IRS PROPOSES UPDATE OF ADVANCE PRICING AGREEMENT REV. PROC.

Announcement 95-49

The Advance Pricing Agreement Program is now more than four years old, and the Service intends to update Rev. Proc. 91-22, 1991-1 C.B. 526, which sets forth procedures for the program.

Included with this announcement is the proposed update of this Revenue Procedure.The Service wishes to receive comments from interested members of the public prior to publishing the final update.

Comments (eight copies) should be sent to Associate Chief Counsel (International) CC:INTL:FO, Internal Revenue Service, 1111 Constitution Avenue, N.W., Room 3501, Washington, D.C. 20224, making reference in the comments to Control Number INTL 0190-92.To ensure that comments are given full consideration, they should be submitted by [date that is 90 days following publication of this announcement in Internal Revenue Bulletin].

The proposed revenue procedure largely restates both the language and substance of Rev. Proc. 91-22. In addition, the update includes new procedures and statements of applicable principles. Many of these additions incorporate innovations that have already been incorporated in the APA process in response to demands of the program's growth.In general, the additions are designed to ensure that (1) the views of the taxpayer and of all involved Service personnel are represented effectively in the APA process, and (2) cases are resolved fairly and promptly in response to the needs of the multinational economic environment.

Specific significant additions or other changes to Rev. Proc. 91-22 are as follows:

 Section of     Nature of Addition or Other Change

* * * * *

Part III

Administrative, Procedural, and Miscellaneous

Section 482 -- Allocations Between Related Parties

Rev. Proc.

SECTION 1. PURPOSE

This revenue procedure updates and supersedes Revenue Procedure 91-22, 1991-1 C.B. 526, and tells how to secure an advance pricing agreement ("APA") from the Office of the Associate Chief Counsel (International) covering the prospective determination and application of transfer pricing methodologies ("TPMs") for international transactions.An APA is an agreement between the Service and the taxpayer on the TPM to be applied to any apportionment or allocation of income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlled, directly or indirectly, by the same interests.

SECTION 2. OVERVIEW

Under the APA request procedure, the taxpayer proposes a TPM and provides data showing that it produces arm's length results between the taxpayer and specified affiliates with respect to specified intercompany transactions.The Service evaluates the APA request by analyzing the data submitted and any other relevant information. After discussion, if the taxpayer's proposal is acceptable, the parties execute an APA covering the proposed TPM.APAs often involve agreements with foreign competent authorities under income tax conventions.

SECTION 3. PRINCIPLES OF THE APA PROCESS

01. The APA process is designed to be a flexible problem-solving process, based on cooperative and principled negotiations between taxpayers and the Service.

02. The TPM generally must accord with the principles of section 482 and the methods specifically described in the regulations thereunder. In appropriate cases, the Service will consider TPMs that use other methods, as permitted by those regulations.In such cases, the taxpayer must show why none of the methods specified in the regulations is applicable or practical.

03. The TPM agreed upon must be consistent with the arm's length standard, supported by available and reliable data, and efficiently administrable. It should produce, with as little adjustment as possible, an anticipated range of arm's length results that clearly reflect income.

04. The APA process is designed to produce an understanding among all the parties on: (a) an appropriate TPM; (b) the factual nature of the transactions involved; and (c) the expected results of the TPM. In appropriate cases, however, an APA may cover only (a) and (b).

05. The taxpayer must, to the extent possible, secure relevant pricing data from independent transactions. If this information cannot be obtained, the taxpayer must identify any transactions or entities it considers to be comparable.Where none exist, the taxpayer must, to the extent possible, secure relevant pricing data from those types of transactions that are similar, even though not exactly comparable, and propose adjustments to create parity with its own operations. The APA process may apply notwithstanding that independent, comparable or similar transactions or businesses do not exist. In such cases, a taxpayer must demonstrate that the proposed TPM otherwise satisfies the requirements of this revenue procedure.

06. The APA Policy Board (the "Policy Board") consists of the Associate Chief Counsel (International), the Assistant Commissioner (International), and the Assistant Commissioner (Examination). The Policy Board establishes Service policy on matters of substantial general importance pertaining to the APA Program, and resolves issues of special importance that arise in connection with particular APA requests or renewals.

07. Application of the TPM to tax years prior to those covered by the APA is an effective means of enhancing voluntary compliance and an effective use of resources in addressing unresolved transfer pricing issues. It is Service policy that, wherever feasible, the TPM should be used for resolving such issues for prior taxable years. When applying the TPM to such prior years, adjustments may need to be made to reflect differences in facts, economic conditions, and applicable legal rules.

08. Promptness in the fair resolution of APA requests and renewals, in keeping with the demands of the multinational economic environment, is a central goal of the APA process.

09. The Service intends that the APA process will retain the flexibility to address the needs of particular taxpayers.To this end, the Service and the taxpayer may, by agreement, adopt special procedures that depart from those set forth in this revenue procedure. Such special procedures might be warranted, for example, in order to meet the needs of small business taxpayers, or in order to facilitate simultaneous negotiation of APAs by the taxpayer, the Service, and foreign competent authorities.

SECTION 4. PREFILING CONFERENCES

Some cases are not suitable for APAs. Even in suitable cases, not all requests will require the same level of factual disclosure and economic or legal analysis. Therefore, the taxpayer may request one or more prefiling conferences to explore informally the suitability of an APA. The prefiling conference is intended to clarify what data, documentation, and analyses are likely to be necessary in order for the Service to be able to consider a request; the need for an independent expert; potentially applicable TPMs; the possibility of an agreement among competent authorities; and the Service's schedule and method for coordinating and evaluating the request with other Service officials.

