Service Releases Guidelines for Securing APA and Resolving Tax Issues in Contravention of a Tax Treaty.

Rev. Proc. 91-22

CONTENTS

SECTION 1. PURPOSE

This revenue procedure tells how to secure an advance pricing agreement ("APA") from the Office of the Associate Chief Counsel (International) ("Chief Counsel") covering the prospective determination and application of transfer pricing methodologies ("TPM"s) for certain international transactions of foreign or domestic taxpayers. 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. An APA may relate to any transaction(s) between related parties that raises such apportionment or allocation issues.

SEC. 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. In appropriate cases, the Service may also enter into an agreement regarding the APA with a foreign competent authority under an income tax convention.

SEC. 3. PRINCIPLES OF THE APA PROCESS

01. The TPM generally must be in accordance with the principles of section 482 of the Code and the methods specifically described in the regulations thereunder. In appropriate cases, the Service will consider TPMs that use other methods (for example, a fourth method), 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.

02. 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.

03. 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).

04. The taxpayer must, to the extent possible, secure relevant pricing data from independent transactions. If this data cannot be obtained, the taxpayer must identify the 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 or businesses that are similar, even though not exactly comparable. If these data cannot be obtained, the taxpayer must identify the transactions or entities it considers to be similar 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 section 3 of this revenue procedure.

SEC. 4. PREFILING CONFERENCES

Some cases are not suitable for an APA. 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 will clarify what data, documentation, and analyses are likely to be necessary; the need for an independent expert; the suitability of the proposed TPM; the possibility for an agreement among competent authorities; and the Service's schedule and method for coordinating and evaluating the request with other Service officials.

SEC. 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) Submit copies of any documents relating to the proposed TPM. Be sure that all submitted data 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, describe the items in 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 a certified English translation.

02. EXPLANATION OF THE PROPOSED TPM.

Provide a detailed explanation and analysis of each proposed TPM based on the principles discussed in subsections 3.01-3.04 of this revenue procedure. Illustrate each proposed TPM by applying it, in a consistent format, to the prior three years' financial and tax data of the parties. Where historical data cannot be used to illustrate a TPM (for example, where it applies to a new product or business), submit an illustration based on projected or hypothetical data. If a three-year period is inappropriate for any reason, use an appropriate period, and explain why this period was chosen.

03. GENERAL FACTUAL AND LEGAL ITEMS FOR ALL PROPOSED TPMs.

Unless otherwise agreed in a prefiling conference, submit 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.

(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 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 direct 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 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.

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, 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. These data will give the Service the industry perspective 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 businesses or types of businesses that may be comparable or similar to the taxpayer's, as well as research efforts, underlying financial data, and screening criteria used to identify possible comparable or similar businesses.

(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, 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).

(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.

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 l0 years, 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 (provide 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 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 tax years and projected for two tax 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 DOMESTIC LAW.

Discuss any relevant collateral U.S. income tax issues raised by the proposed TPM.

07. CRITICAL ASSUMPTIONS.

Describe a proposed set of critical assumptions. Critical assumptions are objective business and economic criteria that are fundamental to the operation of the taxpayer's proposed TPM. A critical assumption is any fact about the taxpayer, a third party, or an industry that would significantly affect the substantive terms of the APA if it changed, whether the change was 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 operating 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. 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.

Propose an initial term for the APA. For example, the APA could take effect at the beginning of the tax year during which it was requested or signed, and last for three years. Propose a term appropriate to the industry, product, or transaction involved.

10. REQUEST FOR COMPETENT AUTHORITY CONSIDERATION.

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).

11. PERJURY STATEMENT.

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, 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 facts. The person signing for a trust or a partnership must be a trustee or a partner who has personal knowledge of the facts.

12. SIGNATURES.

The taxpayer or the taxpayer's authorized representative must sign the request. If an authorized representative is to sign, comply with Rev. Proc. 87-4, 1987-1 C.B. 529.

