Notice 2013-79: A Change in Attitude?

By Craig A. Sharon, Esq.  

Ernst & Young LLP, Washington, DC


The Advance Pricing and Mutual Agreement Program (APMA) issued
its draft of the long-promised revised revenue procedure governing
requests for an Advance Pricing Agreement (APA) on November 23,
2013, in the form of Notice 2013-79 (the Notice or APA
Notice).  On the same day, APMA also issued its draft revenue
procedure governing requests for Competent Authority assistance
under the Mutual Agreement Procedure (MAP) article of a U.S. income
tax treaty, in the form of Notice 2013-78 (the MAP Notice). The APA
Notice would update the current APA revenue procedure, Rev. Proc.
2006-9, 2006-1 C.B. 278, as modified by Rev. Proc.
2008-31, 2008-1 C.B. 1133. The IRS has requested comments on the
APA Notice (and the MAP Notice) no later than March 10, 2014, with
the understanding that a final updated APA revenue procedure will
be issued, and become effective, sometime thereafter (best guess,
during the summer).

My expectation is that the APA Notice will generate a lot of
comments, reflecting the APA program's importance and the
sensitivity of taxpayers and representatives to changes that could
make the program less attractive. Most of the comments will focus
on the new "mandatory" pre-filing rules, the enhanced coordination
between the APA and MAP processes, the opportunity for "abbreviated
APA requests," and the new APA submission rules, including the
proposed changes to the APA fee structure, the alternative filing
deadlines for the first APA year, and the expanded substantive
filing requirements set forth in the appendix to the Notice (the

All of these topics are deserving of serious comment, but they
may not represent as much change as might seem to be the case on
first impression. Specifically, the introduction to Notice 2013-79
identifies 22 separate "significant substantive changes" to the
current revenue procedure. Although the listed items certainly
represent a change in text from Rev. Proc. 2006-9, the majority of
the changes represent restatements, clarifications, or first-time
public expressions of existing APA rules, policies, and practices.
These textual changes are helpful in different ways (e.g., they
provide notice, increase transparency, and anticipate certain
issues), and they mostly accomplish their stated purpose to: (1)
improve the "clarity, readability, and organization" of the APA
revenue procedure; and (2) account for the structural changes
undertaken by the IRS since 2006, especially the 2010 creation of
the Large Business & International Division (LB&I) and the
2012 merger of the former APA program and the Competent Authority
double-tax allocation staff into the APMA Program. But I would
argue that only a few of the changes are, in fact, "significant" on
their face (as opposed to how they might be implemented).

By way of example, the APA program has always had broad
authority to accept or reject APA applications, including requiring
that interrelated issues be covered, that proposed unilateral APAs
be converted to bilateral APAs, and that incomplete applications be
supplemented or re-submitted. Similarly, the APA program has
required that certain APA topics be discussed in a pre-filing
conference (e.g., global dealing APAs and any APA that would apply
transfer pricing principles outside of §482 (see Rev.
Proc. 2008-31)), and taxpayers have long been required to submit
memoranda in advance of pre-filing conferences. Rev. Proc. 2006-9
also allows for streamlined submissions and expedited processing
for small taxpayer APAs and simple renewal APAs. I could go on.

So if the proposed substantive changes don't qualify as "game
changers," what is significant about the Notice? Answer: It's
primarily the apparent shift in tone from previous APA revenue
procedures and the ostensible change in IRS attitude about the APA
process reflected in the Notice. These changes downplay the unique
enforcement value of the APA process generally and, if actually
acted on by APMA, will be seen by many taxpayers as: (1)
unexpected, because they're inconsistent with the positive
direction of the APA program over the past two years; and (2)
troubling, to the extent they signal a move toward a less
reciprocal APA environment. 

