APAs are intended to supplement traditional administrative, judicial, and treaty mechanisms for resolving transfer pricing issues.

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

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

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

All materials submitted with the APA request become part of the APA Program’s case file and will not be returned. Therefore, taxpayers should not submit original documents.

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

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

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

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

A comprehensive table of contents.

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

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

A properly completed Form 2848 (Power of Attorney and Declaration of Representative) for any person authorized to represent the taxpayer in connection with the request, disregarding if appropriate the line 3 instruction limiting the authorization to three future tax periods. If the taxpayer or the taxpayer’s authorized representative retains any other person (for example, a law firm, accounting firm, or economic consulting firm) to assist the taxpayer in pursuing the APA request, the taxpayer must also provide a separate written authorization for disclosures to the person and such person’s employees during the APA Program’s consideration of the request, according to the instructions in § 301.6103(c)-1T (see also T.D. 9011, 2002-2 C.B. 356, 31 C.F.R. Part 10 (July 26, 2002)). Such written authorization may be made by completing Form 8821 (Tax Information Authorization), disregarding, if appropriate, the line 3 instruction limiting the authorization to three future tax periods.

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

A description and analysis of the transactions covered by the APA request, as well as the estimated dollar value of each proposed covered transaction for each year of the proposed term of the APA. The discussion must also describe how the proposed covered transactions relate to other controlled transactions that the taxpayer does not propose to cover.

A statement addressing the extent to which the tested party has transactions involving commission sales and ordinary distribution sales (i.e., buying and reselling). If the APA request involves both kinds of transactions, the taxpayer must propose a TPM and analyze the extent to which it is appropriate under the facts and circumstances to (a) test both kinds of transactions on an aggregated basis; (b) test the two kinds of transactions separately; or (c) exclude one of the two kinds of transactions from the APA.

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

Copies of the principal written agreement(s), if any, setting forth the contractual terms for the covered transactions (within the meaning of § 1.482-1(d)(3)(ii), including without limitation the form of consideration charged or paid); and an explanation of any significant discrepancy between the applicable written agreement(s) and the economic substance of the covered transactions (including payment form) to date and as proposed for the APA.

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

The functional currency of the parties to the proposed covered transactions and their respective foreign currency exchange risks.

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

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

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

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

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

(b) If the taxpayer is requesting a rollback that involves any issues relevant to the proposed covered transactions that are unresolved and still under consideration by Appeals, the taxpayer must include with its APA request a waiver of its right to be present during communications between the Appeals Office and the APA Team members (as described in section 6.04). See Rev. Proc. 2000-43, 2000-2 C.B. 404. The following language satisfies this requirement:

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

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

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

An explanation of the proposed TPMs, including any method used to convert results from one payment form to another (e.g., to convert from a lump sum to a contingent payment such as a sales-based royalty), and an analysis of why each proposed TPM is the best method within the meaning of § 1.482-1(c).

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

Detailed financial data (and licenses or other agreements, if applicable) on the selected independent comparables in print and electronic formats. For example, if the proposed TPM uses the comparable uncontrolled price (CUP) method, the comparable pricing information should be included; if the TPM uses the comparable uncontrolled transaction (CUT) method, the comparable license agreements should be included; and if the TPM uses the comparable profits method (CPM), the annual and multiple year period results using the selected profit level indicator should be included. If pertinent, the taxpayer should demonstrate consideration of alternative measurements of profitability and return on investment (for example, gross profit margin or markup, ratio of gross income to total operating expenses, net operating profit margin, or return on assets).

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

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

A copy of (a) the documents forming or revising the CSA, (b) the documents relevant to the making available of any pre-existing intangible property to the CSA), including the documents relevant to the acquisition or licensing of any pre-existing intangible property that is made available to the CSA, for purposes of research in the intangible development area, and (c) a statement that the CSA conforms to the requirements of § 1.482-7(b).

A specific description of intangible development costs for all participants under the CSA. Such description should include a description of the costs included and excluded (for example, costs of technology acquired from third parties; the treatment of stock-based compensation under the CSA; non-product specific development costs; costs associated with abandoned projects; costs associated with specific stages of product development; relevant labor, material, and overhead costs; and support and administrative costs); a description of any services performed for participants that will be included in intangible development costs (for example, contract research) and how those services would be taken into account; and, for a representative period, a breakdown of total costs incurred, and the costs borne by each participant, according to the CSA.

The basis (as described in § 1.482-7(f)(3)(ii)) used to measure anticipated benefits, the projections used to estimate benefits, and why such basis and projections yield the most reliable estimate of reasonably anticipated benefits.