SECTION 5. CONTENT OF APA REQUESTS

01. General.

(1) All materials submitted with the request become part of the Service's file and will not be returned. Therefore, original documents should not be submitted.

(2) The taxpayer must submit copies of any documents relating to the proposed TPM, and must ensure that all submitted information is properly labeled, indexed, and referenced in the request. If the records or documents to be submitted are too voluminous for transmittal with the request, the taxpayer must describe the terms of the request, certify that the items exist at the time the request is submitted, state where the items are located, state whom the Service can contact to secure the items, and confirm that the items will promptly be made available upon request.

(3) All documents submitted in a foreign language must be accompanied by an English translation.

02. Explanation of the Proposed TPM.

The taxpayer must provide a detailed explanation and analysis of each proposed TPM based on the principles discussed in subsections 3.01-3.05 of this revenue procedure. The request should illustrate each proposed TPM by applying it, in a consistent format, to the prior three taxable years' financial and tax data of the parties. Where historical data cannot be used to illustrate a TPM (for example, where the TPM applies to a new product or business), the request should include an illustration based on projected or hypothetical data. If coverage of three taxable years is inappropriate for any reason, the taxpayer should provide data for an appropriate date range and explain why this range was chosen.

03. General Factual and Legal Items for All Proposed TPMs.

Unless otherwise agreed in a prefiling conference, each request must include the following items:

(1) The organizations, trades, businesses, and transactions that will be subject to the APA.

(2) The names, addresses, telephone numbers, and taxpayer identification numbers of the controlled taxpayers that are parties to the requested APA (the parties).

(3) A properly completed Form 2848 for any persons authorized to represent the parties in connection with the request. If the taxpayer or the taxpayer's authorized representative has retained any other person or persons (including, but not limited to, a law firm, accounting firm, or economic consulting firm) to assist the taxpayer in pursuing the APA request, the taxpayer must also provide a separate written authorization for disclosures to such person or persons and their employees during the Service's consideration of the request, pursuant to the instructions in section 301.6103(c)-1 of the Regulations.

(4) A brief description of the general history of business operations, worldwide organizational structure, ownership, capitalization, financial arrangements, principal businesses, and the place or places where such businesses are conducted, and major transaction flows for the parties.

(5) Representative financial and tax data of the parties for the last three taxable years, together with other relevant data and documents in support of the proposed TPM. This item includes, but need not be limited to, data contained in Form 5471 (Information Report with Respect to a Foreign Corporation); Form 5472 (Information Report of a Foreign Owned Corporation); tax returns; financial statements; annual reports; other pertinent U.S. and foreign government filings (for example, customs reports or SEC filings); existing pricing, distribution, or licensing agreements; marketing and financial studies; and company-wide accounting procedures, business segment reports, budgets, projections, business plans, and worldwide product line or business segment profitability reports.

(6) The functional currency of each party and the currency in which payment between parties is made for the transactions that will be covered by the APA.

(7) The taxable year of each party.

(8) A description of significant financial accounting methods employed by the parties that have a direct bearing on the proposed TPM.

(9) An explanation of significant financial and tax accounting differences, if any, between the U.S. and the foreign countries involved that have a bearing on the proposed TPM.

(10) A discussion of any relevant statutory provisions, tax treaties, court decisions, regulations, revenue rulings, or revenue procedures that relate to the proposed TPM.

(11) An explanation of the taxpayer's and the government's positions on all previous and current issues at the examination, appeals, judicial, or competent authority levels (and any resolutions) that relate to the proposed TPM. The same information may also be required for similar issues involving foreign tax authorities.

04. Specific Factual Items for a Proposed TPM other than a Cost Sharing Arrangement.

The taxpayer must apply the general guidelines in the regulations under section 482 of the Code in developing the TPM proposed in the APA request. For example, the following information may be appropriate to establish the arm's length basis of the proposed TPM:

(1) Pertinent measurements of profitability and return on investment (for example, gross profit margin or markup, gross income/total operating expenses, net operating profit margin, or return on assets), to provide a basis for comparison to comparable or similar businesses.

(2) A functional analysis of each party, setting forth the economic activities performed, the assets employed, the economic costs incurred, and the risks assumed (see paragraph (6) below for guidelines).

(3) An economic analysis or study of the general industry pricing practices and economic functions performed within the markets and geographical areas to be covered by the APA.

(4) A development of similar measurements of profitability within the general industry for the factors selected under paragraph (1) above.This information will give the Service a perspective on the industry within which the taxpayer operates, but will not necessarily establish the proposed TPM.

(5) A list of the taxpayer's competitors and a discussion of any uncontrolled transactions, lines of business or types of businesses that may be comparable or similar to those addressed in the request, as well as research efforts, underlying financial data, and screening criteria used to identify possible comparables.

(6) A detailed presentation of criteria used to identify possible independent comparables or similar businesses. For example, the following factors could be used to adjust the activities of selected independent comparables or similar businesses to create parity with the activities of the parties: segregating lines of business activities performed; accounting differences; functional differences relating to activities performed (for example, marketing), assets employed (for example, inventories and receivables), risks (for example, risks of currency fluctuations), and costs incurred (for example, warranty); volume or scale differences; differing economic assumptions (for example, cost of capital and inflation rates); market penetration (for example, allowances granted and product demand differences); market level of operations; product maturation; terms of sale (for example, freight, insurance, shipping, and financing); and capitalization (for example, debt/equity ratios). The presentation should include a list of entities or transactions considered as possibly comparable, and an explanation of why each entity or transaction was either accepted or rejected as comparable.

