A TAX MANAGEMENT

TRANSFER
PRICING !
VOL. 18, NO. 22 REPORT APRIL 8, 2010

HIGHLIGHTS ALSO IN THE NEWS

Local Tax Bureaus in China Collect Documentation Despite Lack of Audit INDIA: A tax tribunal finds that
Local tax bureaus in China are collecting transfer pricing documentation even an Indian transfer pricing officer
when an audit is not contemplated, with some districts making a 100 percent was correct in adjusting the
sweep, a Shanghai practitioner reports. Several also are going beyond na- price of goods purchased by an
tional requirements and issuing their own documentation circulars. Indian manufacturer of printed
Page 1213; Beijing Text, Page 1227; Tianjin Text, Page 1226 circuit boards for 2003-04, but
the adjustment should apply
Factors Driving Demand for APAs in Canada Include FIN 48, Official Says only to the 45.5 percent of raw
Greater regulatory oversight in the financial reporting area for U.S. compa- materials imported through the
nies could be driving the demand for advance pricing agreements in Canada, company’s related parties in
Patricia Spice, director of the Canada Revenue Agency’s Competent Authority Korea and Thailand. Page 1217
Services Division, says. In an interview with BNA Tax Management, Spice
said other reasons for the increase in APA requests in Canada include addi- UNITED STATES: A former IRS
tional CRA audit resources since 2005, more scrutiny of international transac- competent authority says the
tions by new jurisdictions around the world, and greater complexity of inter- idea for joint government audits
national transactions in a globalized economy. Page 1218; Interview, Page 1223 grew out of the concept that two
governments could sit down
U.S. APAs Annual Report for 2009 Shows Longer Processing Times with the taxpayer and have the
The Internal Revenue Service’s 11th annual statutory APA report shows fewer taxpayer make a joint presenta-
APAs completed in 2009 than in 2008 and also shows the APA Program is tak- tion on the facts. Page 1216
ing longer to complete cases, particularly bilateral agreements.
Page 1215; Text, Page 1227

SECTION INDEX
P R A C T I T I O N E R A N A LY S I S

Should You Use Chinese Private Comparables? Lead Report .........................1213

Glenn DeSouza and Sophia Yan of Transfer Pricing Management Consulting At IRS and Treasury ..............1215
in Shanghai make a case for using private companies as comparables, saying
In the Courts........................1217
the approach can increase the data universe by a factor of more than 100.
In Practice, Page 1248 Around the World..................1218
Global Update ......................1220
Transfer Pricing in Uruguay
Practitioners from Baker & McKenzie’s offices in Mexico, Argentina, and Peru Interview .............................1223
outline the transfer pricing requirements set forth in two recent decrees and a Text ....................................1226
December resolution. Analysis, Page 1250 In Practice...........................1248
Germany’s Recent Draft Principles on Transfer of Business Functions Analysis ..............................1250
Bob Ackerman, Diana Organista, and Carlos M. Mallo of Ernst & Young LLP Perspective ..........................1253
in Washington, D.C. present an overview of the German draft of administra- Journal ................................1261
tion principles addressing the intercompany cross-border transfer of business
functions while discussing some of the principal challenges that it introduces Directory .............................1262
for taxpayers. They also compare the German draft and a U.S. coordinated is-
sue paper on cost sharing, giving an example of each approach.
Perspective, Page 1253

Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. ISSN 1063-2069
1212 (Vol. 18, No. 22)

In This Issue
URUGUAY
TOPICAL SUMMARY
Transfer pricing in Uruguay ............................... 1250

CANADA
Canadian official addresses increased APA
demand ....................................................... 1223
Possible factors driving demand for APAs in
Canada include FIN 48, CRA official says .......... 1218
CHINA
Local tax bureaus in China collect documentation
despite lack of audit ...................................... 1213
Should you use Chinese private comparables? ....... 1248
GERMANY
Intangibles migration: Germany’s recent draft
administration principles on transfer of
business functions ......................................... 1253
INDIA
ITAT partly upholds TNMM-based allocation to
Indian printed circuit board manufacturer ......... 1217
OECD
OECD, council of Europe update pact on
cooperation in tax matters .............................. 1220
U.S. treasury official discusses OECD draft’s
treatment of methods, comparability ................ 1221
UNITED STATES
Former IRS deputy commissioner speaks to joint
audits, other issues ........................................ 1216
U.S. APAs completed in 2009 drop to 63; longer
times for bilaterals, report shows ..................... 1215
TEXT
CHINA
Beijing notice on submission of related-party
documentation ............................................. 1227
Tianjin notice on submission of related-party
documentation ............................................. 1226
APAS
IRS annual report to Congress on U.S. APA
Program ...................................................... 1227
TABLE OF CASES
IL Jin Electronics (I) Pvt. Ltd. v. Asst. Comr. of
Income Tax (New Delhi ITAT)............................ 1217
RESOURCES
JOURNAL
Upcoming conferences ...................................... 1261
DIRECTORY
Private sector sources........................................ 1262
Government sources ......................................... 1262

TAX MANAGEMENT
A TRANSFER PRICING REPORT
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4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TMTR ISSN 1063-2069

Lead Report
Local Bureaus in China Collect Documentation Even Absent Audit
BY KEVIN A. BELL, BNA TAX MANAGEMENT
ocal tax bureaus in China are aggressively collect-
L ing transfer pricing documentation even when an
audit is not contemplated, with some districts do-
ing a 100 percent sweep, a Shanghai practitioner said
recently.
Glenn DeSouza of Transfer Pricing Management
Consulting in Shanghai told BNA March 30 that there
has been a flurry of activity by the local tax bureaus to
facilitate the collection and logging of transfer pricing
documentation and that some local tax authorities have
issued their own documentation circulars.
The collection efforts are sporadic, according to De-
Souza. The high-technology Haidian District of Beijing
appears to be contacting all taxpayers to produce the
six transfer pricing documentation forms, while other
tax districts in Beijing are not bothering to collect any
documentation, he said.
Companies have seen expansive requests in Shang-
hai, Shenzhen, and other locations, DeSouza said, ‘‘but
on a more limited basis.’’
China’s State Administration of Taxation in January
2009 issued circular Guo Shui Fa [2009] No. 2 requiring
taxpayers to prepare contemporaneous documentation
when their annual related-party tangible property
transactions reach RMB 200 million (US$29 million),
with a threshold of RMB 40 million (US$6 million) for
intangible transactions (17 Transfer Pricing Report 671,
1/22/09).
Chinese tax authorities, following the Dec. 31 dead-
line for taxpayers to prepare their 2008 transfer pricing
documentation, took either a targeted or a blanket ap-
proach to requesting documentation (18 Transfer Pric-
ing Report 1055, 2/11/10).
Six Forms. DeSouza said China’s tax bureaus are re-
questing the first six forms set forth in Circular No. 2:
s Form 1, Enterprise’s Functional and Risk Analy-
sis;
s Form 2, Enterprise’s Annual Related-Party Trans-
action Financial Analysis;
s Form 3, Enterprise’s Comparability Factor Analy-
sis;
s Form 4, Related-Party Relationships Assessment;
s Form 5, Related-Party Transactions Assessment;
and
s Form 6, Enterprise’s Comparability Factors Analy-
sis Assessment (17 Transfer Pricing Report S-18,
1/22/09).
Shenzhen. DeSouza said some tax bureaus are going
above and beyond the requirements established in Cir-
cular No. 2 regarding the submission of contemporane-
ous documentation for related-party transactions.
Shenzhen, he said, has always been ahead of the coun-
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1213
try regarding the enforcement of transfer pricing, and
its transfer pricing activities go back to the early 1990s.
DeSouza said Shen Guo Shui Han [2010] No. 11, is-
sued by the Shenzhen State Tax Bureau Jan. 13, re-
quires even enterprises with sales over RMB100 million
to submit documentation to the Shenzhen State Tax Bu-
reau. Moreover, he said, Shenzhen is requiring entities
that wish to be exempted from the transfer pricing
documentation requirements to provide a written expla-
nation to the in-charge tax bureau.
Tianjin. DeSouza said the Tianjin State Tax Bureau
on Dec. 22 issued Jin Guo Shui Han [2009] No. 120,
governing the administration of related-party contem-
poraneous documentation, which appears in the Text
section of this issue.
Tianjin Circular No. 120 goes beyond the require-
ments of SAT Circular Guo Shui Fa [2009] No. 2 by re-
quiring a taxpayer to prepare contemporaneous trans-
fer pricing documentation for 2008 and 2009 if it:
s has implemented a transfer pricing adjustment
and is subject to follow-up administration regardless of
the amount of its related-party purchase transactions;
or
s is in a loss position in 2009 and only bears limited
functions and risks, including manufacturing proces-
sors of supplied materials, distributors, and contract re-
searchers.
Circular No. 120 also provides Tianjin specific dead-
lines for the submission of contemporaneous transfer
pricing documentation. Taxpayers should have pre-
pared their 2008 documentation by Dec. 31, 2009, and
should have submitted it to the in-charge tax authority
by March 31, 2010.
The circular directs taxpayers to prepare their 2009
documentation by the end of May 2010 and submit it to
the tax authority before June 20, 2010. However, the
circular said the taxpayer’s deadline may be extended if
the company is waiting for a consolidated group finan-
cial report because its group companies have different
closing times for their financial years.
The deadline for the 2009 documentation may not be
extended beyond December 2010.
Beijing. The Beijing State Tax Bureau Feb. 3 issued
Jing Guo Shui Han [2010] No. 19, addressing the re-
porting of 2009 related-party transactions and review of
2008 contemporaneous documentation, which appears
in the Text section of this issue.
The Beijing State Tax Bureau in Circular No. 19 di-
rected all its district-level tax bureaus to select the tax-
payers that must to prepare contemporaneous docu-
mentation for 2008 and require them to provide the
documentation within 20 days.
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1214 (Vol. 18, No. 22)
The circular required the district-level tax bureaus to
report to the Beijing State Tax Bureau before Feb. 5.
Regarding submitting documentation for 2009, Cir-
cular No. 19 requires all of its district-level tax bureaus
to report to the Beijing State Tax Bureau before June
15.
Other Key Circulars. DeSouza said other local tax bu-
reaus also have issued important circulars, including:
s the No. 4 branch of the Tax Bureau in Shanghai,
which Jan. 28 issued Wai Gao Qiao—Notice on the sub-
mission of 2008 contemporaneous documentation;
s Shandong State Tax Bureau, which Sept. 9 issued
Lu Guo Shui Han [2009] No. 276—Notice on the admin-
istration of contemporaneous documentation for re-
lated party transactions; and
s Zhongshan State Tax Bureau, which Feb. 8 issued
a notice on the submission of contemporaneous docu-
mentation.
‘Roulette.’ In China, DeSouza said that ‘‘form can be
as important as substance’’ and that prudent taxpayers
reacted to the new documentation requirement under
Guo Shui Fa [2009] No. 2 by exactly following the five-
part, 26-subpart, checklist laid out in Article 14 of Cir-
cular No. 2.
Those multinationals that did not use the approved
format now find themselves unnecessarily exposed, De-
Souza said.
Many companies in China are taking a ‘‘roulette’’ ap-
proach to transfer pricing documentation, preparing
the bare minimum documentation and planning to
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
LEAD REPORT
‘‘deal with the issue in the rare event that they are au-
dited and the documentation is requested.’’
But in what will come as an unpleasant surprise to
such taxpayers, China is following its own path in
strictly enforcing its transfer pricing documentation
rules, DeSouza said.
Many companies have prepared their Chinese trans-
fer pricing documentation taking the shortcut of using
a global template, DeSouza said, and this now leaves
them poorly prepared to reply to recent requests by the
tax bureau to fill out the six transfer pricing forms.
These companies should immediately create a
supplemental documentation package ‘‘to bring their
reports up to spec,’’ DeSouza said.
Form 3. Form 3, which addresses the taxpayer’s com-
parability analysis, is designed to assess whether the
comparables selected by the taxpayer resemble the
tested party in terms of the functions and risks.
DeSouza said the form is extremely detailed, covers
approximately 150 points of functional comparison, and
‘‘is quite unusual’’ and that he has never seen this form
‘‘anywhere else in the world.’’
Clearly, to fill out Form 3 in a proper manner, it
would not be possible to simply rely on the business de-
scriptions in the Bureau van Dijk (BvD) OSIRIS data-
base, DeSouza said.
‘‘To get the required level of detail, it would be nec-
essary to review the annual reports of the companies,
visit their websites, and gather information from other
sources,’’ he said.
TMTR ISSN 1063-2069

