Rev. proc. 91-22: advance pricing agreements.

On April 2, 1993, Tax Executives Institute filed the following comments with the Internal Revenue Service on Rev. Proc. 9122, which sets forth the procedure for obtaining an advance pricing agreement (APA) with respect to section 482 transfer pricing issues. The comments took the form of a letter from TEl President Bob Periman to Regina Deanehan, Assistant Commissioner (International), and Robert E. Culbertson, Associate Chief Counsel (International), and was prepared in response to an IRS request for TEI's comments on the revenue procedure and its recommendations in light of the operation of the APA program over the last two years. The Institute's comments were prepared under the aegis of its International Tax Committee, whose chair is Lisa Norton of Ingersoll-Rand Company. Philip J. Bergquist of Apple Computer Co. contributed materially to the preparation of the Institute's comments.

On March 1, 1991, the Internal Revenue Service issued Rev. Proc. 9122, 1991-1 C.B. 534, outlining the procedure for obtaining an advance pricing agreement (APA) with respect to section 482 transfer pricing issues. This letter responds to your request for TEI's comments on the revenue procedure and our recommendations in light of the operation of the APA program over the past two years.

Overview

TEl commends the IRS for adopting such an innovative procedure for resolving transfer pricing issues. It is our understanding that since Rev. Proc. 91-22 was issued in 1991, more than 50 taxpayers have applied for APAs with respect to operations in 16 foreign countries and Puerto Rico. We believe that the number of pending applications evidences an increasing acceptance by taxpayers--and U.S. treaty partners--of the viability of the APA process. Although the recent proposed section 482 regulations accord taxpayers more flexibility in setting transfer prices, the regulations also introduce more uncertainty in ascertaining whether a particular price will be deemed to satisfy section 482. For many taxpayers, obtaining an APA will doubtlessly reduce that uncertainty, especially with respect to the section 482 regulations. TEl was an early supporter of the APA process, and we continue to believe that the use of the procedure may enhance compliance with section 482, avoid audit disputes, and serve as an effective complement to any generally applicable safe harbors.(1)

A key element of the APA procedure is the ability to obtain a ruling in advance of the years to be covered, thereby placing both taxpayers and the IRS on an equal footing in assessing historical information and projecting the appropriate level at which the various critical assumptions should be set. Although we believe that this feature is critical to the success of the APA process, we do not believe the IRS should foreclose the possibility that the parties may agree to apply the APA retroactively. If the proposed pricing methodology has been used in prior years with respect to the same parties and transactions and the critical assumptions have not changed, common sense dictates that the finding of reasonableness should be given substantial weight in respect of those earlier years.

With respect to the renewal of the APA, we concur with the IRS's approach of "looking back" to contrast actual results with the targeted ranges as a tool in establishing new critical assumptions. New data relating to a taxpayer's company or industry may suggest the rate at which renewal should occur; reviewing historical results is precisely the procedure many taxpayers perform to establish future transfer prices and is therefore an appropriate practice to follow for the APA purposes.

Another important aspect of an APA is its bilateral nature. Negotiating with foreign jurisdictions on an acceptable range of results and establishing critical assumptions make the APA process an advantageous tool for many taxpayers to reduce--or eliminate--future pricing controversies. As the IRS knows well, however, in certain jurisdictions it is difficult to reach a bilateral agreement. Rev. Proc. 91-22 provides that the Chief Counsel may issue a unilateral APA in such circumstances where the taxpayer shows "good and sufficient" reasons. We encourage the IRS to remain open to providing the taxpayer with a unilateral APA. Taxpayers with extensive operations...