The IRS on 12 August 2015 released Rev. Proc. 2015-40 with respect to requesting competent authority (CA) assistance, and it is generally effective for CA requests filed on or after 30 October 2015. Rev. Proc. 2015-40 updates and supersedes Rev. Proc. 2006-54. The IRS concurrently released Rev. Proc. 2015-41 as guidance with respect to APAs and that concerns the process of requesting and obtaining APAs from the Advance Pricing and Mutual Agreement program (APMA) and the administration of executed APAs. The following discussion explains the changes to the CA process.
Rev. Proc. 2015-40 [PDF 245 KB] is a long-awaited final revenue procedure that represents substantial changes from Rev. Proc. 2006-54, and also from the “draft revenue procedure” (Notice 2013-78, released November 2013).
The processes set forth in Rev. Proc. 2015-40 are viewed by tax professionals as being generally welcome and laudable because the processes:
The new procedures also demonstrate an effort to better align the U.S. CA processes with those of Article 14 of the Organisation for Economic Cooperation and Development (OECD) base erosion and profit shifting (BEPS) initiative, which relates to improvements in dispute resolution, as well as other ongoing OECD initiatives to improve CA processes.
Rev. Proc. 2015-40 also contains some meaningful changes to the content of CA requests and the filing process that need to be heeded. Interestingly, some of the more significant changes are also with respect to the limitation on benefits (LOB) discretionary ruling process and are clearly intended to align this process more with the OECD’s BEPS initiative and to prevent treaty abuse and shopping.
Overall, however, in an environment where transfer pricing controversies specifically and cross-border controversies generally are increasing in number every year, the IRS appears (from the language in Rev. Proc. 2015-40) to be committed to making the CA process more broad-based, transparent and effective.
APMA is willing to consider issues and cases that were not generally accepted in the past. One important change—matters arising as a result of taxpayer-initiated adjustments (i.e., adjustments initiated by taxpayers themselves that directly or indirectly result in double taxation) may be permitted into the CA process.
Rev. Proc. 2015-40 provides that mandatory pre-filing procedures are applicable for issues involving taxpayer-initiated positions so that APMA can make a determination as to whether to accept the matter.
Additionally, Rev. Proc. 2015-40 specifies that taxpayers may request assistance with respect to certain ancillary issues, such as penalties, fines, and interest and also repatriation payment matters. Although many of the U.S. income tax treaties contain language about the IRS and its treaty partner-tax administrations being able to consult together to resolve these types of issues, Rev. Proc. 2015-40 spells out that these ancillary issues are part of the CA process and assistance with them can—and should—be requested by taxpayers, if applicable, in their submissions.
Furthermore, APMA will be available for informal consultations (either on an anonymous or named basis) on general matters concerning CA issues, including foreign tax issues and other matters that are related to but not themselves necessarily CA issues. Any advice given, however, is informal and not binding on the IRS.
So that taxpayers have broad access to CA to resolve dispute under the applicable income tax treaties, Rev. Proc. 2015-40 clarifies that taxpayers will not be required to expand the scope of a CA case to include interrelated issues or additional years (or a coupled APA) as a prerequisite to obtaining CA assistance.
The draft revenue procedure would have allowed U.S. CA to condition acceptance of a CA matter on taxpayers agreeing to extend the number of years involved or issues covered (including, in some instances requiring an APA submission or initiating its own CA matter on behalf of a taxpayer). These draft provisions were criticized as potentially creating an environment where taxpayers could be hesitant to approach the U.S. CA because a concern that the scope of their matters would expand well beyond the assistance they required.
Under Rev. Proc. 2015-40, taxpayers may be required to provide information on such interrelated issues—but CA assistance is not conditioned on their coverage or on expanding the scope of a CA matter to include additional years or an APA. This change from the draft revenue procedure will continue to allow taxpayers to have control over the scope of their issues and years when requesting CA assistance.
In contrast, however, Rev. Proc. 2015-41 allows the U.S. CA to condition acceptance of an APA request upon taxpayer extension of years covered or issues covered. Specifically, Rev. Proc. 2015-41 clarifies that APMA may require, as a condition of continuing with the APA process, that the taxpayer expand the proposed scope of its APA request to cover “interrelated matters” (interrelated issues in the same years, covered issues or interrelated issues in other years, and covered issues or interrelated issues in the same or other years as applied to other countries).
