2014-Issue 5—The Internal Revenue Service recently published draft proposed guidance on the competent authority process in the form of Notice 2013-78. This new guidance proposes updates to the set of procedures to be followed by taxpayers seeking assistance of the competent authority under the Mutual Agreement Procedures (MAP) and related provisions to U.S. income tax treaties, and is intended to replace the existing Revenue Procedure 2006-54. It will be finalized after the public comment period (ending March 10, 2014).
This update to the MAP has been much anticipated since the IRS undertook a broad organizational restructuring of its national transfer pricing resources, having combined the competent authority and Advance Pricing Agreement (APA) teams under one roof in the office of Advance Pricing and Mutual Agreement (APMA). The IRS simultaneously released Notice 2013-79, which provides proposed new guidance specific to obtaining an APA. This article focuses on some of the more notable proposed changes to the MAP guidance, although several provisions overlap with the APA procedures.
The overall intention of MAP is to alleviate double taxation arising under the relevant income tax treaties. This revenue procedure informs taxpayers of the required actions they must undertake to secure the assistance of the U.S. competent authority. While the revenue procedure provides detailed guidance on the U.S. side of the transaction, it is important to remember that individual treaties may contain important provisions outlining the steps necessary for requesting relief. Additionally, each foreign tax authority maintains its own procedural guidance for the information required to request relief in that jurisdiction.
Notice 2013-78 proposes several key updates or clarifications. Noteworthy changes include:
MAP Relief and Voluntary Adjustments
Significant risk management and mitigation can occur when taxpayers are allowed to self-correct results not considered arm’s length under the transfer pricing documentation. The Regulations permit taxpayers to make a voluntary downward income adjustment on an originally filed tax return to reflect accurate transfer prices. (See Treas. Reg. 1.482-1(a)(3).) Taxpayers are also generally able to file amended returns that reflect an upward transfer pricing adjustment to their U.S. taxable income. However, taxpayers availing themselves of a voluntary adjustment may face double taxation based on filing positions in the foreign jurisdiction(s) on the flip side of the intercompany transaction. Before the proposed changes, it was not always feasible to obtain relief through MAP. The proposed revenue procedure makes such relief possible — assuming taxpayers follow specified steps.
We have also seen similar consideration for relief made available in Canada — a chief U.S. trading partner and a rich source of transfer pricing controversy cases. Having both the Canada Revenue Agency (CRA) and the IRS aligned on this topic is an important development to manage the overall tax position of multinationals doing business in the two countries.
Note, however, that taxpayer-initiated cases will not be accepted for MAP where the taxpayer is found to have engaged in retroactive tax planning or otherwise engaged in tax evasion.
Coordination with Other Dispute Venues
The proposed revenue procedure features a few interesting changes regarding the interaction between MAP and the U.S. domestic exam venues. First, the timeline for competent authority involvement in tax examinations has been accelerated. Specifically, the draft revenue procedure states that a MAP request for a U.S.-initiated adjustment must have the approval of the U.S. competent authority before any exam resolution is agreed upon between the taxpayer and the field examiners. This change places the U.S. competent authority in a position to directly influence the outcome of an examination. This proposed change may result in more “realistic” adjustments being proposed up front, as the input from the competent authority should reflect its negotiating and settlement experience with the foreign jurisdictions at issue.
The draft guidance stipulates the Simultaneous Appeals Procedure (SAP) as the only means for a taxpayer to elevate an IRS-initiated adjustment to Appeals for review and still keep open the possibility of obtaining double tax relief through MAP. Taxpayers can hold a joint pre-filing conference with the Office of Appeals and Competent Authority to discuss the specific procedural elements on the case. The timing requirements to request SAP place additional burden on the taxpayer to consider its strategic alternatives a bit earlier in the process to ensure the appropriate requests are filed within the specified time frames.
It can often be useful for a taxpayer to obtain preliminary guidance from APMA about its prospects in seeking a MAP resolution. Valuable insights can be obtained about the current relationship with the treaty partner on the other side of the transaction and about how APMA has been negotiating cases that involve similar issues. The pre-filing conference can also shed light on what conditions the IRS may require to accept the case into MAP or simply to clarify what types of information will be needed for efficient handling of the case.
While pre-filing conferences are available under the current revenue procedure, the proposed guidance formalizes and clarifies the parameters for requesting a pre-filing conference. The proposed guidance also makes clear that a pre-filing conference is required in certain circumstances. The circumstances for a mandatory meeting generally arise with the more complex cases, such as taxpayer-initiated adjustments, cases where the cumulative sum of foreign-initiated adjustments exceeds $10 million, and when a joint intellectual property (IP) development arrangement is involved (whether as a formal cost-share or not).
Information Sharing and Taxpayer Cooperation
Historically, inconsistencies in information sharing between the taxpayer and the various taxing authorities can create an impediment to efficient handling of MAP cases. Different packages of financial information being sent to different tax authorities can be a major drag on the competent authority negotiations. When the two sides sit down to discuss the case, the inconsistent information creates an immediate block to resolution, resulting in delays to the overall timeline and potential harm to the taxpayer’s reputation with the taxing authorities. For this reason, the updated procedures require that any case materials provided to one competent authority are also to be provided to the other competent authority. A failure to do so may result in the denial of the request for assistance.
Greater cooperation between the respective taxing authorities equals increased efficiencies for the taxpayer. A helpful sign that greater cooperation between the respective competent authorities is forthcoming is the provision that allows and even encourages taxpayers to make joint presentations to the U.S. and foreign competent authorities. This new process will help to ensure that both tax authorities are in possession of the same information prior to negotiations. This will benefit taxpayers by providing sharper insight into the issues that are likely to be points of contention to achieving a settlement. This tool has already been used in some cases, and early reaction has been favorable.
Alvarez & Marsal Taxand Says:
The proposed revenue procedure features important updates that should clarify the steps necessary to request MAP relief and is designed to increase process efficiency for taxpayers and tax authorities alike. As noted earlier, taxpayers are advised to carefully consider the specific language of the relevant tax treaties and take necessary steps to preserve their rights to seek MAP relief. For example, looking to our trading partners to the north and south, the U.S.-Canada tax treaty requires that both tax authorities be notified of potential MAP assistance within six years from the end of the tax year subject to the transfer pricing adjustment. In the case of the U.S.-Mexico treaty, the notice period is four and a half years. Failure to submit the requisite notification will result in denial of MAP access. Even if a final adjustment is not known within the relevant time period, steps can be taken to file the requisite notifications and protective claims, thereby preserving rights to seek and implement relief under the treaty.
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