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

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

Each participant’s sales, cost of sales, operating expenses, research and development costs, and operating profit (historical for the five most recently completed taxable years and projected for two taxable years) for the product area covered by the CSA.

A description of any amounts to be received from non-participants for the use of covered intangibles (for example, as a royalty pursuant to a license agreement) and how the participants would take into account such amounts.

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

A description of any prior research undertaken in the intangible development area; the identification of any pre-existing intangible property made available to the CSA; the amount of any buy-in or buy-out payment (as defined in § 1.482-7(g)(2)); a complete economic analysis to support the payment; the form of the payment, the method used to determine the amount of the payment (that is, the method used to value the pre-existing intangible property and to calculate any royalty, lump sum, or installment payments, including, if applicable, any conversion between different payment forms); and an explanation of any discrepancy between the proposed payment form and the payment form established in the documents listed in paragraph (1) above (see section 4.03(9)); and an analysis demonstrating that the method used constitutes the best method under § 1.482-1(c).

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

Evidence of the participants’ compliance with the reporting requirements under § 1.482-7(j) of the cost sharing regulations.

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

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

The taxpayer must file its APA request within the time prescribed by statute (including extensions) for filing its Federal income tax return for the first proposed APA year. If the taxpayer receives an extension to file its Federal income tax return, it must file its APA request no later than the actual filing date of the return. An APA request will be considered filed on the date the required user fee is paid (within the meaning of § 7502(a)), provided that a substantially complete APA request is filed with the APA Program within 120 days of the return due date (including extensions) for the first proposed APA year. Because of the need to begin the processing of the APA request in a manner that ensures appropriate prospectivity, the APA Director will consider extending the 120-day period pursuant to section 2.06 only in unusual circumstances. If the APA Program’s evaluation of an APA request is delayed due to a lack of responsiveness or timeliness by the taxpayer subsequent to the filing of its request, the APA Director may deem the taxpayer’s APA request to have been filed for purposes of this paragraph on a date subsequent to its actual filing.

The taxpayer must state whether any of the parties to the proposed covered transactions are residents of or conduct activities in a treaty partner country or U.S. possession, and whether the taxpayer proposes an agreement among competent authorities (see section 7 for guidelines). For purposes of this revenue procedure, “competent authority” includes the Director, International (LMSB) and designated foreign competent authorities under income tax treaties to which the U.S. is a party, and also includes the Director, International (LMSB) acting as the U.S. Competent Authority with respect to a possession tax agency described in Rev. Proc. 89-8, 1989-1 C.B. 778, as well as a designated possession tax official within the meaning of that revenue procedure.

If the APA request is unilateral and involves transactions with an entity in a treaty jurisdiction, the taxpayer must provide an explanation of why the request is not bilateral. See sections 2.08 and 7.06.

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

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

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

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

User fees (accompanied by an identifying cover letter that includes a justification of the fee amount) must be sent to:

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

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

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

The APA Program is located at:

A separate user fee is required for each APA request. For this purpose, an APA request means a substantially complete and timely-filed APA submission, as required by section 4, and includes all such APA submissions filed by the taxpayer within any single sixty-day period. The taxpayer, for purposes of the preceding sentence, includes all members of a controlled group as defined in Treasury Regulations § 1.482-1(i)(6).

User fees shall be made payable to the United States Treasury.

Except as provided in paragraphs (4), (5), and (7), the user fee for an APA request is $50,000.

Except as provided in paragraph (5), the user fee for an APA renewal request is $35,000. For this purpose, an APA request will be considered an APA renewal request if its subject matter is substantially the same as in a previous APA request by the taxpayer.

The user fee for a small business APA request is $22,500. For this purpose, an APA request will be considered a small business APA request if the taxpayer has gross income of less than $200 million or the aggregate value of the covered transactions does not exceed (i) $50 million annually, and (ii) $10 million annually with respect to covered transactions involving intangible property.

For purposes of paragraph 5, the gross income of a taxpayer includes the gross income of all organizations, trades, or businesses owned or controlled directly or indirectly by the same interests controlling the taxpayer. Gross income must be computed for the last full (12-month) taxable year ending before the date the taxpayer filed the APA request. If the information on the taxpayer’s gross income for the last full taxable year is not available, the taxpayer must use its projected gross income for the first twelve months of the APA term.

The user fee to amend an APA request or to amend a completed APA is $10,000. For this purpose, a request to amend will be deemed to occur if a taxpayer requests changes to an APA request or to a completed APA that requires substantial additional work by the APA Team. Generally, no user fee will be imposed if substantial changes are requested by the Service or by a foreign competent authority.

