demonstrate that the proposed TPM otherwise satisfies the requirements of [section] 482 and this revenue procedure.

22. Section 4.03(22) Detailed financial data (and licenses or other agreements, if applicable) on the selected independent comparables in print and electronic formats.

23. Section 4.03(23) A detailed explanation of any adjustments to the selected comparables (e.g., accounting for product line segregations; differences in accounting practices; differences relating to functions, assets employed, risks assumed, and costs incurred; volume or scale differences; and differing economic and market conditions).

24. Section 4.03(24) An illustration of the application of each proposed TPM by applying the TPM, in a consistent format, to the prior three taxable years' financial and tax data of the parties to the covered transactions.

25. Section 4.04 Specific requirements with respect to cost sharing arrangements.

26. Section 4.05 The taxpayer should propose and describe any relevant critical assumptions. A critical assumption is any fact the continued existence of which is material to the taxpayer's proposed TPM, whether related to the taxpayer, a third party, an industry, or business and economic conditions. Critical assumptions might include, for example, a particular mode of conducting business operations, a particular corporate or business structure, a range of expected business volume, or the relative value of foreign currencies.

27. Section 4.06 Section 11.01 provides that the taxpayer must file an annual report for each taxable year covered by the APA. The taxpayer should propose in the request a list of items to be included in each report.

28. Section 4.07 The taxpayer must propose a term for the APA appropriate to the industry, products, and transactions involved. In general, a request for an APA should propose an APA term of at least five years, with at least three prospective years remaining in the term upon the execution of an APA.

29. Section 4.08 Specific requirements for request for competent authority consideration.

30. Section 4.09 The taxpayer must include in any APA request and supplemental submission a declaration in the following form: "Under penalties of perjury, I declare that I have examined this [APA request] [supplemental submission relating to this APA request] including accompanying documents, and, to the best of my knowledge and belief, the [APA request] [supplemental submission] contains all the relevant facts relating to the ]APA request] [supplemental submission], and such facts are true, correct, and complete."

31. Section 4.10 The taxpayer or the taxpayer's authorized representative must sign the APA request.

32. Section 4.11 Mailing, Deliveries, Copies, and Office Location--The taxpayer must provide the original and eight copies of its APA request and any supplemental materials submitted while the request is pending.

33. Section 4.12 A separate user fee is required for each APA request.

(1.) 2008 APA Report, Announcement 2008-27, 2008-15 I.R.B. hereinafter referred to as "2008 APA Report"), Table 1 (stating the 773 APAs have been completed through 2007).

(2.) Id.

(3.) Id.

(4.) See Excerpts from Transcripts of IRS Hearings on Advance Pricing Agreement Program [Hearings held on 2/1/05 and 2/22/05 in Washington, D.C.], 13 Tax Management Transfer Pricing Report 20, 1040 (Mar. 2, 2005).

(5.) OECD Dispute Resolution: Country Profiles on Mutual Agreement Procedures, available at, http: //,3343,en_ 2649_34897_29601439_1_1_1_l,00.html#CountryProfiles (last updated Oct. 2, 2007).

(6.) 2008 APA Report, Table 1.

(7.) Rev. Proc. 2006-9, 2006-2 I.R.B. 278, [section] 2.04.

(8.) Id. at [section] 2.12.

(9.) Id. at [section] 8.01.

(10.) Id. at [section] 8.03.

(11.) Id. at [section] 8.04.

(12.) 107 Public Law No. 204, 116 Stat. 745 (codified as amended in scattered sections of 15 U.S.C.).

(13.) FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109, No. 281-B (June 2006), [paragraph] B40, available at,

(14.) Id. at [section] 10.02.

(15.) Id. at [section] 11.03(2).

(16.) I.R.C. [section][section] 6038A and 6038C created recordkeeping exposure for taxpayers who are more than 25 percent foreign owned and for foreign corporations engaged in a trade or business within the United States, respectively. I.R.C. [section] 6001 requires every person liable for tax to file tax returns and keep sufficient support for the positions taken on their returns.

(17.) Rev. Proc. 2006-9, supra note 7 at [section] 2.08.

