Trust Bloomberg BNA's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.
By Craig A. Sharon, Esq.
Bingham McCutchen LLP, Washington, DC
A little more than a year ago, I wrote a commentary identifying the principal causes of APA case delays and offering "10 best practices" that taxpayers could adopt, unilaterally, to expedite their individual cases.1 Now that the merger between the APA Program and the double-tax allocation staff within the IRS Competent Authority (USCA) office has been completed, in the form of the new Advance Pricing and Mutual Agreement (APMA) Program, it's a good time to focus on what the APMA Program can do, on its own, to expedite individual cases. There is no better time than at the beginning, before a new "steady state" evolves within the APMA Program, to set new priorities, initiate new policies, and adopt new practices. No doubt, APA case processing remains the #1 issue for both the IRS and taxpayers, and after a step back in case processing during 2011 due primarily to the distractions of the merger,2 the APMA Program is now in position to move multiple steps forward to clear out the growing and aging backlog of pending cases and actually begin to materially reduce case processing times for new APA requests.
There are both big and small ways for the APMA Program to improve APA case processing. Some of the improvements are program-wide (e.g., implementing fast-track procedures for simpler cases,3 creating a more leveraged staffing structure, committing to use mandatory treaty arbitration when available, shortening position papers, etc.), while others deal with individual case management. This commentary focuses mostly on improvements to the latter, an admittedly far less exciting, but no less important endeavor (especially in the aggregate) than potential program-wide improvements.
As with the top practices for taxpayers (see note 1), the overriding principle is not to let a case go off track. Once a case goes off track, which can happen for any number of reasons, it can be stalled for months, terminated, and/or sent to the back of the line. Most of the "top 10" practices discussed below will help APMA staff keep a case on track from beginning to end.
1. Upfront risk assessments. In my last year as APA director, I began to review all APA submissions and rate each one on a scale of 1-5. The goal was to monitor and ultimately measure the amount of time spent on a case based on its complexity. We had only begun to implement the new policy when I left in February 2011, but I understand that it fell by the wayside during the merger discussions. I further understand that the practice is being revived (slightly revised) under new APMA management. That's a good sign because it's clear that not all cases deserve the same attention, focus, and commitment of resources.
2. Judicious case assignments. Upfront risk assessments also allow more judicious assignment of cases to APMA analysts4 and economists. Even when APA staff was relatively small, there was considerable variation in the skills, experience, personalities, and productivity of individual staff members. That variation has only increased with the merger and the near doubling of total APA/competent authority staff. In many of the cases that went off track in my years with the Program, such outcomes, in retrospect, seemed predictable, given the combination of personalities involved - from the APA Program and the exam team to the taxpayer and the taxpayer's representative. Taking greater care in assigning suitable APMA personnel to new cases would head off many (but not all) problems.
3. Forming APA teams quickly. Depending on whether or not a taxpayer is under audit, it can take weeks, if not months, to form an APA team. Regardless, the sooner an APA team is formed, the better, because it creates early momentum to begin reviewing the submission, scheduling the first meeting, developing the case plan, and beginning the due diligence. "Out of sight, out of mind" otherwise applies.
4. Developing and adopting case plans. APA case processing guidelines anticipate that a case plan will be executed on or about the first substantive meeting. In reality, that occurs in only a small percentage of cases, mostly on the west coast historically. Such inconsistent implementation is unfortunate because the process of creating a case plan and the active enforcement of the plan are invaluable tools in imposing discipline on the process. There's a reason that the most productive APMA staff adopt and follow case plans vigorously, while the less productive avoid them as much as possible.
5. Establishing credibility with exam teams. APA teams primarily consist of APMA staff and exam personnel. Exam personnel often come to the process skeptical about both the taxpayer's motives and the APA staff's allegiance (i.e., like Appeals, the APA Program is seen by the Field as "giving it away"). The better APMA analysts are usually able to overcome this skepticism by communicating regularly with the exam team, respecting the exam team's full right to participate and be heard, and making clear the exam team's responsibilities in the process. That can be done without compromising the APMA Program's independence and jurisdiction over the APA.
