Announcement 95-49: procedures for securing an advance pricing agreement.

On September 7, 1995, Tax Executives Institute submitted the following comments to the Internal Revenue Service on Announcement 95-59, which sets forth revised procedures for securing advance pricing agreements. The comments were developed under the joint aegis of TEI's International Tax Committee, whose chair is Philip J Bergquist of Apple Computer, Inc., and its IRS Administrative Affairs Committee, whose chair is Robert L. Ashby of Northern Telecom, Inc. The following TEI members contributed to the development of the Institute's comments: Robert D. Adams of Halliburton Company, Lisa Norton of Ingersoll-Rand Company, and James L. Williams of Northern Telecom, Inc.

On May 24, 1995, the Internal Revenue Service issued Announcement 95-49, proposing to amend Rev. Proc. 91-22, 1991-1 C.B. 526, which sets forth procedures for securing an advance pricing agreement (APA). The Announcement is reprinted in the June 12, 1995, issue of the INTERNAL Revenue Bulletin (1995-24 I.R.B. 13).

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our approximately 5,000 members represent more than 2,700 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the Internal Revenue Code relating to the operation of business enterprises, including the tax law's transfer pricing rules. TEI has long supported the APA program and continues to believe that it offers a viable option for taxpayers. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues relating to the procedures for obtaining pricing agreements.

Overview

The preamble to the Announcement 95-49 notes that the proposed procedure "largely restates both the language and substance of Rev. Proc. 91-22." In addition, the Announcement includes new procedures and statements of applicable principles developed largely as a result of four years' experience with the APA process. Such changes are evolutionary and welcome.

The key to success of the APA program is its celerity If the process can be accelerated, more taxpayers will apply for APAs. The "timeliness" issue encompasses two significant problems with the existing process. First, TEI believes field personnel are unnecessarily and excessively involved in the process. There is too much "second-guessing" by field personnel and too frequently additional personnel are later brought into the process without sufficient knowledge about the case. The open-ended nature of the process is fed by the perception that sometimes -- too many times -- no one seems to be in charge. The function and role of field personnel needs to be circumscribed and defined, and clear lines of authority should be drawn, both to expedite the process and to assure taxpayers that an agreement really can be reached.

In addition, we believe too much information is required to be submitted to secure an APA. Under current procedures, taxpayers are essentially required to undergo two examinations: one when they apply for an APA and one when the taxable year is audited. This system is neither efficient nor necessary. We strongly urge the IRS to consider implementing a system -- similar to a determination letter or private letter ruling process -- that essentially accepts the taxpayer's factual representations (submitted under penalties of perjury) and defers their validation until the examination.

Section 1: Purpose

Section 1.00 of Announcement 95-49 deletes language previously found in Rev. Proc. 91-22 that "[a]n APA may relate to any transaction(s) between related parties that raises such apportionment or allocation issues." This deleted language permitted the APA program to address specific issues beyond the narrow realm of section 482, as well as ancillary issues relating to a transfer pricing matter.

Rather than narrow the scope of the APA program, TEI urges the IRS to maintain as broad a charter as possible. While transfer pricing issues remain a primary area of concern, other issues can also benefit from consideration under the APA program, including matters arising under sections 936, 863(b), and 367(d), the effectively connected income rules, permanent establishments, and any other areas of the Code. Consequently, we recommend that the deleted language be restored.

Section 3: Principles of the APA Process

1. APA Policy Board. Section 3.06 formally establishes the APA Policy Board to assist in the administration and coordination of the APA process among the various branches of the IRS. The Announcement, however, does not provide a mechanism for taxpayer access to the Policy Board, for example, where the process is stalled or agreement cannot be reached on the structure and scope of an APA. We submit such access would be beneficial. In addition, there should be a mechanism for an appeal to the Policy Board where the IRS proposes to cancel or revoke an existing APA. TEI...