At IRS and Treasury
Advance Pricing Agreements
U.S. APAs Completed in 2009 Drop to 63;
Longer Times for Bilaterals, Report Shows
he Internal Revenue Service’s 11th annual statu-
T tory report on advance pricing agreements, re-
leased March 29, showed fewer APAs completed in
2009 than in 2008 and also showed the APA Program is
taking longer to complete cases, particularly bilateral
agreements. [Announcement 2010-21, 2010-15 I.R.B. __,
4/12/10, released 3/29/20]
The IRS APA Program completed 63 cases in 2009
compared with 68 the previous year. Bilateral cases on
average took 45.1 months to complete in 2009, a signifi-
cant increase from the 38.1 months on average needed
for 2008. The difference between the two years was
even greater for bilateral renewal cases, which took
44.9 months in 2009 compared with 30.2 months in
2008.
Craig Sharon, director of the APA Program, told
BNA March 29 that the program closed a few very old
bilateral cases during the year, which helps explain the
increase in bilateral case processing times.
As shown in Table 8 of the report, which is published
in the Text section of this issue, two of the bilateral
cases closed in 2009 were more than seven years old,
and nine of the cases were more than six years old.
Resource Constraints. Staffing continues to be an is-
sue in the program, Sharon said. While the latest report
shows higher staff levels—35 professionals, including
paralegals, compared with 29 in the 2008 report—he
noted that those numbers reflect levels at the end of
2009. Early in the year, he said, the number of staff fell
to 25 and ‘‘slowly built back up.’’
Meanwhile, applications reached record levels for
the second year in a row. The program received 123
APA requests in 2008 and 127 requests in 2009, after av-
eraging roughly 90 new cases a year between 2000 and
2007, Sharon said. This means that case loads have
nearly doubled for both team leaders and economists,
he added. While team leaders in the past have carried
between 15 and 20 cases at any one time, they now have
closer to 30, Sharon said. Economists, who in the past
have had case loads of between eight and 12 cases, now
have about 20, he said.
‘‘We simply don’t have the staff to process so many
cases,’’ he said. ‘‘Not only is the absolute number of
cases high, but a higher percentage are large taxpayers
and/or are bilateral.’’
The program is suffering particularly from a short-
age of economists, which is creating delays of between
four and six months in starting new cases, Sharon said.
He added that it was unlikely his office would be able to
hire more staff in the short term, as IRS Chief Counsel
‘‘has significant competing demands for resources, es-
pecially with the passage of health care reform.’’
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1215
Finally, Sharon said, the 35 personnel listed in the re-
port do not reflect the loss of Deputy Director Clark Ar-
mitage, who retired early in 2010, and the impending
retirement of Patricia McCarroll, chief of the West
Coast branch of the program. A new deputy director is
likely to be hired in the next month, he said.
Staff Hours, Annual Reports. Despite resource chal-
lenges, the APA Program managed to log more staff
hours in 2009 than in any year since 2002. The report
shows APA personnel worked a total of 56,549 hours on
cases in 2009—still short of the 61,528 recorded for
2002, but up significantly from 51,077 hours in 2008.
One area in which the program managed to reduce
inventory was processing of taxpayer annual reports,
which document a company’s compliance with the
APA. In 2009, APA staff reviewed a total of 414 annual
reports, compared with 336 in 2008. Inventory of an-
nual reports went from 305 to 259 between 2008 and
2009.
When interviewed about the 2008 report, Sharon
said reducing the backlog of annual reports would be a
goal in 2009 (17 Transfer Pricing Report 889, 4/2/09).
Small Business Taxpayers. The number of small busi-
ness taxpayer APAs closed dropped from 15 in 2008 to
five in 2009, according to Table 10 in the report. Of the
five cases completed in 2009, four were new and one
was a renewal.
The average time needed to complete a small tax-
payer case was 27.7 months, according to Table 11 of
the report—three more months than were needed on
average to complete a unilateral APA, according to
Table 2.
The report said that although the APA Program
strives to complete small business taxpayer APAs on an
expedited basis, ‘‘our experience is that such cases re-
quire nearly the same level of resources and the same
commitment of time as non-SBT cases.’’ The IRS said
one reason for this is that the complexity or novelty of
transfer pricing issues ‘‘do not necessarily depend on
the dollar volume of the related-party transactions.’’
Another reason, the report said, is the lesser transfer
pricing experience or resources of many small business
taxpayers.
Economic Downturn. The report said the APA Program
in 2009 received numerous inquiries about the potential
effect of the economic downturn on existing and pend-
ing APAs. On existing APAs, the IRS said the program,
in consultation with the U.S. Competent Authority, has
adopted a general policy not to reopen closed cases ab-
sent a special critical assumption.
Pending agreements have been dealt with on a case-
by-case basis, the report said. Whether a special adjust-
ment for the down economy is appropriate depends on
a variety of factors, including whether the tested party
and the comparables have been similarly affected by
BNA TAX 4-8-10
1216 (Vol. 18, No. 22)
the downturn, the tested party’s historic risk profile,
and a taxpayer’s willingness to accept a ‘‘symmetrical
adjustment’’ when the economy improves, the IRS said.
The report said approaches that have been consid-
ered include changing the APA term, waiting for more
current financial data, using a different set of compa-
rables, and applying a longer testing period.
Other Items. The report for 2009 also showed that:
s the number of recommended negotiating posi-
tions completed was down from the prior year—35 in
2009 compared with 49 in 2008 (Table 4);
s more rollback years were covered in APAs com-
pleted in 2009 than in 2008 (Table 29); and
s an unspecified method was used as the transfer
pricing method in 12 cases (Table 19).
BY MOLLY MOSES
Competent Authority
Former IRS Deputy Commissioner
Speaks to Joint Audits, Other Issues
he idea for joint audits grew out of the concept that
T two governments could sit down with the taxpayer
and have the taxpayer make a joint presentation on
the facts, a former Internal Revenue Service official said
Feb. 23.
Barry Shott, former deputy commissioner (interna-
tional) of the IRS’s Large and Mid-Size Business Divi-
sion, said he worked on that process before leaving the
Service. In an interview with BNA, he also said he be-
lieves it is likely that tax authorities will find candidates
interested in undergoing the joint process. ‘‘It’s going to
take a little bit of a leap of faith, but I think there’s a lot
of value in it,’’ Shott, who joins PricewaterhouseCoo-
pers LLP in New York this month, said. ‘‘I think the day
is coming.’’
Although he said it is too soon to pin down specifics,
Shott pointed to a longtime list of best practices within
the Organization for Economic Cooperation and Devel-
opment. ‘‘The things that you would need to do in a
joint audit are things that have already been agreed to
in best practices by the member countries of the
OECD,’’ he said. Shott envisioned those practices as
‘‘probably the skeletal framework for how joint audits
could work.’’
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
AT IRS AND TREASURY
Hiring. Shott said that with many senior competent
authority staff retiring, his office was able to hire be-
tween 30 and 40 analysts. ‘‘They came to us from indus-
try, from accounting firms. They were able to hit the
ground running,’’ he said. The IRS also had the oppor-
tunity to hire ‘‘a couple of hundred international
examiners’’—what Shott called ‘‘boots on the ground
people,’’ many of whom are focusing increasingly on
small business issues.
The IRS’s accomplishment in hiring ‘‘is one of the ar-
eas I’m most proud of,’’ Shott said, noting the agency
was able to bring on board an additional 40 economists,
including some with doctorates.
Transfer Pricing Practice. Shott noted that the IRS
now has developed a transfer pricing practice within
the Large and Mid-Size Business Division that com-
prises ‘‘some of IRS’s very best international examin-
ers, economists, and product specialists to consult with
the field on difficult cases.’’ He noted there could be in-
stances where the practice would be asked to ‘‘para-
chute’’ into a case and take over the case completely.
One example, he said, could be cases where input is
needed from those highly skilled in biotechnology is-
sues.
‘‘Transfer pricing seems to grow all the time, its im-
portance is growing, it’s becoming much more techni-
cal,’’ the former official said.
Small Business Taxpayers. One trend Shott said is on
the rise at the IRS is the growing prominence of inter-
national issues in small business cases. At one time, this
was very unusual, he said, but it is now ‘‘more often the
case that those returns have an international compo-
nent than that they don’t.’’
He said the Large and Mid-Size Business Division is
responsible for supporting the Small Business/Self-
Employed Division on international issues and is devot-
ing increasing amounts of time and resources to cases
within that sector. ‘‘I would expect that to continue,’’
Shott said.
Although SB/SE keeps the case if such issues arise,
they make a referral and an international examiner is
assigned to the case, and ‘‘you’ve seen a lot more of that
work,’’ Shott said.
BY ALISON BENNETT
TMTR ISSN 1063-2069

In the Courts
India
ITAT Partly Upholds TNMM-Based Allocation
To Indian Printed Circuit Board Manufacturer
he transfer pricing officer was correct in adjusting
T the price of goods purchased by an Indian manu-
facturer of printed circuit boards for 2003-04, but
the adjustment should apply only to the 45.5 percent of
raw materials imported through the company’s related
parties in Korea and Thailand, the New Delhi Income
Tax Appeals Tribunal held Nov. 6. [IL Jin Electronics (I)
Pvt. Ltd. v. Asst. Comr. of Income Tax, New Delhi ITAT, ITA
No. 438/Del/2008]
The tribunal agreed with the assessing officer and
the Commissioner of Income Tax (Appeals) that the
TPO’s use of the transactional net margin method to
calculate a profit margin for the company, IL Jin Elec-
tronics, was justified. The ITAT also pointed out that
TNMM was the method selected by the company in its
transfer pricing report.
However, the ITAT agreed with the taxpayer that cal-
culating the operating profit on the company’s total
sales was not justified. Therefore, it asked the assessing
officer to modify the assessment ‘‘and make the adjust-
ment only to the extent of difference in the arm’s-length
operating profit with adjusted profit with reference to
the 45.51 percent of the turnover, and not to the total
turnover of the assessee.’’
IL Jin purchased raw materials from related parties
in Korea and Thailand to make printed circuit boards.
The tribunal said that in calculating the operating mar-
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1217
gin from those purchases, IL Jin had sought to include
at least one comparable with a high negative profit mar-
gin, arguing that the company, Sanmar Micropak Lim-
ited, had shown positive results in earlier years. How-
ever, the TPO excluded the comparable in its calcula-
tions, saying comparability applies to the year under
audit.
IL Jin calculated an operating margin of 1.65 per-
cent, while the TPO, using some of the same compa-
rables used by IL Jin, determined an operating margin
of 5.29 percent for the years at issue. Based on the
TPO’s determination, the assessing officer made an in-
come adjustment of 5.37 million rupees (US$118,000)
to the company.
TNMM at Issue. IL Jin contended before both the
CIT(A) and the tribunal that the TPO used TNMM ‘‘in-
stead of a correct method of making comparable analy-
sis of purchase prices of typical items by associate
enterprise[s] from unrelated foreign vendors,’’ accord-
ing to the ITAT. In the alternative, the company argued
that even if TNMM is the correct method, the 5.29 per-
cent operating margin should not be applied to total
sales, but only to the imported goods, which make up
45.5 percent of total purchases.
The tribunal, quoting from the findings of the
CIT(A), noted that despite IL Jin’s arguments against
TNMM, ‘‘the appellant itself had chosen TNMM as the
MAM [most appropriate method] for the international
transaction relating to the purchase of raw materials
from the A.E. [associated enterprises].’’
BY MOLLY MOSES
BNA TAX 4-8-10
1218 (Vol. 18, No. 22)
Around the World
Canada
Possible Factors Driving Demand for APAs
In Canada Include FIN 48, CRA Official Says
reater regulatory oversight in the financial report-
G ing area for U.S. companies could be driving the
demand for advance pricing agreements in
Canada, Patricia Spice, director of the Canada Revenue
Agency’s Competent Authority Services Division, said
March 25.
In an interview with BNA Tax Management, Spice
said the more stringent requirements under FIN 48 and
the Sarbanes-Oxley Act in the United States—Canada’s
largest trading partner—is one possible factor contrib-
uting to the increased APA requests reported by the
CRA for 2008-09. Other factors, she said, include addi-
tional audit resources in Canada as of 2005, more scru-
tiny of international transactions by new jurisdictions
around the world, and greater complexity of interna-
tional transactions in a globalized economy.
The CRA’s Competent Authority Services Division
(CASD) accepted 32 advance pricing agreement re-
quests in 2008-09—the highest annual number ever
recorded—and also reached record levels of inventory,
with 84 cases pending at the end of March 2009, accord-
ing to the agency’s annual APA report released in De-
cember (18 Transfer Pricing Report 1166, 3/25/10).
In addition to discussing some of the statistics in the
APA report, Spice addressed a practitioner’s recent
criticism of the Canadian APA process and talked about
the timing of both APAs and mutual agreement proce-
dure cases in Canada. She also spoke about the effect
of a treaty provision for mandatory arbitration of MAP
cases pending for two years on negotiations with the
United States.
Spice’s full remarks appear in the Interview section
of this issue.
Decision to APA. Asked to address a practitioner’s
criticism of the Canadian APA process as difficult, time-
consuming, and costly, Spice said her office tries to em-
phasize to potential users that the program requires co-
operation between the tax administration and the tax-
payer, with both sides working together to reach
agreement on the transfer pricing method to be used
prospectively. An APA, she said, ‘‘frees up our audit re-
sources, gets taxpayers certainty and comfort from us,
and allows issues to be resolved more quickly than
through an audit.’’
However, Spice acknowledged that not every tax-
payer wants to be, or can afford to be, in the program.
‘‘Some might not have significant transfer pricing trans-
actions, others might not have the resources to spend
on the representation during the process,’’ she said.
Further, Spice added that if the company does not oper-
ate in a country having a treaty with Canada, it would
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
not be able to get a bilateral APA, and it may not be in-
terested in a unilateral agreement.
Timing of APAs, MAP Cases. According to the CRA’s
September 2009 report on MAP statistics, the average
time to complete a MAP request was 28.1 months, while
the average time to complete an APA was more than 40
months (18 Transfer Pricing Report 597, 10/22/09).
Asked why the time for an APA was longer than for
a MAP, Spice pointed out that a MAP does not recog-
nize the time the taxpayer has been under audit, while
a bilateral APA is a consolidation of the audit period
and the time spent in negotiations with the other tax au-
thority. From that perspective, she said, ‘‘the taxpayer
is getting a better turnaround time with an APA than it
would with a MAP.’’
Questioned about a practitioner’s comment that re-
newal APAs are not necessarily easier than new cases,
Spice said ‘‘it’s not automatic’’ that a renewal will take
half the time of the original case.
‘‘Although we do think there are economies of scale
after a taxpayer has been in the program once, transac-
tions change, circumstances change, and sometimes
even the government’s positions change depending on
the kinds of issues that we’re contemplating,’’ she said.
In addition, she said, a taxpayer may not always get
the same analyst or manager in a renewal as in the
original case, ‘‘so there may be a bit of a learning
curve.’’ Still, Spice said, ‘‘having a different analyst may
not make a big difference if most things stay the same.’’
Arbitration. Asked about the number of cases that
would be eligible for arbitration Dec. 15—two years
from the ratification date of the U.S.-Canada protocol
providing for mandatory arbitration—Spice said U.S.
and Canadian officials have not sat down and looked at
potential cases.
‘‘What we are aiming for is to resolve the cases so
they never get to arbitration,’’ she said. ‘‘We are not
looking at what would potentially go to arbitration be-
cause we’re putting our effort into trying to resolve the
cases.’’
Asked about the status of efforts to prepare proce-
dures for implementing arbitration, Spice said officials
from both countries are working toward having the pro-
cedures in place by Dec. 15.
BY MOLLY MOSES
Correction
An article on the U.S. treaty with Belgium in the June
25, 2009, issue said that the arbitration provision in the
pending U.S.-France treaty allowed arbitrators to
choose any of three options—the U.S. position, the
French position, or the taxpayer’s position. The article
should merely have stated that the treaty allows the tax-
payer, as well as the governments, to submit a position
paper to the arbitrators. The panel still must choose be-
TMTR ISSN 1063-2069
AROUND THE WORLD (Vol. 18, No. 22) 1219

tween the two government positions (18 Transfer Pric- force rather than pending (18 Transfer Pricing Report
ing Report 175, 6/25/09). 943, 1/14/10).
The Outlook 2010 article in the issue dated Jan. 14
should have reflected that the French treaty was in The online versions have been corrected.

TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 4-8-10
1220 (Vol. 18, No. 22)
Global Update
OECD
OECD, Council of Europe Update
Pact on Cooperation in Tax Matters
ARIS—The Organization for Economic Coopera-
P tion and Development and the Council of Europe
announced April 6 that they have updated their
1988 multilateral pact on administrative cooperation in
tax matters to make it a more powerful tool in the inter-
national fight against tax evasion and make it available
to more jurisdictions.
The Convention on Mutual Administrative Assis-
tance in Tax Matters, of which the two organizations
are custodians, took effect in 1995 with the stated aim
of providing a legal framework for trans-border coop-
eration while respecting national sovereignty and tax-
payers’ rights.
Some 17 of the eligible 54 countries have signed or
ratified to date, half of those in the last five years, the
OECD said.
The update, in the form of a protocol, amends the
convention to reflect new standards on transparency
and exchange of information to fight tax evasion, as re-
quested by the Group-of-20 countries at their 2009 Lon-
don Summit, Jeffrey Owens, director of the OECD’s
Center for Tax Policy and Administration, told BNA.
The protocol is yet another indication that tax au-
thorities around the world are joining forces in monitor-
ing international tax transactions. In December, gov-
ernment officials said tax information exchange agree-
ments are a priority and are expected to be helpful in
transfer pricing and other international cases (18
Transfer Pricing Report 943, 1/14/10).
Aligns With Standard. In particular, the update aims to
align the convention to the international standard on in-
formation exchange for tax purposes by allowing ex-
change of bank information, as set out in article 26 of
the OECD Model Tax Convention, and it aims to open
the convention to non-OECD and non CoE members,
Owens said.
The convention ‘‘is also important because it covers
all taxes and all forms of assistance, in the assessment
of tax, in terms of providing a framework within which
there can be joint audits, simultaneous examinations,
and assistance in collection, if countries wish,’’ he said.
Owens said he expected the amended convention to
eventually attract many more countries to join.
The original conventional was open only to the Paris-
based OECD’s 30 members, which include the world’s
richest economies, and the 47 members of the Council
of Europe, which is based in Strasbourg, France, and is
independent from the European Union.
The protocol will be presented for signature during
the OECD’s annual ministerial meeting in Paris on May
27-28, the OECD said. Once it has been ratified by five
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
countries, the convention will be open to countries that
are not OECD or CoE members.
As requested by the G-20, the update also will allow
developing countries to become parties to the conven-
tion and thus benefit from today’s more transparent tax
cooperation environment, the OECD said.
Ahead of Its Time. Owens said the original convention
was in many ways ahead of its time when drafted, and
its value to tax administration has only recently been
recognized.
‘‘The climate has changed very much since 1988.
There’s much less tolerance of offshore noncompliance
and greater awareness on the part of governments that
offshore noncompliance often involves multiple juris-
dictions. At last count something like 41 jurisdictions
were affected by the Liechtenstein affair,’’ he said.
‘‘To confront a multilateral problem, it’s helpful to
have a multilateral instrument,’’ said Owens.
He said the convention is intended to be complemen-
tary to bilateral conventions, including treaties, and tax
information exchange agreements, which have mainly
been signed by OECD countries and large non-OECD
countries like China, as well as offshore financial cen-
ters.
TIEAs provide only for exchange of information on
request. Article 26 also provides for spontaneous and
automatic exchange, when two countries agree. ‘‘What
the convention does is put that into a multilateral
framework,’’ said Owens.
He added that ‘‘the majority of OECD countries al-
ready use automatic exchange of information, which
they see as complementary to on-request exchange.’’
All Forms of Activity. Among other things, the updated
convention provides for multilateral simultaneous tax
examinations, service of documents, and cross-border
assistance in tax collection.
‘‘It’s a very powerful instrument, covering all forms
of activity, including transfer pricing audits, verification
of whether a company is correctly dealing with its VAT
obligations, a whole range of issues,’’ Owens said.
As an example, he said transfer pricing cases can in-
volve as many as five or six countries. The convention
provides a legal framework in which like-minded coun-
tries can agree to do a joint transfer pricing audit.
‘‘It’s attractive from the perspective of governments
but also businesses, because it means less hassle and
greater consistency,’’ Owens said.
He said the convention originally established a coor-
dinating body, one purpose of which is to monitor
implementation of the pact and to deal with issues of in-
terpretation as they arise.
The body has been operating since 1998 ‘‘but has not
been very active,’’ said Owens, suggesting it might not
now pick up its activity.
BY RICK MITCHELL
TMTR ISSN 1063-2069
GLOBAL UPDATE
䡺 More information about the update protocol is
online at http://www.oecd.org/document/18/
0,3343,en_2649_33767_39986130_1_1_1_1,00.html.
Methods
U.S. Treasury Official Discusses OECD
Draft’s Treatment of Methods, Comparability
he Organization for Economic Cooperation and
T
Development’s proposed revamp of its 1995 trans-
fer pricing guidelines would replace the organiza-
tion’s strict hierarchy of methods with a more natural
hierarchy, a U.S. Treasury official said in addressing
taxpayer concerns about the draft.
Associate International Tax Counsel David Ernick
said that under the OECD’s Sept. 9 draft of revised
guidelines Chapters I, II, and III, if a taxpayer has ‘‘good
comparables, a transactional method will be the most
reliable [method], but if not, then a transactional profit
method may be more reliable.’’
Ernick, vice chair of OECD Working Party No. 6 on
the taxation of multinational enterprises, said the trans-
actional methods have a greater potential for reliability
when the taxpayer has a perfect comparable, ‘‘but the
most reliable method will depend on the facts of the
case.’’ He told a luncheon sponsored by BNA Tax Man-
agement and hosted by Buchanan Ingersoll & Rooney
PC in Washington, D.C., that the OECD’s draft has a
‘‘strong focus on reliability and the comparability analy-
sis, which is where it should be.’’
The Sept. 9 draft proposed new detailed rules on the
arm’s-length principle, transfer pricing methods, and
comparability, and endorsed the selection of the most
appropriate transfer pricing method to price a taxpay-
er’s related-party transactions (18 Transfer Pricing Re-
port 402, 9/10/09).
Natural Hierarchy. Ernick pointed out that proposed
revised transfer pricing guideline 2.1 would remove the
designation of profit methods as methods of last resort
and that the taxpayer’s selection of a transfer pricing
method would always aim at finding the most appropri-
ate method for a particular case.
Business and industry groups, in comment letters re-
leased by the OECD in January, embraced the draft for
de-emphasizing the hierarchy of transfer pricing meth-
ods, but some asserted that the transactional net mar-
gin method would remain the method of last resort (18
Transfer Pricing Report 1014, 1/28/10).
The OECD draft retains a lingering preference for
the comparable uncontrolled price method and other
transactional methods, Ernick said. Under proposed
guideline 2.2, he noted, when the CUP method can be
applied in an equally reliable manner, ‘‘CUP is to be
preferred.’’
Ernick said taxpayers seem to have a strong concern
that the draft would lead to overuse of profit methods
because ‘‘tax administrations will jump quickly to profit
methods in the absence of perfect or almost perfect
comparables.’’ He added that OECD member country
tax administrations seem to have a similar concern that
taxpayers would overuse profit methods.
The OECD draft does not require taxpayers to jump
quickly to profit methods when they do not have a per-
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1221
fect comparable, Ernick said. He also said that profit-
based methods likely will be used more often because it
is difficult to find comparables for intangibles.
Analyze All Methods? Ernick said the draft would not
require taxpayers to analyze all transfer pricing meth-
ods.
Proposed guideline 2.7 states that ‘‘the guidance at
paragraph 2.1 that the selection of a transfer pricing
method always aims at finding the most appropriate
method for each particular case does not mean that all
the transfer pricing methods should be analysed in
depth or tested in each case in arriving at the selection
of the most appropriate method.’’
Ernick said that for most cases, it should be fairly
easy to eliminate some methods ‘‘right off the bat’’
given the facts of the case and the data available. ‘‘If
you know you don’t have good comparables, you can go
straight to a transactional profit method,’’ he said.
The official also said providing objective rules to de-
termine which method is best, because this is ‘‘neces-
sarily a subjective determination regarding which
method is ‘best,’ or ‘most reliable.’ ’’ Business wants
certainty, and thinks the standard should be ‘‘an’’ ap-
propriate method, which is not necessarily the ‘‘best’’
method, Ernick said. ‘‘But it is hard to argue that you
should use an ‘OK’ method instead of the ‘best’
method.’’
Ernick said it is important to the separate the issue
of the substantive choice of method from the issue of
penalties. The most appropriate transfer pricing
method should always be used, Ernick said, but if a tax-
payer has made a reasonable effort in selecting the
most appropriate method, then penalties should not be
imposed.
Sanity Check. Ernick said draft guideline 2.11 men-
tions using a secondary transfer pricing method to cor-
roborate a primary method.
The point of doing this corroboration, Ernick said, is
to identify ‘‘unusual outcomes’’ that might ‘‘suggest the
need to further review selection and application of the
primary method, to confirm whether or not it is the
most appropriate method.’’
Ernick said corroboration ‘‘seems a little unusual in
that it suggests that the outcomes, the prices, deter-
mined by a method might be used to determine its reli-
ability, yet that is not one of the comparability factors.’’
Also, Ernick said, draft guideline 2.11 seems to con-
flict with the blanket rule in guideline 2.1 that most ap-
propriate method should be used. For these reasons, Er-
nick said, several commentators have recommended
deleting draft guideline 2.11.
‘Reasonably Reliable.’ Proposed guideline 3.2 says
that the phrase ‘‘reasonably reliable comparables’’ as
used in the guidelines refers to the ‘‘most reliable com-
parables’’ under the circumstances of the case.
Ernick said this statement is confusing and contra-
dictory because ‘‘reasonably reliable’’ is not the same
thing as ‘‘most reliable.’’ The official said two different
concepts are inappropriately being mixed together—the
concept of how reliable a comparable should be, and
the concept of how much effort a taxpayer should put
into finding a comparable.
BNA TAX 4-8-10
1222 (Vol. 18, No. 22)
As for the substantive rule, Ernick said, the uncon-
trolled transactions that provide the ‘‘most reliable’’
measure of the arm’s-length result, rather than the
‘‘most reasonably reliable,’’ should be used.
If an uncontrolled transaction can be found that is
identical to the controlled transaction, then it should be
used, Ernick said. In the vast majority of cases, he said,
where identical uncontrolled transactions cannot be
found, then the most reliable comparable should be
used.
Penalties. Ernick said the concept of reasonableness
is applicable in evaluating the taxpayer’s efforts at find-
ing the most reliable comparable to use in determining
the arm’s-length price for purposes of determining
whether a penalty should be imposed.
For example, suppose a tax administration makes a
substantive pricing adjustment to the taxpayer’s re-
ported results based on a comparable that is more reli-
able than the one used by the taxpayer. The substantive
pricing adjustment obviously should be made, based on
the more reliable comparable, Ernick said, but if the
taxpayer used reasonable efforts in finding the most re-
liable comparable, then no penalty should be imposed.
Timing Issues. Ernick said timing issues in compara-
bility, including draft guideline 3.73 on hindsight, is an
‘‘area [of the draft] that needs more clarification.’’
The use of arm’s-length data that was unavailable to
the taxpayer when it set its prices is often confused with
‘‘hindsight,’’ Ernick said.
Ernick said it is clear that the ex post determination
of arm’s-length pricing should be based on the data that
best reflects an arm’s-length price based on comparable
uncontrolled transactions no matter when it becomes
available.
So, Ernick said, tax administrations should be able to
make use of more reliable comparable data that be-
comes available only after the taxpayer files its tax re-
turn for purposes of making pricing adjustments.
The timing of the availability of the relevant data af-
fects the issue of whether a taxpayer should face a pen-
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
GLOBAL UPDATE
alty for incorrect pricing, he said. ‘‘More reliable data
that becomes available only after the taxpayer has set
its prices should be used by tax administrations to make
pricing adjustments, but not for imposing penalties.’’
Ernick said the inappropriate use of hindsight, how-
ever, occurs when a tax administration makes pricing
adjustments based on events occurring after the date of
the uncontrolled transaction.
‘‘There is currently no definition of hindsight in the
guidelines, and its something we need to consider.’’
Databases. Proposed guideline 3.30 states that com-
mercial databases ‘‘can be a practical and sometimes
cost-effective way of indentifying external compa-
rables.’’
However, Ernick said the remainder of the draft
guidance on databases seems to discuss only the poten-
tial problems with using them, such as that databases:
s are not available in all countries;
s might not have detailed enough information;
s should not encourage quantity over quality; and
s should be refined with other publicly available in-
formation.
Ernick said the OECD draft section on databases
perhaps needs to be a ‘‘little more balanced, recogniz-
ing that sometimes databases may provide the most re-
liable information on comparables, considering and
taking into account all their limitations.’’
Effective Date. Ernick said Working Party No. 6 met
in Paris during the week of March 2 to begin evaluating
the comments the OECD received on the draft, and the
working party is discussing which comments have
merit and how to make revisions to the draft.
Some commentators have questioned what would be
the effective date of revised Chapters I, II, and III. This
is an issue that the working party will have to look at,
Ernick said, and it will need to address whether the re-
vised transfer pricing guidelines will apply retrospec-
tively, upon finalization, or to transactions entered into
after finalization.
BY KEVIN A. BELL
TMTR ISSN 1063-2069