6. Focusing due diligence on proving or disproving the taxpayer's "hypothesis." The typical transfer pricing case can be boiled down to a few key business and transfer pricing concepts that can be explained during a long elevator ride or a short cocktail party (the "hypothesis"). In the APA process, the taxpayer gets the first chance to present the hypothesis of a case in its submission. If both the taxpayer and the APMA team have fully embraced the APA concept, the APMA team should, in practice, focus its factual development, at least initially, on proving or disproving the taxpayer's hypothesis, rather than starting its own analysis from scratch, as so often seems the case. If the hypothesis turns out to be accurate, the team can focus on the details of the taxpayer's proposed transfer pricing method (TPM), but that review should be fairly limited. If the hypothesis turns out to be inaccurate, the APMA team has a choice: terminate the APA, require the taxpayer to make a new submission (i.e., go back to the end of the line), or pursue a broader inquiry analysis based on the original submission. In reality, most taxpayer hypotheses turn out to be true, obviating the need for a broad, upfront inquiry.
7. Incorporating bilateral considerations earlier. Boilerplate language in the first paragraph of an APA position paper developed for use in negotiating with a foreign Competent Authority (a so-called recommended negotiating position or "RNP") represents that the APA team, in developing its position, has applied the §482 regulations and factored in the experience of the USCA with the relevant foreign Competent Authority. Notwithstanding efforts by APA and USCA management while I was APA Director to increase the participation of USCA staff in the RNP stage of the process, the vast majority of RNPs reflect the APA Program's close adherence to the U.S. regulations and purer conceptual application of the arm's-length standard. The RNP was then "handed off" to the USCA analyst for direct negotiations with the foreign Competent Authority. Those negotiations routinely produced results that reflected past bilateral negotiations as much as (or more than) the U.S. regulations.
The merged APMA Program will eliminate the handoff on bilateral APAs and should produce two important efficiencies: (1) less loss of information, which occurred when the chief IRS negotiator moved from the APA Program to the USCA; and (2) U.S. negotiating positions that incorporate recent bilateral experience and thereby avoid the early posturing that occurs when the two sides start far apart. The APMA Program cannot, and should not, abandon the U.S. regulations, but earlier incorporation of bilateral considerations into the development of the U.S. position will surely accelerate the successful completion of bilateral negotiations.
8. Continuing communication with taxpayers and foreign Competent Authorities. Both APA teams and the USCA prefer to engage in face-to-face meetings. Given conflicts and for other reasons (e.g., limited travel budgets and the increasing size of APA teams), in-person meetings are hard to schedule, routinely occur months apart, and often have to be rescheduled. As an APA team leader in my first years at the Program, I found it especially useful to schedule interim conference calls and to create subgroups to deal with select issues, such as accounting and economic issues and/or special factual considerations. Such approaches need to become standard APMA practice.
9. Elevate issues early. APMA analysts are given considerable independence in developing their cases. Although prudent APMA analysts elevate issues as they arise and active APMA managers keep abreast of the cases for which they're responsible, the system generally relies on the judgment and discretion of APMA analysts and economists to decide which issues should be elevated for review. The problem arises most frequently with economic issues. APMA teams should err on the side of elevating issues. Taxpayers understandably get upset when they think that they have an agreement only to find out late in the process that an APA reviewer has reversed a position. It can take many months to work out the ensuing dispute and hard feelings.
10. Execute closing documents quickly. As noted in my earlier commentary (see note 1), the pressure to close a case by executing formal documents falls off once an agreement is in place. In a bilateral case, it can take months for the Competent Authorities to execute the mutual agreement and months more for the APMA analyst to draft the APA. It's also not unusual for taxpayers to take weeks, if not months, to sign and return the final APA. Of the 10 best practices, this last practice is the simplest way for APMA to cut case processing times.
The new APMA Director, Richard J. McAlonan, has made APA case processing his top priority, even adopting the motto "Certainty Sooner" as a point of emphasis.5 As the APMA Program moves aggressively to reduce the backlog of pending cases and to lower completion times for new cases, it is open to ideas from all quarters about improving case processing. Significant improvements are possible in individual case processing, program-wide policies, and bilateral/multilateral processes. The time is ripe for both tax authorities and taxpayers to play constructive roles in improving both the efficiency (i.e., processing) and the effectiveness (i.e., results) of the process.
This commentary also will appear in the August 2012 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.
3 While I was APA director, we piloted a fast-track system for a small number of simpler cases and found that it was possible to do, but difficult to implement without additional resources. With the total APA and double-tax staff doubling in the past year, the best time to adopt a fast-track process is now, when cases are being assigned to new staff, rather than later when the adoption of a fast-track system would require a major re-shuffling or reordering of undifferentiated caseloads.
4 As used herein, the term "APMA analyst" refers to the APMA individual assigned to lead the APA team. Prior to the merger, such persons were referred to as "APA team leaders," with USCA double-tax staff generally referred to as "analysts."
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)