(7) A development of similar measurements under paragraph (1) above and ranges for such measurements for the possible independent comparables or similar businesses under paragraph (5) above based on adjustments under paragraph (6) above.

05. Specific Factual Items for a Cost Sharing Arrangement.

The taxpayer must apply the general guidelines in the regulations under section 482 of the Code in developing the cost sharing arrangement proposed in the request.For example, the following information may be appropriate to establish that the proposed cost sharing arrangement is bona fide:

(1) The date that the arrangement commenced, the date the arrangement was reduced to writing, and the date each participant entered the arrangement;

(2) The text of the arrangement, along with any agreements, amendments, addenda, exhibits, and previous agreements for which the current agreement is a successor (if there have been changes in the arrangement during the past 10 years, the taxpayer must provide the dates and substance of the changes);

(3) The history of the business operations, the geographic locations, and principal business activities (for example, manufacturing or marketing) of each of the participants;

(4) Each participant's original contribution to the arrangement, tangible and intangible;

(5) Whether royalties or other amounts were paid to the participants who contributed intangibles, and the method used to compute the amount of such payments;

(6) Whether the arrangement provides for research and development to be conducted in general product areas, processes, or services, or for the research and development of specific products (including representative documents describing the technical scope of the developmental efforts, and documentation explaining the relationship between the participants' businesses and the expected use of the results of the developmental efforts);

(7) How each participant's benefit or expected benefit can be measured (for example, on units of production, budgeted sales, actual sales, or the number of years the research and development will be used);

(8) Which costs are to be shared or excluded (for example, costs of technology acquired from third parties; non-product-specific development costs; costs associated with abandoned projects; costs associated with specific stages of product development; and relevant labor, material, and overhead costs), and how the division of costs is based;

(9) The ownership rights of each participant in the developed intangibles;

(10) Whether the participants have an established procedure for periodically estimating the expected benefits that each will receive from the research and development and for adjusting each participant's share of costs accordingly;

(11) The accounting procedures used to determine each entity's contribution, and whether these procedures have been uniformly followed;

(12) How the cost sharing payments made and received have been treated for U.S. income tax purposes;

(13) Each participant's gross and net profitability (historical for five taxable years and projected for two taxable years) with regard to the product area covered by the arrangement;

(14) Whether new participants may join the arrangement, and, if so, the mechanism used to determine how and when they will pay for any partially or fully developed intangible property; how the arrangement provides for the expansion of an existing participant's rights; the mechanism used to repurchase the rights of a participant that withdraws from the arrangement, or of a participant that will not be using its rights in the active conduct of its trade or business (for example, a participant who will simply be selling or licensing its rights in any intangible property produced); and an explanation of the financing arrangements for the matters listed in this item;

(15) Whether any payments are made for contract research, the manner in which such payments are accounted for by the participants, and how such payments are treated for U.S. income tax purposes;

(16) Whether any payments are received from third parties for the licensing or selling of intangible property developed through the arrangement, and how such payments are treated for U.S. income tax purposes; and

(17) Representative internal manuals, directives, guidelines, and similar documents prepared for accounting, financial, or managerial personnel for purposes of implementing or operating the cost sharing arrangement (for example, research and development committee meeting minutes, market studies, economic impact analyses, capital expenditure budgets, engineering studies, reports and studies of trends and profitability in the industry published by third parties, and financial analyses for financing and cash flow purposes).

06. Discussion of Collateral Income Tax Issues.

The taxpayer must discuss any relevant collateral income tax issues raised by the proposed TPM under United States law.

07. Critical Assumptions.

The taxpayer must describe a proposed set of critical assumptions. Critical assumptions are objective business and economic criteria that are fundamental to the taxpayer's proposed TPM. A critical assumption is any fact about the taxpayer, a third party, or an industry that, if changed, would significantly affect the substantive terms of the APA, regardless of whether the change is within the taxpayer's control (for example, a new business strategy or mode of conducting operations, or the cessation or transfer of a business segment or entity covered by the APA) or beyond it (for example, a significant deviation from budgeted sales volume, or results that differ from the reasonably expected range of arm's length results).

08. Contents of Annual Report.

Section 10.01 of this revenue procedure provides that the taxpayer must file an annual report for each taxable year covered by the APA. The taxpayer should propose in the request a list of items to be included in each report. For example, the report should generally include the following items: (a) the application of the TPM to the actual operations for the year; (b) a description of any changes in critical assumptions, and the reasons therefor (or, if there have been no changes, a statement to that effect); and (c) an analysis of any compensating adjustments to be paid by one entity to the other, and the manner in which the payments are to be made. Other items may be appropriate to the taxpayer's particular circumstances.

09. Term.

(1) The taxpayer must propose an initial term for the APA. For example, the APA could take effect at the beginning of the taxable year during which it was requested or signed, and last for three taxable years. The term should be appropriate to the industry, product, or transaction involved.

(2) The APA request must be filed no later than the date (including extensions) by which the taxpayer's federal income tax return, for the first taxable year to be covered by the APA, is due to be filed.For purposes of the preceding sentence, an APA request will be considered filed on the date the required user fee is paid, provided that a substantially complete APA request is filed with the Service within 120 days thereafter.

10. Request for Competent Authority Consideration.

The taxpayer must state whether any of the parties to a request are residents of or conduct activities in a foreign country that has a tax treaty with the United States, and whether the taxpayer proposes an agreement among competent authorities (see section 7 of this revenue procedure for guidelines). If the taxpayer proposes an agreement among competent authorities, the taxpayer's request must include the information described in [sections 5.06(a) and (b) and, in a separate document, section 5.06(j) of the forthcoming successor to Rev. Proc. 91-23, 1991-1 C.B. 534, as provided in draft form in Announcement 95-9, 1995-7 I.R.B. 57].

