rp-04-40.pdf

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Part III

Administrative, Procedural, and Miscellaneous

[26 CFR 1.482]: Internal Revenue Code §482: Allocation of income and deductions
among taxpayers

Rev. Proc. 2004-40

TABLE OF CONTENTS

Section 1: Purpose .................................................................................................

Section 2: Principles of the APA Program ..............................................................

Section 3: Prefiling Conferences ............................................................................

Section 4: Content of APA Requests......................................................................

Section 5: Processing of APA Requests ................................................................

Section 6: Competent Authority Consideration.......................................................

Section 7: Rollback of TPM ....................................................................................

Section 8: Small Business Taxpayer APAs ............................................................

Section 9: Legal Effect of the APA .........................................................................

Section 10: Administering the APA.........................................................................

Section 11: Renewing the APA..............................................................................

Section 12: Disclosure............................................................................................

Section 13: Effect on Other Documents .................................................................

Section 14: Effective Date ......................................................................................

Section 15: Paperwork Reduction Act ....................................................................

Drafting Information.................................................................................................

SECTION 1: PURPOSE
.01 This revenue procedure explains the manner in which taxpayers may
request an advance pricing agreement ("APA") from the APA Program within the Office
of the Associate Chief Counsel (International), the manner in which such a request will
be processed by the APA Program, and the effect and administration of APAs. This
revenue procedure updates and supersedes Revenue Procedure 96-53, 1996-2 C.B.
375, and Notice 98-65, 1998-2 C.B. 803.

SECTION 2: PRINCIPLES OF THE APA PROGRAM

.01 The APA Program provides a voluntary process whereby the Internal
Revenue Service (“Service”) and taxpayers may resolve transfer pricing issues under
§_482 of the Internal Revenue Code (“Code”), the Income Tax Regulations (“the
regulations”) thereunder, and relevant income tax treaties to which the United States is
a party in a principled and cooperative manner on a prospective basis. The APA
process increases the efficiency of tax administration by encouraging taxpayers to come
forward and present to the Service all the facts relevant to a proper transfer pricing
analysis and to work towards a mutual agreement in a spirit of openness and
cooperation. The prospective nature of APAs lessens the burden of compliance by
giving taxpayers greater certainty regarding their transfer pricing methods, and
promotes the principled resolution of these issues by allowing for their discussion and
resolution in advance before the consequences of such resolution are fully known to
taxpayers and the Service.

.02 The APA Program’s central goal is the prompt, proper, and fair resolution
of APA requests and renewals consistent with the principles of sound tax administration.

.03 The APA Program reserves the right not to accept an APA request or to
terminate consideration of an APA request if the request or the continued development
of the case is contrary to the principles of sound tax administration.

.04 An APA is an agreement between a taxpayer and the Service in which the
parties set forth, in advance of controlled transactions, the best transfer pricing method
(“TPM”) within the meaning of § 482 of the Code and the regulations. The agreement
specifies the controlled transactions or transfers (“covered transactions”), TPM, APA
term, operational and compliance provisions, appropriate adjustments, critical
assumptions regarding future events, required APA records, and annual reporting
responsibilities.

(1) APAs are intended to supplement traditional administrative, judicial, and

treaty mechanisms for resolving transfer pricing issues.

(2) Taxpayers formally initiate the process for APAs. Thereafter, APAs
require discussions among the taxpayer, one or more associated
enterprises, and one or more tax administrations, including the Service.

(3) Ordinarily, an APA is reached only on the proposed covered transactions.
In some cases, however, the APA Program may require that the scope of
the proposed covered transactions be expanded or contracted, or may
determine that the TPM proposed by the taxpayer is not appropriate for
some subset of the proposed covered transactions.

.05 The taxpayer’s participation in the APA process is entirely voluntary. In
some cases, the Service may approach a taxpayer to discuss the advantages of an
APA.

.06 The APA Program is under the immediate supervision of a Director (the
"APA Director") within the Office of the Associate Chief Counsel (International). The
APA Director reports to the Associate Chief Counsel (International) who exercises
general oversight over the APA Program. The APA Director, directly or by delegation,
may take any action – not contrary to statute, regulation, or treaty – necessary to carry
out the provisions of this revenue procedure. The APA Director may modify the
provisions contained in this revenue procedure (for example, time limits, or content of
an APA request), if that modification would be consistent with sound tax administration.

.07 Under the APA request procedure, the taxpayer proposes a TPM and
provides data intended to show that the TPM constitutes the appropriate application of
the best method rule under the § 482 regulations. The Service through an APA Team
evaluates the APA request by analyzing all relevant data and information submitted with
the initial request and at any time thereafter.

.08 Taxpayers may request a bilateral, multilateral, or, if appropriate, a
unilateral APA. A bilateral or multilateral APA involves a request for an APA between
the taxpayer and the Service, accompanied by a request for a mutual agreement
between relevant competent authorities. A unilateral APA involves only an agreement
between the taxpayer and the Service. Where possible, in the interest of sound tax
administration and to ensure that no potential for double taxation results from an APA,
an APA should be concluded on a bilateral or multilateral basis between the competent
authorities through the mutual agreement procedure of the relevant treaty.

.09 In a bilateral or multilateral case, the APA Program prepares a
recommended negotiating position for the U.S. Competent Authority. The negotiating

position serves as a basis for discussions with the relevant foreign competent authority
or authorities under the mutual agreement article of the applicable income tax treaty or
treaties. Prior to finalizing its recommendation, the APA Program through the Team
Leader (see section 5.03) conveys the substance of the APA Team’s position to the
taxpayer to provide an opportunity for the taxpayer to comment. The Team Leader, in
coordination with other members of the APA Team, considers the merits of the
taxpayer’s timely received comments in finalizing the recommended position.

.10 If the U.S. Competent Authority and the relevant foreign competent
authority or authorities reach a mutual agreement, the taxpayer and the Service may
execute one or more APAs consistent with that mutual agreement.

.11 The APA Policy Board establishes policy on matters of substantial general
importance pertaining to the APA Program. It consists of the Associate Chief Counsel
(International), the APA Director, the Director, International (Large and Mid-Size
Business (LMSB) Operating Division), Treasury’s International Tax Counsel, and other
senior officials.

.12 In appropriate cases, the TPM may be applied to tax years prior to those
covered by the APA ("rollback" of the TPM, see section 7). The Service’s policy is to
use rollbacks whenever feasible based on the consistency of the facts, law, and
available records for the prior years. This policy does not apply to unilateral APA
requests in which a rollback would decrease taxable income on a return filed for a
taxable year not covered by the APA (see § 1.482-1(a)(3)).

.13 Filing an APA request does not suspend any examination or other
enforcement proceedings. The APA Program will coordinate its activities with those of
other Service proceedings to avoid duplicative information requests to the taxpayer,
enhance the efficiency of Service operations, and reduce overall taxpayer compliance
burdens.

SECTION 3: PREFILING CONFERENCES

.01 General Principles

A taxpayer may request a prefiling conference (“PFC”) with the APA Program to discuss
informally the suitability of an APA.

.02 Discussion Topics

The taxpayer may use a PFC to clarify what information, documentation, and analyses
are likely to be necessary for the Service to consider an APA request. Among the areas
of discussion are the covered transactions, the potentially applicable TPMs, the

probability of agreement among the competent authorities, and the APA Program’s
schedule and method for coordinating and evaluating the request. To provide for the
efficient use of taxpayer resources, PFCs are recommended in order to ensure that the
APA request is appropriate and focuses on relevant issues.

.03 Scheduling

A taxpayer or its representative may contact the APA Program Office in Washington,
D.C. or California to schedule a PFC. The taxpayer or its representative should
propose three alternative dates, and should generally allow two weeks before the first
proposed date. The telephone and facsimile numbers are:

Washington, DC California
voice: (202) 435-5220 (949) 360-3486
facsimile: (202) 435-5238 (949) 360-3446

.04 PFC May be Named or Anonymous

The taxpayer may request a PFC either on an identified or anonymous basis.

.05 Participation

If a taxpayer identifies itself, representatives of the Service Operating Division with
responsibility for the taxpayer’s return normally will participate in the PFC.
Representatives from Appeals and the Division Counsel field offices may also attend.
In the case of a PFC regarding a bilateral APA request, a Competent Authority analyst
may attend. If a taxpayer initially requests a PFC on an anonymous basis but prior to
the meeting chooses to identify itself, the meeting may be rescheduled to permit
necessary personnel to attend. When requesting a PFC on an identified basis, the
taxpayer must inform the APA Program whether transactions similar or related to those
to be covered by the proposed APA are currently under consideration by a Service
Operating Division, Appeals, Division Counsel, or Associate Chief Counsel.

