Rev Proc

December 31, 1995, and invites public
comment on this matter.
The Internal Revenue Code generally
requires that payors of interest (§ 6049),
dividends (§ 6042), patronage dividends
(§ 6044), and royalties (§ 6050N),
make an information return, in the form
prescribed by the Secretary, setting forth
the amount of such payments and the
name and address of the payee. The
payor must also furnish the payee with a
copy of the information return (the
payee statement) in person or in a
statement mailing. Payors may furnish
either the official Form 1099 or an
acceptable substitute payee statement.
The legislative history to the statement mailing requirement provides that
only certain limited enclosures in the
statement mailing can be made with the
payee statement, specifically: (1) a
check; (2) a letter explaining why no
check is enclosed; and (3) a statement
of the payee’s specific account with the
payor. The legislative history further
provides that a mailing is not a statement mailing if it encloses any other
material such as advertising, promotional material, or a quarterly or annual
report. The legislative history explains
that this additional material is not permitted because these enclosures may
make it less likely that payees will
recognize the importance of the payee
statement and may not utilize the payee
statement in completing their tax returns. See S. Rep. No. 99–318, 99th
Cong., 2d Sess. at 191; and H.R. Conf.
Rep. No. 99–841, 99th Cong., 2d Sess.
at II–791.
The Service recently issued final
regulations that apply to payee statements due after December 31, 1995.
§§ 1.6042–4; 1.6044–5; 1.6049–6(e);
and 1.6050N–1 of the Income Tax
Regulations. These regulations provide
that the mailing of payee statements
must qualify as a statement mailing. To
qualify, the mailing is permitted to contain only certain specified nontax enclosures, limited to: (1) a check; (2) a letter
explaining why no check is enclosed;
(3) a statement of the payee’s account;
and (4) a letter explaining the tax consequences of the information in the payee
statement. See, e.g., § 1.6042–4(d)(2)(i).
The regulations prohibit other nontax
enclosures and promotional or advertising materials and provide that even a de
minimis amount of such material violates the statement mailing requirement.
Although the regulations specifically
permit logos on the envelope and on the
permitted nontax enclosures identified

above, they do not permit logos on the
substitute Form 1099 itself. See, e.g.,
§ 1.6042–4(d)(2)(i).
The Service intends to amend the
regulations to allow the use of certain
logos and identifying slogans on substitute Forms 1099 required to be furnished to payees. The amended regulations generally will permit logos
(including the name of the payor in any
typeface, font, or stylized fashion and/or
a symbolic icon) and identifying slogans, provided the logo or identifying
slogan is used by the payor in the
ordinary course of its trade or business.
However, consistent with Congressional
intent, the amended regulations will provide that use of a logo or identifying
slogan must not make it less likely that
a reasonable payee will recognize the
importance of the payee statement for
tax reporting purposes. Pending issuance
of the amended regulations, the Service
will not impose penalties in connection
with a payor’s use on a payee statement
of a logo or an identifying slogan that
satisfies these requirements.
Public comment invited. The Service
invites public comment on this matter.
Written comments may be submitted by
mail to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn: CC:CORP:T:R (IA–Branch 1),
Room 5228
Washington, D.C. 20044;
or, alternatively, via the internet at:
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.
DRAFTING INFORMATION
The principal author of this notice is
Donna Welch of the Office of Assistant
Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Ms. Welch
on (202) 622–4910 (not a toll-free call).
Section 482 — Allocations Between
Related Parties
Rev. Proc. 96–53
SECTION 1. PURPOSE
This revenue procedure updates and
supersedes Revenue Procedure 91–22,
1991–1 C.B. 526, and informs taxpayers
how to secure an advance pricing agreement (‘‘APA’’) from the Office of the
Associate Chief Counsel (International)
covering the prospective determination

9

and application of transfer pricing methodologies (‘‘TPMs’’) for international
transactions. An APA is an agreement
between the Service and the taxpayer on
the TPM to be applied to any apportionment or allocation of income, deductions, credits, or allowances between or
among two or more organizations,
trades, or businesses owned or controlled, directly or indirectly, by the
same interests. The TPM thus represents
the application to the taxpayer‘‘s specific facts and circumstances of the best
method within the meaning of the income tax regulations under § 482 of the
Internal Revenue Code (’’the regulations‘‘), as agreed pursuant to negotiations between the Service and the taxpayer.
SEC. 2. OVERVIEW
Under the APA request procedure, the
taxpayer proposes a TPM and provides
data intended to show that the TPM is
the appropriate application of the best
method within the meaning of the regulations for determining arm’s length results between the taxpayer and specified
affiliates with respect to specified intercompany transactions. The Service
evaluates the APA request by analyzing
the data submitted and any other relevant information. After discussion, if
the taxpayer’s proposal is acceptable,
the parties execute an APA covering the
proposed TPM. APAs often involve
agreements with foreign competent authorities under income tax conventions.
SEC. 3. PRINCIPLES OF THE APA
PROCESS
.01 The APA process is designed to
be a flexible problem- solving process,
based on cooperative and principled negotiations between taxpayers and the
Service. .
02 APAs are intended to reflect
agreement between the taxpayer and the
Service on the best method, within the
meaning of the regulations, for determining arm’s length prices, and the
proper application of the best method to
the taxpayer’’s specific facts and circumstances (that is, the TPM). In negotiations for APAs involving one or more
foreign competent authorities (‘‘bilateral’’ and ‘‘multilateral’’ APAs), the initial negotiating position of the U.S.
competent authority will reflect the Service’s opinion, based on consultation
with the taxpayer, of the best method
within the meaning of the regulations
and the appropriate TPM.

03 The taxpayer must, to the extent
feasible, secure relevant pricing data
from closely comparable uncontrolled
transactions. If this information cannot
be obtained, the taxpayer must identify
any transactions it believes may be
comparable, but for which reliable data
is unavailable. Where such transactions
cannot be identified, the taxpayer must,
to the extent possible, secure relevant
pricing data from uncontrolled transactions that are similar, even though not
closely comparable, and propose adjustments to account for differences between such uncontrolled transactions
and its own operations. The APA process may apply notwithstanding that no
comparable uncontrolled transactions
can be identified. In such cases, a
taxpayer must demonstrate that the proposed TPM otherwise satisfies the requirements of § 482 and this revenue
procedure.
.04 The APA Policy Board (the
‘‘Policy Board’’) consists of the Associate Chief Counsel (International), the
Assistant Commissioner (International),
and the Assistant Commissioner (Examination). The Policy Board establishes
Service policy on matters of substantial
general importance pertaining to the
APA Program.
.05 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 shall, directly
or by delegation, take any actions necessary for carrying out the provisions of
this revenue procedure.
.06 Application of the TPM to tax
years prior to those covered by the APA
(‘‘rollback’’ of the TPM) is an effective
means of enhancing voluntary compliance and an effective use of resources in
addressing unresolved transfer pricing
issues. It is Service policy that, whenever feasible (based, for example, on
consistency of facts, law, and available
records in the prior years), the TPM
should be used for resolving such issues
for prior taxable years. As provided in
section 8 of this revenue procedure, the
taxpayer may request that the Service
consider a rollback in connection with a
particular request. Taxpayers should recognize that, even absent a request for a
rollback, the Service may, under regularly applicable procedures, determine
that the TPM agreed to in an APA
should be applied to prior years. When
applying the TPM to prior years,
whether or not at the request of the
taxpayer, adjustments may be made to