11. Perjury Statement.

The taxpayer must include in any request for an APA, and any supplemental submission, a declaration in the following form:

Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, I have included all the relevant facts relating to the request and the facts presented in support of the request for the advance pricing agreement are true, correct, and complete.

The declaration must be signed by the person or persons on whose behalf the request is being made and not by the taxpayer's representative. The person signing for a corporate taxpayer must be an authorized officer of the taxpayer who has personal knowledge of the material facts. The person signing for a trust or a partnership must be a trustee or a partner who has personal knowledge of the material facts.

12. Signatures.

The taxpayer or the taxpayer's authorized representative must sign the request. If an authorized representative is to sign, the taxpayer and representative must conform to the rules of Rev. Proc. 92-7, 1992-1 C.B. 640.

13. Copies and Mailing.

The request may be mailed to the Director, APA Program, Office of Associate Chief Counsel (International) CC:INTL, Internal Revenue Service, P.O. Box 23764, Washington, DC 20026-3764.APA requests may also be hand delivered pursuant to Rev. Proc. 88-4, 1988-2 C.B. 586, to the Director, APA Program, Office of Associate Chief Counsel (International) CC:INTL, Internal Revenue Service, Room 4552, 1111 Constitution Avenue, N.W., Washington, D.C. 20224. The taxpayer should provide the original and seven copies of the request, and of all supplemental materials submitted while the request is pending.

14. User Fees.

Pursuant to Rev. Proc. 95-1, 1995-1 I.R.B. 9, the user fee for each request and each renewal is $10,000, except as reduced pursuant to that revenue procedure for certain U.S. persons with sales revenues of less than $100 million. The principles of Rev. Proc. 95-1, including but not limited to section 14 thereof, shall apply to all questions related to user fees in connection with APAs.

SECTION 6. PROCESSING OF APA REQUESTS

01. Initial Contact.

After receiving a request for an APA, the Director of the APA Program (the "APA Director") will contact the taxpayer to discuss any questions that the Service may have, or to ask for any additional information or documents believed necessary in order to initiate processing of the request. Additional information and documents must be supplied by the date specified by the Service, as extended for good cause.

02. Coordination with Other IRS Offices.

Upon receipt of a request, the APA Director will coordinate the evaluation of the request with other appropriate Service offices and officials, including the appropriate District Director, Appeals and District Counsel. In appropriate cases, such as where a request proposes an agreement between competent authorities, the APA Director will coordinate with the U.S. competent authority.

03. Evaluation Process.

The Office of Associate Chief Counsel (International), in coordination with the appropriate District Director and other appropriate Service offices and officials, will evaluate the taxpayer's APA request by discussing it with the taxpayer, verifying the data supplied, and requesting additional supporting data if necessary. The evaluation of the request will not constitute an examination or inspection of the taxpayer's books and records under section 7605(b) or any other provision of the Code.

04. Formation of the APA Team and Designation of Team Leader.

Within 45 days of receiving the taxpayer's APA request and any required user fees, the APA Director will appoint an APA Team to review the request. The APA Team will consist of at least one representative of the Office of Associate Chief Counsel (International), as well as representatives of the appropriate District, Appeals, and, where applicable, the U.S. competent authority.The APA Director will appoint a Team Leader to oversee the APA Team's activities.

05. Negotiation and Drafting.

(1) Within sixty days of receiving the taxpayer's APA request and any required user fees, the APA Team shall arrange with the taxpayer for an initial meeting.In connection with the initial meeting, the APA Team and the taxpayer shall agree on a Case Plan and Schedule, to which everyone involved in the APA -- both government and taxpayer personnel -- will be expected to adhere. The Case Plan and Schedule shall be approved by the APA Director. The Case Plan and Schedule should list each issue raised by the APA request, and should include a schedule for seeking to resolve each of the issues. The Case Plan and Schedule generally should reflect agreement between the APA Team and the taxpayer on the scope and nature of any additional information that will be required to negotiate an APA. Firm dates should be agreed upon for case milestones, including: (a) submission of any necessary additional information by the taxpayer; (b) evaluation of the information by the government; (c) negotiation of a recommended agreement, including the scheduling of meetings needed to conduct the negotiations; and (d) presentation of the recommended agreement, in writing, to the Associate Chief Counsel (International).

(2) The time scheduled for completion of the case milestones will depend to some extent on the scope and complexity of the particular case. Nine months, for example, might be appropriate for some cases, and twelve months for others that are larger or more complicated. Longer time periods might be appropriate in some circumstances. In all cases, however, the schedule should be agreed upon by both taxpayers and the APA Team, and once agreed upon the schedule should be maintained. It is expected that general agreement between the APA Team and the taxpayer on the outlines a recommended agreement should take will be reached relatively early during consideration of the APA, typically within about six months of the start of negotiations. Because competent authority negotiations involve personnel from outside the Service, such negotiations might require time in addition to that covered by the schedule. In all cases, however, the Service will seek to work with the competent authority of the treaty partner involved to minimize the time needed for competent authority resolution.

(3) To minimize delays caused by the need to coordinate different parties' schedules on short notice, the time and place of meetings required for any steps in the case should be determined in the Case Plan and Schedule.

