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IRS agreement on transfer pricing now possible.

In March, the IRS issued revenue procedure 91-22, providing guidance on securing an "advance pricing agreement" (APA). An APA is an agreement between the taxpayer and the government designed to obtain IRS approval of a taxpayer's proposed methodology for some or all intercompany transfer pricing for an agreed-on number of years. Until now, this was a "no rule" area.

Revenue procedure 91-22 requires the taxpayer to propose a transfer pricing methodology and present documents showing it produces arms-length results in transactions to be covered by the APA. If the IRS accepts the taxpayer's proposed methodology after examining these materials, the parties will enter into an APA. The IRS may also include in the APA an agreement with a foreign competent authority to eliminate double taxation issues.

Revenue procedure 91-22 permits, at the election of the taxpayer, the use of one or more prefiling conferences with the IRS to determine whether an APA would be appropriate. The conference(s) will clarify the data, documentation and analyses required to be submitted along with the APA request.

Some companies have expressed doubt about using the APA procedure because the data submitted will be released to the district director. The IRS has informally indicated it will arrange a prefiling conference with advisers on a no name basis to determine whether to proceed.

The information required for an APA request can be extremely extensive. It includes but is not limited to

* Detailed descriptions of the taxpayer's structure, financial records, existing licensing and pricing agreements, marketing studies and all government filings.

* Economic analysis of the taxpayer and affiliates to be covered by the APA plus a study of industry pricing and practices.

* A discussion of all relevant judicial and administrative authority as well as the government's position on previous and current issues at exam or appellate level.

* A list of competitors and their pricing structure for comparable products, as well as documentation of research efforts undertaken to obtain this information.

An annual report must be filed for each year covered by the APA, describing the taxpayer's actual operations and its good faith compliance with the APA. A compensating transfer price adjustment may be required to bring the actual results within the APA's agreed-on range. If there is a change in the critical assumptions underlying the APA, the APA may be revised or cancelled.

Observation: Although an APA may not be appropriate for a taxpayer not likely to be audited or in litigation, taxpayers that expect transfer pricing challenges in the future should consider them. Such taxpayers will gain certainty as to the appropriateness of their transfer pricing, which remains the prime area of audit risk for many multinational companies.

However, the decision to enter into APA negotiations involves an analysis of the risk and expense of disclosing large quantities of data to the IRS.

Edited by Herbert Paul, CPA, Herbert Paul, P.C., New York, New York (individual); Andrew R. Biebl, CPA, partner of Biebl, Ranweiler & Co., New Ulm, Minnesota (small business); Robert Willens, CPA, senior vice-president at Lehman Brothers, New York City (corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner, and Marylouise Dionne, Esq., international tax manager, at Price Waterhouse, New York City (international). n
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Author:Dionne, Marylouise
Publication:Journal of Accountancy
Date:Jul 1, 1991
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