Interview
Interview: Canadian Official Addresses Increased APA Demand,
Completion Times for APA, MAP Cases, Other Issues
Greater regulatory oversight in the financial reporting area for U.S. companies is one
possible factor contributing to increased requests for advance pricing agreements in
Canada, Patricia Spice, director of the Canada Revenue Agency’s Competent Authority
Services Division, said March 25. In an interview with BNA Tax Management, Spice dis-
cussed some of the findings in the CRA’s latest reports on APAs and mutual agreement pro-
cedure cases, including why APAs take longer to resolve than MAPs.
APA Demand
BNA TAX MANAGEMENT: The statistics in the Canada
Revenue Agency’s 2008-09 report on advance pricing
agreements show demand for APAs at an all-time high
(18 Transfer Pricing Report 1166, 3/25/10).
What do you think is driving the demand for the pro-
gram?
SPICE: For the last three years there has been an ex-
ponential increase in applications, and as a result, our
inventory has also gone up. Previously we had averaged
about 15 cases annual intake, and now we are getting a
steady increase to over 30. As stated in our last annual
report, we have 84 APAs in inventory and 33 applica-
tions under consideration.
Applicants don’t tell us why they decided to come in
for an APA—although in the case of a renewal we as-
sume they are coming back because they had a positive
experience.
With increased globalization, the international trans-
actions for multinationals operating in Canada are be-
coming more complex. Since 2005, the CRA has had in-
creased resources for international audits. If taxpayers
wish to get prospective certainty and wish to get out of
the audit cycle, they will be coming to us for APAs.
In addition, a number of new jurisdictions around
the world have provided additional resources to scruti-
nizing international transactions and others have men-
tioned publicly their increased interest in doing interna-
tional tax audits.
In the United States, our largest trading partner,
there has been an increase in regulatory oversight un-
der the Financial Accounting Standards Board’s FIN 48
interpretations and Sarbanes-Oxley. That could drive
U.S. companies with operations in Canada to ask for
APAs.
Considerations for an APA
BNA TAX MANAGEMENT: Despite the high demand for
the program, a Canadian practitioner recently told
those attending a transfer pricing conference that the
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1223
Canadian APA process is difficult, time-consuming, and
costly and advised against it for companies ‘below the
radar screen.’ Can you address those criticisms?
SPICE: When we talk to taxpayers and their represen-
tatives, we try to emphasize that the APA Program is a
cooperative program where the tax administration and
the taxpayer work together to resolve the transfer pric-
ing methodology on a prospective basis. This frees up
our audit resources, gets taxpayers certainty and com-
fort from us, and allows issues to be resolved more
quickly than through an audit.
But not every taxpayer wants to be or can afford to
be in the APA Program. Some might not have signifi-
cant transfer pricing transactions, others might not
have the resources to spend on the representation dur-
ing the process. If the company does not have opera-
tions in a country with which Canada has a treaty, a bi-
lateral APA would not be an option, and the taxpayer
may not be interested in a unilateral agreement.
BNA TAX MANAGEMENT: What kinds of transfer pric-
ing cases generally are, or are not, good candidates for
an APA?
SPICE: When people come in for a pre-file meeting,
we explain to them that we don’t want them to come in
with a preconceived notion of the perfect transfer pric-
ing method. We want them to understand that each gov-
ernment has to determine that the method makes sense
from its perspective. Taxpayers need to be flexible,
adaptable, and cooperative. They need to provide us
with all the facts and circumstances of their operations
on both sides of the border to help us understand
them—but then they need to let the two governments
figure out the best transfer pricing methodology. Tax-
payers that are willing to do this are the best candi-
dates. On the flip side are those who believe that there
is only one way that their transactions can be viewed.
There are some factors that would cause us to auto-
matically reject an APA request. We would not enter-
tain an APA for a transaction that is in front of the
courts, for example. We also would not grant an APA if
BNA TAX 4-8-10
1224 (Vol. 18, No. 22)
the taxpayer does not provide the information re-
quested at the pre-file meeting or specified in the
follow-ups to the meeting or the cost recovery request
letter. Similarly, we would reject the APA request if the
submission contradicts or is materially different from
what we have received through the taxpayer’s other ap-
plications to the CRA for tax credits and the like; or if
we do independent verification after the pre-file and
find that the information is contradictory.
We also may feel an APA is not appropriate if the
transactions are tenuous—that is, if we’re not sure the
results will be predictable or reliable—or if we don’t
have the data to evaluate the transactions.
BNA TAX MANAGEMENT: What generally is the cost of
an APA in Canada?
SPICE: Both bilateral and unilateral APAs other than
those for small business taxpayers may require site vis-
its by the CRA, so applicants provide a fee based on an
estimate of the CRA’s out-of-pocket travel expenses for
site visits and negotiations. A small business APA,
which would always be a unilateral agreement, is sub-
ject to a flat fee of C$5,000 to cover the economic analy-
sis performed by the Competent Authority Services Di-
vision, and there is generally no travel by CRA staff.
Completion Time
BNA TAX MANAGEMENT: The average time to complete
an APA in 2008-09 was more than 40 months, while the
average time to complete a mutual agreement proce-
dure request was 28.1 months, according to the Sep-
tember 2009 report on MAP statistics (18 Transfer Pric-
ing Report 597, 10/22/09).
Why does an APA, which is supposed to be a coop-
erative effort, take so much longer than a regular MAP
case?
SPICE: A MAP case is the culmination of many years
in the CRA—the audit, which involves a lot of back and
forth with the taxpayer; the reassessment; potentially
an appeal—although if the taxpayer comes to compe-
tent authority it must put that in suspension—and fi-
nally the double tax resolution. So the time in MAP
does not recognize the time the taxpayer has been un-
der audit by the CRA. The APA is a consolidation of
both those periods, so from that perspective the tax-
payer is getting a better turnaround time with an APA
than it would with a MAP.
BNA TAX MANAGEMENT: What is the usual term for an
APA in Canada?
SPICE: The standard is five years. Quite often we’ll
have two or three rollback years. It also depends on the
stage at which we settle. If it’s far into the APA period,
both governments would consider extending it a few
more years.
Withdrawals, Unresolved APAs
BNA TAX MANAGEMENT: As noted in the annual report
on APAs, the program recently began keeping track of
withdrawals, separating them into pre- and post-
acceptance categories. The two recorded for 2008-09
were pre-acceptance withdrawals. To what would you
attribute those?
SPICE: It’s difficult to say because the taxpayer gen-
erally does not tell us. It could be that the company’s
circumstances changed because of the economic down-
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
INTERVIEW
turn. There may have been some applicants in the pro-
gram that decided to get out once their businesses were
affected. A change in organizational structure could
also be a factor, or an inability to cover the costs at this
point in time—a company in that position might defer
coming into the program until it is in better shape finan-
cially.
BNA TAX MANAGEMENT: This year, the CRA reported
one unresolved APA, in which agreement could not be
reached either with the taxpayer or the foreign tax au-
thority. This is only the fourth time that has happened
in the history of the program. Can you give any expla-
nation?
SPICE: Unfortunately not. Because it is only one case,
discussing it could be a breach of confidentiality.
Renewals
BNA TAX MANAGEMENT: The Canadian practitioner
advised those at the conference to ‘weigh the options’
when considering a renewal, saying they ‘are supposed
to be easy but they’re not.’ Similar complaints have
arisen in the United States. Can you provide any statis-
tics on renewal cases?
SPICE: We don’t track the numbers, so it’s only anec-
dotal. People do come back for renewals. We have had
some taxpayers come back for two or three renewals,
so obviously the first renewal was not a bad experience.
The easiest cases would be where nothing has
changed—where the governments were happy with the
first APA, everybody left feeling satisfied, and circum-
stances and operations did not change.
However, it’s not automatic that a renewal will take
half the time of the original. Although we do think there
are economies of scale after a taxpayer has been in the
program once, transactions change, circumstances
change, and sometimes even the government’s posi-
tions change depending on the kinds of issues that
we’re contemplating.
BNA TAX MANAGEMENT: Does turnover in the APA
Program sometimes slow down the renewal process?
SPICE: Perhaps. It certainly is the case that we have
turnover, and a taxpayer will not always get the same
analyst or manager when coming in for a renewal of the
case, so there may be a bit of a learning curve. Depend-
ing on the circumstances and issues, having a different
analyst may not make a big difference if most things
stay the same.
BNA TAX MANAGEMENT: Is there anything you would
like to highlight about this year’s APA report?
SPICE: As you noted earlier, we are at an all-time
high for inventory and for demand, and I think we’ll see
a similarly high inventory in the report for 2009-10. We
are trying to see if we can get more resources, but it
may be difficult with the government hiring freeze re-
ported in the federal budget. Of course, we are also in-
stituting efficiencies in program administration.
Still, I think we can make a good case for more hir-
ing. I think it’s an important program, and taxpayers
clearly want APAs.
BNA TAX MANAGEMENT: When do you expect to re-
lease the next report?
SPICE: We are hoping to release it in September.
TMTR ISSN 1063-2069
INTERVIEW
MAP Cases
BNA TAX MANAGEMENT: According to the CRA’s re-
port on mutual agreement procedure cases for 2008-09,
the time needed to resolve a competent authority case
reached its highest level in five years—28.1 months (18
Transfer Pricing Report 597, 10/22/09).
To what do you attribute the longer time needed?
SPICE: We closed a number of older cases last year,
which can skew the results. Part of it may be taxpayer
cooperation, part of may be staffing issues here in
Canada, and part of it may be resourcing in the other
country.
Also, despite the high average, I would point out that
more than half of our cases were resolved within the
targeted 24-month period.
Arbitration
BNA TAX MANAGEMENT: The fifth protocol to the
treaty between the United States and Canada, which
provides for mandatory arbitration, was ratified Dec.
15, 2008, which means the two-year time limit for the
cases already pending on that date will be up at the end
of this year. Can you say even approximately how many
cases currently in MAP will be eligible for arbitration if
not resolved by Dec. 15?
SPICE: What we are aiming for is to resolve the cases
so they never get to arbitration. With that as the goal,
we have not sat down and looked at potential cases. I
think the IRS is probably of the same view. We are not
looking at what would potentially go to arbitration be-
cause we’re putting our effort into trying to resolve the
cases.
BNA TAX MANAGEMENT: Officials from both Canada
and the United States have said they hoped the arbitra-
tion provision would create an incentive for the compe-
tent authorities to resolve cases before the two-year
mark. Has this happened?
SPICE: I think it’s quite clear that since the signing of
the fifth protocol in the fall of 2007, we have been gear-
ing toward this looming deadline and are conscious of
it with every case. It certainly gives us an incentive to
try to find ways to work faster together.
BNA TAX MANAGEMENT: Does the threat of arbitration
change the approach of negotiations in any way?
SPICE: I don’t think we can ever change our ap-
proach. We are obligated to look at the adjustments—
whichever country has issued them—and determine
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1225
whether they make sense under the methodology that
has been accepted. We will settle cases the way we al-
ways have—by defending our adjustments, or question-
ing the adjustments of the other country, in accordance
with what we believe is the arm’s-length valuation.
BNA TAX MANAGEMENT: As I understand it the United
States and Canada still must develop procedures for
implementing arbitration. Can you comment on the sta-
tus of this effort?
SPICE: We have another area in the CRA that takes
the lead on country-to-country negotiations, but treaty
specialist Tam Nguyen and I assist in the effort and we
are all meeting and talking periodically with the IRS.
We are working toward having those procedures in
place in time—by Dec. 15.
Staff Levels
BNA TAX MANAGEMENT: Inventory levels of both APAs
and MAP cases for 2008-09 are the highest ever re-
ported. You said in July that CASD was planning to hire
four more economists and four more analysts for newly
created positions. What are current staff levels, and is
more hiring planned?
SPICE: The staff numbers will be confirmed in our
next report. We have brought new people in but have
also lost a few; I would say we are back to our historic
level. When I came in in 2007 were at our lowest level,
and we are now back to where we were at the height of
our program, but we are still looking at filling a few va-
cancies. As I said earlier, we are also hoping to get more
resources.
BNA TAX MANAGEMENT: What do you expect inven-
tory levels and completed MAPs and APAs to look like
for 2009-10?
SPICE: It depends a little on whether there is a trend
toward appeal as opposed to MAP cases. We think de-
mand for APAs will continue to increase, and I also
think we will have more MAP cases because more au-
dits are being completed in the field. If we see efficien-
cies in both programs and better results on our turn-
around time, that also will attract people into the pro-
gram.
All three of those factors should lend themselves to a
greater demand for both the MAP and APA programs.
BY MOLLY MOSES
BNA TAX 4-8-10
1226 (Vol. 18, No. 22)
Text
Text: Tianjin Notice on Submission of Related-Party Documentation
[Tianjin State Tax Bureau, Jin Guo Shui Han [2009] No. 120, Issued 12/22/09]
Notice issued by the Tianjin State Tax Bureau
regarding the administration of contemporaneous
documentation for related party transactions
[Translated by Transfer Pricing Management Consulting in
Shanghai]
With a view to strengthen the tax administration of re-
lated party transactions and enhance the quality of con-
temporaneous documentation for related party transac-
tions for enterprises in our city, pursuant to Circular of the
State Administration of Taxation on the Issuance of the
Implementation Measures for Special Tax Adjustments
(Trial Implementation) (ref. Guo Shui Fa [2009] No. 2);
Circular on Relevant Issues concerning Enhancement of
the Follow-up Administration over Transfer Pricing, (ref.
Guo Shui Han [2009] No. 188) and Circular of the State
Administration of Taxation on Strengthening the Supervi-
sion over and Investigation of Cross-border Connected
Transactions, (ref. Guo Shui Han [2009] No. 363), the rel-
evant notice regarding the administration of contempora-
neous documentation for related party transactions in Year
2008 and 2009 is hereby issued as follows
1. Enterprises are required to prepare the contemporane-
ous documentation for related party transactions if any one
of the following criteria is met:
1.1. If the annual amount of related party purchase and
sales (for toll manufacturing business, the amount
shall be calculated on the basis of the prices set out
in the customs import and export declarations made
over the course of the year) is more than
RMB200,000,000 or the amount of other related
party transactions over the course of the year (for re-
lated party financing, the amount is calculated on
the basis of the interest received or paid) is more
than RMB40,000,000. The abovementioned related
party purchase/sales or other transactions should ex-
clude those amounts already covered by Cost shar-
ing Agreements or Advance Pricing Agreements ef-
fective in that year.
1.2. If enterprises have implemented a transfer pricing
adjustment, and are subject to a follow-up adminis-
tration in and after Year 2008 (regardless whether
the amount of related party purchase and sales and
other related party transaction has reached the
threshold)
1.3. If enterprise established by a multinational enter-
prise within the territory of China only bear limited
functions and risks such as mono-manufacturing
(processing with supplied materials or processing
with imported materials), distribution or contract re-
search and development, and are in a loss position in
and after Year 2009.
This circular issued by Tianjin State Tax Bureau contains two
articles, the first article identifies types of entities required to
prepare documentation and the second article sets out the tim-
ing for preparation and submission of 2008 and 2009 documen-
tation. We direct your attention particularly to Article 2.1,
which indicates those entities who are required to prepare the
2009 documentation must submit it before March 31, 2010.
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
Enterprises that meet any one of criteria here above are
required to prepare contemporaneous documentation.
If the foreign-invested shares in the company account for
less than 50% , the related party transaction are carried out
only with domestic related party, and the related party
transaction are covered in advance pricing arrangements,
the enterprise can be exempted from preparing contempo-
raneous documentation.
2. The required time to prepare and submit the contem-
poraneous documentation.
2.1 For 2008 contemporaneous documentation for re-
lated party transaction, relevant enterprises (includ-
ing those who are in the follow-up administration pe-
riod), shall have the documentation ready before De-
cember 31, 2009, and submit to in-charge tax
authority before March 31, 2010.
2.2 For 2009 contemporaneous documentation for re-
lated party transaction, relevant enterprises (includ-
ing those who are in the follow-up administration pe-
riod as well as those who report losses and bear lim-
ited functions and risks) shall have the
documentation ready before the end of May, 2010
and submit to in-charge tax authority before June 20,
2010.
2.3 For 2009 contemporaneous documentation for re-
lated party transaction, if enterprises are waiting for
their group consolidated financial report, the dead-
line can be extended, taking into consideration of the
different financial year closing time of different
groups, however, the documentation can not be sub-
mitted to in-charge tax authority any later than the
end of December, 2010.
3. Strengthening the supervision and administration.
All local tax authorities shall integrate this work into the
routine tax collection and administration, ascertain the
number of the enterprises who are required to prepare con-
temporaneous documentation, and actively deliver to them
the major content, framework and timing requirement of
contemporaneous documentation, ensure all these enter-
prises will prepare, file and submit the documentation in
time. All local tax authorities shall collect all documenta-
tions for those enterprises that meet the criteria and effec-
tively implement the special tax adjustments by monitoring
the cross border related party transaction and tax source of
related party transaction under different tax policies within
China. The General Ledger of the Contemporaneous Docu-
mentation for Related Party Transactions shall be filed an-
nually. All local tax authorities need to submit the General
Ledger of Year 2008 and Year 2009 in Excel form (elec-
tronic version) to the international tax unit of municipal
tax bureau before the end of April, 2009 and the end of
June, 2009 respectively.
4. Enterprises who fail to prepare, file and submit con-
temporaneous documentation will be dealt with in accor-
dance with the Tax Collection Law and its Rules for Imple-
mentation, and will be listed as key monitoring enterprises
and targets of special tax adjustment investigation.
TMTR ISSN 1063-2069
TEXT
Text: Beijing Notice on Submission of Related-Party Documentation
[Beijing State Tax Bureau, Jing Guo Shui Han [2010] No. 19, Issued 2/3/10]
Notice issued by the Beijing State Tax Bureau
regarding the declaration of related party transactions
in 2009 and the review of contemporaneous
documentation for related party transactions in 2008
[Translated by Transfer Pricing Management Consulting
in Shanghai]
(Issued by the Beijing State Tax Bureau as document
Jing Guo Shui Han [2010] No. 19)
Issued to each State Tax Authority in all district and
county levels:
In accordance with the anti-tax avoidance requirements
of the State Administration for Taxation (‘‘SAT’’), to en-
sure the declaration of related party transactions in 2009
and the review of contemporaneous documentation pre-
pared for related party transactions in 2008, please follow
the rules in the notice below.
1. Pursuant to Circular of the State Administration of
Taxation on the Issuance of RPC Enterprise Related
Party Transaction Declaration Form (ref. Guo Shui Fa
[2008] No. 114); Circular of the State Administration
of Taxation on the Issuance of the Implementation
Measures for Special Tax Adjustments (Trial Imple-
mentation) (ref. Guo Shui Fa [2009] No. 2), all the dis-
trict level tax bureaus should provide special focus on
the declaration for related party transactions.
2. Pursuant to article 15 in Circular of the State Admin-
istration of Taxation on the Issuance of the Implemen-
tation Measures for Special Tax Adjustments (Trial
Implementation) (ref. Guo Shui Fa [2009] No. 2), all
the district level tax bureaus need to select and inform
the enterprises who were required to prepare the TP
contemporaneous documentation for 2008 to provide
the documentation report within 20 days. The tax bu-
reau needs to sign for the documentation report after
Text: IRS Annual Report to Congress on U.S. APA Program
[Announcement 2010-21, 2010 I.R.B. __, 4/12/10]
Announcement and Report
Concerning
Advance Pricing Agreements
March 29, 2010
This Announcement is issued pursuant to §521(b) of
Pub. L. 106-170, the Ticket to Work and Work Incentives
Improvement Act of 1999, which requires the Secretary of
the Treasury to report annually to the public concerning
Advance Pricing Agreements (APAs) and the APA Pro-
gram. The first report covered calendar years 1991 through
1999. Subsequent reports covered separately each calen-
dar year 2000 through 2008. This eleventh report describes
the experience, structure, and activities of the APA Pro-
gram during calendar year 2009. It does not provide guid-
ance regarding the application of the arm’s length stan-
dard.
Craig A. Sharon
Director, Advance Pricing Agreement Program
Background
Internal Revenue Code (IRC) §482 provides that the Sec-
retary may distribute, apportion, or allocate gross income,
deductions, credits, or allowances between or among two
or more commonly controlled businesses if necessary to
reflect clearly the income of such businesses. Under the
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1227
receiving it and report to the Beijing State Tax Bureau
before February 5.
3. All the district level tax bureaus should assess each
documentation report and prepare an assessment re-
port. The report should include related party informa-
tion, related party transaction, comparability analysis,
selection of TP method and the reasons for such selec-
tion. The report should include the assessment items,
the tax avoidance issue, quality evaluation of the en-