reflect differences in facts, economic
conditions, and applicable legal rules.
.07 The filing of an APA request does
not put into abeyance any examination
or other enforcement proceeding. Service personnel responsible for APAs and
for enforcement proceedings involving
the taxpayer shall, to the extent feasible,
coordinate their activities so as to avoid
duplicative information requests to the
taxpayer, to enhance the efficiency of
Service operations and to reduce overall
taxpayer compliance burdens.
.08 Prompt and fair resolution of
APA requests and renewals, in keeping
with the demands of the multinational
economic environment, are central goals
of the APA process.
.09 The Service intends that the APA
process will retain the flexibility to
address the needs of particular taxpayers. To this end, the Service and the
taxpayer may, by agreement, adopt special procedures, including simplified
procedures, that depart from those set
forth in this revenue procedure. Such
special procedures might be warranted,
for example, in order to meet the needs
of small business taxpayers, or in order
to facilitate simultaneous negotiation of
APAs by the taxpayer, the Service, and
foreign competent authorities.

District and of any Appeals or District
Counsel Office with responsibility for
the taxpayer’s returns normally will participate in the prefiling conference. If
the taxpayer initially requests a prefiling
conference on an anonymous basis, then
chooses to identify itself, the conference
may be rescheduled to permit necessary
personnel to participate. When requesting a prefiling conference on an identified basis, the taxpayer must inform the
APA Office whether transactions similar
or related to those to be covered by the
proposed APA are currently under consideration by Examination, Appeals or
Counsel. Taxpayers should, at least one
week prior to a prefiling conference,
send a brief prefiling submission to the
APA Office that confirms the date, time
and place of the prefiling conference;
lists the persons attending the prefiling
conference for the taxpayer; and outlines
the issues to be discussed at the prefiling conference. If the prefiling submission is ten pages or less, it may be sent
by facsimile; if the prefiling submission
exceeds ten pages, seven copies and one
original should be delivered pursuant to
the instructions contained in section 5.13
of this revenue procedure.

SEC. 4. PREFILING CONFERENCES

SEC. 5. CONTENT OF APA
REQUESTS

.01 Some cases are not suitable for
APAs. Even in suitable cases, the extent
of information needed and scope of the
necessary written request will vary from
case to case. Therefore, the taxpayer
may request one or more prefiling conferences to explore informally the suitability of an APA and to clarify what
data, documentation, and analyses are
likely to be necessary in order for the
Service to be able to consider a request;
the need for an independent expert;
potentially applicable TPMs; the possibility of an agreement among competent
authorities; and the Service’s schedule
and method for coordinating and evaluating the request.
.02 To schedule a prefiling conference, the taxpayer or its representative
should contact the APA Office with
three alternative dates for the prefiling
conference. The taxpayer may request a
prefiling conference either on the basis
that its identity will be made known in
connection with the conference, or that
it will participate in the conference on
an anonymous basis. If the taxpayer
chooses to make its identity known in
the conference, representatives of the

.01 General.
(1) All materials submitted with the
request become part of the Service’s file
and will not be returned. Therefore,
original documents should not be submitted.
(2) The taxpayer must submit copies
of any documents relating to the proposed TPM and must ensure that all
submitted information is properly labeled, indexed, and referenced in the
request. Any previously-submitted documents that the taxpayer wishes to associate with the request must be referenced in the request. 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, certify that
the items exist at the time the request is
submitted, state where the items are
located, state whom the Service can
contact to secure the items, and confirm
that the items will promptly be made
available upon request.
(3) All documents submitted in a foreign language must be accompanied by
an English translation.

10

(4) The user fee should be submitted
with the request, unless previously submitted.
.02 Explanation of the Proposed
TPM.
The taxpayer must provide a detailed
explanation and analysis of each proposed TPM based on the principles
discussed in sections 3.02 and 3.03 of
this revenue procedure. The request
should illustrate each proposed TPM by
applying it, in a consistent format, to the
prior three taxable years’ financial and
tax data of the parties. When 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. If coverage of three taxable years is inappropriate for any reason, the taxpayer should
provide data for an appropriate date
range and explain why this range was
chosen.
.03 General Factual and Legal Items
for All Proposed TPMs.
Unless otherwise agreed in a prefiling
conference, each request must include,
in addition to any other items specified
in this revenue procedure, the following
items:
(1) The organizations, trades, businesses, and transactions that will be
subject to the APA.
(2) The names, addresses, telephone
numbers, and taxpayer identification
numbers of the controlled taxpayers that
are parties to the requested APA (the
parties).
(3) A properly completed Form 2848
for any persons authorized to represent
the parties in connection with the request. If the taxpayer or the taxpayer’s
authorized representative has retained
any other person or persons (including,
but not limited to, a law firm, accounting firm, or economic consulting firm)
to assist the taxpayer in pursuing the
APA request, the taxpayer must also
provide a separate written authorization
for disclosures to such person or persons
and their employees during the Service’s
consideration of the request, pursuant to
the instructions in § 301.6103(c)–1 of
the Income Tax Regulations.
(4) A brief description of the general
history of business operations, worldwide organizational structure, ownership, capitalization, financial arrangements, principal businesses, and the
place or places where such businesses
are conducted, and major transaction
flows of the parties.

(5) Representative financial and tax
data of the parties for the last three
taxable years, together with other relevant data and documents in support of
the proposed TPM. This item includes,
but need not be limited to, data contained in Form 5471 (Information Report with Respect to a Foreign Corporation); Form 5472 (Information Report of
a Foreign Owned Corporation); income
tax returns; financial statements; annual
reports; other pertinent U.S. and foreign
government filings (for example, customs reports or SEC filings); existing
pricing, distribution, or licensing agreements; marketing and financial studies;
and company-wide accounting procedures, business segment reports, budgets, projections, business plans, and
worldwide product line or business segment profitability reports.
(6) The functional currency of each
party and the currency in which payment between parties is made for the
transactions that will be covered by the
APA.
(7) The taxable year of each party.
(8) A description of significant financial accounting methods employed by
the parties that have a direct bearing on
the proposed TPM.
(9) An explanation of significant financial and tax accounting differences,
if any, between the U.S. and the foreign
countries involved that have a bearing
on the proposed TPM.
(10) A discussion of any relevant
statutory provisions, tax treaties, court
decisions, regulations, revenue rulings,
or revenue procedures that relate to the
proposed TPM.
(11) 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 any such
issues. The same information may also
be required for similar issues involving
foreign tax authorities.
.04 Specific Factual Items for a Proposed TPM other than a Cost Sharing
Arrangement.
The following information may be
appropriate to establish the arm’s length
basis of the proposed TPM under
§ 482:
(1) Pertinent measurements of profitability and return on investment (for
example, gross profit margin or markup,

