Small businesses benefit from new APA procedures.

• Author: Whisenant, Lori
• Position: Advance pricing agreements

Small businesses need procedures to negotiate advance pricing agreements (APAs) at a cost and level of complexity that are reasonable relative to the size of the transactions involved. However, under the regular APA procedures of Rev. Proc. 96-53, the Service usually does not begin its formal analysis of a taxpayer's proposed transfer pricing methodology (TPM) until the taxpayer files an APA request and pays the user fee. The regular APA procedures invariably require the taxpayer to produce information that results in increased staff hours, legal, accounting and consulting expenses and user fees. Because of the high cost of using the normal procedures, most APAs have been with large multinational corporations with substantial income or assets. To make the APA program more accessible to small businesses, the Service has proposed special APA procedures in Notice 98-10.

Explanation

The new procedures would apply to a small business taxpayer (SBT), defined as any U.S. taxpayer with total gross income of less than $100 million. For this purpose, gross income includes total income plus cost of goods sold for all organizations owned directly or indirectly by the taxpayer.

Prefiling conference. As under the regular APA procedures, an SBT may request a prefiling conference with the Service. Under the normal APA procedures, the IRS does not begin its due diligence analysis until after the SBT fries the formal APA and pays the user fee. In the case of SBTs, the Service will conduct its due diligence analysis at the beginning of the process before the user fee is paid to accelerate conclusion of the APA negotiations.

Information to be submitted. At least 60 days before the scheduled prefiling conference, the INS will request the SBT to submit a detailed description of the underlying facts of the covered transaction and the proposed transfer pricing methodology. The SBT may provide the same information it is required to maintain under Sec. 6662(e). However, before the prefiling submission, the SBT must consult with APA program personnel to determine the information the Service deems necessary to evaluate the SBT's particular covered transactions.

Case management plan. At the prefiling conference, the SBT and the IRS negotiate the case management plan. The primary objective is to conclude a unilateral APA, or finalize the recommended negotiating position for a bilateral APA, within six months of the date the SBT files the APA request (as opposed to nine...