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

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

In connection with the initial meeting, the APA Team and the taxpayer will agree on a Case Plan to which both Service and taxpayer personnel will be expected to adhere. The Case Plan will be signed by both an APA manager and an authorized official of the taxpayer (see section 4.09(2)). The Case Plan may identify issues raised by the APA Team’s initial review of the APA request. Firm dates should be agreed upon for resolving all outstanding issues, and case milestones should be cited. Case milestones include: (a) submission of any necessary additional information by the taxpayer; (b) any planned site visits or interviews; (c) evaluation of the information by the Service; (d) meeting dates; and (e) presentation of the competent authority negotiating position or recommended agreement to the APA Director. To minimize delays caused by the need to coordinate different parties’ schedules on short notice, the time and place of future meetings required for any steps in the case should be agreed upon at the initial meeting and established in the Case Plan.

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 partners, or the U.S. possession involved to minimize the time needed for competent authority resolution.

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

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

If a case is not completed by the date specified in the operative Case Plan, the APA Team Leader and the taxpayer must submit to the APA Director a joint status report (or separate status reports in the event of disagreement) explaining the substantive or procedural matters causing the delay and specifying how the parties propose to resolve the outstanding issues and complete the case within a reasonable time. If the case is not completed by the new target date, APA Program management will hold a status conference. The purpose of the status conference is to reach agreement on how the case will be resolved. The Associate Chief Counsel (International) may participate in this or subsequent conferences if the case is not resolved satisfactorily in a timely manner.

As set forth in the general rules above, a taxpayer contemplating an APA may request a PFC with the APA Program (see section 3). If a PFC is requested, the APA Program provides informal advice to the taxpayer regarding the taxpayer’s proposal, but ordinarily does not begin significant due diligence until the taxpayer formally files an APA request and pays the appropriate user fee (see section 6.01). In the case of an SBT, however, the APA Program will commence its due diligence analysis earlier in the process to accelerate the conclusion of the APA negotiations.

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

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

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

For each taxable year covered by the APA, the taxpayer must file a timely and complete annual report describing its actual operations for the year and demonstrating compliance with the APA’s terms and conditions. The report must include all items required by the APA, describe any pending or contemplated requests to renew, modify or cancel the APA, and report any adjustments made pursuant to section 11.02. In addition, the annual report must identify any material information submitted while the APA request was pending that the taxpayer discovers during the taxable year was false, incorrect, or incomplete. See section 5.02.

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

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

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

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

An annual report must contain the following declaration:

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

Failure to file a timely, complete, or accurate annual report may be grounds for canceling or revoking the APA under sections 11.06.

APA Primary Adjustments. The APA provides the TPM for determining the proper amount of the taxpayer’s gross or net income, deductions, credits, or allowances with respect to the APA’s covered transactions. In general, the taxpayer’s actual covered transactions during an APA year, as reported in its books and records, should comply with the TPM and be clearly reflected on the taxpayer’s timely-filed original return for the year. Under some TPMs, however, the taxpayer may have to wait until the close of the taxable year to determine whether the intercompany prices it actually paid or received complied with the TPM (for example, a comparable profits method providing for a particular operating margin range). If the taxpayer’s actual covered transactions do not comply with the TPM, the taxpayer must nonetheless report its taxable income in an amount consistent with the TPM (an “APA primary adjustment”) on either a timely-filed original return or an amended return. The generally applicable Code rules, including additions to tax, penalties and interest, apply with respect to an APA primary adjustment. When the taxpayer makes an APA primary adjustment, an appropriate correlative adjustment will also be made with respect to the related foreign entity affected by the APA primary adjustment. See § 1.482-1(g)(2). To the extent the APA covers years for which federal income tax returns were filed prior to, or no later than 60 days after, the effective date of the APA, the taxpayer must file, unless otherwise agreed to in the APA, an amended return or returns that reflect any required primary adjustment and pay any tax due because of such adjustments, within 120 days of entering into the APA. The generally applicable Code rules will apply with respect to the primary adjustment with respect to the APA years for which federal income tax returns were filed before the APA was executed, except: (a) the computation of any required estimated tax installments for the taxable year will not take into account the primary adjustment and related secondary adjustments (see section 11.02(2)); and (b) the taxpayer will not be subject to the failure to pay penalties under §§ 6651 and 6655, or the failure to make timely deposit of taxes penalty under § 6656, by reason of the primary adjustment and related secondary adjustments.

Secondary Adjustments. Absent an election of the APA revenue procedure treatment described in section 11.02(3), an APA primary adjustment requires a secondary adjustment to conform the taxpayer’s accounts. The secondary adjustment may result in additional tax consequences. See § 1.482-1(g)(3).

