On November 22, 2013, the IRS released two notices (Notice 2013-78 and Notice 2013-79) containing draft revenue procedures providing guidance and instructions with respect to requesting competent authority (CA) assistance and advance pricing agreements (APAs).
These long-awaited draft revenue procedures represent substantial changes from the current 2006 revenue procedures, and are consistent with the objectives of the Advance Pricing and Mutual Agreement Program (APMA), which is the IRS department that handles CA and APA matters, to enhance integration between CA matters and APAs and to increase transparency and efficiency in these processes.
Overall, these proposed changes are welcome as they should improve the efficient allocation of resources on the part of taxpayers and APMA alike and should provide enhanced clarity to taxpayers about CA and APA processes. Most significantly, perhaps, they reflect an interest by APMA to further work with taxpayers to try to address proactively through the CA and APA processes cross-border controversies arising within the U.S. income tax treaty network. In an environment where these transfer pricing controversies are generally increasing in number every year, the IRS is committed to making dispute resolution mechanisms more effective.
APMA is willing to consider issues and cases that were not generally accepted in the past. One important change: matters arising as a result of taxpayer-initiated positions (i.e., adjustments initiated by taxpayers themselves that directly or indirectly result in double taxation) may be permitted into the CA process unless, for example, the issue evinces after-the-fact tax planning or fiscal evasion. Furthermore, APMA will be available for informal consultations on general matters concerning CA issues, including whether a CA issue exists, and whether a taxpayer has exhausted all effective and practical remedies to reduce its liability under foreign law for foreign tax credit purposes.
APMA is requiring more transparency in the process with taxpayers, including additional information provided up front, and in the intergovernmental processes.
The new draft revenue procedures provide new prefiling procedures applicable to both APAs and CA cases, including mandatory submission of a prefiling memorandum depending on the nature of the issues or the adjustment amount involved.
For APAs, a prefiling memorandum is required if the taxpayer wishes to file a unilateral APA request to cover an issue that is eligible for coverage by a bilateral or multilateral APA or if the taxpayer seeks to file an abbreviated APA request.
For CA cases, a prefiling memorandum is required for the following issues:
- A foreign-initiated adjustment in which the total adjustments exceed $10 million for all years combined
- A taxpayer-initiated position;
- A request for discretionary limitation on benefits relief
- If the taxpayer believes double tax has arisen outside the context of an examination (such as withholding tax cases).
For both APAs and CA cases, a prefiling memorandum is required if the issues involve any of the following:
- The license or transfer of intangibles in connection with, or the development of intangibles under, an intangible development arrangement
- Global trading arrangements
- Unincorporated branches, pass-through entities, hybrid entities, or entities disregarded for U.S. tax purposes.
There is also a revised listing of the standard specifications for the content of a request for CA assistance and APAs. The additional information that will be required by these changes is generally information that had been previously requested by APMA as part of its due diligence for APAs and CA cases. Now, this information will be provided earlier in the APA or CA process so that APMA can perform its initial evaluation more effectively. Also, a proposed draft APA (based upon the APMA APA template) will now be included as an attachment to the APA submission.
The authors would expect that this increased initial complexity and "front-loading" of these processes should lead, in most instances, to a more focused postfiling due diligence stage by APMA and, accordingly, an overall decrease in case processing time.
Increased transparency also extends to the intergovernmental processes, in both APA and CA cases, with the U.S.'s treaty partners. For example, the draft CA revenue procedure states that the U.S. CA may seek to initiate a CA case in the absence of a taxpayer-initiated CA request or may require that the scope of a CA case be expanded.
The draft APA revenue procedure also provides additional guidance regarding APA rollbacks. Generally, a taxpayer may request an APA rollback in its APA request or within three months after the APA request is filed. In the current APA revenue procedure, taxpayers can request an APA rollback at any time prior to executing the APA.
Another change made more explicit is that APMA reserves the right to pursue an APA rollback to any or all of the taxpayer's open pre-APA years. The burden is now placed on the taxpayer to explain why a rollback of the APA should not be considered and APMA may decline to initiate the APA process or suspend or terminate the process, if it has already begun, if the taxpayer refuses to accept a rollback. Furthermore, throughout the APA process, the taxpayer and the IRS must execute consent agreements, general or restricted, to extend the statute of limitations for each proposed APA or rollback years.
There is also a new proposed deadline for bilateral or multilateral APA requests, which is that the filing with the IRS must occur within 60 days following the filing of the APA request with a foreign CA. This proposed deadline will ensure that both APMA and the foreign CA receive the APA request at the same time and can proceed on a consistent time line for negotiation.
Taxpayers must also provide to one CA any information or analyses that it provides to the other CA. However, APMA will work with taxpayers to develop efficient procedures for disseminating information (such as through the use of indices) in order to minimize administrative burdens on taxpayers. In addition, APMA may require taxpayers to make presentations jointly to the U.S. and foreign CAs during the APA or CA processes.
The draft revenue procedures also propose changes that can further enhance efficiencies by allocating taxpayer and APMA resources effectively through the better integration of CA, accelerated competent authority process (ACAP), and APA processes; this would also include procedures for filing an abbreviated APA request in certain circumstances.
In this situation, for example, if the material facts and issues are consistent throughout the years at issue, a taxpayer may (i) request CA assistance with respect to filed years for which adjustments have been raised, (ii) roll forward the CA resolution through ACAP to filed years for which adjustments have not yet been raised but are likely to be made, and (iii) file an abbreviated APA request to obtain certainty for prospective years. This can permit taxpayers to resolve difficult or recurring transfer pricing issues for a number of years in a combined, better coordinated process. The authors would anticipate that this would be welcomed by the foreign CAs, some of whom may face resource issues or who look for improved efficiencies.
A further efficiency is the future release of standardized templates for such items as (i) protective claim and notification letters for CA cases and (ii) covered issue diagrams and certain financial data templates for APAs.
The APA draft revenue procedure provides that a taxpayer may seek permission to submit an abbreviated APA request in the situation discussed above and also in cases involving renewals of current APAs or for small case APAs. Abbreviated APA requests would require less information than an initial APA request, resulting in a decreased dedication of resources by both the taxpayer and APMA, particularly in the initial stages of the APA process, due to the familiarity with the taxpayer's facts and circumstances and economic situation.
The opportunity to submit an abbreviated request for an APA renewal could serve as a substantial improvement to the APA process, particularly since many taxpayers having APAs have already renewed them more than once. The authors would hope that such a change would also be adopted ultimately by the foreign CAs to enhance symmetry in APA submissions.
The draft revenue procedure for APAs provides that a complete APA request (updated and supplemented as required) will be a factor in determining whether the taxpayer has met the documentation requirements of Reg. Section 1.6662-6(d)(2)(iii) for the proposed APA years. Providing taxpayers with potential penalty protection as part of the APA process is a long-awaited provision as it should mitigate the need for taxpayers to prepare transfer pricing documentation during the period in which the APA is under negotiation.
The IRS and the Treasury Department have requested that comments on these proposed revenue procedures be submitted in writing on or before March 10, 2014. Once comments are received, the IRS will issue final revenue procedures that will be effective for all APAs or CA cases received on or after the day that the revenue procedures are published in the Internal Revenue Bulletin. By agreement between the taxpayer and APMA, the APA draft revenue procedure may apply to any APAs resulting from requests pending on the effective date of the revenue procedure. Taxpayers submitting APAs or CA cases in advance of the effective date still may want to consider the policies and procedures contemplated in these drafts, particularly to the extent that they can be employed to facilitate these processes or provide avenues of additional recourse for taxpayers.
This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.