Combination of APA and Competent Authority – Part I
The redesignation of the Internal Revenue Service’s (IRS) Large and Mid-Size Business (LMSB) to Large Business and International (LB&I) is a formal recognition of the refocused mission of the IRS administrative process. An initial element of the LB&I process has been to combine the Competent Authority (CA) and Advanced Pricing Agreement (APA) Programs for the avowed purpose of seeking overall efficiency in the programs.
LB&I has made the combination operational by creating two CA groups for transfer pricing (including APAs), permanent establishment (PE), and other allocation issues, with a separate LB&I Treaty Assistance and Interpretations Team for non-allocation matters.
The new Advance Pricing Agreement–Competent Authority office (APMA) opened for business in March 2012. IRS counsel will continue to have a role in transfer pricing examinations, hoping to enhance the success of IRS challenges in the future. APMA leaders have streamlined processing procedures, hoping that it will not take, on average, four years to complete an APA. APMA will develop position papers and categorize cases by difficulty and geography. It will also seek to eliminate delay caused by slow response from Multi-National Enterprises (MNEs) and treaty partners.
The director of the APMA Program has advised that the first goal of the program was to close cases to get the docket current.
There is also another obvious necessity. The ratio of U.S. to foreign-initiated adjustments in the U.S. Competent Authority inventory was most recently reported to be 15-to-85 percent. In other words, 85 percent of the current docket reflects adjustments proposed by foreign tax authorities. Just a few years ago, the figures were the opposite. The learning to be derived from this evolution is that IRS Examination has been dramatically less active in treaty-related issues, principally transfer pricing, than have our treaty partners.
The goal of resolving cases is laudable. As a practical matter, the IRS will also need to ramp up its examination process, as it has plainly indicated that it is—and will be—doing via training, hiring, and otherwise.
In the MNE taxpayer community, our anxiety about such changes in both examination and dispute resolution programs is whether the processes will actually be streamlined.
A cynic from the MNE community might observe that disorganization and inefficiency in IRS programs is actually beneficial, since the likelihood of the company having to face major proposed adjustments may be diminished. On the other hand, many companies are interested in having an efficient issue resolution process that minimizes such matters as uncertain tax position financial statement adjustments, UTP Schedule issues, or prolonged examinations, potentially leading to Appeals, litigation, or Competent Authority processes. The popularity of the Compliance Assurance Process (CAP) is an illustration of such interest in at least some MNEs.
We join with others in the MNE community in saluting the efforts of the Service to design an efficient process. Perhaps, the results of programs like CAP can be used as a model for designing and implementing such a system.