.06 Prefiling Submission

A taxpayer must send a brief prefiling submission to the relevant APA Program Office in
Washington, D.C. or California that lists the persons attending the PFC for the taxpayer
(first names only, pseudonyms, or job titles are sufficient if on an anonymous basis) and
that outlines and describes the issues to be discussed. This brief submission should be
provided at least one week in advance of the PFC. If the document is twenty pages or
less, it may be sent by facsimile; but if it exceeds twenty pages, eight copies (or if
anonymous, only three copies) and one original should be delivered.

SECTION 4: CONTENT OF APA REQUESTS

.01 General Principles

(1) For purposes of requesting an APA, each taxpayer that is a member of a
consolidated group (as defined in Treasury Regulations §1.1502-1) must
comply with the provisions of § 1.1502-77.

(2) All materials submitted with the APA request become part of the APA
Program's case file and will not be returned. Therefore, the taxpayer’s
original documents should not be submitted.

(3) The taxpayer must submit copies of any documents relating to the
proposed TPM. All materials submitted must be properly labeled,
indexed, and referenced in the request. Any previously submitted
documents that the taxpayer wishes to associate with the request must be
referenced.

(4) The APA request must include a comprehensive table of contents.

(5) If the records or documents to be submitted are too voluminous for
transmittal with the request, the taxpayer must describe the contents of
such items in the request and confirm that the items will promptly be made
available upon request.

(6) All documents submitted in a foreign language must be accompanied by
an accurate English translation.

(7) All documents in the APA request that are available in electronic format
should be submitted, on either a CD-ROM or diskette, along with the
paper submission. Suitable formats include Microsoft Word, Excel,
PowerPoint, and Adobe Portable Document Format. Other formats may
be arranged on a case-by-case basis.

(8) The user fee should be submitted at the same time as the request, unless
previously submitted. The taxpayer should also provide a justification of
the user fee amount with a demonstration of its calculation. See sections
4.11 and 4.12.

(9) The APA request should provide all information reasonably necessary to
permit the APA Program to evaluate fully the taxpayer’s proposed TPM.
Failure by a taxpayer to provide all materials required by this revenue
procedure in its APA request, or requested by the APA Program during

the negotiation process, may result in rejection of the APA.

(10) The taxpayer must describe in detail in its APA request the transactions it
intends to cover under the APA and, if applicable, how those transactions
relate in context to other related party transactions that the taxpayer does
not intend to cover.

(11) If the APA request is unilateral and involves transactions with an entity in a
treaty jurisdiction, the taxpayer must provide an explanation of why the
request is not bilateral.

(12) The taxpayer is under a duty to supplement its APA submission to correct
and/or to update all material facts and information in its APA submission
or in any supporting documentation. This supplemental submission (or
submissions) must be made within 30 days of request by the APA
Program and, in any event, prior to the commencement of Competent
Authority negotiations (in the case of a bilateral or multilateral APA) and
execution of the APA (in all cases).

.02 Explanation of the Proposed TPM

(1) The taxpayer must provide a detailed explanation and analysis of why the
proposed TPM is the best method within the meaning of § 1.482-1(c).

(2) The request should illustrate application of each proposed TPM by
applying it, in a consistent format, to the prior three taxable years’ financial
and tax data of the parties to the covered transactions. If historical data
cannot be used to illustrate a TPM (for example, when the TPM applies to
a new product or business), the request should include an illustration
based on projected or hypothetical data, as well as a description of the
source of the data. If coverage of three taxable years is inappropriate for
any reason, the taxpayer should provide data for an appropriate period
and explain why the period was chosen.

(3) If a taxable year is completed while the APA is pending, the taxpayer must
update its APA submission within 120 days following the close of the
taxable year by demonstrating the application of the proposed TPM to its
actual financial results for that year.

.03 Factual and Legal Items for All Proposed APAs

The detailed information supporting the APA request should be tailored to the specific
facts relating to the taxpayer, the proposed covered transactions, and relevant legal

authority. It should also take into account discussions with the APA Program in a PFC.
Unless otherwise agreed, each request must include, in addition to any other items
specified in this revenue procedure, the following items:

(1) The names, addresses, telephone and facsimile numbers, taxpayer
identification numbers (if applicable), and both the Standard Industrial
Classification (SIC) and the North American Industry Classification System
(NAICS) codes reported on the most recently filed federal tax returns (if
applicable) of (a) the organizations, trades, and businesses engaging in
the proposed covered transactions, and (b) the controlling taxpayer of the
parties, if the controlling taxpayer is not itself engaging in the proposed
covered transactions.

(2) The controlling taxpayer’s industry (for example, Heavy Manufacturing and
Transportation) within LMSB; or if the taxpayer files its tax returns with the
Small Business/Self-Employed (SB/SE) Operating Division, a statement to
that effect.

(3) A properly completed Form 2848 (Power of Attorney and Declaration of
Representative) for any person authorized to represent the taxpayer in
connection with the request, disregarding if appropriate the line 3
instruction limiting the authorization to three future tax periods. If the
taxpayer or the taxpayer’s authorized representative retains any other
person (for example, a law firm, accounting firm, or economic consulting
firm) to assist the taxpayer in pursuing the APA request, such taxpayer
must also provide a separate written authorization for disclosures to the
person and such person’s employees during the APA Team’s
consideration of the request, according to the instructions in
§ 301.6103(c)-1T (see also, T.D. 9011, 31 C.F.R. Part 10 (July 26, 2002)).
Such written authorization may be made by completing Form 8821 (Tax
Information Authorization), disregarding, if appropriate, the line 3
instruction limiting the authorization to three future tax periods.

(4) A description of the general history of business operations, worldwide
organizational structure, ownership, capitalization, financial arrangements,
principal businesses, the place or places where such businesses are
conducted, and major transaction flows of the parties to the proposed
covered transactions. The description must also identify any branches or
entities disregarded for tax purposes (see § 301.7701-3) that are involved
in the proposed covered transactions.

(5) A description and analysis of the transactions covered by the APA
request, as well as the estimated dollar value of each of the proposed

covered transactions for each year of the proposed term of the APA.

(6) A statement whether the tested party has commission sales income. If the
APA request involves commission income, the taxpayer must propose and
analyze whether, under the facts and circumstances, it is appropriate to:
(a) cover the commission sales income, but separately test it; (b)
segregate the commission sales income and exclude it from the APA; (c)
propose a TPM consistent with a sales function; or, (d) adjust the financial
statement data and results to account for the functional differences
between commission sales transactions and buy-sell transactions.

(7) For each party to the proposed covered transactions, a detailed analysis
of:

(a) the functions and economic activities performed;

(b) the assets employed;

(d) the risks assumed;

(e) relevant contractual terms;

(f) relevant economic conditions; and

(g) relevant non-recognition transactions.

(8) Representative financial and tax data of the parties to the proposed
covered transactions for the last three taxable years (or more years if
relevant to the proposed TPM), together with other pertinent data and
documents in support of the TPM. This item may include (but need not be
limited to) data from the following:

(a) Form 5471 (Information Return of U.S. Persons With Respect to
Certain Foreign Corporations);

(b) Form 5472 (Information Return of a 25% Foreign-Owned U.S.
Corporation or a Foreign Corporation Engaged in a U.S. Trade or
Business);

(d) financial statements;

(e) annual reports to stockholders;

(f) other pertinent U.S. and foreign government filings (for example,
customs reports or SEC filings);

(g) existing pricing, distribution, or licensing agreements;

(h) marketing and financial studies;

(i) documentation prepared in consideration of § 6662(e); and

(j) company-wide accounting procedures, budgets, projections,
business plans, and worldwide product line or business segment
profitability reports.

(9) The functional currency of the parties to the proposed covered
transactions and their foreign currency exchange risk.

(10) The taxable year of each party to the proposed covered transactions.

(11) A description of significant financial accounting methods employed by the
parties that have a bearing on the proposed TPM.

(12) An explanation of any relevant financial and tax accounting differences
between the U.S. and the foreign countries involved.

(13) A discussion of any relevant statutory provisions, tax treaties, court
decisions, regulations, revenue rulings, or revenue procedures that relate
to the appropriateness of the proposed TPM for the requested APA. For
cases in which the taxpayer requests a rollback, the discussion should
include a statement whether the period of limitations for the rollback years
has expired in the U.S. or foreign countries, and if not, when the periods of
limitations do expire.

(14) (a) A statement describing all previous and current issues at the
examination, Appeals, judicial, or competent authority levels that
relate to the proposed TPM, including an explanation of the
taxpayer’s and the government’s positions and any resolution of the
issues.

