Wednesday, May 18, 2011

Good News for U.S.-Canada APA Taxpayers

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There is good news on two fronts for taxpayers considering (or already seeking) an advance pricing agreement between the United States in Canada. First, arbitration will apply broadly to the agreements, and second, more involvement by the U.S. Competent Authority in cases should help relieve the current backlog in the IRS program.

It always sounds strange to talk about "past years" of an APA, which is supposed to prevent future tax disputes. But before the IRS and the Canada Revenue Agency came out with their joint memorandum (first document at http://www.irs.gov/businesses/international/article/0,,id=201209,00), the possibility existed that only "rollback years"—years for which a return has been filed that are being negotiated along with the future years—would have been eligible for arbitration, as was true under a recent agreement with Germany (same site above, third document under Germany). The U.S. and Canadian governments were more inclusive. For APAs that go to arbitration (those inevitably will involve some past years due to the time-consuming APA/competent authority process and the two-year waiting period for arbitration), the solution arrived at for those past years will apply going forward.

IRS APA director Craig Sharon says he is pleased about how the arbitration memorandum applies to APAs. Sharon has also said more than once that his program, run from the IRS Office of Associate Chief Counsel (International), could use more resources and that taxpayers now have to wait at least six months before work can begin on their cases.

That could change now that Mike Danilack, head of the IRS’s international audit function and also the U.S. Competent Authority, has decided to have analysts from his office—which has greater ability to hire than Chief Counsel—work APAs from start to finish. This, according to Danilack, eliminates the hand-off system under which APA could spend months meeting with taxpayers to develop a position only to have it scrapped during the bilateral portion of the negotiations.

-- Molly Moses

Managing Editor, Transfer Pricing

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