By Craig A. Sharon, Esq.
Ernst & Young LLP, Washington, D.C.
This is my second commentary on Notice 2013-79 (the Notice),2 the Advance
Pricing and Mutual Agreement (APMA) Program's draft update of the
current Advance Pricing Agreement (APA) revenue procedure (Rev.
Proc. 2006-9, 2006-2 I.R.B. 278, as modified by Rev. Proc. 2008-31,
2008-23 I.R.B. 1133) (hereinafter simply Rev. Proc. 2006-9). My
first commentary focused on the apparent shift in tone in the
Notice compared to earlier APA revenue procedures and questioned
whether or not that shift might signal an unexpected change in the
IRS' attitude about the APA process.3 On this issue,
we'll have to wait and see how the Notice is revised and how the
final revenue procedure (the Final Rev. Proc.) is actually
There are other broad themes in the Notice that deserve comment,
but I'm sure that many others will address those issues, e.g.,
APMA's elevated role in audits and IRS Appeals, the increased
standardization and expanded information requirements for APA
submissions, and the higher upfront investments likely to be
required under the Notice. This commentary will focus instead on a
small number of narrow technical issues.
The Notice introduces a new term, "coverable issues," which
refers to the issues eligible for APA coverage. The
definition of "coverable issues" expands the range of possible
APA-covered transactions in favorable ways, but some clarification
would be helpful, especially as it relates to the issues currently
covered by Rev. Proc. 2008-31, the revenue procedure that expanded
the APA program's jurisdiction to cover any issue that applies
transfer pricing principles. Specifically, the Notice includes
"ancillary issues" - another new term - among coverable
issues. Ancillary issues include recurring secondary issues,
such as an election to treat a primary or correlative APA
adjustment as a payable or receivable under the principles of Rev.
Proc. 99-325 (i.e., newly
defined as an APA repatriation), interest on refunds and
deficiencies, penalties with respect to U.S.-initiated adjustments,
and the determination of whether a payment is compulsory for
foreign tax credit purposes. Of these issues, all but an APA
repatriation are newly eligible for APA coverage, although it's
possible, in fact, likely, that some of these issues have been
covered in past APAs on an ad hoc basic.6 The Notice makes clear
that such issues are now generally eligible for coverage in all
APAs. That's good because it allows a taxpayer to resolve
these secondary issues as part of the APA process, rather than
having to deal with them in a separate proceeding (e.g., as part of
a closing agreement with the IRS Exam function or administratively
with a foreign tax authority).
A few issues need clarification:
The Notice retains the IRS's preference stated in Rev. Proc.
2006-9 for bilateral APAs when a treaty partner is on the other
side of the covered transactions. Indeed, under the Notice,
taxpayers requesting a U.S. unilateral APA in such situations will
be required to submit a pre-filing memorandum before submitting a
formal APA request to give APMA an opportunity to consider the
issue in advance. In recent years, taxpayers have been allowed,
under Rev. Proc. 2006-9, to file for a unilateral APA, even though
a bilateral APA was possible, in certain fairly common
circumstances, such as when a covered transaction involved many
countries (e.g., headquarters allocations or licensing royalties)
or when the value of the covered transaction was small and the
likely time and cost to complete a bilateral APA disproportionately
Under earlier APA revenue procedures, a taxpayer with a U.S.
unilateral APA involving a treaty country has been allowed to seek
Competent Authority relief in the event of a foreign-initiated
adjustment to a transaction covered by the APA. Not only would the
U.S. Competent Authority take the case, but it also was willing to
compromise the APA transfer pricing methodology to the extent
necessary to avoid double taxation. That posture contrasts with the
U.S. Competent Authority's unwillingness to compromise (as opposed
to negotiating correlative relief only) the results of a closing
agreement, Form 870-AD, or U.S. court decision covering the same
The Notice drops the express right to Competent Authority relief
contained in the earlier revenue procedures without comment or
substitute language. The draft update to the Competent Authority
revenue procedure, Notice 2013-78 (the MAP Notice),7 imposes new
limits on taxpayer access to a proceeding under the Mutual
Agreement Procedure article (a MAP), so it's possible that APMA is
intending to reverse its policy of taking foreign-initiated
adjustments relating to a unilateral APA to Competent Authority. Or
perhaps APMA will resolve the issue on a case-by-case basis as part
of the mandatory pre-filing process or during the unilateral APA
negotiations. Regardless, APMA should clarify its position in the
Final Rev. Proc.