11

gross income/total operating expenses,
net operating profit margin, or return on
assets).
(2) A functional analysis of each
party setting forth the economic activities performed, the assets employed, the
economic costs incurred, and the risks
assumed.
(3) An economic analysis or study of
the general industry pricing practices
and economic functions performed
within the markets and geographical
areas to be covered by the APA.
(4) A list of the taxpayer’s competitors and a discussion of any uncontrolled transactions, lines of business or
types of businesses that may be comparable or similar to those addressed in the
request.
(5) A detailed presentation of the research efforts and criteria used to identify and select possible independent
comparables and of the application of
the criteria to the potential comparables.
This presentation should include a list of
potential comparables and an explanation of why each was either accepted or
rejected.
(6) A detailed explanation of the selection and application of the factors
used to adjust the activities of selected
independent comparables for purposes
of devising the proposed TPM. Examples of possible adjustments include
adjustments to accord with product line
segregations; for functional differences
relating to activities performed, assets
employed, risks and costs incurred; for
volume or scale differences; and for
differing economic and market conditions.
.05 Specific Factual Items for a Cost
Sharing Arrangement.
The taxpayer must apply the cost
sharing regulations under § 482 in developing the cost sharing arrangement
proposed in the request. The following
illustrates information that may be appropriate to establish that the proposed
arrangement is a qualified cost sharing
arrangement:
(1) The history of the business operations, the geographic locations, and principal business activities (for example,
manufacturing or marketing) of each of
the participants.
(2) Documentation of the arrangement and any changes made to it, along
with an explanation and the dates
thereof.
(3) The participants, their dates of
entry, each participant’s contribution to
the arrangement, each participant’s inter-

est in any covered intangibles, and how
each participant reasonably anticipates
that it will derive benefits from the use
of covered intangibles; a statement
whether there has been or will be any
transfer by any participant of covered
intangibles to another taxpayer under
common control and, if so, how benefits
will be reflected under those circumstances; and evidence of participants’
compliance with the reporting requirements under the cost sharing regulations.
(4) The method for calculating each
participant’s share of intangible development costs and the reason why such
method can reasonably be expected to
reflect that participant’s share of anticipated benefits; and a statement whether
and how the participants’ shares of
intangible development costs will be
adjusted to account for changes in economic conditions, the business operations and practices of the participants,
and the ongoing development of intangibles under the arrangement.
(5) The scope of the research and
development to be undertaken, including
the intangible or class of intangibles
intended to be developed.
(6) The duration of the arrangement;
the conditions under which the arrangement may be modified or terminated;
and the consequences of such modification or termination, such as the interest
that each participant will receive in any
covered intangibles.
(7) The scope of intangible development costs, and which costs are included
and which are excluded (for example,
costs of technology acquired from third
parties; non-product specific development costs; costs associated with abandoned projects; costs associated with
specific stages of product development;
and relevant labor, material, and overhead costs); a description of any services performed for participants to 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,
pursuant to the arrangement.
(8) The basis used for measuring
benefits, the projections used to estimate
benefits, and why such basis and projections yield the most reliable estimate of
reasonably anticipated benefits; 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 such amounts would be taken

into account; and, for a representative
period, a comparison of projected and
actual benefit shares.
(9) The accounting method used to
determine the cost and benefits of the
intangible development (including the
method used to translate foreign currencies), and to the extent that the accounting method differs materially from U.S.
generally accepted accounting principles,
an explanation of any material differences.
(10) Prior research, if any, undertaken
in the intangible development area; any
tangible or intangible property made
available for use in the arrangement and
any compensation paid for that property
(specifying the amount, payor and
payee, and how such compensation is
determined); and any other information
used to establish the value of preexisting and covered intangibles.
(11) Whether and how participants
may join or leave the arrangement (or
otherwise change their interests in covered intangibles); any adjustments that
will be made to the participants’ interests in covered intangibles in such
cases; any payments that must be made
in such cases, and how such payments
will be calculated and made; and
whether any changes in the participants’
interests in covered intangibles have
already occurred, any compensation paid
for those interests, and any information
used to establish the value of such
interests.
(12) How cost sharing payments and
buy-in or buy-out payments (i.e., payments made when a participant contributes intangibles, or acquires or relinquishes an interest in covered
intangibles) made or received have been
treated for U.S. income tax purposes.
(13) Representative internal manuals,
directives, guidelines, and similar documents prepared for purposes of implementing or operating the cost sharing
arrangement (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).
(14) Each participant’s gross and net
profitability (historical for five taxable
years and projected for two taxable
years) with regard to the product area
covered by the arrangement.

12

.06 Discussion of Collateral Income
Tax Issues.
The taxpayer must discuss any relevant collateral income tax issues (for
example, issues relating to foreign tax
credits) raised by the proposed TPM
under United States law.
.07 Critical Assumptions.
The taxpayer must propose and describe a set of critical assumptions. A
critical assumption is any fact (whether
or not within control of the taxpayer)
related to the taxpayer, a third party, an
industry, or business and economic conditions, the continued existence of which
is material to the taxpayer’s proposed
TPM. Critical assumptions might include, for example, a particular mode of
conducting business operations, a particular corporate or business structure or
a range of expected business volume.
.08 Contents of Annual Report.
Section 11.01 of this revenue procedure 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. For
example, the report should generally
include the following items: (a) the
application of the TPM to the actual
operations for the year; (b) a description
of any material lack of conformity with
critical assumptions and the reasons
therefor (or, if there has been no material lack of conformity with critical
assumptions, a statement to that effect);
and (c) an analysis of any compensating
adjustments to be paid by one entity to
the other, and the manner in which the
payments are to be made. Other items
may be appropriate to the taxpayer’s
particular circumstances.
.09 Term.
(1) The taxpayer must propose an
initial term for the APA. For example,
the APA could take effect at the beginning of the taxable year during which it
was requested or signed, and last for
three taxable years. The term should be
appropriate to the industry, product, or
transaction involved.
(2) The APA request must be filed no
later than the time prescribed by law
(including extensions) for filing the taxpayer’s Federal income tax return for
the first taxable year to be covered by
the APA. For purposes of the preceding
sentence, an APA request will be considered filed on the date payment of the
required user fee is made (within the
meaning of § 7502(a)), provided that a

substantially complete APA request is
filed with the Service within 120 days
thereafter, subject to extension by the
Service based on a showing of substantial unforeseen circumstances.
.10 Request for Competent Authority
Consideration.
The taxpayer must state whether any
of the parties to a request are residents
of or conduct activities in a foreign
country that has a tax treaty with the
United States or in a possession of the
United States, and whether the taxpayer
proposes an agreement among competent authorities or an agreement described in Rev. Proc. 89–8, 1989–1 C.B.
778 (see section 7 of this revenue
procedure for guidelines). For purposes
of this revenue procedure, ‘‘competent
authority’’ includes the U.S. and foreign
competent authorities under income tax
treaties to which the U.S. is a party, and
also includes the Assistant Commissioner (International) acting with respect
to a possession tax agency described in
Rev. Proc. 89–8, as well as a designated
possession tax official within the meaning of that revenue procedure. If the
taxpayer proposes an agreement among
competent authorities for the initial term
of the APA, the taxpayer’s request must
include the information described in
sections 4.05(a) and (b) and, in a separate document, section 4.05(m), of Rev.
Proc. 96–13, 1996–3 I.R.B. 31, or similar information pursuant to a request for
relief under Rev. Proc. 89–8.
.11 Perjury Statement.
The taxpayer must include in any
request for an APA, and any supplemental submission, a declaration in the following form:
Under penalties of perjury, I declare that I have examined this
request, including accompanying
documents, and, to the best of my
knowledge and belief, the request
contains all the relevant facts relating to the request, and such facts
are true, correct, and complete.
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
and whose duties are not limited to
obtaining letter rulings or determination
letters from the Service, or negotiating
APAs. The person signing for a trust or