(4) Failures by either the taxpayer or the APA Team to meet case milestones will be addressed promptly. If a taxpayer fails to meet one of the case milestones without good cause, the Service will consider the APA request to be withdrawn. Thus, in order to continue to pursue the APA, the taxpayer would be required to refile the request and pay a new user fee. In general, only clear and compelling circumstances, which could not reasonably have been foreseen at the time the Case Plan and Schedule was determined, will constitute good cause for failing to meet a case milestone. If the APA Team fails to meet one of the case milestones, the APA Director will promptly schedule a meeting involving both the taxpayer and the APA Team. If serious issues of case management, or other problems, surface in that meeting, the Associate Chief Counsel (International), in cooperation with the Policy Board, will be consulted to resolve any problems blocking adequate case progress.

(5) In some circumstances, development of the case after agreement on the Case Plan and Schedule will suggest, to both the APA Team and the taxpayer, that some milestone dates should be adjusted. To preserve flexibility, the APA Team and the taxpayer may amend the Case Plan and Schedule by mutual agreement, subject to the approval of the APA Director.

(6) Negotiations between taxpayers and the APA Team generally should proceed by means of draft agreements marked to show changes from the previous draft, with brackets used to indicate the parties' differing positions on still-unresolved issues. The exchange of draft agreements, rather than of letters or of summary agreements in principle, should help avoid misunderstandings concerning the scope of tentative agreement between taxpayers and the APA Team.The Service does not respond to letters seeking to confirm the substance of oral discussions, and the absence of a response to such a letter is not confirmation of the substance of the letter.

(7) The function of the APA Team is to recommend an agreement to the Associate Chief Counsel (International), who will consult as appropriate with the APA Policy Board. The members of the APA Team, or other Service personnel other than the Associate Chief Counsel (International), are not authorized to bind the Service to any particular outcome of APA negotiations.

06. Signature.

Signature of an APA by the Associate Chief Counsel (International) and the taxpayer will constitute agreement to the APA.

07. Withdrawing the Request.

The taxpayer may withdraw the request at any time before the later of (a) the conclusion of a competent authority agreement, if any, or (b) the execution of the APA. If the request is withdrawn, any previous understandings between the parties related to the request will be of no further force and effect unless otherwise required by law.

08. Rejecting the Request.

The Service may decline either to accept any APA request or to execute any APA after a request has been accepted. If the Service proposes to reject an APA request, the taxpayer will be granted one conference of right. Other conferences may be granted at the Service's discretion.

SECTION 7. COMPETENT AUTHORITY CONSIDERATION.

01.Where any of the parties to a request are entitled to seek relief under the mutual agreement provision of a tax treaty between a foreign country and the United States, the competent authorities may enter into agreements concerning the APA. Requests similar to APA requests that are initiated through treaty partners and submitted to the U.S. competent authority will be processed under this revenue procedure. It generally is Service policy that coordination among the taxpayer, the Service, and the competent authorities of treaty partners should begin at the earliest possible stage of consideration of an APA request including, where possible, the prefiling stage. The APA negotiation process should facilitate such coordination. For example, in many cases, it will be appropriate for the taxpayer and the Service APA Team to agree preliminarily on (i) the general structure of an appropriate TPM, (ii) a pool of potential comparables, and (iii) the information that will be necessary for the Service to negotiate effectively with the foreign competent authority and to administer an APA if one is concluded. The Service then will seek to conclude an agreement with the foreign competent authority that will avoid subjecting the taxpayer to double taxation. The taxpayer should remain available to assist the Service in reaching agreement with the foreign competent authority. Final agreement to the negotiated APA will be sought among the taxpayer, the Service, and the foreign competent authority.

02. The purpose of the competent authority agreement is to avoid double taxation. The U.S. competent authority will conclude an agreement only with the consent of the taxpayer. If such an agreement is not acceptable to the taxpayer, the taxpayer may withdraw the APA request (see subsection 6.07 of this revenue procedure). If the competent authorities are unable to reach an agreement or the taxpayer does not accept the competent authority agreement, the Service and the taxpayer may nevertheless execute an APA (see subsection 7.07) or may decline to execute an APA (see subsection 6.08).

03.The taxpayer must cooperate with the Service and the U.S. competent authority, pursuant to the standards set forth in [sections 4.05 (a), (b) and (j) of the forthcoming successor to Rev. Proc. 91-23, 1991-1 C.B. 534, as provided in draft form in Announcement 95-9, 1995-7 I.R.B. 57] and any other applicable revenue procedure. Any information received or prepared by the Service, including information furnished by the taxpayer or the related foreign entity, will be subject to the restrictions on disclosure of tax related information provided by U.S. law and the applicable income tax convention.

04.It may be necessary to request sensitive confidential data (such as trade secrets) which, if disclosed, could harm the taxpayer's competitive position. In such cases, the parties will attempt to negotiate a mechanism to permit verification by a foreign competent authority without disclosing such information.

05.Where the competent authorities enter into an agreement covering an APA, the Service will, to the extent practicable, agree to a mutual exchange of information with the foreign competent authority concerning any subsequent modifications, cancellation, revocation, requests to renew, evaluation of annual reports, or examination of the taxpayer's compliance with the terms and conditions of the APA.

06. The U.S. competent authority will seek to persuade the foreign competent authority to use APA data only on terms similar to those described in subsections 9.04 and 9.05 of this revenue procedure.

07. To minimize taxpayer and governmental uncertainty and administrative cost, bilateral or multilateral APAs generally are preferable to unilateral APAs when competent authority procedures are available with respect to the foreign country or countries involved. In appropriate circumstances, however, the Service may execute an APA with a taxpayer without reaching a competent authority agreement. The taxpayer must show good and sufficient reasons for such an APA. When a unilateral APA request involves taxpayers operating in a country that is a treaty partner, the Service may notify the treaty partner of the filing of the request and provide the treaty partner with other information related to the request, as part of normal relations with the treaty partner's competent authority. In some circumstances, procedures agreed upon with particular foreign competent authorities may preclude a unilateral APA.