APMA will impose these requirements with due regard to considerations of principled, effective, and efficient tax administration and only after considering the views of the taxpayer and the applicable foreign competent authority.
This distinction in treatment may reflect IRS commitment to the BEPS Action 14 goal to make dispute resolution procedures more effective, while managing resources to create efficiencies in the APA process.
Rev. Proc. 2015-40 also reflects changes from Rev. Proc. 2006-54 and the draft revenue procedure in terms of the bases for denying CA assistance, and taxpayers need to be aware of these changes as they still could be “traps for the unwary.” One significant change is with respect to the level and type of agreement that taxpayers may enter into with foreign tax authorities in order to resolve their tax disputes. Section 12.02(6) of Rev. Proc. 2006-54 provided that the U.S. CA may deny assistance if “…the taxpayer was found to have acquiesced in a foreign initiated adjustment that involved significant legal or factual issues that otherwise would be properly handled through the competent authority process and then unilaterally made a corresponding correlative adjustment or claimed an increased foreign tax credit, without initially seeking U.S. competent authority assistance.”
Accordingly, under these procedures, the U.S. taxpayer had to make a corresponding correlative adjustment or claim an increased foreign tax credit with respect to a foreign adjustment (related to significant legal or factual issues) to which they had acquiesced in order for the assistance subsequently to be potentially denied.
Section 6.02(4) of the draft revenue procedure, however, provided that the U.S. CA may deny assistance if “…the taxpayer agreed to or acquiesced in a foreign-initiated adjustment involving significant legal or factual issues without previously having consulted the U.S. CA” [emphasis supplied]. This draft provision was viewed as troubling, as it is often the case that foreign taxpayers, similar to U.S. taxpayers, need to conclude a foreign audit, agreeing to an adjustment, solely for purposes of being able to move the case—for ultimate resolution—to another forum such as CA. In this way, taxpayers can conclude protracted, expensive exam audits that show little or no sign of satisfactory resolution and also, for example, eliminate additional interest or withholding tax exposures.
The requirement of having to consult with APMA as a prerequisite to reaching any kind of agreement with foreign government would have resulted in a difficult, sometimes draconian decision for taxpayers in many instances. For example, for Canadian taxpayers, an agreement at the exam level is the only way to repatriate funds and avoid secondary adjustments during the audit process. The draft revenue procedure language, if embedded in the final procedures, would have meant that a Canadian taxpayer that chose to repatriate funds at the time of the examination in order to avoid withholding taxes being levied would have been at risk for being denied CA assistance unless the U.S. CA were consulted first. Moreover, Canadian taxpayers, for example, typically are given a 30-day deadline within which to respond to adjustments in Canada, which likely could have precluded them in many instances from even having the time to access U.S. CA to inform them of the situation and get a response.
Rev. Proc. 2015-40 creates less of a barrier to CA assistance than the draft procedure would have, although it leaves some ambiguity. Section 7.03 provides that the U.S. CA may deny CA assistance if the taxpayer’s conduct before or after filing the CA request “has undermined or been prejudicial to” the CA process. An example of this is when “…the taxpayer agreed to or acquiesced in a foreign-initiated adjustment, or entered into a unilateral APA with a foreign tax authority, involving significant legal or factual issues in a manner that impeded the U.S. competent authority from engaging in full and fair consultations with the foreign competent authority on the competent authority issues.” The potential requirement of having to consult with the U.S. CA in advance of reaching an agreement in order to protect access to CA has been removed. Clearly, though, it remains important for taxpayers to not-enter into binding arrangements with foreign tax authorities that could preclude these other tax authorities from being willing or able to discuss and negotiate the underlying facts and issues.