a partnership must be a trustee or a
partner who has personal knowledge of
the facts.
.12 Signatures.
The taxpayer or the taxpayer’s authorized representative must sign the request. If an authorized representative is
to sign, the taxpayer and representative
must conform to the rules of Rev. Proc.
96–1, 1996–1 I.R.B. 8 (or its successor).
.13 Copies and Mailing.
(1) Requests or other documents containing user fees must be mailed or
delivered to
Internal Revenue Service
Attn: CC:DOM:CORP:T
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044,
or 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 may
either be mailed to
Advance Pricing Agreement Program
Internal Revenue Service
Attn: CC:INTL
Room 3501, 1111 Constitution Ave.,
N.W.
Washington, DC 20224
or may be delivered to
Advance Pricing Agreement Program
Internal Revenue Service
Attn: CC:INTL
5th Floor, 950 L’Enfant Plaza, S.W.
Washington, DC 20024
The taxpayer should provide the original
and seven copies of its APA request and
of all supplemental materials submitted
while the request is pending.
.14 User Fees.
(1) The user fee for each separate
request for an advance pricing agreement is $25,000 except as provided
below in this section 5.14 of this revenue procedure.
(2) The user fee for each separate request for an advance pricing
agreement from a taxpayer with gross
income (as determined in section
5.14(7) of this revenue procedure) of at
least $100,000,000 and less than
$1,000,000,000 is $15,000.
(3) The user fee for each separate
request for an advance pricing agreement or renewal from a taxpayer with
gross income (as determined in section
5.14(7) of this revenue procedure) of
less than $100,000,000 is $5,000.
(4) Notwithstanding sections 5.14(1)
and (2) of this revenue procedure, if it is

13

apparent on the face of the APA request
that the transaction or transactions subject to the request involve tangible property and/or services the total annual
value of which is not in excess of
$50,000,000, or payments for intangible
property (such as royalties) not in excess of $10,000,000 annually, the user
fee for each separate request shall not
be more than $7,500.
(5) As explained in section 5.14(8) of
this revenue procedure, an APA request
that involves pricing issues in more than
one foreign jurisdiction will normally be
considered to constitute multiple bilateral requests. The user fee for the first
such request shall be determined under
sections 5.14(1), (2), (3), (4), or (6) of
this revenue procedure as applicable.
The user fee for each subsequent bilateral request, however, shall be not more
than $7,500, if such subsequent bilateral
request (a) involves the same product
line, goods, services, or intangibles, and
the same issues, as involved in the first
request; (b) covers the same taxable
years as covered by the first request;
and (c) proposes the same TPM as the
first request.
(6) Notwithstanding sections 5.14(1)
and (2) of this revenue procedure, the
user fee for a request for renewal of an
APA, when the material facts, critical
assumptions and proposed TPM have
not substantially changed, shall not be
more than $7,500.
(7) For purposes of sections 5.14(2)
and 5.14(3) of this revenue procedure,
gross income of a U.S. person (or
non-U.S. person filing a federal income
tax return with respect to all such
person’s income) is equal to ‘‘total income’’ as reported on the last federal
income tax return for such person (as
amended) filed for a full (12 month)
taxable year ending before the date the
request was filed, plus ‘‘cost of goods
sold’’ as reported on that federal income
tax return, plus any income not subject
to tax under section 103 for that period;
and gross income of all other persons
shall be computed on an equivalent
basis (that is, gross receipts or economic
income plus cost of goods sold) for such
person’s most recently completed 12month year. For purposes of sections
5.14(2) and (3) of this revenue procedure, gross income of a taxpayer shall
include the gross income (determined
pursuant to the preceding sentence) of
all organizations, trades or businesses
(whether or not incorporated, whether or
not resident or organized in the U.S.,
and whether or not affiliated for tax

purposes) owned or controlled directly
or indirectly by the same interests controlling the taxpayer.
(8) For purposes of this section 5.14
of this revenue procedure, a separate
request constitutes a request for agreement on a transfer pricing methodology
or methodologies comprising a closely
related set of facts, such that review of
the single set of facts will suffice to
determine the suitability of all the methodologies involved in the separate request. For example, an APA submission
involving the pricing of tangible products and the manufacturing services provided by a parent to a subsidiary with
respect to those products usually would
constitute one separate request. Similarly, a submission involving separate
product lines manufactured in the same
location by substantially similar processes usually would constitute one
separate request. However, a submission
involving product lines manufactured at

different locations, or by manufacturing
processes that are not substantially similar, usually would constitute more than
one request. The fact that an APA
submission involves pricing issues related to more than one foreign jurisdiction, and thus requires analyses of separate factual or economic issues, as well
as negotiations between the U.S. and
more than one foreign competent authority, will normally result in treatment
of the submission as more than one
request. However, such separate requests
may be eligible for reduced user fees
under paragraph (5) of this section 5.14
of this revenue procedure.
(9) If an APA request is submitted or
processed under paragraphs (2), (3), (4),
(5), or (6) of this section 5.14 of this
revenue procedure, and it later becomes
apparent that the request does not meet
the criteria for application of such paragraphs, the Service will request an additional user fee to conform the request to

the proper amount under this revenue
procedure, as appropriate. The taxpayer
may either pay such additional fee and
continue the APA process or may withdraw the request. If the taxpayer withdraws the request, the Service may return
the user fee to the taxpayer if the Service
determines that such action would be
appropriate under the circumstances. Except to the extent inconsistent with this
revenue procedure, the principles of Rev.
Proc. 96–1 (or its successor), including
but not limited to section 14 thereof,
shall apply to all questions related to
user fees in connection with APAs. The
APA Team Leader described in section
6.04 of this revenue procedure, prior to
the initial meeting with the taxpayer on a
filed APA, will make a determination
regarding the correctness of the taxpayer’s initial payment of user fees and
request any necessary corrections.
(10) The chart below summarizes the
foregoing user fee provisions:

Taxpayer Gross Income

Original Request

Each Additional
Multilateral Request1 Routine Renewal2

Small Transactions3

$1 billion
Less than
than or
Less than

$25,000
$15,000

$7,500
$7,500

$7,500
$7,500

$7,500
$7,500

$5,000

$5,000

$5,000

$5,000

or more
$1 billion and greater
equal to $100 million
$100 million

1

Only if such additional request involves the same issues, covers the same years, and proposes the same TPM as the first request; see section 5.14(5).
Only if the material facts, critical assumptions, and proposed TPM have not substantially changed; see section 5.14(6).
3
Regardless of taxpayer size, applies to transactions that involve (i) tangible property or services valued at no more than $50 million annually, or (ii) payments
for intangible property not in excess of $10 million annually; see section 5.14(4).
2

SEC. 6. PROCESSING OF APA
REQUESTS

Director will coordinate with the U.S.
competent authority.