.08 If a unilateral APA is executed, and the taxpayer has activities with a related party in a treaty country, the competent authority procedures set forth in [the forthcoming successor to Rev. Proc. 91-23, 1991-1 C.B. 534], and in any other applicable revenue procedure, will apply if double taxation subsequently develops as a result of the taxpayer's compliance with the terms and conditions of the APA. If such double taxation occurs, the U.S. competent authority may deviate from the terms and conditions in the APA in an attempt to resolve double taxation.

SECTION 8.INDEPENDENT EXPERT OPINION

01. The taxpayer may be required to provide at its own expense an independent expert, acceptable to both the taxpayer and the Service (and, if applicable, the foreign competent authorities) to review and opine on the proposed TPM. The taxpayer may suggest in its APA request whether an independent expert is needed, or the Service (or, if applicable, the foreign competent authorities) may determine that an independent expert is needed for the evaluation of the taxpayer's APA. An independent expert will not be necessary in every case.

02. For purposes of this revenue procedure, an expert is any person who, by agreement between the taxpayer and the Service (and, if applicable, the foreign competent authorities), possesses expert education or experience in a field of study, industry or geographic area that is relevant to the subject matter of the taxpayer's APA request.

03.For purposes of this revenue procedure, an expert is independent if the expert has not participated to any material extent in the development of the request, and has not in the past assisted either the Service or the taxpayer in matters substantially related to the request.

04.If an expert is necessary, the expert will critically analyze the taxpayer's proposed TPM and render a written opinion. The opinion will address any questions and concerns raised by the Service or the taxpayer (and, if applicable, the foreign competent authorities); conclude whether the proposed TPM or a revised version fairly supports and produces an arm's length approach; and provide the basis for this opinion. However, the expert's opinion will not be binding on any of the parties. The taxpayer and the Service (and, if applicable the foreign competent authorities) will have access to the expert's report and supporting documentation.

05.If an independent expert is necessary, the taxpayer must provide a waiver under section 6103(c) of the Code to the Service for purposes of discussing returns or return information with the expert. The taxpayer must also ensure that the expert is familiar with the provisions of this revenue procedure and that any opinion rendered by the expert complies with those provisions.

SECTION 9. LEGAL EFFECT

01.An APA is a binding agreement between the taxpayer and the Service.

02.If the taxpayer complies with the terms and conditions of the APA, the Service will regard the results of applying the TPM as satisfying the arm's length standard, and, except as provided in subsection 10.03 of this revenue procedure, will not contest the application of the TPM to the subject matter of the APA. The taxpayer remains otherwise subject to U.S. income tax laws, and is entitled to any benefits and competent authority relief otherwise available under U.S. income tax laws and tax treaties.

03.An APA shall not constitute precedent except with respect to the taxpayer, taxable years and transactions to which the APA specifically relates.

04.Except as otherwise provided by written agreement, neither the APA nor any non-factual oral or written representations or submissions made in conjunction therewith may be introduced by the taxpayer or the Service as evidence in any judicial or administrative proceeding in relation to any tax year, transaction, or person not covered by the APA. As part of its request, the taxpayer must provide a list of representations or submissions it considers to be non-factual for review and concurrence by the Service.

05.Except as otherwise provided by written agreement, if an APA is not executed or if an executed APA is later revoked or canceled, neither the APA or the proposal to use a particular TPM nor any non-factual oral or written representations or submissions made during the APA process may be introduced by the taxpayer or the Service as an admission by the other party in any administrative or judicial proceeding for the taxable years for which the APA was requested or executed.

SECTION 10 ADMINISTERING THE APA

01. Annual Reports.

(1) For each taxable year covered by the APA, the taxpayer must file a timely and complete annual report describing the taxpayer's actual operations for the year and demonstrating good faith compliance with the terms and conditions of the APA. The report must include all items called for by the APA, and any requests to renew, modify or cancel the APA.

(2) The taxpayer shall file an original and four copies of each report, no later than ninety (90) days after filing the taxpayer's U.S. income tax return (determined with regard to any extensions of time for filing) for the year covered in the report, with the Associate Chief Counsel (International) at the following address: Director, APA Program, Office of Associate Chief Counsel (International) CC:INTL, Internal Revenue Service, P.O. Box 23764, Washington, DC 20026-3764. The report must comply with subsections 5.11 and 5.12 of this revenue procedure.

(3) The Service will review the annual report for any items requiring a response (for example, a request to modify the APA). This review will be coordinated among the taxpayer, the District Director, the Office of Associate Chief Counsel (International), and (if applicable) foreign competent authorities.

(4) If a response is not required, the Service will contact the taxpayer regarding an annual report only if it is necessary to clarify or complete the information contained in the annual report. Additional information must be supplied by the date specified by the Service, as extended for good cause. Any contact between the taxpayer and the Service for the purpose of clarifying the information contained in the annual report will not constitute an examination, or the commencement of any examination, of the taxpayer for purposes of section 7605(b) or any other provision of the Code.

02. Compensating Adjustments.

(1) If the results of applying the TPM differ from those contemplated by the APA, the APA may permit the taxpayer and its related foreign entity to make a compensating adjustment. For example, if the APA provides for a range of expected operating results, and the actual operating results are outside that range (but within any limits specified in the APA), the APA may permit the parties to make a compensating adjustment to bring the results to an agreed upon point within the described range.

