0. Current Developments in Competent Authority and APA Proceedings
Natalie Hoyer Keller
Chicago Tax Club
May 3, 2010
© 2010 Kirkland & Ellis LLP. All rights reserved.

1. I. Competent Authority Proceedings

2. FY 2009 U.S. Competent Authority Statistics
Received 158 new transfer pricing cases
Only 24 cases (15%) involved U.S.-initiated adjustments
Closed 85 transfer pricing cases
30 cases (35%) involved U.S.-initiated adjustments
329 transfer pricing cases in inventory at fiscal year end
724 total cases
Average processing time for closed transfer pricing cases: 795 days
Full double taxation relief granted for 96% of dollar adjustments
35% - correlative adjustments; 61% - adjustments withdrawn
No relief in 1% of cases (down from 7%)

3. Foreign-Initiated Competent Authority Cases
Increase in foreign-initiated adjustments
From FY 2005-FY 2009, foreign-initiated cases increased from 75 to 134, while U.S.-initiated cases declined from 34 to 24
In FY 2005, foreign-initiated adjustments = 70% of total CA cases (75 out of 109 cases)
In FY 2009, 85% = foreign-initiated (134 out of 158 cases)
Between FY 2008 and FY 2009, there was a 35% increase in foreign-initiated cases (from 98 to 134)
Potential explanations

4. Mandatory Binding Arbitration Provisions
U.S. tax treaties with Germany, Belgium, Canada and France
French protocol ratified 12/3/2009; effective 1/1/2010
Key provisions
Baseball-style arbitration (with French twist)
Process
Eligible two years after case submission
Panel of three arbitrators
Impact on Competent Authority negotiations
U.S. Treasury: no plans to make mandatory binding arbitration part of U.S. model treaty

5. Competent Authority Procedure
Taxpayer involvement
Joint fact-finding sessions
ACAP (Accelerated Competent Authority Procedure)
U.S. experience (Rev. Proc )
Canadian experience (CRA Transfer Pricing Memorandum released 12/12/2008)

6. II. Advance Pricing Agreements

7. CY 2009 APA Statistics Received 127 APA applications (record number)
88 bilateral and 39 unilateral
Executed 63 APAs (904 since 1991)
28 APA renewals and 35 new APAs
42 bilateral, 0 multilateral and 21 unilateral
More than 70% = foreign parent/U.S. subsidiary
Most common transaction = sale of tangible property into U.S.
Most common method = CPM (with operating margin as PLI)
Most common term = five years
Average of 45.4 months to complete new bilateral APA
Average of 18.5 months to complete new negotiating position

8. CY 2009 APA Statistics
321 pending requests for APAs at year end (submissions received)
99 bilateral APAs that have been forwarded to Competent Authority office for discussion with treaty partner
165 bilateral APAs for which APA program has not yet completed recommended negotiating position
57 unilateral APAs
APA staffing
39 full-time staff v. 33 in 2008

9. APA Program Scope and Application
Rev. Proc expansion of scope
Attribution of profits to PE and other issues for which transfer pricing principles may be relevant
10 APA submissions in CY 2009 under this Rev. Proc.
APA fast-track pilot program
Goal = resolution in 6 months
“Handful” of cases selected (renewals only)
Not likely to be expanded without additional staffing

10. Current Economic Conditions
Impact on APAs
Taxpayer’s operating results
Lag time for comparable data
Taxpayer requests to reopen APAs
Critical assumption triggered?
IRS reluctant to renegotiate without corresponding upside for IRS
Future APAs – build in flexibility upfront

11. III. Observations

12. Significant Transfer Pricing Cases
Cost sharing arrangements
IRS has encouraged use of APAs to reduce uncertainty
Taxpayers should leave sufficient “paper” and “conduct” trails to support APA position
Not ruled out seeking APA before entering into CSA
Xilinx, Inc. v. Comm’r, 598 F.3d 1191 (9th Cir. 2010)
Three-judge panel of 9th Circuit reversed prior decision
Stock option costs do not need to be shared to have qualified cost sharing arrangement
Years involved were prior to 2003 amendment to regulations
IRS request en banc review?

13. Significant Transfer Pricing Cases – CSAs
Vertias Software Corp. v. Comm’r, 133 T.C. No. 14 (2009)
Tax Court held IRS calculation of buy-in payment ($1.68 billion) was arbitrary and capricious
IRS position relied heavily on positions in 2007 CIP (even though 1996 regulations applied)
IRS appeal to 9th Circuit?

14. Significant Transfer Pricing Developments
Reporting of Uncertain Tax Positions – Schedule UTP
Must rank transfer pricing items by either (i) amount recorded as reserve or (ii) estimated adjustment if tax position not sustained
Increase audits of sensitive issues, and thus CA proceedings?
Increase desirability of certainty, and thus APAs?
Transfer Pricing Audit Pilot Program
IRS identifying handful of cases with high strategic importance
IRS team to include internat’l examiners, technical advisers and economists (including National Office, Counsel and APA staffs)
Joint Audits
IRS seeking candidate for first case by end of fiscal year

15. Current Relationships with Treaty Partners
Canada
300 international auditors recently hired
Record level of APA requests (32) and inventory (84) (FYE 3/09)
Completed 10 APAs
Completed 53 transfer pricing CA cases (FYE 3/09)
~80% of U.S./Canada CA cases involve Canadian-initiated adjustments
“Pay to play” -- upfront payment (50%) to challenge assessment (currently under consideration)
Strong criticism from ABA Section of Taxation (12/08 letter)
Perception that “CRA operates to increase revenue at the expense of principle”

16. Current Relationships with Treaty Partners
India
International tax reforms enacted in mid 2009 – mixed results
Creation of dispute resolution panel
Empower creation of safe harbor rules
Clarify determination of arm’s-length price
Expanded ability to enter into treaties
Aggressive PE enforcement
APA program under consideration
Litigation – 15 to 20 years

17. Current Relationships with Treaty Partners
Japan
Received 113 APA requests and has 270 pending CA cases (FYE 6/09)
Focus on automotive and electronics industries
China
New transfer pricing regulations released early 2009
Expansion of APA program
Wal-Mart received first U.S./China APA in 2007
More than 30 bilateral APAs pending

18. Current Relationships with Treaty Partners
Mexico
New detailed transfer pricing questionnaires – must be signed by the taxpayer’s registered public accountant
Segmented financial statements
Disclosure of transfer pricing methods
Adjustments made to comply with arm’s-length principle
Transfer pricing studies
Aggressive transfer pricing audits

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