terprise report and management suggestions for the
enterprise. Assessment reports that have tax avoid-
ance issue should be submitted to the Beijing State
Tax Bureau by the end of May. Other assessment re-
ports are kept for future reference by the International
Taxation Unit.
After the assessment, the tax bureau should return the
documentation report that has no tax avoidance issues
to the submitter and register and keep relevant vouch-
ers.
4. The tax bureau should do internal staff training along
with the assessment of contemporaneous documenta-
tion for related party transactions in 2008. The tax bu-
reau should also guide key enterprises and improve
the quality of their documentation. The enterprises
who have a large revenue but have not declared any
related party transactions, or in loss or have a big
amount of fees paid to overseas should be regarded as
key enterprises. The tax bureau should ask these key
enterprises to fill out Financing Transaction Form
(‘‘Form 7’’) - ‘‘ratio of debt financed by related parties
to equity investments’’.
All the district level tax bureaus should report to the Bei-
jing State Tax Bureau before June 15 regarding the sub-
mission for contemporaneous documentation for related
party transactions for 2009.
§482 regulations, the standard to be applied in determining
the true taxable income of a controlled business is that of
a business dealing at arm’s length with an unrelated busi-
ness. The arm’s length standard has also been adopted by
the international community and is incorporated into the
transfer pricing guidelines issued by the Organization for
Economic Cooperation and Development (OECD). OECD,
TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND
TAX ADMINISTRATORS (1995). Transfer pricing issues by their
nature are highly factual and have traditionally been one of
the largest issues identified by the IRS in its audits of mul-
tinational corporations. The APA Program is designed to
resolve actual or potential transfer pricing disputes in a
principled, cooperative manner, as an alternative to the tra-
ditional examination process. An APA is a binding contract
between the IRS and a taxpayer by which the IRS agrees
not to seek a transfer pricing adjustment under IRC §482
for a covered transaction if the taxpayer files its tax return
for a covered year consistent with the agreed transfer pric-
ing method (TPM). In 2009, the IRS and taxpayers ex-
ecuted 63 APAs and amended 8 APAs.
Since 1991, with the issuance of Rev. Proc. 91-22, 1991-1
C.B. 526, the IRS has offered taxpayers, through the APA
Program, the opportunity to reach an agreement in ad-
BNA TAX 4-8-10
1228 (Vol. 18, No. 22)
vance of filing a tax return on the appropriate TPM to be
applied to related party transactions. In 1996, the IRS is-
sued internal procedures for processing APA requests.
Chief Counsel Directives Manual (CCDM), ¶¶ 42.10.10 –
42.10.16 (November 15, 1996).1 Also in 1996, the IRS up-
dated Rev. Proc. 91-22 with the release of Rev. Proc. 96-53,
1996-2 C.B. 375.2 In 1998, the IRS published Notice 98-65,
1998-2 C.B. 803,3 which set forth streamlined APA proce-
dures for small business taxpayers. Then on July 1, 2004,
the IRS updated and superseded both Rev. Proc. 96-53 and
Notice 98-65 by issuing Rev. Proc. 2004-40, 2004-2 I.R.B.
50,4 effective for all APA requests filed on or after August
19, 2004.
On December 19, 2005, the IRS again updated the proce-
dural rules for processing and administering APAs with the
release of Rev. Proc. 2006-09, 2006-1 C.B. 278.5 Rev. Proc.
2006-09 supersedes Rev. Proc. 2004-40 and is effective for
all APA requests filed on or after February 1, 2006. On May
21, 2008, the IRS released Rev. Proc. 2008-31, 2008-23
IR.B. 1133, which revised Rev. Proc. 2006-09 to describe
further the types of issues that may be resolved in the APA
process.6 Specifically, Rev. Proc. 2008-31 added a new sen-
tence to Section 2.01 of Rev. Proc. 2006-09, to advise that
the APA process may be used to resolve any issue for
which transfer pricing principles may be relevant, such as
attribution of profit to a permanent establishment under
certain U.S. income tax treaties, the amount of income ef-
fectively connected with the conduct of a U.S. trade or
business, and the amount of income derived from sources
partly within and partly without the United States.
Advance Pricing Agreements
An APA generally combines an agreement between a
taxpayer and the IRS on an appropriate TPM for the trans-
actions at issue (Covered Transactions) with an agreement
between the U.S. and one or more foreign tax authorities
(under the authority of the mutual agreement process of
our income tax treaties) that the TPM is correct. With such
a ‘‘bilateral’’ APA, the taxpayer ordinarily is assured that
the income associated with the Covered Transactions will
not be subject to double taxation by both the U.S. and the
foreign jurisdiction. The policy of the United States, as re-
flected in §§2.08 and 7 of Rev. Proc. 2006-09, is to encour-
age taxpayers that enter the APA Program to seek bilateral
or multilateral APAs when competent authority procedures
are available with respect to the foreign country or coun-
tries involved. However, the IRS may execute an APA with
a taxpayer without reaching a competent authority agree-
ment (a unilateral APA).
A unilateral APA is an agreement between a taxpayer
and the IRS establishing an approved TPM for U.S. tax
purposes. A unilateral APA binds the taxpayer and the IRS,
but does not prevent a foreign tax administration from tak-
ing a different position on the appropriate TPM for a trans-
action. As stated in §7.07 of Rev. Proc. 2006-09, should a
transaction covered by a unilateral APA be subject to
double taxation as the result of an adjustment by a foreign
tax administration, the taxpayer may seek relief by re-
questing that the U.S. Competent Authority consider initi-
ating a mutual agreement proceeding pursuant to an appli-
cable income tax treaty (if any).
When a unilateral APA involves taxpayers operating in a
country that is a U.S. treaty partner, information relevant
to the APA (including a copy of the APA and APA annual
reports) may be provided to the treaty partner under nor-
1
Current CCDM provisions regarding APA procedures are
available at http://www.irs.gov/irm/part32/ch04s01.html.
2
Available at http://www.irs.gov/pub/irs-irbs/irb96-49.pdf.
3
Available at http://www.irs.gov/pub/irs-irbs/irb98-52.pdf.
4
Available at http://www.irs.gov/pub/irs-irbs/irb04-29.pdf.
5
Available at http://www.irs.gov/irb/2006-02_IRB/
ar12.html.
6
Available at http://www.irs.gov/pub/irs-irbs/irb08-31.pdf.
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
TEXT
mal rules and principles governing the exchange of infor-
mation under income tax treaties.
The APA Program
An IRS team headed by an APA team leader is respon-
sible for the consideration of each APA. As of December
31, 2009, the APA Program had 19 team leaders. The team
leader is responsible for organizing the IRS APA team. The
IRS APA team leader arranges meetings with the taxpayer,
secures whatever information is necessary from the tax-
payer to analyze the taxpayer’s related party transactions
and the available facts under the arm’s length standard of
IRC §482 and the regulations thereunder, and leads the
discussions with the taxpayer.
The APA team generally includes an economist, an
LMSB international examiner, LMSB field counsel, and, in
a bilateral case, a U.S. Competent Authority analyst who
leads the discussions with the treaty partner. The econo-
mist may be from the APA Program or the IRS field orga-
nization. As of December 31, 2009, the APA Program had
8 economists on staff, plus one economist manager. The
APA team may also include an LMSB International Techni-
cal Advisor, other LMSB exam personnel, and/or an Ap-
peals Officer.
The APA Process
The APA process is voluntary. Taxpayers submit an ap-
plication for an APA, together with a user fee as set forth
in Rev. Proc. 2006-09, §4.12. The APA process can be bro-
ken into five phases: (1) application; (2) due diligence; (3)
analysis; (4) discussion and agreement; and (5) drafting,
review, and execution.
(1) Application
In many APA cases, the taxpayer’s application is pre-
ceded by a pre-file conference with the APA staff in which
the taxpayer can solicit the informal views of the APA Pro-
gram. Pre-file conferences can occur on an anonymous ba-
sis, although a taxpayer must disclose its identity when it
applies for an APA. The APA Program has been requiring
taxpayers interested in an APA under Rev. Proc. 2008-31 to
schedule a pre-file conference before submitting a formal
APA application.
As part of a taxpayer’s APA application, the taxpayer
must file the appropriate user fee on or before the due date,
including extensions, of the tax return for the first taxable
year that the taxpayer proposes to be covered by the APA.
(If the taxpayer receives an extension to file its tax return,
it must file its user fee no later than the actual filing date of
the return.) Many taxpayers file a user fee first and then
follow up with a full application later — a ‘‘dollar file’’ in
APA parlance. The procedures for pre-file conferences,
user fees, and applications can be found in §§3 and 4 of
Rev. Proc. 2006-09.
The APA application can be a relatively modest docu-
ment for small businesses. Section 9 of Rev. Proc. 2006-09
describes the special APA procedures for small business
taxpayers. For most taxpayers, however, the APA applica-
tion is a substantial document filling several binders. APA
applications must be accompanied by a declaration, signed
by an authorized corporate officer, attesting to the accu-
racy and completeness of the information presented.
The application is assigned to an APA team leader who
is responsible for the case. The APA team leader’s first re-
sponsibility is to organize the APA team. This involves con-
tacting the appropriate LMSB International Territory Man-
ager to secure the assignment of an international examiner
to the APA case and the LMSB Counsel’s office to secure a
field counsel lawyer. In a bilateral case, the U.S. Compe-
tent Authority will assign a U.S. Competent Authority ana-
lyst to the team. In a large APA case, the international ex-
aminer may invite his or her manager and other LMSB per-
sonnel familiar with the taxpayer to join the team. If the
APA may affect taxable years in Appeals, the appropriate
appellate conferee will be invited to join the team. In cases
involving cost-sharing arrangements, other complex intan-
gibles and services transactions, or novel issues, the APA
team leader contacts the Manager, LMSB International
TMTR ISSN 1063-2069
TEXT
Technical Advisors, to determine whether or not to include
a technical advisor on the team. The multi-functional na-
ture of APA teams combines the APA Program’s transfer
pricing expertise and APA experience with other elements
of the IRS that possess complementary or supplementary
knowledge about the taxpayer, the taxpayer’s industry, re-
lated or ancillary tax issues, the foreign competent author-
ity, and other relevant issues. By bringing all relevant par-
ties to the table in a single proceeding, the APA process is
able to resolve transfer pricing issues early on in a more
principled, efficient, consistent, and comprehensive man-
ner than the standard administrative process (i.e., audit,
appeals, litigation).
The APA team leader distributes copies of the APA appli-
cation to all team members, makes initial contact with the
taxpayer to confirm the APA Program’s receipt of the tax-
payer’s application, and sets up an opening conference
with the taxpayer. Under current APA case management
procedures, the APA office strives to (i) make initial con-
tact with the taxpayer within 21 days of its receipt of the
APA application and (ii) hold the opening conference
within 45 days from the date that the APA team expects to
begin actively working the case – the ‘‘Start
Date’’ under the revised case management procedures.
Because of heavy caseloads (especially among APA econo-
mists) and staff turnover during 2009, we were unable to
hold many opening conferences within the 45-day target.
On or about the opening conference, the APA team
leader proposes a case plan appropriate for the case. Case
plans are generally targeted to complete a unilateral APA
or, in the case of a bilateral APA, the recommended U.S.
negotiating position within 12 months from the date the
full application is filed. The targeted completion date in a
particular case, however, may vary from the 12-month
benchmark, depending on the complexity of the case, APA
team workloads, taxpayer schedules, and other factors.
Case plans are signed by both an APA manager and an au-
thorized official of the taxpayer and, under the new APA
case management procedures, will generally be adhered to
except in unforeseen or exceptional circumstances. The ac-
tual median and average times for completing unilateral
and bilateral APAs, recommended negotiating positions for
bilateral APAs, and APAs for small business taxpayers are
shown below in Tables 2, 5, and 11, respectively.
(2) Due Diligence
The APA team must satisfy itself that the relevant facts
submitted by the taxpayer are complete and accurate. This
due diligence aspect of the APA is vital to the process. It is
because of this due diligence that the IRS can reach ad-
vance agreements with taxpayers in the highly factual set-
ting of transfer pricing. Due diligence can proceed in a
number of ways. Typically, the APA team leader will sub-
mit in advance of the opening conference a list of questions
to the taxpayer for discussion at the conference. The open-
ing conference may result in additional questions and an
agreement to meet one or more times in the future. These
questions and meetings are not an audit and are focused on
the transfer pricing issues associated with the transactions
in the taxpayer’s application, or other transactions that the
taxpayer and the IRS may agree to add.
(3) Analysis
A significant part of the analytical work associated with
an APA is done typically by the APA economist and/or an
IRS field economist assigned to the case. The analysis may
result in the need for additional information. Once the IRS
APA team has completed its due diligence and analysis, it
begins discussions with the taxpayer over the various as-
pects of the APA including the covered transactions, the
TPM, the selection of comparable transactions, asset inten-
sity and other adjustments, the appropriate critical as-
sumptions, the APA term, and other key issues. The APA
team leader will discuss particularly difficult issues with
his or her managers, but generally the APA team leader is
empowered to negotiate the APA.
(4) Discussion and Agreement
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1229
The discussion and agreement phase differs for bilateral
and unilateral cases. In a bilateral case, the discussions
proceed in two parts and involve two IRS offices — the
APA Program and the U.S. Competent Authority. In the
first part, the APA team will attempt to reach a consensus
with the taxpayer regarding the recommended position
that the U.S. Competent Authority should take in negotia-
tions with its treaty partner. This recommended U.S. nego-
tiating position is a paper drafted by the APA team leader,
reviewed by APA management, and signed by the APA Di-
rector that provides the APA Program’s view of the best
TPM for the Covered Transactions, taking into account IRC
§482 and the regulations thereunder, the relevant tax
treaty, and the U.S. Competent Authority’s experience with
the treaty partner.
The experience of the APA office and the U.S. Competent
Authority is that APA negotiations are likely to proceed
more rapidly with a foreign competent authority if the U.S.
negotiating position is fully supported by the taxpayer.
Consequently, the APA office works together with the tax-
payer in developing the recommended U.S. negotiating po-
sition. Often, however, the taxpayer will disagree with part
or all of the recommended U.S. position. In these cases, the
APA office will send a recommended U.S. negotiating posi-
tion to the U.S. Competent Authority that identifies and ex-
plains the elements of the recommended position with
which the taxpayer disagrees. The APA team leader also
solicits the views of the other members of the APA team,
and, in the vast majority of APA cases, the other members
of the APA team concur in the position prepared by the
APA team leader. If there is any disagreement, it is noted
in the position paper.
After the APA Program completes the recommended
U.S. negotiating position, the APA process shifts from the
APA Program to the U.S. Competent Authority. The U.S.
Competent Authority analyst assigned to the APA takes the
recommended U.S. negotiating position and prepares the
final U.S. negotiating position, which is then transmitted to
the foreign competent authority. The negotiations with the
foreign competent authority are conducted by the U.S.
Competent Authority analyst, most often in face-to-face ne-
gotiating sessions conducted periodically throughout the
year. At the request of the U.S. Competent Authority, APA
Program staff may assist in the negotiations.
In unilateral APA cases, the discussions proceed solely
between the APA Program and the taxpayer. In a unilateral
case, the taxpayer and the APA Program must reach agree-
ment to conclude an APA. As in bilateral cases, the APA
team leader almost always will achieve a consensus with
the IRS field personnel assigned to the APA team regard-
ing the final APA. Under APA Program procedures, IRS
field personnel assigned to a case are solicited formally for
their concurrence in the final APA. This concurrence, or
any item in disagreement, is noted in a memorandum pre-
pared by the APA team leader that accompanies the final
APA sent forward for review and execution.
(5) Drafting, Review, and Execution
Once the IRS and the taxpayer reach agreement, the fi-
nal APA is drafted. The APA Program has developed stan-
dard language that is incorporated into every APA. The
current version of this language is found in Attachment A.
APAs are reviewed by the APA Branch Chief and the APA
Director. In addition, the team leader prepares a summary
memorandum for approval by the Associate Chief Counsel
(International) (ACC(I)). On March 1, 2001, the ACC(I) del-
egated to the APA Director the authority to execute APAs
on behalf of the IRS. See Chief Counsel Notice CC-2001-
016. The APA is executed for the taxpayer by an appropri-
ate corporate officer.
Model APA at Attachment A
[§521(b)(2)(B)]
Attachment A contains the current version of the model
APA language.
The Current APA Office Structure, Composition, and Opera-
tion
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In 2009, the APA office consisted of four branches, with
Branches 1 and 3 staffed with APA team leaders and
Branch 2 staffed with economists based in Washington,
D.C. Branch 4, the APA West Coast branch, is headquar-
tered in Laguna Niguel, California, with an additional of-
fice in San Francisco, and is staffed with both team leaders
and economists.
APA staffing fluctuated during 2009, starting at 33 at the
end of 2008, falling to a low of 30 in early 2009, and build-
ing back up to 39 by the end of the year. As of December
31, 2009, the APA staff was as follows:
Consistent with the increase in total APA headcount
from 2008 to 2009, total APA staffing measured by hours
increased in 2009 compared to 2008. APA staff hours in
2009 were similar to APA staff hours in 2006 and 2007,
when APA staffing levels were similar at year end (39 in
2009 vs. 40 in 2006 and 37 in 2007), with the small varia-
tion in staff hours due primarily to the timing of departures
and hires within a year. The change in APA professional
staffing levels over the last eight years is reflected in the
table below.
Hours of APA attorneys, economists, and paralegal staff
by year (excluding holiday and leave):
APA Issue/Industry Coordination Teams
In May 2005, the IRS Chief Counsel announced a series
of initiatives to improve APA Program performance. One
initiative was to increase specialization within the office by
creating teams of select individuals to handle all cases of a
particular type. The purpose was to increase efficiency,
quality, and consistency.
The APA Program selected five categories of cases for
specialization – cases involving cost sharing arrangements,
financial products, the semiconductor industry, the auto-
motive industry, and the pharmaceutical industry. These
categories were selected because they each had a sufficient
number of cases and commonality of issues to warrant
their assignment to teams. Cases falling within these five
categories have historically accounted for about 40 percent
of the APA Program’s case load and about half of its total
case time. At the end of 2009, cases within these five cat-
egories accounted for 86 of the 222 cases pending in the of-
fice that were either unilateral APAs or bilateral APAs that
had not yet been forwarded to Competent Authority.
Staffing of the coordination teams at the end of 2009 is
indicated below:
The APA Program is mindful that the purpose of the co-
ordination effort is not to impose the same transfer pricing
method on all taxpayers in an industry. The appropriate
transfer pricing method remains a case-by-case determina-
tion, influenced by numerous factors that are not common
Table 1: APA Applications, Executed APAs, and Pending APAs
Unilateral Bilateral
APA applications filed during 2009 39 88
All APAs executed8
Year 2009 21 42
1991–2008 364 464
APA renewals executed during 2009 8 20
APAs revised or amended during 2009 4 4
Pending requests for APAs 70 282
Pending requests for new APAs 47 174
Pending requests for renewal APAs 23 108
APAs canceled or revoked 0 0
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TEXT
to all companies operating in a particular industry. While
the coordination effort may result in the APA Program pro-
moting a common approach on some issues where appro-
priate, the Program expects that the greater industry famil-
iarity developed through the coordination effort will also
allow it to develop a more sophisticated understanding of
issues that will permit more tailored approaches, thereby
promoting more (appropriately) varied results than might
otherwise be the case.
APA Training
In 2009, the APA office continued its training activities.
Training sessions addressed APA-related current develop-
ments, the application of Rev. Proc. 2008-31, regulatory de-
velopments, new APA office practices and procedures, and
international tax law issues. The training materials used
for new hires are available to the public through the APA
internet site at http://www.irs.gov/businesses/corporations/
article/0,,id=96221,00.html. The APA’s new-hire materials,
which were originally prepared in 2003 and have not been
updated, do not constitute guidance on the application of
the arm’s length standard and are not to be relied upon or
cited as precedent. Also available to the public is a spread-
sheet model that performs calculations in a Comparable
Profits Method (CPM) analysis, which APA economists de-
veloped in 2007 and which is now routinely used by the
APA office when performing APA analyses. An electronic
version of the model may be obtained by contacting the
APA office in Washington, D.C. at (202) 435-5220 (not a
toll-free number).
APA Program Statistical Data
[§521(b)(2)(C) and (E)]
The statistical information required under §521(b)(2)(C)
is contained in Tables 1 and 10 below; the information re-
quired under §521(b)(2)(E) is contained in Tables 2 and 3
below. The 127 APA applications during 2009 represented
a new one-year high for the Program, following a record-
breaking year in 2008 when we received 123 applications.7
From 2000-2007, the APA Program averaged 91 applica-
tions per year, and it had never received more than 110 ap-
plications in a single year. The APA Program expects APA
applications to continue in 2010 at the same high levels as
in 2008 and 2009.
7
Of the 127 new APA applications in 2009 — the first full
year in which Rev. Proc. 2008-31 was in effect — approxi-
mately ten submissions invoked APA jurisdiction under Rev.
Proc. 2008-31.
Multilateral Year Total Cumulative Total
127 1,379
0 63 904
13 841
28 261
8 61
352
221
131
0 9
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APAs withdrawn 6 8 14 146