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

The Service will give effect to an APA primary adjustment, secondary adjustment, and payment under APA revenue procedure treatment, if applicable, for all U.S. income tax purposes. The tax treatment of any such adjustment or payment depends on the facts and circumstances of the adjustment or payment. For example, if a taxpayer’s APA primary adjustment involves the reporting of an additional royalty expense for a transaction with a related foreign entity, the Service will deem a payment in the nature of a royalty in the amount of the APA primary adjustment to have been made by the taxpayer to the related foreign entity. This deemed payment may be subject to U.S. withholding tax, and interest would accrue on the tax required to be withheld from the due date of the taxpayer’s federal income tax return without regard to extensions. Similarly, a taxpayer’s APA revenue procedure treatment may involve the recharacterization of a dividend paid by its foreign subsidiary as a payment of an account receivable established in connection with an APA primary adjustment. Any foreign tax withheld from the payment may be treated as a noncompulsory payment ineligible for the foreign tax credit, unless the taxpayer exhausts all effective and practical remedies, including invocation of competent authority procedures, to obtain consistent treatment that would eliminate the foreign tax liability. See § 1.901-2(e)(5).

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

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

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

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

The Service Operating Division must inform the APA Director if the taxpayer has not satisfied any requirement in the prior paragraph. After consulting with the appropriate Service Operating Division personnel, the Associate Chief Counsel (International) may decide to apply the terms of the APA, or revise (see section 11.05), cancel, or revoke (see section 11.06) the APA.

The Service Operating Division may audit and propose adjustments to the taxpayer’s operating results as determined under the TPM without affecting the APA’s validity or applicability. The taxpayer may agree with the proposed adjustments in the same manner as any other adjustment, and the Service Operating Division will assess any resulting additional tax or refund any resulting overpayment of tax. If the taxpayer does not agree with the proposed adjustment, the taxpayer may contest it through the normal administrative and judicial procedures. The taxpayer must include the audit adjustments as finally determined for the purpose of applying the TPM and, as necessary, make any APA primary, secondary and correlative adjustments under section 11.02. APA revenue procedure treatment under section 11.02(3) is unavailable for audit adjustments.

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

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

An APA may be revised by agreement of the parties, consistent with the principles set forth herein and the interests of sound tax administration. The Associate Chief Counsel (International) may agree to revise an APA in lieu of canceling or revoking it. If the parties agree to revise the APA, the revised APA will indicate its effective date.

If the parties agree to revise a bilateral or multilateral APA, the Team Leader will submit the revised APA to the U.S. Competent Authority to obtain the consent of the foreign competent authority. If the foreign competent authority refuses to accept the revised APA, or if the competent authorities cannot agree on a revised APA acceptable to all parties, the APA Director and the taxpayer may agree to: (a) apply the existing APA, if appropriate; (b) apply the revised APA or agree to further revisions; or (c) request the Associate Chief Counsel (International) to cancel the APA as of an agreed date. If the APA Director and the taxpayer cannot agree on how to proceed, the Associate Chief Counsel (International) will cancel the APA pursuant to section 11.06.

The Associate Chief Counsel (International) may revoke an APA due to fraud or malfeasance (as defined in § 7121), or disregard (as defined in § 6662(b)(1) and (c)) by the taxpayer in connection with the APA, including, but not limited to, fraud, malfeasance, or disregard involving (a) material facts in the request or subsequent submissions (including an annual report) or (b) lack of good faith compliance with the APA’s terms and conditions.

The Associate Chief Counsel (International) may cancel an APA due to the taxpayer’s misrepresentation, mistake as to a material fact, failure to state a material fact, failure to file a timely annual report, or lack of good faith compliance with the terms and conditions of the APA.

Unless the parties agree to revise the APA, the Associate Chief Counsel (International) will cancel an APA in the event of a failure of a critical assumption, or a material change in governing case law, statute, regulation, or a treaty (as described in section 11.07).

For purposes of this section 11.06(1) and (2) the Associate Chief Counsel (International) will consider facts as material if, for example, knowledge of the facts could reasonably have resulted in an APA with significantly different terms and conditions. In regard to annual reports, the Associate Chief Counsel (International) will consider facts as material if, for example, knowledge of the facts would have resulted in (a) a materially different allocation of income, deductions, or credits than reported in the annual report, or (b) the failure to meet a critical assumption.

The Associate Chief Counsel (International) may waive cancellation if the taxpayer can satisfactorily show good faith and reasonable cause and agrees to make any adjustment proposed to correct for the misrepresentation, mistake as to a material fact, failure to state a material fact, or noncompliance.

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

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

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