In recent years, many taxpayers have effectively used mutual agreement procedure (MAP) cases and advance pricing agreements (APAs) to reduce or eliminate actual or potential double taxation due to inconsistent treatment of transactions with cross-border impact--most conspicuously for transfer pricing matters, but potentially for other issues as well. As the global tax environment has become more complex, with tax authorities now applying OECD Base Erosion and Profit Shifting (BEPS) Actions 8-10 and other new anti-avoidance measures, taxpayers have filed record numbers of MAP cases and APA requests. Combined with the emergence of new requirements to engage with the Internal Revenue Service examination process, this increased demand for closing MAP cases quickly and (in many cases) for coming to terms with untested provisions of the recent Tax Cuts and Jobs Act of 2017 (TCJA) has stretched the finite resources of the U.S. Advance Pricing Mutual Agreement Program (the APMA program, or simply APMA). And yet, this trend is unlikely to slow, as global trends in tax administration will continue to increase the relevance and importance of MAPs and APAs to taxpayers. In this resource-constrained environment, taxpayers will be well advised to consider in advance how to effectively develop and present their MAP cases and APA requests in an efficient, principled manner. Below is a brief overview of the MAP and APA procedures and challenges in the current global tax environment, followed by practical suggestions for taxpayers seeking MAP relief and APAs. At the end is a preview of potential new issues on the horizon.
Main Objectives of MAP Cases and APAs
MAP cases and APAs (1) share the same objective--to eliminate economic double taxation, (2) However, the time frames of the procedures differ, in that MAPs may be used to reduce actual double taxation post assessment whereas APAs eliminate possible future double taxation through a forward-looking agreement on the arm's-length result of transactions. Nevertheless, as a practical matter, the two procedures necessarily overlap somewhat under the U.S. Accelerated Competent Authority Procedure (ACAP) rules, which allow a MAP case to resolve filed years subsequent to the year(s) subject to the initial transfer pricing adjustment. Similarly, in the United States and many treaty partner jurisdictions, APA rollback mechanisms may grant retroactive coverage, allowing an APA to include prior filed years. Because the rules of specific jurisdictions differ, it is a best practice to coordinate closely with foreign advisors to ensure that the desired coverage is available as a procedural matter.
Below is a brief review of the considerations relevant to both the MAP and APA processes.
MAP: Reduce or Eliminate Double Taxation
Notwithstanding cases where a taxpayer seeks ACAP relief for unaudited years subsequent to the year(s) of adjustment, most MAP cases attempt to reduce or eliminate double taxation in cases where adjustments have already been made. (3) Most U.S. income tax treaties merely require the treaty partners, after having accepted a MAP case, to endeavor to eliminate taxation not in accordance with the treaty (see OECD Model Tax Convention on Income and Capital (2007). In other words, absent a mandatory arbitration provision, there is no binding requirement that the treaty partners eliminate double taxation or even conclude consultations wiuhin a specific time frame. Nevertheless, as reviewed below, the results of the OECD BEPS Action Plan have increased the pressure on the IRS and other tax authorities to complete MAP cases more expeditiously.
The United States and most of its treaty partners have an excellent track record of eliminating double taxation, although time-to-completion has historically been an issue. Aggregate statistics released by APMA indicate that, even excluding the results under tax treaties that provide for binding arbitration, the United States and its treaty partners have reached agreement for full relief from double taxation in the vast majority of cases and partial relief in the minority of cases; rarely are they unable to reach agreement at all. (4) Unagreed cases may result, for example, if one treaty partner adopts a different view of the material facts or, less frequently, if one treaty partner identifies a procedural issue that, in its view, bars relief. Such deadlock cases, however, are very much the exception, not the rule.
MAP CASES NOT ALL ALIKE
Different considerations can apply to MAP cases originating from U.S. adjustments, from non-US. adjustments, and from taxpayer-initiated adjustments.
Much of the complexity in the MAP space results from the fact that a transfer pricing adjustment can originate from several different sources-IRS Examination, a foreign tax authority, or even the taxpayer itself (5) (in the case of a taxpayer-initiated adjustment) (6)--and from the IRS' perspective, each type of adjustment implicates different rules and procedures, although the details of these rules are beyond the scope of this article.
To provide one example, in the case of foreign-initiated adjustments, the MAP revenue procedure (Rev. Proc. 2015-40) expresses the concern that the taxpayer should not "acquiesce" in the adjustment or otherwise compromise its rights to contest the adjustment in the foreign jurisdiction. In a similar vein, U.S. foreign tax credit rules require a taxpayer to undertake reasonable challenges to income adjustments in the foreign jurisdiction, and the taxpayer may also be required seek MAP relief as well. (7) Taxpayers should keep in mind that distinct and partially overlapping requirements apply under two separate sets of rules (MAP and foreign tax credit).
Taxpayers should understand how the MAP rules and requirements differ depending on the origin of the specific transfer pricing adjustment and should proceed with caution to ensure that they meet each of these requirements.
APMA'S UNILATERAL REVIEW BEFORE REFERRAL TO BILATERAL NEGOTIATIONS
The OECD Model Tax Convention and the OECD Transfer Pricing Guidelines provide the basic framework for countries to evaluate transfer pricing adjustments. (8) Article 25(2) (MAP) of the OECD Model Tax Convention (and most actual bilateral treaties between OECD members) contemplates that a treaty jurisdiction will commence bilateral MAP negotiations only to the extent that "it is not itself able to arrive at a satisfactory solution." In other words, a competent authority presented with a MAP request should first consider whether the adjustment is consistent with the arm's-iengm principle under the OECD Transfer Pricing Guidelines. If, after doing so, the competent authority concludes that a domestic-initiated adjustment is not supported, or mat a foreign-initiated adjustment is supported, the competent authority can and should grant double tax relief unilaterally, without engaging in further negotiations. (9)
Consistent with this provision in the OECD Model Tax Convention, Rev. Proc. 2015-40 authorizes APMA to grant unilateral double tax relief in appropriate cases involving either IRS- or foreign-initiated adjustments. (10) Indeed, APMA's practice in recent years has been to conduct a preliminary review of IRS-initiated adjustments to first verify if the specific adjustment is one that should be formally presented to the treaty partner." This review may lead the APMA program to withdraw the IRS' transfer pricing adjustment in full. Further, published statistics indicate that APMA now grants double tax relief on a unilateral basis in a significant number of cases (i.e., in ninety-four out of 293 total MAP cases resolved in 2017). (12)
What is more, new LB&I guidance now requires IRS Examination to consult with the APMA program early in the examination process in any case involving a treaty partner and, in any event, before proposing a transfer pricing adjustment. (13) This new guidance is apparently intended to ensure that APMA's expertise and experience with treaty partners are fully taken into account by examination teams and to prevent adjustments that cannot be supported in MAP negotiations (i.e., those that APMA would unilaterally withdraw) from ever being proposed.
Collectively, these practices of APMA unilateral review of proposed adjustments in MAP, and even earlier internal APMA review of mere potential adjustments under the new LB&I...