8
‘‘All APAs executed’’ includes APA renewals, but not APAs revised or amended.

Table 2: Months to Complete APAs

Months to Complete Advance Pricing Agreements in 2009

All New All Renewals All Combined

Average 38.0 Average 37.9 Average 37.9

Median 33.6 Median 31.4 Median 33.1

Unilateral New Unilateral Renewals Unilateral Combined

Average 25.5 Average 20.5 Average 23.6

Median 19.2 Median 15.1 Median 18.2

Bilateral/MultilateralNew Bilateral/Multilateral Renewals Bilateral/Multilateral Combined

Average 45.4 Average 44.9 Average 45.1

Median 42.1 Median 37.9 Median 40.6

Table 3: APA Completion Time – Months Per APA

Months Number of APAs Months Number of APAs Months Number of APAs

1 26 51 1
2 27 1 52 2
3 28 53
4 29 1 54 2
5 30 1 55 2
6 31 2 56 3
7 32 1 57
8 33 4 58 1
9 2 34 1 59
10 35 60
11 1 36 2 61
12 3 37 1 62 1
13 1 38 2 63
14 39 64
15 40 65
16 2 41 3 66 1
17 1 42 1 67
18 3 43 68
19 1 44 2 69
20 2 45 1 70-79
21 1 46 80 2
22 47 87 1
23 2 48 92 1
24 1 49 122 1
25 2 50

Table 4: Recommended Negotiating Positions

Recommended Negotiating Positions Completed in 2009 35

Table 5: Months to Complete Recommended Negotiating Positions

New Renewal Combined

Average 18.5 Average 21.0 Average 19.9

Median 17.2 Median 21.0 Median 18.6

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Table 6: Recommended Negotiating Positions Completion Time – Months per APA

Months Number Months Number Months Number Months Number
1 12 23 1 34
2 13 24 2 35
3 14 2 25 1 36 1
4 1 15 1 26 37
5 16 2 27 38
6 17 4 28 39
7 1 18 3 29 3 40
8 19 1 30 1 41
9 20 31 42
10 1 21 3 32 1 43
11 2 22 3 33 1 44

Tables 7 and 8 below show how long each APA request pending at the end of 2009 has been in the system as
measured from the filing date of the APA submission. The numbers for pending unilateral and bilateral cases
differ from the numbers in Table 1 because Tables 7 and 8 reflect only cases for which submissions have been
received, while Table 1 includes any case for which a user fee has been paid.
Table 7: Unilateral APAs – Time in Inventory – Months per APA
Months Number of APAs Months Number of APAs Months Number of APAs Months Number of APAs
1 7 9 2 17 25 3
2 1 10 1 18 4 26
3 1 11 3 19 2 27
4 3 12 1 20 1 28
5 2 13 4 21 2 29 1
6 4 14 22 3 30 1
7 15 1 23 43 1
8 5 16 1 24 3

Table 8: Bilateral APAs – Time in Inventory – Months per APA

Months Number of Months Number of Months Number of Months Number of APAs
APAs APAs APAs
1 12 25 7 49 1 73 1
2 3 26 3 50 1 74
3 2 27 4 51 2 75
4 8 28 5 52 1 76
5 7 29 6 53 2 77
6 8 30 2 54 1 78
7 9 31 4 55 79
8 12 32 1 56 1 80
9 7 33 8 57 3 81
10 6 34 58 82
11 6 35 4 59 1 83 1
12 10 36 4 60 2 84
13 9 37 3 61 85 1
14 5 38 62 86
15 3 39 1 63 2 87
16 8 40 6 64 88
17 9 41 65 89
18 4 42 1 66 90
19 8 43 1 67 91
20 3 44 1 68 1 92
21 10 45 1 69 93
22 5 46 1 70 2 94 1
23 12 47 1 71 95
24 4 48 6 72 96+

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Of the 321 cases in the APA Program’s inventory shown
in Tables 7 and 8, 99 cases (all of which are reflected in
Table 8) are bilateral cases that have been forwarded to the
Competent Authority office for discussion with a treaty
partner. This leaves 222 cases in the APA Program’s active
inventory at the end of 2009 that are either unilateral APAs
(57 cases) or bilateral APAs for which the APA Program
has not yet completed a recommended negotiating position
(165 cases). Of the 222 active APA cases, 20 involve small
business taxpayer (SBT) cases, as defined in Rev. Proc.
2006-9, §4.12(5).
The table below shows the average age (in months) of
the 222 active cases in inventory at the end of 2009, along
with a comparison of the number of active cases and their
average age at year-end for each year back to 2004. The
table also shows the same information for cases that were
at least 6-months old or 1-year old (the latter being a sub-
set of the former) at the end of each year to allow compari-
son without potential distortions caused by year-to-year
variations in the number of cases received in the latter half
or during the course of the year. The build-up in inventory
during 2009 primarily reflects the delays caused by the sig-
nificant fluctuations in APA personnel combined with the
record number of new APA applications during the past
two years. The increases in APA applications and inventory
levels have, in fact, masked improvements in recent years
in APA productivity, as measured by the number of com-
pleted APA items (e.g., APAs, APA amendments, and rec-
ommended US negotiating positions) divided by total APA
staff hours during a year.