No one should be surprised, following the LB&I
restructuring, the creation of the Office of Transfer Pricing
Operations (the TPO), and the merger of the APA program and the
U.S. Competent Authority double-tax staff, that the IRS would want
to integrate the new transfer pricing functions better. That makes
sense for various reasons, especially if it creates new case
processing efficiencies and streamlines issue resolution, but the
question is whether the Notice strikes the appropriate balance in
involving the APMA program: (1) more heavily in the issues to be
covered in an APA (i.e., years, countries, and transactions); and
(2) more centrally in resolving transfer pricing issues at audit
and working with IRS Appeals. Taxpayers have legitimate reasons to
be concerned whether an expanded/strengthened APMA role will work
as intended for the benefit of both the IRS and taxpayers, or
whether it will instead stretch APMA's resources, unnecessarily
reduce taxpayer control over what is supposed to be a voluntary APA
process, and/or complicate the settlement of transfer pricing
controversies involving treaty countries. Conceptually, I can
imagine the IRS approach working, but I have doubts in practice
because the Notice, increasingly blurs the lines of responsibility
and decision-making authority between and among the various
transfer pricing functions. This intentional IRS decision could
create significant implementation challenges.
Take the case of APA rollbacks as an example. Under Rev.
Proc. 2006-9, taxpayers decide whether or not to request a
rollback, and the Exam team, which has jurisdiction over pre-APA
years, decides the question. The APMA program has jurisdiction only
over APA years. In practice, the two functions consult with each
other, but disagreements about the best approach to an APA
involving a rollback request are common (e.g., the Exam team may
want to deny a rollback and/or limit the covered transactions in
the APA). These disagreements may require higher-level review to be
resolved, but, in the end, one function or the other has the final
say (e.g., Exam on rollback years). The TPO, which stood up in the
last year, has complicated the jurisdictional issues, but the
existing framework remains essentially in place for now (i.e., the
TPO has not claimed issue jurisdiction over transfer pricing
The Notice obscures the existing jurisdictional lines further.
On rollback requests, the Notice provides that APMA will coordinate
and collaborate with other offices within the IRS and then inform
the taxpayer whether or not its rollback request has been accepted.
Perhaps it's implied, but it's not clear whether APMA is given
responsibility only for coordinating the decision-making process
and relaying the decision to the taxpayer or whether it has final
decision-making authority over the request and/or jurisdiction over
any accepted rollback.8 The same goes for
APMA's new right to condition acceptance of an APA request on the
taxpayer's acceptance of a rollback. As with rollback requests, the
Notice only reserves APMA the right to coordinate with the
applicable IRS offices and then inform the taxpayer of the final
decision. But is APMA the decision-maker or not? In my view, it
should be "the decider" at least on bilateral cases.
I understand that, under the new LB&I structure, all
transfer pricing issues ultimately funnel to the LB&I Deputy
Commissioner (International) (currently, Mike Danilack), but I
question whether or not it is realistic to expect one senior
executive, with a small personal staff, to resolve the
case-specific disagreements that will arise in the hundreds (and
growing) of transfer pricing audits and APAs underway at any one
time. I appreciate the notion of a "roundtable" of IRS
professionals making decisions on a consensus basis, but I was also
part of the 2010-11 Transfer Pricing Pilot that led to the creation
of the TPO, and I know firsthand the practical challenges of moving
cases forward on a timely basis when no one is officially in
charge, the IRS team is large, and resources are stretched.
Although the new rules of engagement are a work in progress, I
would encourage the IRS to draw clearer jurisdictional lines in the
Final Rev. Proc. Indeed, it doesn't have to look further than
§§9.01(4) and 9.02(1) of the MAP Notice to find potential
There are a few other "rollback" issues that should be
I'm not sure any time limit for taxpayer rollback requests is
necessary (up to the final agreement), since APMA can always deny a
late request. But if a time limit is to be imposed, it should
extend well past three months, given that the APA process rarely
starts so soon after a submission. At a minimum, a later cutoff
date should be provided (e.g., after the First Meeting or after
APMA presents its preliminary economic analysis).
The Notice prohibits anonymous pre-filings for the enumerated
mandatory pre-filing topics (e.g., unilateral requests when a
bilateral is available, cost-sharing cases, global dealing, etc.).
I understand the thinking that full transparency is needed on
subjects that the IRS deems to be sensitive or complex, but a
hard-and-fast prohibition on anonymity may hurt the IRS and
taxpayers alike, because such conferences allow APMA to learn about
new and emerging issues early on and to potentially steer them
toward the more cooperative APA environment. The APMA program
should want these cases. At a minimum, I'd hope that APMA will make
clear that it remains open to informal anonymous consultations.
Contents of Pre-Filing Memoranda
The Notice provides that mandatory pre-filing memoranda "must
have a length and content appropriate to the size and complexity"
of the covered issues, while pre-filing memoranda for optional
pre-filing issues "must have a length and content appropriate to
the substantive or procedural issues the taxpayer wishes to raise"
with APMA. Are these different standards?