.01 Initial Contact.
After receiving a request for an APA,
a representative of the APA Program
will contact the taxpayer to discuss any
questions that the Service may have, or
to ask for any additional information or
documents believed necessary in order
to initiate processing of the request.
Additional information and documents
must be supplied by the date specified
by the Service, as extended for good
cause.

.03 Evaluation Process.
The Office of Associate Chief Counsel (International), in coordination with
the appropriate District Director and
other appropriate Service officials, 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 any other provision of the
Code.

.02 Coordination with Other IRS Offices.
Upon receipt of a request, the APA
Director will coordinate the evaluation
of the request with other Service officials, such as the District Director, Regional Director of Appeals and District
Counsel. In appropriate cases, such as
where a request proposes an agreement
between competent authorities, the APA

.04 Formation of the APA Team and
Designation of Team Leader.
Within 45 days of receiving the taxpayer’s APA request and any required
user fees, the APA Director will appoint
an APA Team to review the request. The
APA Team normally will consist of at
least one representative of the Office of

14

Associate Chief Counsel (International),
as well as representatives of the appropriate District and District Counsel and,
when appropriate, Appeals and the U.S.
competent authority. The APA Director
will appoint a Team Leader to oversee
the APA Team’s activities. Whenever
reasonably feasible, if a prefiling conference has been held with the taxpayer,
the Team Leader will be appointed from
among the IRS representatives at the
prefiling conference.
.05 Negotiation and Drafting.
(1) The APA Team shall arrange with
the taxpayer for an initial meeting to
take place within 60 days of receiving
the taxpayer’s APA request and required
user fee. In connection with the initial
meeting, the APA Team and the taxpayer
shall agree on a Case Plan and Schedule, to which everyone involved in the
APA–both government and taxpayer
personnel–will be expected to adhere.
The Case Plan and Schedule should list
each question raised by the initial Ser-

vice review of the APA request and
should include a schedule for seeking to
resolve each. The Case Plan and Schedule generally should reflect agreement
between the APA Team and the taxpayer
on the scope and nature of any additional information that will be required
to resolve these questions in order to
negotiate an APA. Firm dates should be
agreed upon for case milestones, including: (a) submission of any necessary
additional information by the taxpayer;
(b) evaluation of the information by the
government; (c) negotiation of a recommended agreement or competent authority negotiating position; and (d) presentation of the recommended agreement or
competent authority negotiating position
in writing to the Associate Chief Counsel (International).
(2) 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 U.S. possession involved to minimize
the time needed for competent authority
resolution.
(3) To minimize delays caused by the
need to coordinate different parties’
schedules on short notice, the time and
place of meetings required for any steps
in the case should be determined in the
Case Plan and Schedule.
(4) Failures by either the taxpayer or
the APA Team to meet case milestones
will be addressed promptly, normally in
a meeting or telephone conference involving the APA Director, members of
the Service APA Team, and the taxpayer.
If a taxpayer has failed to meet one of
the case milestones, the APA Director
will assist the taxpayer in remedying
any difficulties and will propose a
course of action to ensure that milestones can be met. Substantial and consistent failure by the taxpayer to comply
with the Case Plan and Schedule will be
treated by the Service as a withdrawal
of the APA request. In this event, if the
taxpayer wishes to continue to pursue
the APA, the taxpayer will be required
to refile the request and pay a new user
fee. If the Service fails to meet a case
milestone, the APA Director, the Service
APA Team, and supervisors in the District and Region, as appropriate, shall
work together promptly to remedy the
situation.
(5) In some circumstances, development of the case after agreement on the
Case Plan and Schedule will suggest, to

both the APA Team and the taxpayer,
that some milestone dates should be
adjusted. To preserve flexibility, the
APA Team and the taxpayer may amend
the Case Plan and Schedule by mutual
agreement, consistent with the need to
maintain progress toward completion of
the case as expeditiously as feasible.
(6) The function of the APA Team is
to negotiate and recommend an agreement, and if applicable to recommend in
consultation with the taxpayer a competent authority negotiating position, to the
Associate Chief Counsel (International).
Negotiations between taxpayers and the
APA Team should be documented by
means agreed between the parties. The
District Director with responsibility for
the taxpayer’s returns shall be provided
an opportunity to review and comment
on the draft APA in the case of a
unilateral APA, and the proposed initial
US competent authority negotiating position in the case of a bilateral or
multilateral APA. Signature of an APA
by the Associate Chief Counsel (International) and the taxpayer will constitute
agreement to the APA.
.06 Withdrawing the Request.
The taxpayer may withdraw the request at any time before the execution
of the APA. Pursuant to the principles of
Rev. Proc. 96–1 (or its successors),
including but not limited to section
14.09 thereof, the user fee generally will
not be refunded if the taxpayer withdraws its request for an APA.
.07 Rejecting the Request.
The Service may decline either to
accept any APA request or to execute
any APA, as requested, after a request
has been accepted. If the Service declines to execute an APA after the
request has been initiated, the Service
normally will retain the user fee, although the fee may be returned if the
Service determines that such action
would be appropriate under the circumstances. If the Service proposes to reject
an APA request, the taxpayer will be
granted one conference of right. Other
conferences may be granted at the Service’s discretion.
SEC. 7. COMPETENT AUTHORITY
CONSIDERATION
.01 When any of the parties to a
request are entitled to seek relief 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

15

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. 96–13, 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 is encouraged to submit APA requests and related
correspondence simultaneously to the
Service and to foreign competent authorities involved in the requests.
.02 The purpose of the competent
authority agreement is to avoid double
taxation. If such an agreement is not
acceptable to the taxpayer, the taxpayer
may withdraw the APA request (see
section 6.06 of this revenue procedure).
If the competent authorities are unable
to reach an agreement or the taxpayer
does not accept the competent authority
agreement, the Service will attempt to
negotiate a unilateral APA with the
taxpayer (see section 7.07 of this revenue procedure).
.03 The taxpayer must cooperate with
the Service and the U.S. competent
authority, pursuant to the standards set
forth in Rev. Proc. 96–13 and any other
applicable revenue procedures. Any information received or prepared by the
Service, including information furnished
by the taxpayer or the related foreign
entity, will be subject to the restrictions
on disclosure of tax related information
provided by U.S. law and the applicable
income tax convention.
.04 It may be necessary to request
sensitive confidential data (such as trade
secrets) which, if disclosed, could harm
the taxpayer’s competitive position. In