(2) The taxable income and earnings and profits of both the taxpayer and its related foreign entity for a taxable year covered by an APA will include all income generated as a result of the TPM as increased or decreased by any compensating adjustment for that year. A compensating adjustment will be deemed to accrue as of the last day of the taxable year to which it applies, and it will not be taken into account in the computation of any required estimated tax installments for such year.For all other U.S. income tax purposes, after taking into consideration any compensating adjustment, the adjusted figures will be used.

(3) A compensating adjustment includes any subsequent compensating adjustments. A subsequent compensating adjustment arises when the taxpayer or the Service makes normal and routine adjustments (for example, correction of computational errors) to the determination and computation of the taxpayer's TPM during the taxable year or years under the APA, as determined in accordance with the TPM. The generally applicable Code rules relating to assessment, collection and refund of tax apply to any resulting change in federal income tax liability because of a subsequent compensating adjustment.

(4) The taxpayer or its related foreign entity must pay the compensating adjustment to the other entity within ninety (90) days of the date of filing the taxpayer's Federal income tax return for the year giving rise to the adjustment. Any subsequent compensating adjustment must be paid within ninety (90) days of the date of any adjustment upon examination as finally determined by the Service and agreed to by the taxpayer or the filing of an amended Federal income tax return by the taxpayer.

(5) Subject, where applicable, to agreement between competent authorities, the taxpayer or the related foreign entity may employ any method that accords with Rev. Proc. 65-17, 1965-1 C.B. 833, for paying compensating adjustments or subsequent compensating adjustments, including checks, wire transfers, offsets through intercompany accounts, or recharacterized dividends. All payments must be documented and disclosed in the annual report.

(6) Payments of compensating adjustments and subsequent compensating adjustments will not be subject to withholding taxes or penalties, and no interest will accrue on any receivable or payable with respect to such adjustments if payment is made within the 90-day period. A compensating adjustment may, however, be taken into account for purposes of redetermining any foreign tax credits in accordance with section 901 of the Code.

(7) Where an agreement between competent authorities is sought as part of the APA request, the principles stated in this section will be discussed with the appropriate foreign competent authority to seek to ensure substantially identical treatment of the taxpayer's related foreign entity.

03. Examination.

(1) If the District Director examines a tax year covered by an APA, the examination of the APA will be limited to the factors in paragraph (2) below. The District Director will not re-evaluate the TPM itself.

(2) The District Director may require the taxpayer to establish that (a) the taxpayer has complied in good faith with the terms and conditions of the APA; (b) the material representations in the APA and the annual reports remain valid and accurately describe the taxpayer's operations; (c) the supporting data and computations used in applying the TPM were correct in all material respects; (d) the critical assumptions underlying the APA remain valid; and (e) the taxpayer has consistently applied the TPM and met the critical assumptions.

(3) If the District Director determines that any requirement in paragraph (2) has not been satisfied, the issue will be submitted to the Associate Chief Counsel (International) for resolution. The Associate Chief Counsel (International) will decide either to continue to apply the APA; revoke the APA (see subsection 10.05 of this revenue procedure); cancel the APA (see subsection 10.06); or revise the APA (see subsection 10.07).

(4) The District Director may, without securing the consent of the Associate Chief Counsel (International), propose normal and routine audit adjustments to the determination and computation of the operating results of the taxpayer's TPM during the taxable year or years under examination (as determined in accordance with the TPM) without affecting the continued validity or applicability of the APA. If the taxpayer agrees with the proposed adjustments, they will be given effect through payment of additional compensating adjustments. If the taxpayer does not agree, the taxpayer may contest the proposed adjustments through normal administrative and judicial proceedings. Any changes to compensating adjustments previously made by the taxpayer, in respect of the taxable year or years under examination, that arise as a result of the audit adjustments made by the District Director will be made within ninety (90) days of a final determination of the audit adjustments. Any such changes to compensating adjustments will be treated as subsequent compensating adjustments for purposes of subsection 10.02 of this revenue procedure.

04. Record Retention.

(1) The taxpayer must maintain books and records sufficient to enable the Service to examine the taxpayer's compliance with the APA. The APA may specify the books and records that are necessary to fulfill this objective.

(2) Upon examination, information requested by the Service must generally be made available to the Service upon written request within sixty (60) days, and translations provided within 30 days of a request for translations of specific documents, as extended for good cause. The fact that a foreign jurisdiction may impose a penalty upon the taxpayer or other person for disclosing the material will not constitute reasonable cause for noncompliance with the Service's request.

05. Revoking the APA.

(1) The Associate Chief Counsel (International) may revoke the APA if there has been fraud or malfeasance (as defined in section 7121 of the Code) or disregard (as defined in section 6662(b)(1) and (c)) by the taxpayer in connection with the APA, including but not limited to fraud, malfeasance or disregard involving any of the following: the material facts set forth in the request, subsequent submissions (including the annual report), or lack of good faith compliance with the terms and conditions of the APA. Material facts are those that, if known by the Service, would have resulted in a significantly different APA (or no APA at all). The Associate Chief Counsel (International) is not required to revoke the APA, and may require the taxpayer to continue to abide by it.

(2) Where the APA is revoked for any reason, the revocation may be retroactive to the first day of the first taxable year for which the APA was effective.

(3) If the APA is revoked for any reason, the Service may determine deficiencies in income taxes and additions thereto in accordance with applicable provisions of the Code. In addition, (a) relief under Rev. Proc. 65-17, 1965-1 C.B. 833 may be denied; (b) if the Service determines that the taxpayer may avail itself of the relief under Rev. Proc. 65-17, interest on any account receivable established under subsection 4.03 of that revenue procedure may be determined not to be subject to mutual agreement or correlative relief; (c) the revocation of the APA may be treated as an "egregious case" under Rev. Rul. 80-231, 1980-2 C.B. 219, with the result that the taxpayer may be denied a foreign tax credit in accordance with that ruling; and (d) the unilateral relief provisions of [the forthcoming successor to Rev. Proc. 91-23, 1991-1 C.B. 534] may not be available. When an APA has been the subject of negotiation with a foreign competent authority, the Service will seek to coordinate any action concerning revocation of the APA with the foreign competent authority.

