The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
John C.C. Hughes, acting director of the Internal Revenue Service's Advance Pricing and Mutual Agreement Program (APMA), says the joint effort between the U.S. and Mexico to grant advance pricing agreements to a number of maquiladora companies was a “tremendous success” and advises taxpayers on how they can help expedite the APA process. In an interview with Bloomberg BNA's Sony Kassam, he also opines on the nature of OECD guidance, saying recent revisions to the transfer pricing guidelines don't change the long-standing principles underlying them.
In October, the IRS announced it had agreed to terms with the Mexican State Tax Administration (SAT) to grant double tax relief to companies with maquiladora operations that agree to a unilateral advance pricing agreement with Mexico. It seems to be at least the second time that the U.S. and Mexico have done something like mass negotiations of maquiladora cases. Can you elaborate on the process? Has this agreement been a success for the IRS and U.S. taxpayers?
It was a very collaborative exercise. We worked hand in hand with the Mexican competent authority with respect to all the facets of the analysis. That was a tremendous success. Working collaboratively with them gave us confidence as to what results would be applied in the unilateral APAs that the Mexican tax administration would be entering into with these maquiladoras. It was truly a win-win situation for both tax administrations and for taxpayers as well. My understanding is that unilateral APAs have been either resolved or are on their way to being resolved for nearly all of the maquiladoras we had anticipated would be covered, which is remarkable and a testament to the good work of both administrations.
How has it differed from similar maquila initiatives in the past?
Though the discussions with Mexico on this effort had been taking place over the course of several years, I see the approach we adopted as being similar to what we did with India and that we’re pursing with other treaty partners—a collaborative approach from the ground up.
What is the next step for the IRS-SAT relationship?
We’re turning our attention to other cases that have been in the inventory, including cases that are not covered by this arrangement. We look forward to working with the Mexican competent authority on these cases in a collaborative, productive way.
India’s Central Board of Direct Taxes said in its APA report that it managed to conclude bilateral APAs in 39 months, adding that this is better than what many countries have managed to achieve in their APA program and pointed out that the U.S. for taking about 51 months to complete the bilateral APAs in 2016. Can you comment?
I read the report as looking at the U.S. as an important treaty partner that has been doing APAs for much longer than India. So the comparison is one of experience, as well as the U.S. setting a kind of benchmark. Our relationship with India is very good and I’m pleased for India that they’ve had such success with their APA program. We are eager to have successes with our bilateral APA relationship now that it has been established.
The APA report showed that 24 applications were withdrawn in 2016. You’ve previously stated that the lengthy process of getting an APA is a reason for the withdrawals. The last time withdrawals were that high was in 2002, where 26 applications were withdrawn. What other factors could explain the high number of withdrawals?
We don’t get an exit statement from taxpayers when they withdraw, so I can’t rule out the possibility that there are some taxpayers who’ve said that the APA process has taken too long. I think it’s more likely the case that withdrawals involve situations where a taxpayer’s proposed transactions that they want to cover with an APA no longer take place. For example, it is not uncommon that a line of business a taxpayer wanted to cover with an APA is perhaps acquired by someone else, or perhaps the taxpayer discontinues it for reasons wholly independent of the APA process. However, where a withdrawal does result from something about the APA process, then I take it as incentive for us to improve.
What does the current staffing level look like? How many people are on staff? How many vacancies are there?
We have 62 team leaders, 20 economists and 10 senior managers. So, the professional staff that we have is slightly over 90, and that’s largely on par with prior years. In terms of our staffing and resources, many considerations go into determining APMA’s resources, as it is one office among many in LB&I. My role is to ensure that we are doing the best with the resources that we have.
How have staffing and resource constraints affected the IRS's ability to promptly process APA requests and reach agreements with foreign tax authorities? What’s needed for the IRS to retain its staff?
The relationship between staffing size and processing time of an APA is not an easy one to point to as a problem, because the delays could very well be caused by other things, including the taxpayer. The taxpayer may be taking months to furnish us with information, and it has nothing to do with whether or not we’re adequately staffed. And treaty partners may have their own resource limitations. So, it is not a simple relationship between staff size and processing time.
Interest in APAs has waxed and waned over the years. The program has had more than 10 different directors, including acting directors, and has expanded and contracted depending on budget and other factors. The IRS's philosophy has also gone back and forth, sometimes emphasizing productivity and other times consistency. Can you talk about what factors play into this?