such cases, the parties will attempt to
negotiate a mechanism to permit verification by a foreign competent authority
without disclosing such information.
.05 When the competent authorities
enter into an agreement covering an
APA, the Service will, to the extent
practicable, 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 The U.S. competent authority will
seek to persuade the foreign competent
authority to use APA data only on terms
similar to those described in sections
10.04 and 10.05 of this revenue procedure.
.07 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. When a unilateral APA request involves taxpayers operating in a
country that is a treaty partner, the
Service may notify the treaty partner of
the filing of the request and provide the
treaty partner with other information
related to the request, under normal
rules governing the exchange of information under income tax treaties. In
some circumstances, procedures agreed
upon with particular foreign competent
authorities, or the requirements of
proper relations with treaty partners,
may preclude unilateral APAs.
.08 Section 7.05 of Rev. Proc. 96–13
provides in part that, if a taxpayer
reaches a settlement on an issue with
Counsel 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. 96–13 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 such APA‘‘s TPM (as discussed in sections 3.06 and 8 of this
revenue procedure), section 7.05 of Rev.
Proc. 96–13 will apply to such rollback
years in the regular manner.)
SEC. 8. ROLLBACKS
.01 The taxpayer may indicate in its
APA request, or at any time prior to the
completion of APA negotiations, that it
desires for the Service to consider using
the TPM of the APA to resolve transfer
pricing issues for years prior to the
earliest year covered by the APA. In
general, the principles set forth in section 3.06 of this revenue procedure will
govern the Service’s consideration of
this request (the ‘‘rollback request’’).
When a rollback request is made after
submission of the APA request, the
taxpayer must provide the request to the
APA Director at the address indicated in
section 5.13(2) of this revenue procedure.
.02 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. 96–13. The Office of Associate Chief Counsel (International), the
District Director, 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.
96–13, 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,
except that, in order to facilitate effective competent authority negotiations,
the Service may require that, if accelerated competent authority consideration
is to be granted, it will apply to one or
more specified years. In exercising their
regular discretion over the conduct of
accelerated competent authority consid-

16

eration, Service officials shall seek to
implement the policy concerning APA
rollbacks stated in section 3.06 of this
revenue procedure.
.03 If a rollback request is submitted
in connection with a bilateral or multilateral APA and involves a taxable year
that is under the jurisdiction of Appeals,
the rollback request will be deemed to
constitute an application for simultaneous Appeals and competent authority
consideration as described in section 8
of Rev. Proc. 96–13 and will be subject
to the rules set forth therein. The Office
of Associate Chief Counsel (International), the Regional Director of Appeals, and the U.S. competent authority
will coordinate consideration of the request. In exercising their regular discretion over the conduct of simultaneous
Appeals and competent authority consideration, Service officials shall seek to
implement the policy concerning APA
rollbacks stated in section 3.06 of this
revenue procedure.
.04 Subject to the policy set forth in
section 3.06 of this revenue procedure,
the determination whether a rollback
shall be granted with respect to a taxable year is within the discretion of the
Service official with jurisdiction over
the taxable year subject to the rollback
— typically, either the District Director,
the Regional Director of Appeals, the
Assistant Commissioner (International)
(for matters subject to competent authority negotiations), or the District Counsel
(for matters under litigation). Except to
the extent inconsistent with this revenue
procedure, normal procedures for resolving tax issues, including but not limited
to closing agreements and other settlement documents and Forms 870 and
870AD, shall be used to implement APA
rollbacks.
SEC. 9. INDEPENDENT EXPERT
OPINION
.01 The taxpayer may be required to
provide at its own expense an independent expert, acceptable to both the taxpayer and the Service (and, in a bilateral
or multilateral proceeding, the foreign
competent authority or authorities) to
review and opine on the proposed TPM.
The taxpayer may suggest in its APA
request whether an independent expert is
needed, or the Service (or, if applicable,
the foreign competent authority) may
determine that an independent expert is
needed for the evaluation of the taxpayer’s request.

.02 For purposes of this revenue procedure, an expert is any person who, by
agreement between the taxpayer and the
Service (and, if involved, the foreign
competent authority), possesses expert
education or experience in a field of
study, industry or geographic area that is
relevant to the subject matter of the
taxpayer’s APA request.
.03 For purposes of this revenue procedure, an expert is independent if the
expert has not participated to any material extent in the development of the
request and has not in the past assisted
either the Service or the taxpayer in
matters substantially related to the request.
.04 If an expert is necessary, the
expert will critically analyze the taxpayer’s proposed TPM and render a written
opinion. The opinion will address any
questions and concerns raised by the
Service or the taxpayer (and, if involved, the foreign competent authority);
conclude whether the proposed TPM or
a revised version fairly supports and
produces an arm’s length approach; and
provide the basis for this opinion. However, the expert’s opinion will not be
binding on any of the parties. The
taxpayer and the Service (and, if involved, the foreign competent authority)
will have access to the expert’s report
and supporting documentation. The Service and the taxpayer shall both be kept
fully informed of any communications
between the other party and the independent expert, and receive copies of all
information provided by such other
party to the expert.
.05 If an independent expert is necessary, the taxpayer must provide a waiver
under § 6103(c) to the Service for purposes of discussing returns or return
information with the expert. The taxpayer must also ensure that the expert is
familiar with the provisions of this revenue procedure and that any opinion
rendered by the expert complies with
those provisions.
SEC. 10. LEGAL EFFECT
.01 An APA is a binding agreement
between the taxpayer and the Service.
.02 If the taxpayer complies with the
terms and conditions of the APA, the
Service will regard the results of applying the TPM as satisfying the arm’s
length standard, and, except as provided
in this revenue procedure, will not contest the application of the TPM to the
subject matter of the APA. The taxpayer
remains otherwise subject to U.S. in-

come tax laws and is entitled to any
benefits otherwise available under U.S.
income tax laws.
.03 Except to the extent provided by
regulations, an APA shall have no legal
effect except with respect to the taxpayer, taxable years and transactions to
which the APA specifically relates.
.04 Except as otherwise provided by
written agreement, regulations, or this
revenue procedure, neither the APA nor
any non-factual oral or written representations or submissions made in conjunction therewith may be introduced by the
taxpayer or the Service as evidence in
any judicial or administrative proceeding
in relation to any tax year, transaction,
or person not covered by the APA.
However, taxpayers should recognize
that the preceding sentence does not
preclude rollback of the APA TPM, nor
the discovery, use, or admissibility of
non-factual material otherwise discoverable or obtained other than in the APA
process merely because the same or
similar material was also included in the
APA or representations or submissions
made in connection with the APA or
presented during the APA process.
.05 Except as otherwise provided by
written agreement or regulations, if an
APA is not executed or if an executed
APA is later revoked or canceled, neither the APA or the proposal to use a
particular TPM, nor any non-factual oral
or written representations or submissions
made during the APA process, may be
introduced by the taxpayer or the Service as an admission by the other party
in any administrative or judicial proceeding for the taxable years for which
the APA was requested or executed.
However, taxpayers should recognize
that the preceding sentence does not
preclude the discovery, use, or admissibility of non- factual material otherwise
discoverable or obtained other than in
the APA process merely because the
same or similar material was also included in the APA or representations or
submissions made in connection with
the APA or presented during the APA
process.
SEC. 11. 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
the taxpayer’s actual operations for the
year and demonstrating good faith compliance with the terms and conditions of
the APA. The report must include all