To be successful, the APA program requires the IRS and taxpayers
(and their representatives) to embrace the voluntary and
cooperative nature of the process. The program was started as an
alternative dispute resolution program, and it works best when the
process is transparent, interactive, and flexible - qualities that
build a healthy level of trust and allow for principled discussion
and resolution. The APA process is not supposed to be like an

Earlier APA revenue procedures, including Rev. Proc. 2006-9
(which I helped draft soon after I joined the APA program in 2005),
reflect the core values of the APA process - not perfectly, mind
you, but arguably better than Notice 2013-79, which uses more
formal language and proposes rules that make the APA process sound
and feel more like the audit process. Taxpayers are told that they
"must" do certain things or are "required" to satisfy certain
IRS-predetermined conditions, while, in contrast, APMA is given
virtually unlimited discretion, granted unilateral decision-making
authority, and freed from existing time commitments. At the same
time, many of the revisions sound as if they're aimed at common or
widespread taxpayer behavioral problems, when, in fact, they deal
with taxpayer conduct that, at least during my time at the APA
program, rarely occurred and was properly handled by applying sound
tax administration principles, good judgment, and timely
communication. I don't recall Rev. Proc. 2006-9 being the cause of
serious case processing problems, as opposed to, e.g., the
program's persistent resource shortages.

Examples from the APA Notice illustrate the issue:

 The Notice states that "in accordance with its mission,
APMA endeavors to administer the programs within its jurisdiction
in a manner that secures the appropriate tax bases of the United
States and its treaty partners, prevents fiscal evasion, and is
otherwise consistent with tax administration." This mission
statement is fine to the extent it applies generally to the IRS or
LB&I, but the language is referring to base erosion and profit
shifting (BEPS) issues that shouldn't be associated with the APA
program.  Indeed, the APA process represents an antidote to
BEPS by encouraging taxpayer cooperation, transparency, and upfront
compliance. These highly positive aspects of the APA process could
be highlighted or emphasized more.

 The APA Notice identifies a number of scenarios in which
APMA could reject an APA request depending on the taxpayer's
willingness to accept certain IRS conditions (e.g., to roll back
the APA to open years, to apply for accelerated competent authority
(ACAP) relief, to convert a unilateral request to a bilateral
request when available). APMA's decision to condition or reject an
APA request would be unilateral and final.  At least under
Rev. Proc. 2006-9, when a taxpayer's APA request is rejected, a
taxpayer is guaranteed a conference of right with the APA Director.
Historically, the APA program has held few such conferences, so why
drop this opportunity?

 The Appendix adopts a one-size-fits-all approach to the
substance and form of APA submissions. Such an approach is
generally not a good fit in transfer pricing, and it contrasts with
Rev. Proc. 2006-9, which allows taxpayers to tailor their
submissions to the specific facts and circumstances, with the APA
program reserving the right to request supplemental information or
reject a deficient APA submission.  Admittedly, the filing
requirements in the current revenue procedure could use some
clarification, but, in my experience, the problems that the
Appendix seems to address (i.e., varied formatting and the filing
of incomplete submissions) are limited and manageable with a more
flexible "relevancy-based" standard and early APMA review of the
contents of a submission. One solution to the problem of varied
formats is to develop a "checklist" for a menu of possible
submission requirements (based, e.g., on the Appendix) to be
included in every application so that APA teams can easily identify
the included and omitted items, and follow up as necessary.

 The Notice's expanded submission requirements and revised
fee structure (plus the new pre-filing rules) will increase the
upfront time and cost of entering the APA program for many
taxpayers. The upfront investment required to prepare an APA
submission already deters taxpayers from pursuing APAs. Increasing
that investment, which can be substantial in dollars and time,
could drive more taxpayers away from the program - an unfortunate
result from a transfer pricing administration point of view. As for
the revised fee structure, elimination of the current "60-day rule"
applicable to fee determinations may raise a small amount of
revenue for the government, but it will also reintroduce the
recurring pre-2006 questions about whether or not a taxpayer's APA
submission involves one or more requests. If money is the
objective, I'd raise the fee amounts and retain the administrative
simplicity of the 60-day rule.