(18.) 2008 APA Report, supra note 1, Table 1.

(19.) U.S. Model Income Tax Convention of November 15, 2006, Art. 25.

(20.) A taxpayer can seek competent authority assistance through several procedural paths. If the taxpayer is unsatisfied with the relief offered by IRS Appeals, the taxpayer can seek Competent Authority assistance to reduce or eliminate double taxation. If the taxpayer reaches a settlement with IRS Examination, Appeals, or Counsel, or receives a U.S. Court determination of taxes, the U.S. competent authority will endeavor only to obtain correlative relief from the foreign competent authority. Rev. Proc. 2006-54, 2006-2 C.B. 1035, [section] 7.05. Taxpayers can also seek simultaneous consideration of the transfer pricing adjustment by IRS Appeals and competent authority. Id. at [section] 8.01.

(21.) In one case, the court decision resolving a taxpayer's transfer pricing issues for its 1975 through 1980 tax years was not filed until September, 1993, 17 years after the taxpayer filed its returns for the 1975 year. Perkin-Elmer Corporation v. Commissioner, T.C. Memo 1993-414 (1993).

(22.) Rev. Proc. 2006-9, supra note 7, at [section] 6.01.

(23.) 2008 APA Report, supra note 1, Table 2 and Table 5.

(24.) Rev. Proc. 2006-9, supra note 7 at [section] 11.

(25.) The application of the rollback provisions has resulted in a number of APAs that have resolved 10 or more prior tax years.

(26.) Rev. Proc. 2006-9, supra note 7.

(27.) Id. at [section] 4.12

(28.) For purposes of the APA Program, a small business either has a gross annual income of less than $200 million or the annual aggregate value of the covered transaction does not exceed $50 million or $10 million for covered transactions involving intellectual property. See id. at [section] 4.12(5).

(29.) No fee will be charged on substantial changes requested by the Service or foreign competent authority. See id. at [section] 4.12(5).

(30.) E.g., a taxpayer's calendar year 2007 could be covered by a comprehensive APA request submitted on January 13, 2009, if the taxpayer had submitted the requisite filing fee before the extended filing date of September 15, 2008. Rev. Proc. 2006-9, supra note 7, at [section] 4.07(2).

(31.) Id. at [section]4.03.

(32.) Id.

(33.) Id. at [section] 4.04; see Treas. Reg. [section] 1.482-7.

(34.) Rev. Proc. 2006-9, supra note 7, at [section] 4.02(5).

(35.) Id. at [section]4.03(24).

(36.) E.g., a range of expected business volume, a range of currency fluctuation, or continued operations. Id. at [section] 4.05.

(37.) Id. at [section] 4.06.

(38.) Id. at [section] 4.07(1).

(39.) Id. at [section] 4.08(3).

(40.) Id. at [section] 4.09.

(41.) Id. at [section][section] 4.09(2) and 4.10.

(42.) Id. at [section] 4.11(1).

(43.) Id.

(44.) Id. at [section] 4.11(3).

(45.) Id. at [section]4.11(2).

(46.) Id. at [section] 4.11(4).

(47.) Id. at [section] 5.01.

(48.) Id. at [section] 5.02.

(49.) Id. Annual Reports are discussed in more depth in section IV.9.a.

(50.) Id. at [section] 5.03.

(51.) Id. at [section] 5.04.

(52.) Id. at [section] 5.05. Revocation, cancellation, or revision of an APA is discussed in section IV.9.e.

(53.) Id. at [section] 6.07(1).

(54.) 2006 APA Report, supra note 1, Table 2.

(55.) Rev. Proc. 2006-9, supra note 7, at [section] 6.05.

(56.) Id.

(57.) Id. at [section] 6.07(1).

(58.) Id.

(59.) Id.

(60.) Id.

(61.) Id.

(62.) Id. at [section] 6.07(4). Delay by the IRS will be addressed by the Director of the APA Program.

(63.) Initially, taxpayers and practitioners objected to the case plan because a taxpayer failure to reach case milestones was met with more severe consequences than an IRS failure to meet a case milestone. However, taxpayer criticisms have subsided because the consequences of a taxpayer failure were reduced in Rev. Proc. 96-53. In fact, practitioners are generally pleased with the case plan.