(b) If the taxpayer is requesting a rollback that involves any issues

relevant to the proposed covered transactions that are unresolved
and still under consideration by Appeals, the taxpayer must include
with its APA request a waiver of its right to be present during
communications between the Appeals Office and the APA Team
members (as described in section 5.04). See Rev. Proc. 2000-43,
2000-2 C.B. 404. The following language satisfies this
requirement:

Waiver of Ex Parte Communication: [Name of taxpayer(s)] agrees to the
participation of the Appeals Office in the consideration of this APA request,
and hereby waives its right to be present during, or participate in,
communications related to the APA request or the proposed covered
transactions between the Appeals Office and the APA Team members.

(15) A statement describing any APAs with, or rulings by, foreign tax
authorities relating to the proposed covered transactions (or any pending
requests for such APAs or rulings) and, if requested, copies of such APAs
or rulings.

(16) An economic analysis or study of the general industry pricing practices
and economic functions performed within the markets and geographical
areas covered by the APA request.

(17) A list of the taxpayer’s competitors and a discussion of any uncontrolled
transactions, lines of business or types of businesses comparable or
similar to those addressed in the request.

(18) A detailed presentation of the research efforts and criteria used to identify
and select possible independent comparables. This presentation should
include a list of potential comparables and an explanation of why each
was either accepted or rejected. The taxpayer may request an APA even
though no comparable uncontrolled prices, transactions, or companies
can be identified. In such cases, a taxpayer must demonstrate that the
proposed TPM otherwise satisfies the requirements of § 482 and this
revenue procedure.

(19) Detailed financial data (and licenses or other agreements, if applicable) on
the selected independent comparables in print and electronic formats. For
example, if the proposed TPM uses the comparable uncontrolled price
(CUP) method, the comparable pricing information should be included; for
the comparable uncontrolled transaction (CUT) method, the comparable
license agreements should be included; and for the comparable profits
method (CPM), the annual and multiple year period results using the

selected profit level indicator should be included.

(a) The taxpayer should be prepared to update the comparables data,
if requested, following 90 days after the close of its fiscal year.

(b) In addition, if pertinent, the taxpayer should demonstrate
consideration of alternative measurements of profitability and return
on investment (for example, gross profit margin or markup, ratio of
gross income to total operating expenses, net operating profit
margin, or return on assets).

(20) A detailed explanation of any adjustments to the selected comparables,
such as accounting for product line segregations, differences in
accounting practices, functional differences relating to activities
performed, assets employed, risks assumed, costs incurred, volume or
scale differences, and differing economic and market conditions.

.04 Specific Items for a Cost Sharing Arrangement

In addition to the items in section 4.03, an APA request related to a cost sharing
arrangement (“CSA”) must include:

(1) A copy of the CSA and a statement that the CSA conforms with the
requirements of §1.482-7(b).

(2) A specific description of intangible development costs for all participants
under the CSA. Such description should include a description of the costs
included and excluded (for example, costs of technology acquired from
third parties; the treatment of stock-based compensation under the CSA;
non-product specific development costs; costs associated with abandoned
projects; costs associated with specific stages of product development;
relevant labor, material, and overhead costs; and support and
administrative costs); a description of any services performed for
participants that will be included in intangible development costs (for
example, contract research) and how those services would be taken into
account; and, for a representative period, a breakdown of total costs
incurred, and the costs borne by each participant, according to the CSA.
(3) The basis (as described in § 1.482-7(f)(3)(ii)) used to measure anticipated
benefits, the projections used to estimate benefits, and why such basis
and projections yield the most reliable estimate of reasonably anticipated
benefits.
(4) The method used to calculate each participant’s share of intangible

development costs; the reason why that method can reasonably be
expected to reflect that participant’s share of anticipated benefits; and a
statement of the circumstances under which the participants’ shares of
intangible development costs will be adjusted to account for changes in
economic conditions, business operations and practices, and the ongoing
development of intangibles under the CSA.

(5) The accounting method used to determine the costs and benefits of the
intangible development (including the method used to translate foreign
currencies).

(6) Each participant's sales, cost of sales, operating expenses, research and
development costs, and operating profit (historical for the five most
recently completed taxable years and projected for two taxable years) with
regard to the product area covered by the CSA.
(7) A description of any amounts to be received from nonparticipants for the
use of covered intangibles (for example, as a royalty pursuant to a license
agreement) and how the participants would take into account such
amounts.

(8) Representative internal manuals, directives, guidelines, and similar
documents prepared for purposes of implementing or operating the CSA
(for example, research and development committee meeting minutes,
market studies, economic impact analyses, capital expenditure budgets,
engineering studies, reports and studies of trends and profitability in the
industry, and financial analyses for financing and cash flow purposes).

(9) A description of any prior research undertaken in the intangible
development area; the amount of any buy-in or buy-out payment (as
defined in §1.482-7(g)(2)); a complete economic analysis to support the
payment; the method used to determine the amount of the payment (that
is, the method used to value the pre-existing intangible property and to
calculate any royalty, lump sum, or installment payments); and an analysis
demonstrating that the method used constitutes the best method under
§1.482-1(c).

(10) The treatment of cost sharing and buy-in or buy-out payments for U.S.
income tax purposes (for example, the source and character of those
payments).

(11) Evidence of the participants' compliance with the reporting requirements

under §1.482-7(j) of the cost sharing regulations.

(12) Taxpayers requesting an APA that covers a CSA but does not cover the
related buy-in transaction, or an APA that covers a buy-in transaction but
does not cover the related CSA, must provide the reasons why an APA
limited in this manner is consistent with the principles of the APA process,
as set forth in this revenue procedure. The APA Program will evaluate the
requests to ensure their consistency with the principles of this revenue
procedure and sound tax administration. If an APA request is limited to
covering only buy-in payments, the APA must include the critical
assumption that the CSA to which the buy-in payments relate meets the §
482 regulatory requirements for CSAs.

.05 Critical Assumptions

The taxpayer should propose and describe any relevant critical assumptions. A critical
assumption is any fact the continued existence of which is material to the taxpayer's
proposed TPM whether related to the taxpayer, a third party, an industry, or business
and economic conditions. Critical assumptions might include, for example, a particular
mode of conducting business operations, a particular corporate or business structure, a
range of expected business volume, or the relative value of foreign currencies.

.06 Contents of Annual Report

Section 10.01 provides that the taxpayer must file an annual report for each taxable
year covered by the APA. The taxpayer should propose in the request a list of items to
be included in each report. Consideration should be given to all items listed in Appendix
C to the APA Program’s current Model APA (see Announcement 2004-26, 2004-15
I.R.B. 743, 768).

.07 Term

(1) The taxpayer must propose a term for the APA appropriate to the industry,
products, and transactions involved. Although the appropriate APA term
is determined on a case-by-case basis, a request for an APA should
propose an APA term of at least five years unless the taxpayer states a
compelling reason for a shorter term. Additionally, the APA Program
strives to have at least three prospective years remaining in the term upon
the execution of an APA (in the case of a unilateral APA) or completion of
the APA Program’s recommended negotiating position for Competent
Authority (in the case of a bilateral or multilateral APA), except in unusual
circumstances. Accordingly, taxpayers should anticipate that the APA

Program may require their agreement to extend the proposed term of an
APA if necessary to ensure such prospectivity.

(2) The taxpayer must file its APA request within the time prescribed by
statute (including extensions) for filing its Federal income tax return for the
first proposed APA year. An APA request will be considered filed on the
date the required user fee is paid (within the meaning of § 7502(a)),
provided that a substantially complete APA request is filed with the APA
Program within 120 days of the return due date (including extensions) for
the first proposed APA year. Because of the need to begin the processing
of the APA request in a manner that ensures appropriate prospectivity, the
APA Director will consider extending the 120 day period pursuant to
section 2.06 only in unusual circumstances. In the event the APA
Program’s evaluation of an APA request is delayed due to a lack of
responsiveness or timeliness by the taxpayer subsequent to the filing of its
request, the APA Director may deem the taxpayer’s APA request to have
been filed for purposes of this paragraph on a date subsequent to its
actual filing.

.08 Request for Competent Authority Consideration

(1) The taxpayer must state whether any of the parties to the proposed
covered transactions are residents of or conduct activities in a treaty
partner country or U.S. possession, and whether the taxpayer proposes
an agreement among competent authorities (see section 6 for guidelines).
For purposes of this revenue procedure, "competent authority" includes
the Director, International (LMSB) and designated foreign competent
authorities under income tax treaties to which the U.S. is a party, and also
includes the Director, International (LMSB) acting as the U.S. Competent
Authority with respect to a possession tax agency described in Rev. Proc.
89-8, 1989-1 C.B. 778, as well as a designated possession tax official
within the meaning of that revenue procedure.