 Notice 2013-79 requires taxpayers to complete various
tasks within time limits fixed in the Notice or to be set by APMA
(e.g., updating financial data for completed APA years, responding
to the APA Team Leader's summary position paper in bilateral APAs,
and requesting APA rollbacks), while simultaneously eliminating
similar deadlines for APMA (e.g., when APMA must notify a taxpayer
whether or not a pre-filing memorandum/meeting is required, an APA
request has been accepted, or an APA submission or annual report is
deemed to be complete). In contrast, under Rev. Proc. 2006-9, the
APA program commits to complete a unilateral APA request or adopt a
U.S. negotiating position within 12 months, to arrange a first
meeting within 45 days from the assignment of an APA Team Leader to
the case, and to execute a case plan to which both the IRS and the
taxpayer are expected to adhere. Setting aside whether or not the
current time limits are practicable, the APA program has at least
committed itself to stated case processing targets. The APA Notice
contains no such commitments and drops the case plan requirement

 The Notice maintains the limited coordination in Rev.
Proc. 2006-9 between the APA process and an IRS examination
involving the same transactions, but different years (i.e., an APA
with a rollback). I would have thought, with all IRS transfer
pricing enforcement functions now part of LB&I and with a more
rigorous APA acceptance process, that APMA would be given greater
control over the common transfer pricing issues in APA and rollback
years. Continuation of the existing overlapping jurisdictional
lines seems like a missed opportunity.

 Notice 2013-79 drops the language in Rev. Proc. 2006-9
providing that no interest will be charged on an account
established for an APA year when a taxpayer elects APA revenue
procedure treatment to effectuate a primary adjustment. Instead,
the APA Notice refers taxpayers to the repatriation rules in the
MAP Notice, which provide that the terms of any APA repatriation
will be determined on a case-by-case basis and that APMA will
decide whether or not to require an interest charge based on the
principles of Rev. Proc. 99-32, 1999-2 C.B. 296. The rationale for
this change is not provided, but it doesn't seem to distinguish
between the procedural posture of a U.S.-initiated transfer pricing
audit adjustment and that of a voluntary, prospective APA.

 Finally, the APA Notice provides that the submission of "a
complete APA request, updated and supplemented in accordance" with
the Notice will only be a "factor taken into account" in
determining whether the taxpayer has met the transfer pricing
documentation requirements under §6662(e). Is that all the penalty
comfort that APMA is willing to give a taxpayer that complies with
the new pre-filing rules and submits and updates, as the Notice
assumes, all the information required in the Appendix? I would
think that if APMA accepts a taxpayer's APA submission under the
standards in the Notice, the submission would be deemed to satisfy
the penalty documentation rules, absent fraud, substantial error,
or some other exceptional circumstance.

I recognize that my concern about the tone of the APA Notice and
ostensible change in IRS attitude may infer too much about APMA's
intentions. Over the past few years, the IRS (including Chief
Counsel) has demonstrated its support of the APA process in
important ways (e.g., doubling staff resources), and there have
been many favorable developments in APA case processing since the
merger.  Perhaps the IRS should be given the benefit of the
doubt. Still, when the first guidance issued since the APA program
was moved from IRS Chief Counsel to the IRS conveys an audit-like
approach and signals a less reciprocal APA environment, that
guidance invariably raises flags. Even if current APMA management
were to exercise its oft-stated discretionary authority in a fair
and balanced manner, as I would expect, there's no guarantee that
future program leaders will show similar restraint. I'd certainly
feel more comfortable if the final APA revenue procedure adopted a
more flexible tone and embraced an attitude more in line with the
original approach to the APA process.  The APA program is a
critical component of transfer pricing administration for both
taxpayers and the IRS, and it needs to remain a vibrant and
effective alternative dispute resolution process.

This commentary also will appear in the February 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, an APA special counsel, Deputy Director, and Director from
March 2005 to February 2011, and do not necessarily reflect those
of Ernst & Young LLP or any other member of Ernst & Young
Global Limited.