TEI Urges Senate Finance Committee to Retain Program, Maintain Confidentiality.

On March 8, 1999, Tax Executives Institute submitted the following comments to Senator William V. Roth, Jr., chair of the Senate Committee on Finance. TEI's comments, prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Stephen W. Boocock of Allegheny Teledyne, Inc., took the form of a letter from Institute President Lester D. Ezrati of Hewlett-Packard Company.

Dear Senator Roth:

You recently outlined five criteria for reforming the system of international taxation and later this week the Senate Finance Committee will hold the first in a series of hearings on international tax reform, including the elimination of unnecessary complexity. Tax Executives Institute is developing its comments in respect of your eau for action and intends to file those comments soon. I want to take this opportunity, however, to alert you to an issue that we believe merits immediate consideration. I am referring to the future of the IRS's advance pricing agreement (APA) program -- a program in which you have expressed an interest in facilitating and promoting.

The APA program is designed to forestall contentious and expensive transfer pricing disputes between taxpayers and the IRS. A voluntary venture, it is one of the IRS's success stories of the 1990s and furthers one of your stated goals -- the elimination of unnecessary complexity in the tax law. Each APA specifies a methodology negotiated between the specific taxpayer and the IRS (and, at times, a foreign country) for the taxpayer to use in determining its intercompany pricing and thereby assure compliance with section 482 of the Code. The information set forth in an APA -- the method by which a company determines its profit margins -- is highly fact specific and involves sensitive financial and commercial information. Almost 200 APAs have been negotiated since the program began in 1091 and the program has been used as a model by the international community as a means of minimizing double taxation of income and settling costly transfer pricing disputes.

Since its inception until January 8, 1999, the IRS treated the APAs and their supporting documentation as tax return information that was not subject...