(2) If the taxpayer requests a bilateral or multilateral APA, the taxpayer's
request must include the information described in section 4.05(a) and (b)
and, in a separate document, section 4.05(n), of Rev. Proc. 2002-52,
2002-2 C.B. 242 (or its successor), or similar information pursuant to a
request for relief under Rev. Proc. 89-8. The following wording satisfies
section 4.05(n) of Rev. Proc. 2002-52:

[Name of taxpayer(s)] consents to the disclosure to the competent
authority of [name of foreign country] and the competent authority’s staff of
any or all of the items of information set forth or enclosed in the

[bilateral/multilateral] APA request for the taxable year(s) ______________
[and accompanying rollback request for relief from economic double taxation
of income for the taxable years ______________], and any further
submissions, within the limits contained in the [name of treaty].

.09 Perjury Statement

(1) The taxpayer must include in any APA request and supplemental
submission a declaration in the following form:

Under penalties of perjury, I declare that I have examined this [APA request]
[supplemental submission relating to this APA request] including
accompanying documents, and, to the best of my knowledge and belief, the
[APA request] [supplemental submission] contains all the relevant facts
relating to the [APA request] [supplemental submission], and such facts are
true, correct, and complete.

(2) The declaration must be signed by the person or persons on whose behalf
the request is being made and not by the taxpayer's representative. The
person signing for a corporate taxpayer must be an authorized officer of
the taxpayer who has personal knowledge of the facts, whose duties are
not limited to obtaining letter rulings or determination letters from the
Service, or negotiating APAs, and who is authorized to sign the taxpayer’s
income tax return pursuant to § 6062. The person signing for any other
person must be an individual who has personal knowledge of the facts,
and who is authorized to sign in accordance with §§ 6061 or 6063, as
applicable.

(3) While the APA request is pending and after it is executed, a taxpayer is
under a duty to timely supplement its disclosures if the taxpayer discovers
that in some material respect the information provided was incomplete,
inaccurate, or incorrect, or that the facts or business practices as
described in the materials or statements submitted in support of the APA
request have changed or will change. Failure to do so may be considered
fraud, malfeasance, or misrepresentation with respect to a material fact, or
failure to state a material fact.

.10 Signatures

The taxpayer or the taxpayer's authorized representative must sign the APA request. If
an authorized representative is to sign, the taxpayer and representative must satisfy the
relevant instructions on signatures in Rev. Proc. 2004-1, 2004-1 I.R.B. 1 (or its
successor).

.11 Mailing, Deliveries, Copies, and Office Location

(1) User fees (accompanied by an identifying cover letter) must be sent to:

Internal Revenue Service
Attn: CC:DOM:CORP:T
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

The fee payment may also be hand delivered to the drop box at the 12th
Street entrance of 1111 Constitution Avenue, N.W., Washington, DC.

(2) All other communications must be mailed or delivered as follows (unless
arranged otherwise, for example, mailing to the California office):

Office of Associate Chief Counsel (International)
Advance Pricing Agreement Program
Attn: CC:INTL:APA; MA2-266
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

(3) The taxpayer must provide the original and eight copies of its APA request
and any supplemental materials submitted while the request is pending.

(4) The APA Program is located at:

799 9th Street, N.W.
Washington, D.C. 20001

.12 User Fees.

(1) The following general principles apply to user fees for APA requests.

(a) A separate user fee is required for each APA request.

(b) A separate APA request concerns a specific TPM and distinct facts,
such that a review of the facts will determine the suitability of the
TPM and all other methodologies under consideration.

(c) A single filing may include more than one APA request and may
require more than one user fee. A reduced user fee will apply to

additional APA requests. The maximum user fee for any filing
involving more than one APA request is $50,000.

(d) User fees are made payable to the United States Treasury.

(e) For user fee purposes, a multilateral APA request will normally be
considered as multiple bilateral APA requests. The user fee for the
first bilateral request will be determined under the principles of
section 4.12(2). The user fee for the other foreign jurisdictions will
be treated as additional bilateral requests to which a reduced user
fee will apply.

(f) A unilateral APA request will normally be considered as only one
APA request even though it may involve a pricing issue in more
than one foreign jurisdiction. If separate analyses are required for
each foreign jurisdiction, the unilateral APA request may be treated
as multiple APA requests for which reduced user fees will apply to
the additional requests.

(g) For purposes of determining the applicable user fee in accordance
with section 4.12(2), the gross income of a taxpayer includes the
gross income of all organizations, trades, or businesses owned or
controlled directly or indirectly by the same interests controlling the
taxpayer. Gross income must be computed for the last full (12
month) taxable year ending before the date the taxpayer filed the
APA request. If the information on the taxpayer’s gross income for
the last full taxable year is not available, the taxpayer must use its
projected gross income for the first year of the APA term.

(h) The APA Director may request an additional user fee after
submission of an APA request if the request does not meet the
criteria for the user fee amount initially paid by the taxpayer. The
taxpayer may either pay the additional fee and continue the APA
process or withdraw the request.

(i) If a taxpayer requests substantial changes to the originally
proposed TPM or proposed covered transactions during the
processing of the APA request, the APA Director may consider the
request an entirely new APA request and an additional user fee
may be required. Generally, no additional user fee will be imposed
if substantial changes are requested by the Service or by a foreign
competent authority.

(2) The following user fees apply to APA requests.

(a) The user fee for an original APA request or a non-routine renewal
from a taxpayer with gross income of $1 billion or more is $25,000,
and each additional separate request is $7,500.

(b) The user fee for an original APA request or a non-routine renewal
from a taxpayer with gross income of at least $200 million and less
than $1 billion is $15,000, and each additional separate request is
$7,500.

(c) The user fee for each separate APA request or renewal request
from a taxpayer with gross income of less than $200 million is
$5,000.

(d) The user fee for the request for a routine APA renewal (that is,
where the material facts, critical assumptions, and proposed TPM
have not substantially changed) from a taxpayer with gross income
of at least $200 million is $7,500.

(e) If the taxpayer’s gross income is at least $200 million, but the
transaction or transactions in the APA request involve either (i)
tangible property and/or services with a total annual value not in
excess of $50 million, or (ii) payments for intangible property not in
excess of $10 million annually, the user fee for each separate APA
request or renewal is $5,000 (“small transactions”).

(f) The following chart summarizes the above user fees:

Taxpayer’s Gross
Income or
Transactions
Original Request
or Non-Routine
Renewal
Each Additional
Separate Request
Routine
Renewal
$1 billion or more $25,000 $7,500 $7,500
$200 million to
$1 billion
$15,000 $7,500 $7,500
Less than $200
million
$5,000 $5,000 $5,000
Small
Transactions
$5,000 $5,000 $5,000

SECTION 5: PROCESSING OF APA REQUESTS

.01 General

The time for processing an APA request follows one of two paths, depending on
whether the request is for a bilateral or multilateral APA, or for a unilateral APA. The
scheduling of due diligence, analysis, discussion, agreement, and drafting is designed
to complete the recommended U.S. negotiating position (bilateral or multilateral APA
request), or a unilateral APA, within 12 months from the date the full request was filed.
The filing of a full APA request includes not only the payment of a user fee, but also the
receipt by the APA Program of the materials specified in sections 4.01 through 4.10.
Significant factual analysis of the APA request will not begin until a full request has been
filed.

.02 Initial Contact

After receiving an APA request, a representative of the APA Program will contact the
taxpayer or representative to discuss any preliminary questions the APA Program may
have, or to ask for any additional information or documents necessary in order to initiate
processing of the request. Additional information and documents must be supplied by
the date specified by the APA Program, as extended for good cause, accompanied by
the perjury statement as set forth in section 4.09.

.03 Designation of Team Leader

Shortly after receiving the taxpayer's APA request and any required user fees, the APA
Director will appoint a Team Leader to review the request. If a prefiling conference was
held with the taxpayer, the Team Leader generally will be appointed from among the
APA Program staff attending the prefiling conference. The Team Leader will oversee
the APA Team’s activities in processing the APA request.

.04 Formation of APA Team

The Team Leader will organize the APA Team, which normally consists of the following
personnel: the Team Leader, an APA Program economist and/or a Service Operating
Division economist, an LMSB international examiner, a Division Counsel attorney, and a
competent authority analyst in bilateral cases. In appropriate cases, the international
examiner’s manager and other Service Operating Division personnel familiar with the
taxpayer may participate in the APA Team. If the APA may affect taxable years in
Appeals, the appropriate Appeals Officer will be invited to participate. The APA Team
Leader will assure that copies of the APA request are distributed to all Team members
for review.

.05 Function of APA Team

The function of the APA Team is the following: (1) for a bilateral or multilateral APA, to
develop, in consultation with the taxpayer and consistent with sound tax administration,
a competent authority negotiating position that it can recommend for approval, and (2)
for a unilateral APA, to make best efforts, consistent with sound tax administration, to
develop an APA that it can recommend for approval by the Associate Chief Counsel
(International). The Service Operating Division field office responsible for the taxpayer's
income tax return will be provided an opportunity to review and comment on the
recommended U.S. competent authority negotiating position in the case of a bilateral or
multilateral APA, and the proposed APA in the case of a unilateral APA.