Rev. Proc. 2015-40 narrows the scope of issues for which pre-filing processes are required. While Rev. Proc. 2015-40 makes clear that APMA welcomes requests from taxpayers for pre-filing meetings, on a named or anonymous basis, as part of its effort to be of more assistance to taxpayers navigating the CA process, these pre-filing procedures are only mandatory for cases involving, as noted above, taxpayer-initiated adjustments. Issues for which pre-filing procedures are recommended but not required include, but are limited to, the following:
In many places in Rev. Proc. 2015-40, the proactive role of the taxpayer in the CA process is clarified. Although these iterations of the taxpayer’s responsibility and role during the CA process are, for the most part, examples of the way APMA likes taxpayers to coordinate and work with the APAM personnel, this has been helpfully articulated in the new final procedures.
For example, Rev. Proc. 2015-40 provides that taxpayers need to remain proactively in contact with the U.S. CA team leader throughout the CA process, particularly when a tentative CA resolution has been reached. The taxpayer is also required to make sure, as part of the process, that the relevant tax authorities receive complete, accurate, and timely information on the underlying factual and legal issues, and are specifically permitted to offer constructive and principled proposals for resolving their cases. Additionally, taxpayers can request the opportunity to make joint presentations before the relevant tax authorities in order to clarify certain issues or factual matters.
When a tentative agreement has been reached—as opposed to the final agreement—Rev. Proc. 2015-40 provides that the taxpayer will be apprised of this tentative agreement, orally or in writing depending upon the size and complexity of the case.
This is a very significant change as under the current procedures, taxpayers are often only advised of the formal outcome. However, the final guidance procedures also clarify that the purpose of informing the taxpayer is not to cause the re-negotiation of the underlying inter-governmental agreement but rather to address any implementation issues (e.g., computational issues or other implementation type concerns).
It is noteworthy that taxpayers now must advise the U.S. CA that they accept the CA resolution. Previously, taxpayers were presumed to accept the resolution if they were silent. Going forward, the U.S. CA may deem the taxpayer to have rejected the tentative CA resolution if the taxpayer does not timely accept it. [The new procedures do not specify that the acceptance or rejection be in writing but likely this would be prudent in order to memorialize the taxpayer’s decision and that it was conveyed to APMA.]
There is also a revised listing of the standard specifications for the content and format of a request for CA assistance. The additional information is generally information that had been previously requested by APMA as part of its due diligence for CA cases. Now, this information will be provided earlier in the CA process so that APMA can perform its initial evaluation more effectively. Additionally, more copies of the request must be filed (printed copies as well as electronic versions).
Rev. Proc. 2015-40 makes clear that failure to provide complete requests, and in the format specified, at best will delay the processing of the request and, at worst, could even result in the denial of its acceptance into the APMA program.
Some of the more extensive revisions to CA process are with respect to the manner of requesting discretionary rulings with respect to limitation on benefits (LOB) treaty provisions. These requests for assistance, which are filed with the Treaty Assistance and Interpretation Team (TAIT) of U.S. CA, reflect the IRS’s intent to better align its processes with the OECD’s BEPs initiative—particularly with respect to treaty abuse and treaty-shopping. The information that is required for a complete submission, like those submitted to APMA for relief from double taxation, are quite extensive and represent a “front loading” of the current discretionary ruling process. The criteria that will be looked to during the process in terms of the granting of the request for discretionary LOB relief are already in many ways part of the existing process but now are memorialized in writing.
Noteworthy, Rev. Proc. 2015-40 makes clear that with respect to this process:
The new procedures, consistent with BEPS, also provide that the applicant is unlikely to be successful in obtaining the desired treaty benefits if: (1) it is subject to a special tax regime in its country of residence with respect to the class of income for which benefits are sought or if the item of income is subject to little or no taxation in the country of residence or source (“double non-taxation”); or (2) the basis for the request is solely predicated upon the fact that the applicant is a direct or indirect subsidiary of a publicly traded company resident in the third country “…and the relevant withholding rate provided in the tax treaty between the United States and the country of residence of the applicant is not lower than the corresponding withholding rate in the tax treaty between the United States and the country of residence of the parent company or any immediate owner" (i.e., the derivative benefits test).
There still has to be a presentation of strong non-tax reasons as to why the applicant is resident in the treaty country.
Favorably, the new rules with respect to LOB rulings also include what is viewed as simplified processes for renewing existing rulings when there have not been any material changes in fact or law. The IRS user fee for these ruling processes is increasing from $27,500 to $32,500 for rulings filed prior to 30 September 2016 and to $37,000 thereafter.
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