The question speaks to productivity and consistency, and I see those being part and parcel of good, sound program administration. I would resist the idea that productivity is on one side and consistency is on the other. Both are important. That’s always been a driving philosophy of the APA program. Other things are also important – the relationship with treaty partners is important. And so is the commitment to taxpayers, as they are making an investment with us in order to obtain an agreement.
Have the European Commission’s state aid investigations dampened taxpayer interest in APAs in any way that you can perceive?
I have not seen any evidence of this.
What does the IRS feel is its mission regarding APAs today, and why?
We think that APAs are central to the pursuit of voluntary transfer pricing compliance and we seek the certainty that APAs provide to both taxpayers and to the IRS and other countries’ tax administrations. We see APAs as being a benefit to all sides and pursue them with taxpayers where it makes sense for us to do so. On the one hand, it is by right that taxpayers come to us with MAP cases [double-tax cases under the mutual agreement procedure of treaties]. On the other hand, APAs are voluntary, but we see them as an important part of managing the MAP relationship.
How has the implementation of the OECD’s recommendations under its Action Plan on Base Erosion and Profit Shifting affected the APMA program and the IRS’s view of APAs?
One message that I think is important for taxpayers to understand is that the changes to the OECD guidelines brought about by the BEPS program—specifically Actions 8 through 10, and the other changes to the [OECD] guidelines—are live now. They do not have an effective date where, as though the changes don’t apply to cases in existence before that day. The guidelines are ambulatory in the sense that the principles in the revised guidelines have been there even though the precise words used to articulate them are different from prior versions of the guidelines. We’ve applied the principles articulated in the revised guidelines and have discussed them with treaty partners in cases that have taxable years before the implementation of Actions 8 through 10.
So, it’s important that taxpayers understand that our teams need to be familiar with what ‘DEMPE' [development, enhancement, maintenance, protection and exploitation of intangibles] means and the other revisions that have been introduced. But, again, we are following long-standing guiding principles when we discuss cases with our treaty partners.
Lastly, I should add that in APMA we are keenly focused on Action 14 [the action on improving dispute resolution] and making sure that we’re administering the MAP process, and by extension the APA process, in an efficient and thoughtful way.
When you first assumed the position of acting director of the APMA program in July last year, what was something that surprised you?
When I came to the IRS in 2011, I came as a senior manager within APMA. When I took this position, I had spent most of my career in the IRS within APMA, so I knew a lot about the program.
In terms of what I found surprising, I would say that I have gained a greater appreciation of the diversity of competent authority practices around the globe and generally how the competent authority relationship is handled. In part, the differences are cultural, but it is also interesting to see how the differences reflect differences in the structures of tax administrations.
Even though there’s diversity in the conduct of the MAP process, there’s similarity and commonality in the substantive issues that we see from a transfer pricing and a general treaty administration perspective. That’s why one of the things that I’m especially focused on with our teams is making sure that we appreciate that we need to be consistent with our handling of the substantive issues across certain types of cases. This is a challenge, but it’s one that we’re certainly taking steps to improve upon. And I see the effects of that starting to take fruition.
What are some challenges the APMA program currently faces?
As I mentioned earlier, I think consistency across the program in our handling of the MAP and APA processes and consistency in the substantive positions that we take across geographies is a challenge.
We also face some specific challenges with certain kinds of cases. Some of the more challenging cases that we have in the program involve ‘sandwich' transactions. These are interrelated intercompany transactions that involve not just one treaty partner but at least one other, maybe more. These multilateral cases present challenges for us, but we’re continuing to work on handling them better.
As a last point, I want to add that, even with the challenges we face, I have confidence in, and tremendous respect and appreciation for, the 90-some professionals in APMA, including our administrative staff. They are embracing our commitments to improvement per Action 14 and the strategic plan of the Forum on Tax Administration's MAP forum [setting forth the principles by which members of the MAP forum agree to conduct the MAP process] and we’re beginning to see the effects of this and the successes. I appreciate their willingness to sometimes change their past approaches or perspectives on cases and how we handle them. They’re doing a great job with that.
When are the U.S. competent authority statistics coming out?
The U.S. competent authority’s MAP statistics will be coming out with other countries’ statistics per the new reporting approach mandated by Action 14.
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