17

items called for by the APA, must
describe any pending or contemplated
requests to renew, modify or cancel the
APA, and must describe any compensating adjustments made pursuant to section 11.02 of this revenue procedure.
(2) The taxpayer shall file an original
and four copies of each report, no later
than 90 days after the time prescribed
by law (including extensions) for filing
the taxpayer’s Federal income tax return
for the year covered by the report, or by
such other date as is specified in the
APA, with the APA Director at the
address indicated in section 5.13(2) of
this revenue procedure. The taxpayer
may also be required to file a copy of
the annual report with the treaty partner
or partners with respect to a bilateral or
multilateral APA. The report must comply with sections 5.11 and 5.12 of this
revenue procedure.
(3) The Service will contact the taxpayer regarding an annual report only if
it is necessary to clarify or complete the
information contained in the annual report. Additional information must be
supplied by the date specified by the
Service, as extended for good cause.
Any contact between the taxpayer and
the Service for the purpose of clarifying
the information contained in the annual
report will not constitute an examination, or the commencement of any examination, of the taxpayer for purposes
of § 7605(b) or any other provision of
the Code.
.02 Compensating Adjustments.
(1) If the results of applying the TPM
differ from those contemplated by the
APA, the APA may permit the taxpayer
and its related foreign entity to make a
compensating adjustment. For example,
if the APA provides for a range of
expected operating results, and the actual operating results are outside that
range (but within any limits specified in
the APA), the APA may permit the
parties to make a compensating adjustment to bring the results to an agreed
upon point within the described range.
Such compensating adjustment should
be reflected on the taxpayer’s timely
filed (with extensions) federal income
tax return; if the taxpayer is not able to
make such adjustments in its original
return, the required compensating adjustment must in any event be made and
paid within 90 days of the date prescribed for filing such return (with extensions), and reflected on an amended
return filed within such period and the
timely filed annual report required by

section 11.01 of this revenue procedure.
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 compensating adjustments in an amended
return or returns filed within, and pay
such compensating adjustments within,
90 days of entering into such APA.
(2) The taxable income and earnings
and profits of both the taxpayer and its
related foreign entity for a taxable year
covered by an APA will include all
income generated as a result of the TPM
as increased or decreased by any compensating adjustment for that year. A
compensating adjustment will be
deemed to have been made as of the last
day of the taxable year to which it
applies. For all U.S. income tax purposes, after taking into consideration
any compensating adjustment, the adjusted figures will be used. Provided
that the taxpayer has made a good faith
effort to comply with the TPM in such
manner as to avoid the need for compensating adjustments, and payments of
compensating adjustments are made
within the time specified in section
11.02(1) of this revenue procedure, (i)
the compensating adjustment will not be
taken into account in the computation of
any required estimated tax installments
for such year, (ii) the taxpayer will not
be subject to the failure to pay penalties
under § § 6651 and 6655 by reason of
the compensating adjustment, and (iii)
no interest will accrue on any receivable
or payable established to settle such
compensating adjustment. A compensating adjustment may, however, be taken
into account for purposes of redetermining any foreign tax credits in accordance
with § 901. Subject, where applicable,
to agreement between competent authorities, the taxpayer or the related
foreign entity may employ any method
that accords with section 4 of Rev. Proc.
65–17, 1965–1 C.B. 833 (as modified),
or any successor, for paying compensating adjustments, including checks, wire
transfers, offsets through intercompany
accounts, or recharacterized dividends.
All actions taken with respect to such
compensating adjustments must be
documented and disclosed in the annual
report.
(3) A ‘‘subsequent compensating adjustment’’ arises when the taxpayer or
the Service makes normal and routine
adjustments (for example, correction of
computational errors) to the determination and computation of the taxpayer’s
TPM during the taxable year or years

under the APA, as determined in accordance with the TPM. The generally
applicable Code rules relating to assessment, collection and refund of tax and
the principles of Rev. Proc. 65–17 (as
modified), or any successor, apply to
any resulting change in Federal income
tax liability because of a subsequent
compensating adjustment.
(4) When an agreement between
competent authorities is sought as part
of the APA request, the principles stated
in this section will be discussed with the
appropriate foreign competent authority
to seek to ensure substantially identical
treatment of the taxpayer’s related foreign entity.
(5) The Service and the taxpayer may
agree in an APA to modify the foregoing
provisions relating to compensating adjustments.
.03 Examination.
(1) If the District Director examines a
tax year covered by an APA, the examination of matters covered by the APA
will be limited to the factors in section
11.03(2) of this revenue procedure. The
District Director will not re-evaluate the
TPM itself.
(2) The District Director may require
the taxpayer to establish that (a) the
taxpayer has complied in good faith
with the terms and conditions of the
APA; (b) the material representations in
the APA and the annual reports remain
valid and accurately describe the taxpayer’s operations; (c) the supporting data
and computations used in applying the
TPM were correct in all material respects; (d) the critical assumptions underlying the APA remain valid; and (e)
the taxpayer has consistently applied the
TPM and met the critical assumptions.
(3) If the District Director determines
that any requirement in section 11.03(2)
of this revenue procedure has not been
satisfied, the issue will be submitted to
the Associate Chief Counsel (International) for resolution. The Associate
Chief Counsel (International) will decide
either to continue to apply the APA;
revoke the APA (see section 11.05 of
this revenue procedure); cancel the APA
(see section 11.06); or revise the APA
(see section 11.07).
(4) The District Director may, without securing the consent of the Associate Chief Counsel (International), propose normal and routine audit
adjustments, which are not related to
interpretation of the TPM, to the determination and computation of the operating results of the taxpayer’s TPM during

18

the taxable year or years under examination (as determined in accordance with
the TPM) without affecting the continued validity or applicability of the APA.
If the taxpayer agrees with the proposed
adjustments, they will be given effect
through payment of additional compensating adjustments. If the taxpayer does
not agree, the taxpayer may contest the
proposed adjustments through normal
administrative and judicial proceedings.
Any changes to compensating adjustments previously made by the taxpayer,
in respect of the taxable year or years
under examination, that arise as a result
of the audit adjustments made by the
District Director will be made within
ninety days of a final determination of
the audit adjustments. Any compensating adjustments and changes to compensating adjustments described in this section 11.03(4) will be treated as
subsequent compensating adjustments
for purposes of section 11.02 of this
revenue procedure.
.04 Record Retention.
(1) The taxpayer must maintain
books and records sufficient to enable
the Service to examine the taxpayer’s
compliance with the APA. The APA may
specify the books and records that are
necessary to fulfill this objective and
may specify that compliance with the
applicable provisions of the APA will
constitute compliance with the provisions of § § 6038A and 6038C with
respect to transactions covered by the
APA.
(2) Upon examination, information
requested by the Service must be made
available to the Service upon written
request within 30 days, and translations
must be provided within 30 days of a
request for translation of specific documents, both 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’s request.
.05 Revoking the APA.
(1) The Associate Chief Counsel (International) may revoke the APA if there
has been 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 any of
the following: the material facts set
forth in the request or subsequent submissions (including the annual report),