(64.) Rev. Proc. 2006-9, supra note 7, at [section] 6.07(5).

(65.) Id. at [section] 6.07(6).

(66.) Id.

(67.) Id.

(68.) Rev. Proc. 2006-9, supra note 7, at [section] 4.05.

(69.) Some practitioners have objected to the involvement of competent authority analysts in APA negotiations, but most welcome the early involvement of the competent authority analyst to facilitate later compromise in competent authority negotiations.

(70.) Rev. Proc. 2006-9, supra note 7, at [section] 7.01.

(71.) Id. at [section] 7.04.

(72.) Id. at [section] 7.05.

(73.) 2008 APA Report, supra note 1.

(74.) Id.

(75.) Rev. Proc. 2006-9, supra note 7, at [section] 11.01.

(76.) Id.

(77.) Id. at [section] 11.01(2). The taxpayer and the IRS, however, may agree to alternative filing dates. Id.

(78.) Id. at [section] 11.01(3).

(79.) Id. at [section] 11.02.

(80.) Id. at [section] 11.02(1)

(81.) Id.

(82.) Id.

(83.) Id.

(84.) Id. at [section] 11.02(3).

(85.) Id.

(86.) Id. at [section] 11.03(2).

(87.) Id. at [section] 11.03(3).

(88.) Id. at [section] 11.03(4).

(89.) Id. at [section] 11.04.

(90.) Id.

(91.) A fact is "material" if knowledge of the facts could reasonably have resulted in an APA with significantly different terms and conditions. In regard to annual reports, a fact is material if, "knowledge of the facts would have resulted in (a) a materially different allocation of income, deductions or credits than reported in the annual report, or (b) the failure to meet a critical assumption." Id. at [section] 11.06(4).

(92.) Id. at [section] 11.06(6) (referring to Rev. Proc. 2002-52, which subsequent to publication of Rev. Proc. 2006-9, has been superseded by Rev. Proc. 2006-54).

(93.) Id. at [section] 11.06(2).

(94.) Id. at [section] 11.06(7).

(95.) Id. at [section] 11.06(5).

(96.) Id. at [section] 11.05.

(97.) Id. at [section] 11.06(3).

(98.) Id. at [section] 11.05(2).

(99.) Id.

(100.) Id. at [section] 4.12.

(101.) Id. at [section] 12.01.

David J. Canale is the Director of Ernst & Young LLP's National Transfer Pricing Group. With more 13 years of experience in transfer pricing, his practice focuses on transfer pricing planning, structuring, and risk management, including developing transfer pricing policies for clients, controversy resolution, including examination dispute resolution, Advance Pricing Agreements (APA) and avoiding double taxation through mutual agreement procedures (MAP) and competent authority. Mr. Canale serves as chair of the Transfer Pricing Committee in the ABA Section of Taxation. He is a frequent speaker on transfer pricing matters, has co-authored BNA's Tax Practice Series on Transfer Pricing, and has authored various articles on transfer pricing issues. He may be reached at david,

Steven C. Wrappe is a principal in Ernst & Young LLP's Washington, D.C., Transfer Pricing practice. He has more than 25 years of tax experience, including more than 17 years in all aspects of transfer pricing. Mr. Wrappe's experience in transfer pricing controversy includes examination, appeals, ADR solutions, advance pricing agreements (APA), mutual agreement procedures (MAP), and Customs agreements. He is an Adjunct Professor (Transfer Pricing) at Georgetown University Law Center, has published two books and numerous articles on transfer pricing topics, and speaks globally on transfer pricing and dispute resolution. He may be reached at
Table 1: APA User Fees (27)

                                 (IN U.S. DOLLARS)

Regular APA Request              50,000

Renewal of APA Request           35,000 / 50,000
(routine / non-routine)

Small Business (28) (SBT) APA    22,500

Renewal of SBT APA               22,500
(routine / non-routine)

Amending APA Request or          10,000
a Completed APA (29)
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Author:Canale, David J.; Wrappe, Steven C.
Publication:Tax Executive
Date:May 1, 2008
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