.06 Due Diligence and Analysis

The APA Team will evaluate the taxpayer's APA request by discussing it with the
taxpayer, verifying the data supplied, and requesting additional supporting data if
necessary. The evaluation of the request will not constitute an examination or
inspection of the taxpayer's books and records under § 7605(b) or other provisions of
the Code.

.07 Schedule for Discussion and Drafting

(1) The APA Team will arrange with the taxpayer for an initial meeting to take
place within 45 days from the assignment of an APA Team Leader (and
following receipt of the APA request). The function of the initial meeting is
to review the taxpayer’s facts, to discuss and clarify issues, and to reach
agreement on the scope and nature of the APA Team’s due diligence.

(2) In connection with the initial meeting, the APA Team and the taxpayer will
agree on a Case Plan, to which both Service and taxpayer personnel will
be expected to adhere. The Case Plan may identify issues raised by the
APA Team’s initial review of the APA request. Firm dates should be
agreed upon for resolving all outstanding issues, and case milestones
should be cited. Case milestones include: (a) submission of any
necessary additional information by the taxpayer; (b) any planned site
visits or interviews; (c) evaluation of the information by the Service; (d)
negotiation dates; and (e) presentation of the competent authority
negotiating position or recommended agreement to the APA Director. To
minimize delays caused by the need to coordinate different parties'
schedules on short notice, the time and place of future meetings required
for any steps in the case should be agreed upon at the initial meeting and
established in the Case Plan.

(3) The time scheduled for completion of the case milestones will depend to
some extent on the scope and complexity of the particular case. In the
case of bilateral or multilateral requests, the Service will seek to work with
the competent authority of the treaty partner or the U.S. possession
involved to minimize the time needed for competent authority resolution.

(4) Failures to meet case milestones will be addressed promptly. The APA
Director will assist in remedying any difficulties to ensure a course of
action to meet case milestones. Substantial or persistent failure by the
taxpayer to comply with the Case Plan may be treated by the APA
Program as a withdrawal of the APA request. In this event, if the taxpayer
wishes to continue to pursue the APA, it must refile the request and pay a
new user fee.

(5) In some circumstances, development of the case will suggest to both the
APA Team and the taxpayer that they adjust some milestone dates. To
preserve flexibility, the APA Team and the taxpayer may amend the Case
Plan by mutual agreement, consistent with the need to complete the case
expeditiously.

.08 Execution

Signature of an APA by the APA Director and the taxpayer will constitute agreement to
the APA. For purposes of executing the APA, each taxpayer that is a member of a
consolidated group (as defined in § 1.1502-1) must comply with the provisions of §
1.1502-77. The person signing the APA request on behalf of the taxpayer must satisfy
the requirements of section 4.09(2).

.09 Withdrawing the Request

The taxpayer may withdraw the request at any time before the execution of the APA.
The user fee generally will not be refunded if the taxpayer withdraws its APA request
after the due diligence process has been initiated.

.10 Rejecting the Request

The APA Program may decline either to accept any APA request or to execute any APA
after a request has been accepted. If the APA Program declines to execute an APA
after the due diligence process has been initiated, the Service normally will retain the
user fee, although the fee may be returned if the APA Program determines that such
action would be appropriate under the circumstances. If the APA Program proposes to
reject an APA request, the taxpayer will be granted one conference of right with the
APA Director. Other conferences may be granted at the APA Director's discretion.

SECTION 6: COMPETENT AUTHORITY CONSIDERATION

.01 When any of the parties to a request are entitled to obtain assistance
under the mutual agreement provision of a tax treaty between a foreign country and the
United States, or under Rev. Proc. 89-8, the competent authorities may enter into
agreements concerning the APA. Requests similar to APA requests that are initiated
through treaty partners or possession tax agencies and submitted to the U.S. competent
authority will be processed under this revenue procedure and Rev. Proc. 2002-52, as
appropriate. In order to provide timely clarification of factual issues, minimize the
potential for miscommunication, and assist in development of a multiple party
agreement on a timely basis, the Service will generally initiate coordination among the
taxpayer, the Service, and the competent authorities of treaty partners at the earliest
possible stage of consideration of an APA request including, where possible, the
prefiling stage. In this manner, the U.S. and foreign competent authorities can develop
a joint understanding of the case, which should facilitate negotiation and resolution of
competent authority issues. The taxpayer should remain available throughout
consideration of the request to assist the Service in reaching agreement with the foreign
competent authority. Final agreement to the negotiated APA will be sought among the
taxpayer, the Service, and the foreign competent authority. As a general matter, the
taxpayer should submit APA requests and related correspondence simultaneously to
the Service and to foreign competent authorities involved in the requests.

.02 The purpose of a competent authority agreement is to avoid double
taxation or taxation not in accordance with the relevant income tax treaty. If such an
agreement is not acceptable to the taxpayer, the taxpayer may withdraw the APA
request (see section 5.09). If the competent authorities are unable to reach an
agreement, the taxpayer may withdraw its request or, at its discretion, the Service may
negotiate and enter into a unilateral APA with the taxpayer (see section 6.06).

.03 The taxpayer must cooperate with the Service and the U.S. competent
authority, pursuant to the standards set forth in Rev. Proc. 2002-52 and any other
applicable revenue procedures.

.04 Taxpayers have an affirmative obligation to identify relevant concerns that
may impact competent authority negotiation of an APA request. For example, it may be
necessary for the Service to request sensitive confidential data (including material that
may constitute a trade secret), which if disclosed, could harm the taxpayer's competitive
position. If the taxpayer identifies such sensitive information, the Service will work with
the taxpayer in developing a mechanism to permit consideration or verification by the
treaty partner of the information while still preserving its confidentiality.

.05 When the competent authorities enter into an agreement covering an

APA, the Service will, to the extent appropriate, agree to a mutual exchange of
information with the foreign competent authority concerning any subsequent
modifications, cancellation, revocation, requests to renew, evaluation of annual reports,
or examination of the taxpayer's compliance with the terms and conditions of the APA.
Bilateral APAs may provide for simultaneous filing of the annual report with the Service
and with the foreign tax administration.

.06 To minimize taxpayer and governmental uncertainty and administrative
cost, bilateral or multilateral APAs generally are preferable to unilateral APAs when
competent authority procedures are available with respect to the foreign country or
countries involved. In appropriate circumstances, however, the Service may execute an
APA with a taxpayer without reaching a competent authority agreement. The taxpayer
must show sufficient justification for a unilateral APA. In some circumstances,
procedures agreed upon with particular foreign competent authorities, or the
requirements of proper relations with treaty partners, may preclude unilateral APAs.

.07 Section 7.05 of Rev. Proc. 2002-52 provides in part that, if a taxpayer
reaches a settlement on an issue pursuant to a written agreement, the U.S. competent
authority will endeavor only to obtain a correlative adjustment from a treaty country and
will not undertake any actions that would otherwise change such agreement. The
restrictions imposed under section 7.05 of Rev. Proc. 2002-52 with respect to the
discretion of the U.S. competent authority to negotiate correlative relief will not apply to
a unilateral APA. However, a unilateral APA may hinder the ability of the U.S.
competent authority to reach a mutual agreement which will provide relief from double
taxation, particularly when a contemporaneous bilateral or multilateral APA request
would have been both effective and practical (within the meaning of § 1.901-2(e)(5)(i))
to obtain consistent treatment of the APA matters in a treaty country. If there is a
settlement with respect to taxable years prior to the first year subject to a unilateral APA
based on rollback of the APA’s TPM (as discussed in sections 2.12 and 7 of this
revenue procedure), section 7.05 of Rev. Proc. 2002-52 will apply to the rollback years
in the regular manner.

SECTION 7: ROLLBACK OF TPM

.01 Application of the TPM to tax years prior to those covered by the APA
("rollback" of the TPM) may be an effective means of enhancing voluntary compliance
and of using available resources to address unresolved transfer pricing issues. The
taxpayer may request that the Service consider a rollback (a “rollback request”) in
connection with a particular APA request. Under regularly applicable procedures, the
Service may determine that the same or a similar TPM as that agreed to in an APA
should be applied to prior years even in the absence of a rollback request. When
applying the TPM to prior years, adjustments may be made to reflect differences in

facts, economic conditions, and applicable legal rules. Those adjustments may be
made regardless of whether the taxpayer or the Service initiated the rollback request.

.02 The taxpayer may make a rollback request in its APA request or at any
time prior to the execution of the APA. The principles set forth in section 2.12 generally
will govern the Service’s consideration of the request. The balance of prospectivity and
retroactivity of the total number of years covered by the proposed overall agreement,
and the status of any on-going examination, will also be given consideration in the
Service’s decision to entertain a rollback request. Rollbacks requested after submission
of the APA request must be in writing and addressed to the APA Director.