APA User Fee
Rev. Proc. 2006-9 adopted the current rule that taxpayers need
pay only one APA user fee for all APA submissions filed by a
taxpayer within any 60-day period. This "60-day" rule replaced the
rule in Rev. Proc. 2004-40,9 the predecessor
to Rev. Proc. 2006-9, that required a separate APA fee for each APA
request. The Notice drops the 60-day rule and goes back to Rev.
Proc. 2004-40. From an IRS perspective, the revived "per-APA" fee
structure may seem reasonable given the size of most APA taxpayers,
but I can say - somewhat to my surprise since leaving the APA
program - that an APA fee can represent a sizable portion of a
taxpayer's investment in submitting an APA request. Even under the
60-day rule, the fees are high enough to reduce taxpayer interest
in the program. The new fee structure will only increase the
disincentive, and it's also not cost-free to APMA. Eliminating the
current rule may raise a small amount of revenue for the
government, but it will also reintroduce the recurring pre-2006
debates about whether or not a taxpayer's APA submission involves
one or more requests. At least Rev. Proc. 2004-40 included a
definition of "separate APA request."10 The Notice does
not, but should. Better yet, the Final Rev. Proc. should retain the
Abbreviated APA Requests
The Notice provides for newly named "abbreviated APA requests"
in three named circumstances: simple renewals, small case requests,
and requested extensions of a MAP agreement into an APA. I commend
the concept, but Rev. Proc. 2006-09 already provides for expedited
processing for the first two cases; however, it rarely occurs,
mostly because there aren't many simple renewals or small business
taxpayers willing to accept rough-justice results. I hope that APMA
is prepared to do better going forward, but it will require a
serious commitment (and pushy taxpayers) to make it work.
"Appendix 1" Full APA Submissions and Covered Issue
Surely, there will be a full array of comments on Appendix 1 in
the Notice (e.g., pros and cons of increased standardization, how
much information is enough, will the new requirements streamline or
complicate the process, etc.). I'll let others offer their views on
the general topic. Here, I'll ask one specific question:
Extension of Statute of Limitations
Taxpayers have always been required to extend the statute of
limitations for years covered by an APA request, including rollback
years. Virtually all taxpayers are willing to do so, but most would
prefer to sign a restricted consent, which keeps the statute open
only for the APA-covered transactions (and ancillary issues),
rather than a general consent, which keeps open all issues in the
affected years. Whether or not a taxpayer is allowed to sign a
restricted consent is generally within the purview of IRS district
counsel, and the policy in most district counsel offices, typically
with the support of the IRS Field, has been to require general
consents. The Notice suggests a softening of the current practice
by providing that taxpayers will be instructed as to the type of
consent to execute, "viz., general or restricted." A more liberal
use of restricted consents would be desirable and defensible,
especially for rollback years when the IRS has had reasonable time
and opportunity to complete an audit for an older year (as is often
the case, given how long it typically takes to complete an
This commentary also will appear in the April 2014 issue of
the Tax Management International Journal. For
more information, in the Tax Management Portfolios, see Levey,
Carmichael, van Herksen, Patton, Levi, Krupsky and Kellar, 890
T.M., Transfer Pricing: Alternative Practical Strategies
(Chapter 8, "Advance Pricing Agreements"), and in Tax
Practice Series, see ¶3600, Section 482 - Allocations of Income and
Deductions Between Related Taxpayers.
1 The views expressed herein are those of the
author and do not necessarily reflect those of Ernst & Young
LLP or any other member of Ernst & Young Global Limited.
Moreover, they should be viewed in the context of the time they
were expressed. Ernst & Young Global Limited, a U.K. company
limited by guarantee, does not provide services to clients. Ernst
& Young LLP is a client-serving member firm of Ernst &
Young Global Limited operating in the United States. EY refers to
the global organization, and may refer to one or more of the member
firms of Ernst & Young Global Limited, each of which is a
separate legal entity.
6 The U.S. Model Treaty and a dozen or so U.S.
treaties (e.g., with the U.K. and Denmark) expressly allow for
interest and penalties to be resolved in a mutual agreement.
However, such issues have not generally been dealt with in mutual
8 Adding to the uncertainty, the Notice also states
that "[a]lthough APMA will coordinate within the IRS to minimize
duplicative requests in conducting its due diligence, the taxpayer
remains obligated to respond to information document requests
issues, and according to deadlines set, by other IRS offices in any
examination or enforcement proceedings."
10 "A separate APA request concerns a specific
[transfer pricing methodology (TPM)] and distinct facts, such that
a review of the facts will determine the suitability of the TPM and
all other methodologies under consideration." Rev. Proc. 2004-40,
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