06. Cancelling the APA.

(1) The Associate Chief Counsel (International) may cancel the APA if the District Director, with the concurrence of the Associate Chief Counsel (International), determines that there was a misrepresentation, mistake as to a material fact, failure to state a material fact, or lack of good faith compliance with the terms and conditions of the APA (but not fraud, malfeasance or disregard) in connection with the request for the APA, or in any subsequent submissions (including the annual report). Material facts are those that, if known by the Service, would have resulted in a significantly different APA (or no APA at all).

(2) The Associate Chief Counsel (International) may waive cancellation if the taxpayer can show good faith or reasonable cause to the satisfaction of the Associate Chief Counsel (International), and if the taxpayer agrees to make any adjustment proposed by the Associate Chief Counsel (International) to correct for the misrepresentation, mistake as to a material fact, failure to state a material fact, or noncompliance.The Associate Chief Counsel (International) is not required to cancel the APA, and may require the taxpayer to continue to abide by it.

(3) Where the APA is canceled for any reason, the cancellation will be effective as of the beginning of the year in respect of which the misrepresentation, mistake as to a material fact, failure to state a material fact, or noncompliance occurs.

(4) If the APA is canceled for any reason, then as of the effective date of the cancellation the APA will cease to be of any further force and effect with respect to the taxpayer and the Service for U.S. income tax purposes. After the effective date of the cancellation, the tax treatment of the transactions covered by the APA will be subject to all U.S. tax rules (including treaty rules) that otherwise apply. When an APA has been the subject of negotiation with a foreign competent authority, the Service will seek to coordinate any action concerning cancellation of the APA with the foreign competent authority.

07. Revising the APA.

(1) If a critical assumption has not been met (or there has been a change in law or treaty as described in subsection 10.09 of this revenue procedure), the APA may be revised (including, where appropriate, cancelled by agreement).

(2) If a critical assumption has not been met, the taxpayer must notify the APA Director, including with the notification supporting documentation and a statement whether a revision appears appropriate. The taxpayer shall file the notification at any time during the year giving rise to the failure to meet a critical assumption, but no later than the date for filing the annual report for that year.In providing the notification, the taxpayer must follow the procedures contained in subsections 5.11-5.13 of this revenue procedure.

(3) If a critical assumption has not been met, the taxpayer and the Service will discuss how to revise the APA. If the taxpayer and the Service cannot execute a revised agreement, the APA will be cancelled as of the beginning of the taxable year giving rise to the failure to meet a critical assumption. If the Service and the taxpayer can agree on a revised APA, the effective date of the revised APA will be stated in the new APA.

(4) If the Service determines that a failure to meet a critical assumption neither occurred for good faith business reasons nor resulted from economic circumstances beyond the control of the taxpayer, the Service may revoke (see subsection 10.05 of this revenue procedure) or cancel (see subsection 10.06) the APA, whichever may apply.

(5) If the Service and the taxpayer agree to revise an APA that has been subject to competent authority agreement, the revised APA will be submitted to the U.S. competent authority in order to seek the consent of the foreign competent authority to the revised APA. If the foreign competent authority refuses to accept the revised APA, or if the competent authorities cannot agree on a revised APA agreeable to all parties, the taxpayer and the Service may: (a) agree to continue to apply the existing APA, (b) agree to apply the revised APA, or (c) agree to cancel the APA as of an agreed date.

08. Renewing the APA.

A taxpayer may request renewal by following the form and procedures that apply to initial APA requests. The taxpayer must submit appropriate supporting documentation with the request. The taxpayer must file the request to renew no earlier than nine months before the expiration of the initial term or any renewal term. In general, the Service will seek to base a renewal on the TPM set forth in the initial APA. The Service, however, reserves the right to require changes in the TPM based on changes in underlying facts or applicable law, or changes or developments in Service policy. Ordinarily, an APA will be renewed only with the consent of all parties to the initial APA.

09. Change in Law or Treaty.

If there is a change in any applicable U.S. law or treaty that changes the federal income tax treatment of any matter covered by the APA, the new law or treaty provision supersedes the APA to the extent the APA is inconsistent therewith. The parties may revise the APA under subsection 10.07 of this revenue procedure to reconcile it with the new law or treaty provision.

SECTION 11. DISCLOSURE

The information received or generated by the Service during the APA process relates directly to the potential tax liability of the taxpayer under the Internal Revenue Code. Therefore, the APA and such information are subject to the confidentiality requirements of section 6103 of the Code. The information may also be commercially sensitive and may be proprietary or otherwise privileged. In addition, the APA and such information may be confidential pursuant to the terms and conditions of income tax conventions between the United States and involved foreign governments.

SECTION 12. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 91-22, 1991-1 C.B. 526, is superseded.

SECTION 13.EFFECTIVE DATE

This revenue procedure will apply to all APA requests and renewals received on or after [the date that is 15 days after the date of publication of this revenue procedure in final form in the Internal Revenue Bulletin].

DRAFTING INFORMATION

The principal author of this document is Michael C. Durst of the Office of the Associate Chief Counsel (International). For further information regarding this revenue procedure contact Sabine Wahl- Moriarty at (202) 260-9825 (not a toll-free number).