.03 If a rollback request is submitted in connection with a bilateral or
multilateral APA, the rollback request will be deemed to constitute an application for
accelerated competent authority consideration as described in section 7.06 of Rev.
Proc. 2002-52 (or its successor). The Office of Associate Chief Counsel (International),
the Service Operating Division field office involved, and the U.S. Competent Authority
will coordinate consideration of the request. The taxpayer's request must include all
information required for accelerated competent authority consideration under Rev. Proc.
2002-52 (or its successor), subject to the rules set forth therein. The taxpayer's request
can pertain to any years prior to the first year to be covered under the requested APA.
As necessary to reach a competent authority agreement, the Service may require that
the rollback be applied to one or more specified years if accelerated competent
authority is to be granted. In exercising its discretion over the conduct of accelerated
competent authority consideration, the U.S. Competent Authority will seek to implement
the policy concerning APA rollbacks stated in section 2.12.

.04 Rollback requests submitted in connection with a bilateral or multilateral
APA and involving a taxable year under the jurisdiction of Appeals will be deemed to
constitute an application for simultaneous Appeals and competent authority
consideration. That application is described in section 8 of Rev. Proc. 2002-52 and is
subject to the rules of that section. The Office of Associate Chief Counsel
(International), Appeals, and the U.S. Competent Authority will coordinate consideration
of the request. In exercising its discretion in a simultaneous Competent Authority-
Appeals proceeding, the U.S. Competent Authority will seek to implement the policy
concerning APA rollbacks stated in section 2.12. Taxpayers are encouraged to request
accelerated competent authority consideration under section 7.03 above, in conjunction
with an application for the simultaneous Appeals and competent authority process.

.05 Subject to the policy stated in section 2.12, the Service official with
jurisdiction over the taxable year subject to the rollback has discretion as to whether the
rollback is applied. That official may be either the Service Operating Division executive
responsible for the taxpayer’s income tax return, the National Chief of Appeals, the U.S.
Competent Authority (for matters subject to competent authority negotiations), or the

Division Counsel (for matters pending litigation). Except to the extent inconsistent with
this revenue procedure, APA rollbacks will be implemented using regularly applicable
procedures for resolving tax issues. Such procedures include but are not limited to
closing agreements and other settlement documents and Forms 870 and 870AD.

SECTION 8: SMALL BUSINESS TAXPAYER APAs

.01 Special Provisions Available to Small Business Taxpayers

At the request of a small business taxpayer (“SBT”), the APA Program may apply any or
all of the following provisions in this section. A SBT is any U.S. taxpayer with total gross
income of $200 million or less, as determined under section 4.12(1)(g). In addition, SBT
procedures will be available for APAs that cover small transactions described in section
4.12(2)(d). Although transactions involving valuable intangible property or CSAs would
not ordinarily be amenable to these SBT procedures due to the complexity of valuing
such intangibles, the APA Program will consider employing special procedures for such
transactions on a case-by-case basis.

.02 PFC Procedures

(1) Under ordinary conditions, a taxpayer contemplating an APA may request
a PFC with the APA Program. If a PFC is requested, the APA Program
provides informal advice to the taxpayer regarding the taxpayer's
proposal, but ordinarily does not begin its due diligence evaluation in
earnest until the taxpayer formally files an APA request along with the
appropriate user fee. In contrast, the APA Program will commence its due
diligence analysis of a SBT at the front end of the process to accelerate
the conclusion of the APA negotiations.

(2) The APA Program and a SBT may hold a PFC to determine as early as
possible the best method for the SBT's proposed covered transactions.
The APA Program will need a detailed description of the underlying facts
and the proposed TPM for the SBT's proposed covered transactions at
least 60 days prior to the scheduled conference. The SBT may provide
the information it maintains under § 6662(e) to satisfy this requirement.
Prior to its prefiling submission, the SBT must consult with the APA
Program to determine the information required to evaluate the SBT's
covered transactions.

(3) An APA Team will evaluate the APA prefiling information to determine
items of concern and the additional documentation needed to evaluate the
request. The SBT will be advised of the APA Team's initial conclusions
before the PFC so that it can address these items before or at the

conference.

(4) At the PFC, the SBT and APA Program will agree on a schedule with the
objective of finalizing the recommended negotiating position for a bilateral
APA, or concluding a unilateral APA, within six months of the date the SBT
files its APA request. The APA Program expects that performing this
analysis earlier in the process should result in a reduced number of post-
filing meetings and supplemental information requests.

.03 Items Required for an SBT APA Request

Before an SBT submits an APA request, the APA Program and the SBT may agree to
reduce or eliminate specific items that would otherwise be required by section 4.

.04 Locale and Number of Meetings for SBT APA Requests

The APA Program will endeavor to hold meetings with the SBT at a location convenient
to the SBT. To minimize the number of meetings, teleconferences will be employed
whenever feasible.

.05 Assistance in Economic Analysis

At the SBT’s request, the APA Program will assist the SBT in the selection and
evaluation of comparables, as well as the computation of any appropriate adjustments
to comparables.

.06 APA

For unilateral APA requests, a SBT should submit a proposed draft APA in a form
substantially similar to the APA Program’s current Model APA (see Announcement
2004-26, 2004-15 I.R.B. 743, 765). The electronic component of the APA request
should include a “redline” version showing the differences between the Model APA and
the SBT’s proposed draft (see section 4.01(7)).

.07 APA Program’s Consideration of Other Alternative Procedures

The APA Program may consider other procedures suggested by the SBT to reduce the
SBT's administrative and financial burden, consistent with the objectives of the APA
Program and the requirements of § 482.

SECTION 9: LEGAL EFFECT OF THE APA

.01 An APA is a binding agreement between the taxpayer and the Service.

See sections 2.01 - 2.04.

.02 If the taxpayer complies with the terms and conditions of the APA, the
Service will not contest the application of the TPM to the subject matter of the APA
except as provided in this revenue procedure. The taxpayer remains otherwise subject
to U.S. income tax laws and applicable income tax conventions.

.03 An APA shall have no legal effect except with respect to the taxpayer,
taxable years, and transactions to which the APA specifically relates.

.04 Unless provided otherwise by written agreement or regulations, the
Service and the taxpayer may not introduce the APA or non-factual oral and written
representations made in conjunction with the APA request as evidence in any judicial or
administrative proceeding regarding any tax year, transaction, or person not covered by
the APA. This paragraph does not preclude the Service and the taxpayer from agreeing
to roll back the APA TPM, or the Service’s use of any non-factual material otherwise
discoverable or obtained other than in the APA process merely because the parties
considered the same or similar material in the APA process.

.05 Unless provided otherwise by written agreement or regulations, the
Service and the taxpayer may not introduce a proposed, cancelled, or revoked APA, or
any non-factual oral or written representations or submissions made during the APA
process, as an admission by the other party in any judicial or administrative proceeding
regarding any taxable year of the requested APA term. This paragraph does not
preclude the Service’s use of any non-factual material otherwise discoverable or
obtained other than in the APA process merely because the APA Program and the
taxpayer considered the same or similar material in the APA process.

SECTION 10: ADMINISTERING THE APA

.01 Annual Reports

(1) For each taxable year covered by the APA, the taxpayer must file a timely
and complete annual report describing its actual operations for the year
and demonstrating compliance with the APA’s terms and conditions. The
report must include all items required by the APA, describe any pending or
contemplated requests to renew, modify or cancel the APA, and report
any adjustments made pursuant to section 10.02. Failure to timely file the
annual report is grounds for canceling the APA. In appropriate
circumstances, the APA Director may extend the time to file the annual
report.

(2) The taxpayer must file an original and four copies of the annual report by

the later of (a) 90 days after the time prescribed by statute (including
extensions) for filing its federal income tax return for the year covered by
the report, or (b) 90 days after the effective date of the APA. The Service
and the taxpayer may agree to alternative filing dates. The taxpayer
should file the original annual report and copies with the APA Director in
Washington, D.C., as indicated in section 4.11. For bilateral or multilateral
APAs, the Service may require the taxpayer to file simultaneously a copy
of the annual report with the treaty partner or partners.

(3) The Service Operating Division or the APA Program Office will contact the
taxpayer regarding an annual report if it is necessary to clarify or complete
the information submitted in the annual report. The taxpayer must supply
the additional information by the date specified.

(4) Any contact between the Service Operating Division, or the APA Program
Office, and the taxpayer to clarify the information in an annual report is not
an examination or the commencement of an examination of the taxpayer
for purposes of § 7605(b) or any other Code provision.

(5) If a filed annual report contains incomplete or incorrect information, or
reports an incorrect application of the TPM, the taxpayer must amend it
within 45 days after becoming aware of the need to amend the report.
The time may be extended for good cause.