Table 9: Number and Average Age of Active Cases in Inventory at Year-end

2004 2005 2006 2007 2008 2009

Active cases 130 133 110 105 161 222

Average age (months) 15.2 13.2 10.6 9.1 10.2 12.9

Active cases 6+ months 106 87 81 66 110 176

Average age (months) 17.8 18.5 13.0 13.0 13.5 15.6

Active cases 1+ year 60 55 32 27 51 116

Average age (months) 24.2 23.3 19.4 18.5 18.7 19.5

Table 10: Small Business Taxpayer APAs

Small Business Taxpayer APAs Completed in 2009 5
New 4
Renewals 1
Unilateral 2
Bilateral 3

Table 11: Months to Complete Small Business Taxpayer APAs

Months to Complete Small Business Taxpayer APAs in 2009

New Renewal Combined

Average 29.3 Average 21.6 Average 27.7

Median 29.3 Average 21.6 Average 23.1

Although the APA Program strives to complete SBT
cases on an expedited basis, our experience is that such
cases require nearly the same level of resources and the
same commitment of time as non-SBT cases. This phenom-
enon may be explained by a number of factors, including
the fact that the complexity or novelty of transfer pricing
issues do not necessarily depend on the dollar volume of
the related-party transactions, the lesser transfer pricing
experience and/or resources of many SBTs, and the impor-
tance to both SBTs and non-SBTs of obtaining APA out-
comes that reflect each taxpayer’s particular facts and cir-
cumstances (as opposed to an analysis based on stream-
lined factual development and general transfer pricing
principles).

Table 12: Industries Covered9

Industry Involved – NAICS Codes Number

Wholesale trade, durable goods – 421 10-12

9
The categories in this table are drawn from the North American Industry Classification System (NAICS), which has replaced
the U.S. Standard Industrial Classification (SIC) system. NAICS was developed jointly by the United States, Canada, and Mexico to
provide new comparability in statistics about business activity across North America.

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Wholesale trade, nondurable goods – 422 10-12

Transportation equipment manufacturing – 336 7-9
Computer and electronic product manufacturing – 334 4-6
Motor vehicle and parts dealers – 441 4-6
Chemical manufacturing – 325 4-6
Electronic equipment, appliance, and component manufacturing – 335 1-3
Machinery manufacturing – 333 1-3
Apparel manufacturing – 315 1-3
Oil and gas extraction – 212 1-3
Publishing industries – 511 1-3
Miscellaneous manufacturing – 339 1-3
Professional, scientific, and technical services – 545 1-3
Information service and data processing - 514 1-3
Fabricated metal manufacturing – 332 1-3
Food and beverage stores – 445 1-3
Wood product manufacturing – 321 1-3
Electronic and appliance stores – 443 1-3

Trades or Businesses The nature of the relationships between the related orga-
nizations, trades, or businesses covered by APAs executed
[§521(b)(2)(D)(i)] in 2009 is set forth in Table 13 below:

Table 13: Nature of Relationships Between Related Entities

Relationship Number of APAs

Foreign Parent - U.S. Subsidiary (-ies) 45

Unilateral 18
Bilateral 27
U.S. Parent - Foreign Subsidiary (-ies) 16
Unilateral 3
Bilateral 13
Partnership 3

Covered Transactions The controlled transactions covered by APAs executed in

[§521(b)(2)(D)(ii)] 2009 are set forth in Tables 14 and 15 below:

Table 14: Types of Covered Transactions

Transaction Type Number

Sale of tangible property into the United States 29

Performance of services by U.S. entity 18
Use of intangible property by non-U.S. entity 15
Performance of services by non-U.S. entity 14
Use of intangible property by U.S. entity 10
Sale of tangible property from the United States 9
Other 8
Cost Sharing – U.S. parent/foreign subsidiary 3

Table 15: Types of Services Included in Covered Transactions

Intercompany Services Involved in the Covered Transactions Number

Marketing 10
Headquarter costs 7
Contract research and development 6
Technical support services 5
Distribution 5

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TEXT (Vol. 18, No. 22) 1235

Administrative 5
Logistical support 4
Sales support 4
Purchasing 4
IT 4
Research and development 3
Legal 3
Corporate and public relations 3
Warranty services 3
Tax 3
Management 3
Assembly 3
Health, safety, environmental, and regulatory affairs 3
Accounting and auditing 3
Product support 3
Benefits 3
Staffing and recruiting 3
Accounts receivable 3
Payroll 3
Treasury activities 3
Budgeting 3

Business Functions Performed and Risks Assumed businesses whose results are tested in the Covered Trans-
[§521(b)(2)(D)(ii)] actions in the APAs executed in 2009 are set forth in Tables
The general descriptions of the business functions per- 16 and 17 below:
formed and risks assumed by the organizations, trades, or

Table 16: Functions Performed by the Tested Party

Functions Performed Number

Distribution 59
Manufacturing 41
Product service 35
Marketing functions 29
Research and development 16
Purchasing and materials management 13
Transportation and warehousing 13
Product assembly or packaging 12
Product testing and quality control 11
Managerial, legal, accounting, finance, personnel, and other support services 10
Product design and engineering 8
Licensing of intangibles 8
Technical training and technical support 8
Process engineering 4
Engineering and construction-related services 3

Table 17: Risks Assumed by the Tested Party

Risks Assumed Number

Market risks, including fluctuations in costs, demand, pricing, and inventory 73

General business risks (e.g., related to ownership of PP&E) 61
Credit and collection risks 47
Product liability risks 38
Financial risks, including interest rates and currency 30
Research and development risks 15

Discussion

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1236 (Vol. 18, No. 22)
The majority of APAs have Covered Transactions that in-
volve numerous business functions and risks. For instance,
with respect to functions, multinational groups that manu-
facture products typically conduct research and develop-
ment (R&D), engage in product design and engineering,
manufacture the product, market and distribute the prod-
uct, and perform support functions such as legal, finance,
and human resources services. Regarding risks, these
groups are subject to market risks, R&D risks, financial
risks, credit and collection risks, product liability risks, and
general business risks. In the APA evaluation process, a
significant amount of time and effort is devoted to under-
standing how the functions and risks are allocated among
the controlled group of companies that are party to the
Covered Transactions.
In its APA submission, the taxpayer must provide a func-
tional analysis. The functional analysis identifies the eco-
nomic activities performed, the assets employed, the eco-
nomic costs incurred, and the risks assumed by each of the
controlled parties. The importance of the functional analy-
sis derives from the economic theory positing that there is
a positive relationship between risk and expected return
and that different functions provide different value and
have different opportunity costs associated with them. It is
important that the functional analysis go beyond simply
categorizing the tested party as, say, a distributor. It should
provide more specific information because, in the example
of distributors, not all distributors undertake similar func-
tions and risks.
The functional analysis is critical in determining the ap-
propriate TPM (including the selection of comparables,
tested party, and profit level indicator (PLI)). In conjunc-
tion with evaluating the functional analysis, the APA Pro-
gram considers contractual terms between the controlled
parties, the allocation of risk between the parties, the rel-
evant economic conditions, and the type of property or ser-
vices at issue. In assessing contractual terms and risk allo-
cations, the APA Program considers not only written
agreements between the parties, but also the economic
substance of the transactions as indicated by the conduct
of the parties over time, the financial capacity of each party
to fund losses arising from risks, and the managerial or op-
erational control each party exercises over activities giving
Table 18: Related Organizations, Trades, or Businesses Whose Prices
or Results are Tested11
Type of Organization
U.S. distributor
U.S. manufacturer
U.S. provider of services
Non-U.S. manufacturer
Non-U.S. provider of services
Non-U.S. distributor
Other
U.S. licensor of intangible property
Non-U.S. licensor of intangible property
Non-U.S. participant in cost sharing agreement
11
‘‘Multiple tested parties’’ includes covered transactions that utilize profit splits, CUPs, and CUTs.
Transfer Pricing Methods and the Circumstances Leading to
the Use of Those Methods
[§521(b)(2)(D)(iv)]
The TPMs used in APAs executed in 2009 are set forth in
Tables 19 and 20 below:
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TEXT
rise to risk. Relevant economic conditions reviewed often
include the geographic market and the level of the market
in which the functions are performed, and the business
cycle or general economic condition of the industry under
review.
During 2009, the APA Program received numerous in-
quiries about the potential effect of the economic downturn
on existing and pending APAs. On existing APAs, the APA
Program, in consultation with the U.S. Competent Author-
ity, has adopted a general policy not to re-open closed
cases absent a special Critical Assumption on point.10 The
APA Program has dealt with pending APA applications
(whether pending with the U.S. Competent Authority or
the APA Program) on a case-by-case basis. Whether or not
a special ‘‘down-economy adjustment’’ might be appropri-
ate depends on a variety of factors, including whether or
not the tested party and the comparables have been simi-
larly affected by the downturn, the tested party’s historic
risk profile and performance, and a taxpayer’s willingness
to accept a symmetrical adjustment (e.g., in a renewal
APA) when the economy improves. Approaches to the
down economy that have been considered include chang-
ing the APA term, waiting for more current financial data,
using a different set of comparables, and/or applying a
longer testing period.
The APA Program’s evaluation of the functional analysis
also considers the assets or other resources employed by
each controlled party. In this evaluation, each party’s own-
ership or investment in valuable intangible assets is often
an important consideration.
Related Organizations, Trades, or Businesses Whose Prices
or Results Are Tested to Determine Compliance with APA Trans-
fer Pricing Methods
[§521(b)(2)(D)(iii)]
The related organizations, trades, or businesses whose
prices or results are tested to determine compliance with
TPMs prescribed in APAs executed in 2009 are set forth in
Table 18 below:
10
See Table 21 and accompanying text.
Number
31
17
17
7
7
5
5
3
3
3
Table 19: Transfer Pricing Methods Used for Transfers of Tan-
gible and Intangible Property12
12
PLIs used with the Comparable Profit Method of Treas.
Reg. §1.482-5, and as used in these TPM tables, are as follows:
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TEXT
TPM Used
CPM: PLI is operating margin
CPM: PLI is Berry ratio
Unspecified method
Residual profit split
CPM: PLI is return on assets or capital employed
CPM: PLI is markup on total costs
CUT (intangibles only)
Comparable Other profit split profit split
Cost Plus Method (tangibles only)
CPM: PLI is other PLI
CPM: PLI is gross margin
CPM: PLI is markup on other costs
Table 20: Transfer Pricing Methods Used for Services
TPM Used
CPM: PLI is operating profit to total services cost ratio
Services Cost Method: Specified Covered Services
CPM: PLI is operating margin
CPM: PLI is Berry ratio
CPM: PLI is return on assets or capital employed
Cost of Services Plus Method
Services Cost Method: Low Margin Covered Services
Comparable Uncontrolled Services Price Method
(1) operating margin (ratio of operating profit to sales); (2) Berry ratio (ratio of gross profit to operating expenses); (3) gross mar-
gin (ratio of gross profit to sales); (4) markup on total costs (percentage markup on total costs); and (5) rate of return on assets or
capital employed (ratio of operating profit to operating assets).
Discussion
The TPMs used in APAs completed during 2009 were
based on the section 482 regulations. Under Treas. Reg.
§1.482-3, the arm’s length amount for controlled transfers
of tangible property may be determined using the Compa-
rable Uncontrolled Price (CUP) Method, the Resale Price
Method, the Cost Plus Method, the Comparable Profits
Method (CPM), or the Profit Split Method. Under Treas.
Reg. §1.482-4, the arm’s length amount for controlled
transfers of intangible property may be determined using
the Comparable Uncontrolled Transaction (CUT) Method,
the CPM, or the Profit Split Method. An ‘‘Unspecified
Method’’ may be used for transfers of either tangible or in-
tangible property if it provides a more reliable result than
the enumerated methods under the best method rule of
Treas. Reg. §1.482-1(c).
For transfers involving the provision of services, Treas.
Reg. §1.482-2(b) provided that services performed for the
benefit of another member of a controlled group should
bear an arm’s length charge, either deemed to be equal to
the cost of providing the services or an amount that would
have been charged between independent parties. Generally
effective beginning in 2007, Temp. Reg. §1.482-9T provides
that the arm’s length charge for controlled services trans-
actions may be determined under the Services Cost
Method, the Comparable Uncontrolled Services Price
(CUSP) Method, the Gross Services Margin Method, the
Cost of Services Plus Method, the CPM, the Profit Split
Method, or an Unspecified Method. In addition, Treas. Reg.
§1.482-2(a) provides rules concerning the proper treatment
of loans or advances.
On January 5, 2009, the IRS issued new temporary regu-
lations, Treas. Reg. §1.482-7T, which provide rules for
qualified cost sharing arrangements under which the par-
ties agree to share the costs of developing intangibles in
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(Vol. 18, No. 22) 1237
Number
30
14
12
9
7
7
5
3
3
3
3
3
Number
11
4
3
3
3
3
3
3
proportion to their shares of reasonably anticipated ben-
efits. APAs involving cost sharing arrangements generally
address both the method of allocating costs among the par-
ties as well as determining the appropriate amount of the
payment for ‘‘platform contribution transactions’’ (PCTs)
due for the transfer of pre-existing intangibles, and the
commitment of services with embedded intangibles,
among the controlled participants (known as ‘‘buy ins’’ in
the previous cost-sharing regulations). In 2009, the APA
Program completed its recommendations on three or fewer
bilateral cost sharing/PCT cases and sent those on to Com-
petent Authority. In addition, the APA Program is currently
working on nearly ten cases involving cost-sharing/PCTs,
split almost evenly between bilateral and unilateral. The
PCT cases include both initial and subsequent buy-in/buy-
out transactions. The methods used in the completed and
pending PCT cases include valuations based on the income
method, including cases involving a split of the discounted
present value of platform contributions made by two or
more parties, and other types of analyses.
In reviewing the TPMs applicable to transfers of tangible
and intangible property reflected in Table 19, the majority
of the APAs followed the specified methods. However, sev-
eral points should be made. The section 482 regulations
note that for transfers of tangible property, the CUP
Method will generally be the most direct and reliable mea-
sure of an arm’s length price for the controlled transaction
if sufficiently reliable comparable transactions can be iden-
tified. Treas. Reg. §1.482-3(b)(2)(ii)(A). As in earlier years,
it was the experience of the APA Program in 2009, that in
the cases that came into the APA Program, sufficiently re-
liable CUP transactions were difficult to find.
Similar to the CUP Method, for transfers of intangible
property, the CUT Method will generally provide the most
reliable measure of an arm’s length result if sufficiently re-
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liable comparables may be found. Treas. Reg. §1.482-
4(c)(2)(ii). It has generally been difficult to identify exter-
nal comparables, and APAs using the CUT Method tend to
rely on internal transactions between the taxpayer and un-
related parties. In 2009, five Covered Transactions utilized
the CUT TPM.
The Resale Price Method was not applied in 2009. See
Treas. Reg. §1.482-3(c), (d).
The CPM is frequently applied in APAs. That is because
reliable public data on comparable business activities of in-
dependent companies may be more readily available than
potential CUP data, and comparability of resources em-
ployed, functions, risks, and other relevant considerations
are more likely to exist than comparability of product. The
CPM also tends to be less sensitive than other methods to
differences in accounting practices between the tested
party and comparable companies, e.g., classification of ex-
penses as cost of goods sold or operating expenses. Treas.
Reg. §1.482-3(c)(3)(iii)(B) and (d)(3)(iii)(B). In addition,
the degree of functional comparability required to obtain a
reliable result under the CPM is generally less than that re-
quired under the Resale Price Method or the Cost Plus
Method. Lesser functional comparability is required be-
cause differences in functions performed often are re-
flected in operating expenses, and thus taxpayers perform-
ing different functions may have very different gross profit
margins but earn similar levels of operating profit. Treas.
Reg. §1.482-5(c)(2).
Table 19 reflects at least 61 uses of the CPM (with vary-
ing PLIs) in Covered Transactions involving tangible or in-
tangible property. In some APAs, the CPM was also used
concurrently with other methods.
Table 21: Critical Assumptions
Critical Assumptions involving the following:
Material changes to tax and/or financial accounting practices
Material changes to the business
Assets will remain substantially same
Other
Changes in affiliated companies
Material sales fluctuations
Currency fluctuations
Other financial ratios
Discussion
APAs include critical assumptions upon which their re-
spective TPMs depend. A critical assumption is any fact
(whether or not within the 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 assump-
tions might include, for example, a particular mode of con-
ducting business operations, a particular corporate or busi-
ness structure, or a range of expected business volume.
Rev. Proc. 2006-09, §4.05. Failure to meet a critical as-
sumption may render an APA inappropriate or unwork-
able. Most APAs contain only the standard critical assump-
tion language set forth in Appendix B of the Model APA
(Attachment A to this Announcement and Report). Where
appropriate, additional critical assumption language may
be added, but the APA Program generally seeks to limit ad-
ditional critical assumption language to objective, measur-
able benchmarks.
A critical assumption may change or fail to materialize
due to changes in economic circumstances, such as a fun-
damental and dramatic change in the economic conditions
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TEXT
The CPM has proven to be versatile in part because of
the various PLIs that can be used in connection with the
method. Reaching agreement on the appropriate PLI has
been the subject of much discussion in many of the cases,
and it depends heavily on the facts and circumstances.
Some APAs have called for different PLIs to apply to differ-
ent parts of the Covered Transactions or applied a second-
ary PLI as a check against the primary PLI.
The CPM was also used regularly with services as the
Covered Transactions in APAs executed in 2009. There
were at least 14 services Covered Transactions using the
CPM Method with various PLIs according to the specific
facts of the taxpayers involved. At least five services-
related APAs completed in 2009 applied the new Services
Cost Method under the §1.482-9T regulations. Table 20 re-
flects the methods used to determine the arm’s length re-
sults for APAs involving services transactions.
In 2009, nine APAs involving tangible or intangible prop-
erty used the Residual Profit Split Method. Treas. Reg.
§1.482-6(c)(3). In residual profit split cases, routine contri-
butions by the controlled parties are allocated routine mar-
ket returns, and the residual income is allocated among the
controlled taxpayers based upon the relative value of their
contributions of non-routine intangible property to the rel-
evant business activity.
Profit splits have also been used in a number of financial
product APAs in which the primary income-producing
functions are performed in more than one jurisdiction.
Critical Assumptions
[§521(b)(2)(D)(v)]
Critical Assumptions used in APAs executed in 2009 are
described in Table 21 below:
Number of APAs
63
63
15
10
3
3
3
3
of a particular industry. In addition, a critical assumption
may change or fail to materialize due to a taxpayer’s ac-
tions that are initiated for good faith business reasons,
such as a change in business strategy, mode of conducting
operations, or the cessation or transfer of a business seg-
ment or entity covered by the APA.
If a critical assumption has not been met, the APA may
be revised by agreement of the parties. If such an agree-
ment cannot be achieved, the APA is canceled. If a critical
assumption has not been met, the taxpayer must notify and
discuss the APA terms with the Service, and, in the case of
a bilateral APA, competent authority consideration is initi-
ated. Rev. Proc. 2006-09, §§11.05, 11.06.
Sources of Comparables, Selection Criteria, and the Nature
of Adjustments to Comparables and Tested Parties
[§521(b)(2)(D)(v), (vi), and (vii)]
The sources of comparables, selection criteria, and ratio-
nale used in determining the selection criteria for APAs ex-
ecuted in 2009 are described in Tables 22 through 24 be-
low. Various formulas for making adjustments to compa-
rables are included as Attachment B.
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Table 22: Sources of Comparables