13. COPIES AND MAILING

Submit the original request and seven copies to the Associate Chief Counsel (International), CC:INTL:FO, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. APA requests may also be hand delivered pursuant to Rev. Proc. 88-4, 1988-1 C.B. 586.

14. USER FEES.

The user fee for each request and each renewal is $5,000. This revenue procedure supplements Rev. Proc. 90-17, 1990-1 C.B. 479, as reinstated by Announcement 90-125, 1990-48 I.R.B. 8.

SEC. 6. PROCESSING OF APA REQUESTS

01. INITIAL CONTACT.

After receiving a request for an APA, Chief Counsel will contact the taxpayer to discuss any questions that the Service may have, or to ask for any additional information believed necessary in order to process the request. Additional information must be supplied by the date specified by the Service, as extended for good cause.

02. TRANSMISSION TO OTHER OFFICES.

After the request is determined to be complete, Chief Counsel will coordinate the evaluation of the request with the appropriate District Director. Where a request proposes an agreement between competent authorities, Chief Counsel will so notify the U.S. competent authority.

03. EVALUATION OF THE REQUEST.

Chief Counsel, in coordination with the District Director, 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. FURTHER INFORMATION.

The Service may ask for additional information to complete its evaluation of the request. Additional information must be supplied by the date specified by the Service, as extended for good cause.

05. TRANSMISSION TO COMPETENT AUTHORITIES.

See section 7 of this revenue procedure for guidelines on competent authority consideration.

06. GRANTING THE REQUEST.

If the Service determines to grant the request, Chief Counsel and the taxpayer will execute the APA, which may be in any form acceptable to the parties and the Service (subject to section 9 of this revenue procedure). The APA may be made subject to an agreement with foreign competent authorities, or incorporate terms substantially identical to those in a competent authority agreement.

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, neither party will have any obligations to the other and any previous understandings between the parties will be of no further force and effect unless otherwise required by law.

08. REJECTING THE REQUEST.

Chief Counsel 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. If after all conferences the Service rejects the request, the taxpayer may obtain a return of the user fee pursuant to Rev. Proc. 90-17, 1990-1 C.B. 479, as reinstated by Announcement 90-125, 1990-48 I.R.B. 8.

SEC. 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.

02. The purpose of the competent authority agreement is to avoid double taxation between the taxpayer and its related foreign entities that the APA might otherwise cause. 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, Chief Counsel and the taxpayer may nevertheless execute an APA (see subsection 7.08) or may refuse 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 Rev. Proc. 91-23, this Bulletin. 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) that, 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 the APA, the Service will, to the extent practical, 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. To the extent practical, the competent authorities will attempt to ensure that each country's statute of limitations with respect to any matter covered in the APA will expire at the same time.

07. The U.S. competent authority will seek to persuade the foreign competent authority to use APA data only on terms similar to the legal effect provisions in section 9 of this revenue procedure.

08. In appropriate circumstances, Chief Counsel 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. If such an APA is executed, and the taxpayer has activities with a related party in a treaty country, the regular competent authority procedures set forth in Rev. Proc. 91-23, this Bulletin, 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 negotiate a settlement.

SEC. 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 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 the 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.

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 is supportable, fairly presents the economic interests of the parties to the APA, and supports and produces an arm's length approach; and provide the basis for these conclusions. 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.

SEC. 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. 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.

04. 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.

SEC. 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. Include in the report all items called for by the APA, and any requests to renew, modify or cancel the APA.

(2) 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), with the Associate Chief Counsel (International) at the following address: Associate Chief Counsel (International) CC:INTL:FO, Internal Revenue Service, 1111 Constitution Avenue, N.W., Room 3501, Washington, D.C. 20224. The report must comply with subsections 5.11- 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 Chief Counsel, 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) 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 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 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 Chief Counsel for resolution. Chief Counsel will decide to have the District Director 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 Chief Counsel, 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 them 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.

(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.