(6) An annual report must contain the following declaration:

Under penalties of perjury, I declare that I have examined this annual report
including accompanying documents, and, to the best of my knowledge and
belief, this annual report contains all the relevant facts relating to the annual
reporting requirements pursuant to the APA, and such facts are true, correct,
and complete.

[If applicable: An adjustment to conform taxable income and other relevant
items to reflect the results reported herein has been reported to the
appropriate responsible Service Operating Division personnel.]

[If applicable: An amended income tax return to conform taxable income and
other relevant items to reflect the results reported herein [has been] [will be]
filed with the appropriate Internal Revenue Service Center.]

(7) The taxpayer must sign the declaration in compliance with sections 4.09
(Perjury Statement) and 4.10 (Signatures).

.02 APA Primary Adjustments, Secondary Adjustments, and Revenue Procedure
Treatment

(1) APA Primary Adjustments. The APA provides the TPM for determining
the proper amount of the taxpayer’s gross or net income, deductions,
credits, or allowances with respect to the APA’s covered transactions.
Under some TPMs, the taxpayer may have to wait until the close of the
taxable year to determine whether the intercompany prices it actually paid
or received complied with the TPM (for example, a comparable profits
method providing for a particular operating margin range). If the
taxpayer’s actual transactions do not comply with the TPM, the taxpayer
must nonetheless report its taxable income in an amount consistent with
the TPM (an “APA primary adjustment”), either on a timely filed original
return or on an amended return. The generally applicable Code rules,
including additions to tax, penalties and interest, apply with respect to an
APA primary adjustment. When the taxpayer makes an APA primary
adjustment, an appropriate correlative adjustment will also be made with
respect to the related foreign entity affected by the APA primary
adjustment. See § 1.482-1(g)(2). To the extent the APA covers years for
which federal income tax returns were filed before the APA was executed,
the taxpayer must make any required primary adjustments in an amended
return or returns filed within, and pay such primary adjustments within, 90
days of entering into the APA. The generally applicable Code rules will
apply with respect to the primary adjustment with respect to the APA years
for which federal income tax returns were filed before the APA was
executed, except: (a) the computation of any required estimated tax
installments for the taxable year will not take into account the primary
adjustment and related secondary adjustments (see section 10.02(2)); and
(b) the taxpayer will not be subject to the failure to pay penalties under
§§ 6651 and 6655, or the failure to make timely deposit of taxes penalty
under § 6656, by reason of the primary adjustment and related secondary
adjustments.

(2) Secondary Adjustments. Absent an election of the APA revenue
procedure treatment described in section 10.02(3), an APA primary
adjustment requires a secondary adjustment to conform the taxpayer’s
accounts. The secondary adjustment may result in tax consequences.
See § 1.482-1(g)(3).

(3) APA Revenue Procedure Treatment. If a taxpayer makes an APA primary
adjustment, the taxpayer and its related foreign entity may elect APA
revenue procedure treatment and avoid the possible adverse tax
consequences of a secondary adjustment that would otherwise follow the

APA primary adjustment. Under APA revenue procedure treatment,
consistent with the principles of Rev. Proc. 99-32, 1999-2 C.B. 296, the
taxpayer will be permitted to establish an account receivable from, or
payable to, its related foreign entity in the amount of the APA primary
adjustment as of the last day of the taxable year to which the APA primary
adjustment applies. The account will not bear interest and must be paid
within 90 days of the later of (a) the date for timely filing (with extensions)
of the federal income tax return for the taxable year to which the APA
primary adjustment applies, or (b) the APA’s effective date. The account
must be paid within the 90 day period to receive revenue procedure
treatment. Payment must be in the form of money, a written debt
obligation payable at a fixed date and bearing interest at an arm’s length
rate as provided in § 1.482-2(a)(2), or through an accounting entry
offsetting such account against an existing bona fide debt between the
U.S. taxpayer and the related foreign entity. The taxpayer must document
the payment or offset of the account, and disclose it in the APA annual
report for the year of the payment.

(4) The Service will give effect to an APA primary adjustment, secondary
adjustment, and payment under APA revenue procedure treatment, if
applicable, for all U.S. income tax purposes. The tax treatment of any
such adjustment or payment depends on the facts and circumstances of
the adjustment or payment. For example, if a taxpayer’s APA primary
adjustment involves the reporting of an additional royalty expense for a
transaction with a related foreign entity, the Service will deem a payment
in the nature of a royalty in the amount of the APA primary adjustment to
have been made by the taxpayer to the related foreign entity. This
deemed payment may be subject to U.S. withholding tax, and interest
would accrue on the tax required to be withheld from the due date of the
taxpayer’s federal income tax return without regard to extensions.
Similarly, a taxpayer's APA revenue procedure treatment may involve the
recharacterization of a dividend paid by its foreign subsidiary as a
payment of an account receivable established in connection with an APA
primary adjustment. Any foreign tax withheld from the payment may be
treated as a noncompulsory payment ineligible for the foreign tax credit,
unless the taxpayer exhausts all effective and practical remedies, including
invocation of competent authority procedures, to obtain consistent
treatment that would eliminate the foreign tax liability. See §_1.901-
2(e)(5).

(5) If the Service proposes a tax adjustment or the taxpayer files an amended
return that does not require an APA primary adjustment, generally
applicable Code rules will apply.

(6) If the taxpayer requests a bilateral or multilateral APA, the U.S. Competent
Authority will discuss the principles of this section with the appropriate
foreign competent authority to seek substantially identical treatment of the
taxpayer's related foreign entity.

.03 Examination

(1) With respect to the application of § 482 to the covered transactions, the
Service will limit the examination of a taxpayer’s income tax return for a
tax year covered by an APA to the requirements described in the next
paragraph and will not reconsider the TPM.

(2) For the year under examination, the Service may require the taxpayer to
establish: (a) compliance with the APA’s terms and conditions; (b) validity
and accuracy of the annual report’s material representations; (c)
correctness of the supporting data and computations used to apply the
TPM; (d) satisfaction of the critical assumptions; and (e) consistent
application of the TPM.

(3) The Service Operating Division must inform the APA Director if the
taxpayer has not satisfied any requirement in the prior paragraph. After
consulting with the appropriate Service Operating Division personnel, the
Associate Chief Counsel (International) may decide to enforce, revise (see
section 10.05), cancel (see section 10.06) or revoke (see section 10.07)
the APA.

(4) The Service Operating Division may audit and propose adjustments to the
taxpayer’s operating results as determined under the TPM without
affecting the APA’s validity or applicability. The taxpayer may agree with
the proposed adjustments in the same manner as any other adjustment,
and the Service Operating Division will assess any resulting additional tax
or refund any resulting overpayment of tax. If the taxpayer does not agree
with the proposed adjustment, the taxpayer may contest it through the
normal administrative and judicial procedures. The taxpayer must include
the audit adjustments as finally determined for the purpose of applying the
TPM and, as necessary, make any APA primary, secondary and
correlative adjustments under section 10.02. Revenue procedure
treatment under section 10.02(3) is unavailable for audit adjustments.

.04 Record Retention

(1) The taxpayer must maintain books and records sufficient to enable the

Service Operating Division to examine whether the taxpayer has complied
with the APA. The taxpayer’s compliance with this paragraph fulfills the
record-keeping requirements of §§ 6038A and 6038C as applied to the
covered transactions.

(2) Upon examination, the Service Operating Division may submit a written
request to the taxpayer requiring the submission of requested information
or the translation of specific documents within 30 days, as extended for
good cause. The fact that a foreign jurisdiction may impose a penalty
upon the taxpayer or other person for disclosing the material will not
constitute reasonable cause for noncompliance with the Service Operating
Division's request.

.05 Revising the APA

(1) In the event of failure of a critical assumption, or a material change in
governing case law, statute, regulation, or a treaty, as described in section
10.08, the APA Director and the taxpayer will discuss revising the APA. If
the APA Director and the taxpayer cannot agree to revise the APA, the
Associate Chief Counsel (International) will cancel it as of the beginning of
the taxable year in which the failure or change occurred. If the APA
Director and the taxpayer agree to revise the APA, the revised APA will
indicate its effective date.

(2) In the event of failure of a critical assumption, the taxpayer must notify the
APA Director and provide supporting documentation and a statement as to
whether revision appears appropriate. The taxpayer must file the
notification before the last date permitted for filing the annual report for the
year in which the failure occurred. In providing the notification, the
taxpayer must follow the procedures contained in sections 4.09 through
4.11.

