The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Sony Kassam
Corporate taxpayers should give the IRS all the information associated with a transaction to be covered in an advance pricing agreement—and provide the same material to the foreign tax authority, an agency official said.
“Our teams are going to be wondering how the profits that may be reported within the U.S. for a certain transaction may be affected by other transactions,” John Hughes, the acting director of the Internal Revenue Service’s Advance Pricing and Mutual Agreement Program (APMA), said May 13. APMA is responsible for resolving double tax disputes with foreign governments and for negotiating agreements between a company and the IRS—and often a foreign government—that allow the taxpayer to avoid a transfer pricing audit for future years.
“I’m thinking of cases in which we may have a U.S. tested party vis-à-vis a certain transaction with the foreign party, but then they’re also engaged in another transaction separately with a different foreign party. It’s kind of a sandwich transaction. So in those cases, we want to know what is the full extent of which our tested party is interacting with other affiliates,” he said during an American Bar Association tax section meeting. The tested party is the entity of the multinational group whose profits are measured against those of comparable, unrelated parties in a transfer pricing analysis.
Hughes said he’s witnessed many situations in which a taxpayer will provide varying information from one tax authority to another, which adds months to a case. Both tax authorities need to have the same basic information that is material to the negotiations, Hughes said.
“It’s frustrating for everyone; it’s especially frustrating for us because we’re geared up to try to resolve your case and then we’re disappointed when it happens,” Hughes told practitioners at the meeting. “That happens often enough that it’s good for you to advise your clients that they need to be aware of that.”
Patricia Lewis, a member of Caplin & Drysdale, Chartered, in Washington, said she was surprised to hear taxpayers aren’t simultaneously sharing information because Revenue Procedures 2015-40 and 2015-41 require them to do so.
“I’m surprised to even have to say it,” Hughes said, as attendees laughed.
Another tip for avoiding delays in APA application processing is to submit financial information in the form of Excel files instead of PDF files.
An innovation in Rev. Proc. 2015-41 for APAs is that a draft of the final agreement itself can be submitted with the initial application submission.
The drafted version of the final agreement can help streamline the end of the APA process, but practitioners have put a hold on it because they’re waiting for more guidance, Lewis said.
Pat Lacey, deputy division counsel at the IRS’s Large Business & International division, said APMA and counsel are developing a “new model APA.”
“It’ll be more of a template,” Lacey said. “That will be something taxpayers will be able to access and complete as part of their application. It’s been an effort that counsel and I have been working on.”
Lewis said a template for drafting the final agreement in the early stages of the APA process would be helpful: “It really puts the eye on the ball early on and makes things clear.”
The IRS will have a face-to-face meeting with China at the end of July, Hughes said.
“As with other countries, we’ve expressed our view to China that we see APAs as being an important part of the overall competent authority relationship but also an important part of managing the MAP relationship,” Hughes said, referring to the treaty mutual agreement procedure (MAP), under which governments resolve overlapping tax claims on a multinational company’s income.
Sean Foley, global head of KPMG’s global transfer pricing services group, said the ABA and other groups have suggested taxpayers would benefit from a published list of upcoming meetings between treaty partners. A published schedule could ensure taxpayers give relevant information to the IRS before holding meetings with other competent authorities.
“That would be a relatively simple step to adding some transparency to what is often thought to be a black box situation,” said Foley, who is a former director of the IRS’s APA program.
Lewis added, “It would help get stuff in faster.”
Hughes expressed interest in the idea and said he could see how it would also benefit the U.S. Competent Authority “to impress upon taxpayers that we really need such and such schedule in advance of a meeting because we want to discuss it.”
The U.S. also met with the Indian competent authority in mid-April, when the parties reached terms on an APA that is in the execution process, Hughes said. The two parties have also discussed other pending APAs, though Hughes declined to elaborate further on any settlements.
To contact the reporter on this story: Sony Kassam in Washington at email@example.com
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