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Small businesses benefit from new APA procedures.

Small businesses need procedures to negotiate advance pricing agreements (APAs) at a cost and level of complexity that are reasonable relative to the size of the transactions involved. However, under the regular APA procedures of Rev. Proc. 96-53, the Service usually does not begin its formal analysis of a taxpayer's proposed transfer pricing methodology (TPM) until the taxpayer files an APA request and pays the user fee. The regular APA procedures invariably require the taxpayer to produce information that results in increased staff hours, legal, accounting and consulting expenses and user fees. Because of the high cost of using the normal procedures, most APAs have been with large multinational corporations with substantial income or assets. To make the APA program more accessible to small businesses, the Service has proposed special APA procedures in Notice 98-10.


The new procedures would apply to a small business taxpayer (SBT), defined as any U.S. taxpayer with total gross income of less than $100 million. For this purpose, gross income includes total income plus cost of goods sold for all organizations owned directly or indirectly by the taxpayer.

Prefiling conference. As under the regular APA procedures, an SBT may request a prefiling conference with the Service. Under the normal APA procedures, the IRS does not begin its due diligence analysis until after the SBT fries the formal APA and pays the user fee. In the case of SBTs, the Service will conduct its due diligence analysis at the beginning of the process before the user fee is paid to accelerate conclusion of the APA negotiations.

Information to be submitted. At least 60 days before the scheduled prefiling conference, the INS will request the SBT to submit a detailed description of the underlying facts of the covered transaction and the proposed transfer pricing methodology. The SBT may provide the same information it is required to maintain under Sec. 6662(e). However, before the prefiling submission, the SBT must consult with APA program personnel to determine the information the Service deems necessary to evaluate the SBT's particular covered transactions.

Case management plan. At the prefiling conference, the SBT and the IRS negotiate the case management plan. The primary objective is to conclude a unilateral APA, or finalize the recommended negotiating position for a bilateral APA, within six months of the date the SBT files the APA request (as opposed to nine to 12 months under the regular APA procedures). With these new procedures, the Service intends to reduce the total time it takes to conclude an APA for an SBT by reducing the number of post-filing meetings and supplemental information requests.

Flexibility of procedures. One focus of the new procedures is flexibility in application; thus, the IRS will consider any SBT-suggested procedures. The Service will look at each SBT as unique when it comes to the appropriate procedures required to administer the APA negotiations efficiently and effectively. Further, the IRS and the SBT may negotiate the reduction or elimination of specific elements otherwise required (such as the submission of an annual report, economic analysis of general industry price practices and detail of comparables and method of selection). Finally, if teleconferences are not feasible, all meetings between the Service and the SBT will be held at a location convenient to the SBT.

Other provisions. First, the IRS will assist the SBT in the selection and evaluation of comparables or the computation of adjustments to comparables under Regs. Sec. 1.482-1(d)(3). Second, the initial term of the SBT APA will be three years (with a potential to renew for a longer term). Third, for unilateral APA requests, the SBT may submit a proposed draft APA in a form substantially identical to the current APA model included in Notice 98-10. If the SBT submits such a draft, it must include a redlined version showing the differences between the APA model and the draft. In addition, the SBT must provide a copy of the draft on a computer disk in a word processing format acceptable to the Service.


The primary advantage of the new APA procedures for SBTs is that they allow taxpayers with smaller operations to participate in the ADA program at a cost more commensurate with the scale of their operations. Under the normal APA procedures, a taxpayer could expect to spend between $7,500-$25,000 on user fees, depending on the circumstances; an SBT's user fee is only $5,000. Of more importance, the SBT procedures should reduce some of the costs involving outside experts and the time devoted by inhouse staff. Likewise, while APA requests are typically concluded in nine to 12 months, the expedited SBT procedures aim for a six-month deadline for both concluding a unilateral request (i.e., an APA only with the IRS) and finalizing a negotiating position under a bilateral request (i.e., an APA involving the Service and another country).

Practitioners have generally praised the draft proposal. However, some commentators have suggested that the IRS clarify some of the issues addressed in Notice 98-10. One of these is the $100 million gross income limitation; this is a concern because a small business today is not the same as a small business five years ago. Another issue is whether the income limitation applies to all members of a multinational group or just the taxpayer's U.S. income. The Service has indicated that while the $1 O0 million limit applies to worldwide income, it is considering changing the definition.
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Title Annotation:advance pricing agreements
Author:DeSirgh, Jana
Publication:The Tax Adviser
Date:Jul 1, 1998
Previous Article:When is a tax year "closed"?
Next Article:Current income tax treaty developments.

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