(3) If the APA Director and the taxpayer agree to revise a bilateral or
multilateral APA, the Team Leader will submit the revised APA to the U.S.
Competent Authority to obtain the consent of the foreign competent
authority. If the foreign competent authority refuses to accept the revised
APA, or if the competent authorities cannot agree on a revised APA
acceptable to all parties, the APA Director and the taxpayer may agree to:
(a) apply the existing APA, if appropriate; (b) apply the revised APA or
agree to further revisions; or (c) request the Associate Chief Counsel
(International) to cancel the APA as of an agreed date. If the APA Director
and the taxpayer cannot agree on how to proceed, the Associate Chief
Counsel (International) will cancel the APA pursuant to section 10.06(1).

.06 Canceling the APA

(1) The Associate Chief Counsel (International) or designee may cancel an
APA due to the failure of a critical assumption, or due to the taxpayer’s
misrepresentation, mistake as to a material fact, failure to state a material
fact, failure to file a timely annual report, or lack of good faith compliance
with the terms and conditions of the APA. The Associate Chief Counsel
(International) will consider facts as material if, for example, knowledge of
the facts could reasonably have resulted in an APA with significantly
different terms and conditions. In regard to annual reports, the Associate
Chief Counsel (International) will consider facts as material if, for example,
knowledge of the facts would have resulted in (a) a materially different
allocation of income, deductions, or credits than reported in the annual
report or (b) the failure to meet a critical assumption.

(2) The Associate Chief Counsel (International) may waive cancellation if the
taxpayer can satisfactorily show good faith and reasonable cause and
agrees to make any adjustment proposed to correct for the
misrepresentation, mistake as to a material fact, failure to state a material
fact, or noncompliance. The Associate Chief Counsel (International) is not
required to cancel the APA and may require the taxpayer to continue
abiding by it.

(3) If the Associate Chief Counsel (International) cancels an APA, the
cancellation relates back to the beginning of the year in which the critical
assumption failed or the beginning of the year to which the
misrepresentation, mistake as to a material fact, failure to state a material
fact, or noncompliance relates. If, however, the cancellation results from a
change in case law, statute, regulation, or treaty, the cancellation normally
relates back to the effective date of the change in case law, statute,
regulation, or treaty.

(4) As of the effective date of the cancellation, the APA has no further force
and effect with respect to the Service and the taxpayer for U.S. income tax
purposes. The Service will seek to coordinate any action concerning the
cancellation of a bilateral or multilateral APA with the foreign competent
authority.

.07 Revoking the APA

(1) The Associate Chief Counsel (International) may revoke an APA due to
fraud or malfeasance (as defined in § 7121), or disregard (as defined in

§ 6662(b)(1) and (c)) by the taxpayer in connection with the APA,
including, but not limited to, fraud, malfeasance, or disregard involving (a)
material facts in the request or subsequent submissions (including an
annual report) or (b) lack of good faith compliance with the APA’s terms
and conditions. The Associate Chief Counsel (International) will consider
facts as material if, for example, knowledge of the facts could reasonably
have resulted in an APA with significantly different terms and conditions.
In regard to annual reports, the Associate Chief Counsel (International)
will consider facts as material if, for example, knowledge of the facts would
have resulted in (a) a materially different allocation of income, deductions,
or credits than reported in the annual report or (b) the failure to meet a
critical assumption.

(2) If the Associate Chief Counsel (International) revokes an APA, the
revocation relates back to the first day of the APA’s first taxable year.

(3) If the Associate Chief Counsel (International) revokes an APA, the Service
may: (a) determine deficiencies in income taxes and additions thereto; (b)
deny relief under Rev. Proc. 99-32, 1999-2 C.B. 296; (c) allow the
taxpayer relief under Rev. Proc. 99-32, but determine the interest on any
account receivable established under Rev. Proc. 99-32, section 4.01,
without mutual agreement or correlative relief; (d) revoke the APA as an
"egregious case" under Rev. Rul. 80-231, 1980-2 C.B. 219, so as to deny
the taxpayer a foreign tax credit; and (e) not make available the unilateral
relief provisions of Rev. Proc. 2002-52 (see section 12.07). The Service
will seek to coordinate any action concerning revocation of a bilateral or
multilateral APA with the foreign competent authority.

.08 Change in Case Law, Statute, Regulation, or Treaty

If applicable U.S. case law, statutes, regulations, or treaties change the federal income
tax treatment of any matter covered by the APA, the new case law, statute, regulation,
or treaty provision supersedes inconsistent terms and conditions of the APA. The APA
Director and the taxpayer may revise the APA under section 10.05 to reconcile it with
the new law or treaty provision, or agree to cancel the APA.

SECTION 11: RENEWING THE APA

.01 A taxpayer may request renewal of an APA using the procedures for initial
APA requests. The taxpayer must submit the user fee required under section 4.12 and
appropriate supporting documentation. In general, the principles in section 11.02
govern the APA Program’s consideration of the renewal request. The renewal request
must address changed or anticipated changes in facts and circumstances the APA

Team should consider. Taxpayers are encouraged to file the renewal request nine
months before the expiration of the APA term.

.02 The APA Program will expedite the processing of a renewal APA if the
following conditions exist: (a) substantially the same law and policy applied to the
existing APA; (b) no substantial differences exist between the taxpayer’s proposed TPM
and the TPM under the existing APA; (c) no material changes occurred in the taxpayer’s
facts or circumstances since the parties entered into the existing APA; and (d) for a
bilateral APA, a rollback or closed year considerations did not influence the TPM in the
existing APA.

.03 If the conditions in the prior paragraph exist, the APA Team begins its
evaluation of the renewal APA by considering the continuing applicability of the existing
APA, using updated comparables as appropriate. The APA Team will focus on any
changed facts and circumstances. While the APA Team will endeavor to streamline the
renewal process, certain cases may require additional analysis. That is, experience and
insight gained from applying the TPM to actual data (for example, APA annual reports)
may provide insight that indicates the need to modify the TPM.

SECTION 12: DISCLOSURE

.01 An APA, any background information related to the APA, and the
taxpayer’s APA request for that APA, are return information and are confidential. See
§§ 6103, 6105, 894, and 7852(d).

.02 An APA, any background information related to the APA, and the
taxpayer’s APA request, are not “written determinations,” and they are not open to
public inspection. See § 6110.

.03 The Secretary must prepare an annual report for public disclosure. See
§ 521(b) of the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L.
106-170, 113 Stat. 1860, 1925. That report includes specifically designated information
concerning all APAs, but in a form that does not identify taxpayers or their trade secrets
or proprietary or confidential business or financial information.

.04 An APA, any annual reports, and any factual information contained in the
background files is subject to exchange of information under income tax treaties or tax
information exchange agreements in accordance with the terms of such treaties and
agreements (including terms regarding relevancy, confidentiality and the protection of
trade secrets). In cases where the exchange of information would be discretionary,
information may be exchanged to the extent consistent with sound tax administration
and the practices of the relevant foreign competent authority, including where relevant
the existence and application by the foreign competent authority of rules similar to those

described in sections 9.04 and 9.05.

SECTION 13: EFFECT ON OTHER DOCUMENTS

Rev. Proc. 96-53, 1996-2 C.B. 375, and Notice 98-65, 1998-2 C.B. 803, are
superseded.

SECTION 14: EFFECTIVE DATE

This revenue procedure will apply to all APA requests, including requests for renewal,
received on or after 30 days after publication. By agreement, this revenue procedure
may apply to any APA resulting from an APA request pending on such date.

SECTION 15: PAPERWORK REDUCTION ACT

The collections of information contained in this revenue procedure have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545 - 1503.

An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays a valid control
number.

The collections of information are in sections 3.06, 4, 7.03, 10.01, 10.02(1), 10.04,
10.05 and 11.01. This information is required to provide the Service sufficient
information to evaluate and process the APA request or request for renewal of an
existing APA, or to determine whether the taxpayer is in compliance with the terms and
conditions of an APA. This information will be used to evaluate the proposed TPM, and
the taxpayer's compliance with the terms and conditions of any APA to which it is a
party. The collections of information are required to obtain an APA. The likely
respondents are business or other for-profit institutions.

The estimated total annual reporting and/or recordkeeping burden is 8200 hours.

The estimated average burden for an APA prefiling conference is 10 hours; the
estimated average burden for an APA request is 50 hours; and the estimated average
burden for preparation of an annual report by a party to an APA is 15 hours. The
estimated number of respondents and/or recordkeepers is 230.

The estimated annual frequency of responses is one request or report per year per
applicant or party to an APA, except that a taxpayer requesting an APA may also
request a prefiling conference.

Books or records relating to a collection of information must be retained as long as their
contents may become material in the administration of any internal revenue law.
Generally tax returns and tax return information are confidential, as required by § 6103.

DRAFTING INFORMATION

The principal authors of this document are various members of the Advance Pricing
Agreement Program of the Office of Associate Chief Counsel (International). For further
information regarding this revenue procedure please contact Mr. Peyton Robinson at
(202) 435-5220, or Mr. Matthew Kramer at (415) 848-4846 (not toll free numbers).

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