(3) The taxpayer and the Service may enter into a record retention agreement at any time during the APA process. A record retention agreement describes which documents and other materials the taxpayer must retain, their retention period, and the time period for producing the records upon the Service's request. The agreement may also cover the record retention requirements of section 6001 and any other provision of the Code (for example, section 6038A) insofar as it relates to the subject matter of the APA.

05. REVOKING THE APA.

(1) The Service may revoke the APA if the District Director, with the concurrence of Chief Counsel, determines that there has been fraud or malfeasance (as defined in section 7121 of the Code) or disregard (as defined in section 6662(b)(l) and (c)) by the taxpayer, in connection with any of the following: the material facts set forth in its request, subsequent submissions (including the annual report), or lack of good faith compliance with the terms and conditions in 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 Service 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-I 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 for 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 Rev. Proc. 91-23, this Bulletin, may not be available.

06. CANCELING THE APA.

(1) The Service may cancel the APA if the District Director, with the concurrence of Chief Counsel, determines that there was a misrepresentation, mistake as to a material fact, omission 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) Chief Counsel may waive cancellation if the taxpayer can show good faith or reasonable cause to the satisfaction of Chief Counsel, and if the taxpayer agrees to make any adjustment proposed by Chief Counsel to correct for the misrepresentation, mistake as to a material fact, omission to state a material fact, or noncompliance. The Service 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, omission 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 benefits) that otherwise apply.

07. REVISING THE APA.

(1) If there is a change in critical assumptions (or change in law or treaty in accordance with subsection 10.09 of this revenue procedure), the APA may be revised (including, where appropriate, cancellation by agreement).

(2) If a change has occurred, notify Chief Counsel. Accompany the notice with supporting documentation and a statement whether a revision appears appropriate. File the notice at any time during the year giving rise to the event, but no later than the date for filing the annual report for that year. Follow the procedures contained in subsections 5.11-5.13 of this revenue procedure.

(3) If a change in a critical assumption has taken place, the taxpayer and the Service will discuss how to revise the APA. If the taxpayer and Service cannot execute a revised agreement, the APA will be canceled as of the beginning of the taxable year encompassing the event causing the change in 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 change in critical assumptions 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 the APA, the revised APA will be submitted (if applicable) 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.

(1) Request renewal by following the form and procedures that apply to initial APA requests. Submit appropriate supporting documentation with the request.

(2) Where the Service and taxpayer are satisfied that the TPM in the initial APA has conformed to expectations, (that is, material facts, critical assumptions, and computations remain valid; the application of the TPM continues to produce an expected arm's length range of operating results; and the taxpayer has complied with the terms and conditions of the initial APA), the renewal process will focus on updating and adjusting the critical assumptions, facts, and computations agreed to in the initial APA.

(3) Where substantial changes in facts, critical assumptions, or computations have occurred, or where the initial APA did not adequately consider subsequent economic, technical, product, or industry practices, submit a proposed revision with updated studies, analyses, and supporting documentation.

(4) Propose a term for the renewed APA.

(5) File the request to renew no earlier than nine months before the expiration of the initial term or any renewal term.

(6) Ordinarily, the 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 applicable U.S. law or income tax treaties 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 it 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.

SEC. 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. Finally, 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.

SEC. 12. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 90-17, 1990-1 C.B. 479, as reinstated by Announcement 90-125, 1990-48 I.R.B. 8, is supplemented to the extent that this revenue procedure provides for an additional category and amount payable for a user fee under subparagraph 6.03(1)(a) of Rev. Proc. 90-17 for APAs. Rev. Proc. 91-23, this Bulletin, is amplified to the extent that competent authority consideration for an APA is requested under this revenue procedure.

SEC. 13. EFFECTIVE DATE

This revenue procedure will apply to all APA requests on hand on March 18, 1991, the date of publication of this revenue procedure in the Internal Revenue Bulletin, as well as to requests received thereafter.

DRAFTING INFORMATION

The principal author of this document is Robert E. Ackerman of the Office of the Associate Chief Counsel (International). For further information regarding this revenue procedure contact Mr. Ackerman at (202) 566-6442 (not a toll-free number).