or lack of good faith compliance with
the terms and conditions of the APA.
Material facts are those that, if known
by the Service, could reasonably have
resulted in a significantly different APA
(or no APA at all). The Associate Chief
Counsel (International) is not required to
revoke the APA and may require the
taxpayer to continue to abide by it.
(2) If the APA is revoked for any
reason, the revocation may be retroactive to the first day of the first taxable
year for which the APA was effective.
(3) If the APA is revoked for any
reason, the Service may determine deficiencies in income taxes and additions
thereto in accordance with applicable
provisions of the Code. In addition, (a)
relief under Rev. Proc. 65–17 may be
denied; (b) if the Service determines
that the taxpayer may avail itself of the
relief under Rev. Proc. 65–17, interest
on any account receivable established
under section 4.03 of that revenue procedure may be determined not to be
subject to mutual agreement or correlative relief; (c) the revocation of the APA
may be treated as an ‘‘egregious case’’
under Rev. Rul. 80–231, 1980–2 C.B.
219, with the result that the taxpayer
may be denied a foreign tax credit in
accordance with that ruling; and (d) the
unilateral relief provisions of Rev. Proc.
96–14, 1996–3 I.R.B. 41, may not be
available. When an APA has been the
subject of negotiation with a foreign
competent authority, the Service will
seek to coordinate any action concerning
revocation of the APA with the foreign
competent authority.
.06 Cancelling the APA.
(1) The Associate Chief Counsel (International) may cancel the APA if the
District Director, with the concurrence
of the Associate Chief Counsel (International), determines that there was a
misrepresentation, mistake as to a material fact, failure to state a material fact,
or lack of good faith compliance with
the terms and conditions of the APA
(but not fraud, malfeasance or disregard)
in connection with the request for the
APA, or in any subsequent submissions
(including the annual report). Material
facts are those that, if known by the
Service, would have resulted in a significantly different APA (or no APA at
all).
(2) The Associate Chief Counsel (International) may waive cancellation if
the taxpayer can show good faith and
reasonable cause to the satisfaction of
the Associate Chief Counsel (Interna-

tional), and if the taxpayer agrees to
make any adjustment proposed by the
Associate Chief Counsel (International)
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 to
abide by it.
(3) If the APA is cancelled under
section 11.06(1) of this revenue procedure, the cancellation will be effective
as of the beginning of the year in
respect of which the misrepresentation,
mistake as to a material fact, failure to
state a material fact, or noncompliance
occurs. If, however, the cancellation
results from a change in law or treaty,
as provided in section 11.07(1) of this
revenue procedure, the cancellation normally will be effective as of the effective date of the change in law or treaty.
(4) If the APA is cancelled for any
reason, then as of the effective date of
the cancellation the APA will cease to
be of any further force and effect with
respect to the taxpayer and the Service
for U.S. income tax purposes. After the
effective date of the cancellation, the tax
treatment of the transactions covered by
the APA will be subject to all U.S. tax
rules (including treaty rules) that otherwise apply. When an APA has been the
subject of negotiation with a foreign
competent authority, the Service will
seek to coordinate any action concerning
cancellation of the APA with the foreign
competent authority.
.07 Revising the APA.
(1) If a critical assumption has not
been met, or there has been a change in
law or treaty as described in section
11.09 of this revenue procedure, the
APA may be revised by agreement of
the parties. If such agreement cannot be
achieved, the APA will be cancelled.
(2) If a critical assumption has not
been met, the taxpayer must notify the
APA Director, including with the notification supporting documentation and a
statement whether a revision appears
appropriate. The taxpayer shall file the
notification at any time prior to the last
date permitted for filing the annual
report for the year in which the failure
to meet a critical assumption occurred.
In providing the notification, the taxpayer must follow the procedures contained in sections 5.11 through 5.13 of
this revenue procedure.
(3) If a critical assumption has not
been met, the taxpayer and the Service

19

will discuss how to revise the APA. If
the taxpayer and the Service cannot
execute a revised agreement, the APA
will be cancelled as of the beginning of
the taxable year in which the failure to
meet a critical assumption occurred. If
the Service and the taxpayer can agree
on a revised APA, the effective date of
the revised APA will be stated in the
new APA.
(4) If the Service and the taxpayer
agree to revise an APA that has been
subject to competent authority agreement, the revised APA will be submitted
to the U.S. competent authority in order
to seek the consent of the foreign competent authority to the revised APA. If
the foreign competent authority refuses
to accept the revised APA, or if the
competent authorities cannot agree on a
revised APA agreeable to all parties, the
taxpayer and the Service may: (a) agree
to continue to apply the existing APA,
(b) agree to apply the revised APA or
agree to further revision thereof, or (c)
agree to cancel the APA as of an agreed
date. If such agreement cannot be
achieved, the APA will be cancelled
pursuant to section 11.07(1) of this
revenue procedure.
.08 Renewing the APA.
A taxpayer may request renewal by
following the form and procedures that
apply to initial APA requests. The taxpayer must submit the user fee as
required under section 5.14 of this revenue procedure, and must provide appropriate supporting documentation with
the request. Unless otherwise agreed by
the Service, the taxpayer should file the
request to renew no later than nine
months before the expiration of the
initial term or any renewal term.
.09 Change in Law or Treaty.
If there is a change in any applicable
U.S. law or treaty that changes the
Federal income tax treatment of any
matter covered by the APA, the new law
or treaty provision supersedes the APA
to the extent the APA is inconsistent
therewith. The parties may revise the
APA under section 11.07 of this revenue
procedure to reconcile it with the new
law or treaty provision.
SEC. 12. DISCLOSURE
The information received or generated
by the Service during the APA process
relates directly to the existence and
amount of tax liability of the taxpayer
under the Internal Revenue Code. Therefore, the APA and such information are

subject to the confidentiality requirements of § 6103. In addition, the APA
and such information may be confidential pursuant to the provisions of income
tax conventions, or other rules applicable to communications with foreign
governments.
SEC. 13. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 91–22, 1991–1 C.B. 526,
is superseded. Rev. Proc. 96–13 is modified. Rev. Proc. 96–1 is modified.
SEC. 14. EFFECTIVE DATE
This revenue procedure will apply to
all APA requests, including requests for
renewal, received on or after December
31, 1996, except that (i) section 7.08
shall apply to all such APA requests and
APA requests that have been filed on or
after the effective date of Rev. Proc.
96–13, (ii) section 8.02 and/or section
8.03 may at the taxpayer’s request apply
to an APA request filed prior to such
date and with respect to which an APA
has not been concluded, and (iii) any
provision of section 5.14 may apply to a
request filed prior to such date and with
respect to which an APA has not been
concluded, if the taxpayer demonstrates
that such application is necessary to
avoid unfairness to the taxpayer.

SEC. 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 in this
revenue procedure are in sections 4.02,
5, 8.02, 9, 11.01, 11.02(1), 11.04, 11.07,
and 11.08. 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 5,250
hours.

20

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 160.
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 Office of the Office of the Associate Chief
Counsel (International). For further information regarding this revenue procedure contact Ms. Carolyn Fanaroff or
Ms. Sherri New at (202) 874–4360 (not
a toll-free number).