The IRS on April 25 issued interim guidance to IRS Treaty and Transfer Pricing Operations (TTPO) employees on the process for review and acceptance of advance pricing agreement (APA) submissions. The document provides instructions to staff for implementing a newly required review of APA prefiling memoranda and APA requests, including APA renewal requests, to determine whether the APA will be accepted into the Advance Pricing and Mutual Agreement (APMA) program.
The stated goal of the April 25 memorandum to TTPO employees is to improve the quality and timeliness of the APA program by providing an early mechanism for identifying potential issues that may hinder the successful conclusion of an APA. Additionally, an underlying goal of the new guidance is to make reasonable efforts to ensure taxpayer and tax administration resources are used effectively.
New APA Review Criteria
The new APA review guidance applies as of the date of the memorandum -- April 25, 2023. The review criteria apply to prefiling memoranda, APA requests and APA renewal requests. The new APA review criteria are multifaceted and are intended to consider whether an alternative workstream such as ICAP or a joint audit is better suited to address the taxpayer’s transfer pricing issues, compared to an APA.
Given the costs involved in preparing and submitting an APA submission, the APMA program recommends submitting a prefiling memorandum to allow the taxpayer to benefit from a prefiling memorandum review. If a taxpayer wants to forego a prefiling memorandum and submit an APA request, it may still do so, but the APA request will be reviewed under the same criteria as the prefiling memorandum.
The IRS estimates that a prefiling memorandum review generally should be completed within four weeks from the date when the prefiling memorandum was submitted, or the date when any additional information requested was received. For APA requests, the IRS estimates that the submission review and acceptance process should be completed within eight weeks of the filing date of the completed APA request. APMA’s acceptance of a taxpayer’s request to enter the APA program is discretionary, and APMA’s decision to decline to initiate the APA process is not subject to administrative review.
Based on the results of the prefiling memorandum review, the APMA review team (consisting of an APMA Team Leader and a Transfer Pricing Risk Assessment (TPRA) team member) will make one of three recommendations to the taxpayer:
- Proceed with submission of the APA request.
- Consider an alternative workstream as a more effective route to tax certainty (if such an alternative workstream is identified) because the proposed APA is unlikely to be accepted by APMA.
- Provide additional information to APMA about the proposed APA. (Once APMA has received and reviewed the information requested, the taxpayer will be provided with one of the above recommendations.)
Some of the key review criteria the APMA program will use in evaluating APA requests include the following:
- Whether the proposed covered transaction(s) rise to a level of significance that justifies the use of resources necessary to engage in and complete an APA.
- Whether there is a high probability that transfer pricing compliance will be significantly enhanced through an APA.
- Whether the proposed transactions are suitable for resolution through taxpayer participation in the ICAP.
- Whether the proposed transaction(s) potentially are suitable for resolution through a future potential Transfer Pricing Practice (TPP) examination or joint/multilateral audit.
- Whether the applicable international exchange agreements, including applicable income tax treaties, provide for the requisite exchange of information between the relevant tax administrations and the extent to which disclosure restrictions may constrain communications among the parties.
- Whether there is potential for the proposed APA to impact prior tax year or period compliance.
- Whether the proposed APA term, including rollback years, would meet the requirements of Rev. Proc. 2015-41 or successor guidance regarding the remaining period of limitations for assessment of tax for each proposed APA year.
Taxpayers should note that if they submit an APA request and it is rejected with the recommendation that a joint audit would be more suitable, the TPP will initiate contact with the taxpayer to discuss any timing and administrative issues related to the joint audit process. Therefore, submitting an APA request could trigger a joint audit process if the submission is rejected.
In addition to this guidance to TTPO, in the coming months the IRS is expected to issue a new Revenue Procedure for APAs to replace Rev. Proc 2015-41. It is expected that this new Rev Proc will provide more guidance on what should be included in a Prefiling Memorandum and APA submission to support a taxpayer’s request for an APA.
Recommendations for Taxpayers
Taxpayers who are interested in applying for an APA should prepare and submit a Prefiling Memorandum that provides as much information as possible in support of their APA request. This information should go beyond the requirements of the current Rev Proc and address the criteria that APMA is now using to determine whether it will accept an APA request.
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