Comparable Sources Number of Times This Source Used

Compustat 78
Disclosure 31
No Comparables used 19
Worldscope 15
Other 14
Global Vantage 10
Moody’s 9
Global Symposium 7
Osiris 3
Mergent FIS 3
Japan Accounts and Data on Enterprises (JADE) 3
Orbis 3
Bonds Franchise Guide 3

Table 23: Comparables Selection Criteria

Selection Criteria Considered Number of Times This Criterion Used

Comparable functions 81
Comparable risks 56
Comparable industry 56
Comparable intangibles 33
Comparable products 30
Comparable terms 6

Table 24: Adjustments to Comparables or Tested Parties

Adjustment Number of Times Used

Balance sheet adjustments

Payables 54
Receivables 52
Inventory 52
Property, plant, equipment 4
Other 3
Accounting adjustments
LIFO to FIFO inventory accounting 34
Other 15
Accounting reclassifications (e.g., from COGS to operating expenses) 3
Profit level indicator adjustments (used to ‘‘back into’’ one PLI from another PLI)
Operating expense 3
Other 3
Miscellaneous adjustments
Other 6
Goodwill value or amortization 3
Stock-based compensation 3
Geographic adjustments 3

Discussion a three-part process. First, a pool of companies with poten-

At the core of most APAs are comparables. The APA Pro-
gram works closely with taxpayers to find the best and
most reliable comparables for each Covered Transaction.
In some cases, CUPs or CUTs can be identified. In other
cases, profit data on comparable business activities of inde-
pendent companies are used in applying the CPM or a
Profit Split Method. Generally, in the APA Program’s expe-
rience since 1991, CUPs and CUTs have been most often
derived from the internal transactions of the taxpayer.
For profit-based methods in which comparable business
activities or functions of independent companies are
sought, the APA Program typically has selected them using
tially comparable business activities has been identified
through broad searches. From this pool, companies per-
forming business activities that are clearly not comparable
to those of the tested party have been eliminated through
the use of quantitative and qualitative analyses, i.e., quan-
titative screens and review of business descriptions. Then,
based on a review of available descriptive and financial
data, a set of comparable independent companies has been
finalized. The comparability of the final set has then been
enhanced by adjusting their financial data.
Sources of Comparables

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Comparables used in APAs can be U.S. or foreign, de-
pending on the relevant market, the type of transaction be-
ing evaluated, the availability of relevant data, and the re-
sults of the functional and risk analyses. In general, com-
parables have been located by searching a variety of
databases that provide data on U.S. publicly traded compa-
nies and on a combination of public and private non-U.S.
companies. Table 22 shows the various databases and
other sources used in selecting comparables for the APAs
executed in 2009.
Although comparables were most often identified from
the databases cited in Table 22, in some cases, compa-
rables were found from other sources, such as compa-
rables derived internally from taxpayer transactions with
third parties.
Selecting Comparables
Initial pools of potential comparables generally are de-
rived from the databases using a combination of industry
and keyword identifiers. Then, the pool is refined using a
variety of selection criteria specific to the transaction or
business activity being tested and the TPM being used.
The listed databases allow for searches by industrial
classification, by keywords, or by both. These searches can
yield a number of companies whose business activities may
or may not be comparable to those of the entity being
tested. Therefore, comparables based solely on industry
classification or keyword searches are rarely used in APAs.
Instead, the pool of comparables is examined closely, and
companies are selected based on a combination of screens,
business descriptions, and other information such as that
found in the companies’ Annual Reports to shareholders
and filings with the U.S. Securities and Exchange Commis-
sion (SEC), company websites, and investment analyst re-
ports.
Business activities of independent companies generally
must meet certain basic comparability criteria to be consid-
ered comparable. The independent company’s functions,
risks, and economic conditions, and the property (product
or intangible) and services associated with the company’s
business activities, must be comparable to those involved
in the Covered Transaction. Determining comparability re-
quires judgment – the goal has been to use comparability
criteria restrictive enough to eliminate business activities
that are not comparable, but yet not so restrictive as to
leave no comparables remaining. The APA Program nor-
mally has begun with relatively strict comparability criteria
and then has relaxed them slightly if necessary to derive a
pool of reliable comparables. A determination on the ap-
propriate size of the comparables set, as well as the busi-
ness activities that comprise the set, is highly fact-specific
and depends on the reliability of the results.
In addition, the APA Program, consistent with the sec-
tion 482 regulations, generally has looked at the results of
comparables over a multi-year period (the analysis win-
dow). Often this has been a three-year or a five-year period,
but other periods are sometimes used depending on the
circumstances of the controlled transaction. Using a
shorter period might result in the inclusion of comparables
in different stages of economic development or use of
atypical years of a comparable due to cyclical fluctuations
in business conditions. The economic downturn has fo-
cused particular attention on the appropriate analysis win-
dow for APAs with terms that include 2008 and 2009, given
the different economic conditions that may have con-
Table 25: Comparability and Financial Distress Screens
Comparability/Financial Distress Screen
Comparability screens used
R&D/sales
Foreign sales/total sales
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TEXT
fronted the comparables during the years comprising the
analysis window, which typically lags behind the years cov-
ered by an APA (e.g., the comparables results for 2004-08
may be used to test the taxpayer’s results under the APA
from 2008-2012). As noted in the discussion following
Table 17, the APA Program has been dealing with the eco-
nomic downturn in various ways, including waiting for
more current comparables’ financial data to develop a
more contemporaneous analysis window.
Many Covered Transactions have been tested with com-
parables that have been chosen using additional criteria
and/or screens. These include sales level criteria and tests
for financial distress and product comparability. These
common selection criteria and screens have been used to
increase the overall comparability of a group of companies
and as a basis for further research. The sales level screen,
for example, has been used to remove companies that, due
to their smaller size, might face fundamentally different
economic conditions from those of the transaction or busi-
ness activities being tested. In addition, APA analyses have
incorporated selection criteria designed to identify and re-
move companies experiencing ‘‘financial distress’’ because
of concerns that companies in financial distress face un-
usual circumstances and operational constraints that ren-
der them not comparable to the business activity being
tested. These ‘‘financial distress’’ criteria may include an
unfavorable auditor’s opinion, bankruptcy, failure to com-
ply with financial obligations (e.g., debt covenants), and, in
certain circumstances, operating losses in a given number
of years.
An additional important class of selection criteria is the
development and ownership of intangible property. Most
often, comparables are sought to test the results of a busi-
ness activity that does not employ significant intangible as-
sets or engage in intangible development. Thus, for ex-
ample, in some cases in which the tested business activity
is manufacturing conducted by a controlled entity that
does not own significant manufacturing intangibles or con-
duct R&D, several criteria have been used to ensure that
the comparables similarly do not own significant intan-
gibles or conduct R&D. These selection criteria have in-
cluded determining the importance of patents to a com-
pany or screening for R&D expenditures as a percentage of
sales. Similar selection criteria may be applied to ensure,
where appropriate, that the comparables do not own or de-
velop significant marketing intangibles such as valuable
trademarks. Again, quantitative screens related to identify-
ing comparables with significant intangible property gen-
erally have been used in conjunction with an understand-
ing of the comparable derived from publicly available busi-
ness information.
Selection criteria relating to asset comparability and op-
erating expense comparability have also been used at
times. A screen of property, plant, and equipment (PP&E)
as a percentage of sales or assets, combined with a reading
of a company’s SEC filings, has been used to help ensure
that distributors (generally lower PP&E) were not com-
pared with manufacturers (generally higher PP&E), re-
gardless of their industry classification. Similarly, a test in-
volving the ratio of operating expenses to sales has helped
to determine whether a company undertakes a significant
marketing and distribution function.
Table 25 shows the number of times various screens
were used in APAs executed in 2009:
Times Used
40
26
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TEXT
Sales
Other
Government sales
Non-startup or start-up
PP&E total assets
PP&E/sales
SG&A/sales
Financial distress
Bankruptcy
Unfavorable auditor’s opinion
Losses in one or more years
Other
Adjusting Comparables
After the comparables have been selected, the regula-
tions require that ‘‘[i]f there are material differences be-
tween the controlled and uncontrolled transactions, adjust-
ments must be made if the effect of such differences on
prices or profits can be ascertained with sufficient accuracy
to improve the reliability of the results.’’ Treas. Reg.
§1.482-1(d)(2). In almost all cases involving income-
statement-based PLIs used in the CPM or the Residual
Profit Split Method, certain ‘‘asset intensity’’ or ‘‘balance
sheet’’ adjustments for factors that have generally agreed-
upon effects on profits are calculated. In addition, in spe-
cific cases, additional adjustments are performed to im-
prove reliability.
The most common balance sheet adjustments used in
APAs are adjustments for differences in accounts receiv-
able, inventories, and accounts payable. The APA Program
generally has required adjustments for receivables, inven-
tory, and payables based on the principle that there is an
opportunity cost for holding assets. For these assets, it is
generally assumed that the cost is appropriately measured
by the interest rate on short-term debt.
To compare the profits of two business activities with dif-
ferent relative levels of receivables, inventory, or payables,
the APA Program estimates the carrying costs of each item
and adjusts profits accordingly. Although different formu-
las have been used in specific APA cases, Attachment B
presents one set of formulas used in many APAs. Underly-
ing these formulas are the notions that (1) balance sheet
items normally should be expressed as mid-year averages,
(2) formulas should try to avoid using data items that are
being tested by the TPM (for example, if sales are con-
trolled, then the denominator of the balance sheet ratio
should not be sales), (3) a short term interest rate should
be used, and (4) an interest factor should recognize the av-
erage holding period of the relevant asset. As in 2007 and
2008, during the course of 2009, the APA Program used an
interest rate equal to LIBOR (3 months) plus 200 basis
points for purposes of calculating adjustments for accounts
receivable and accounts payable for U.S. companies in
many cases. In addition, the APA Program often used an
interest rate equal to the Corporate Bonds (Moody’s) Baa
rate for purposes of calculating inventory adjustments for
Table 26: Ranges and Targets13
Type of Range
Interquartile range
Specific point within CPM range (not floor or ceiling)
Cost-only services
13
The numbers do not include TPMs with cost or cost-plus methodologies.
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(Vol. 18, No. 22) 1241
26
22
7
5
3
3
3
51
34
10
6
U.S. companies. However, the facts and circumstances sur-
rounding a given case will ultimately determine the reli-
ability of making balance sheet adjustments and the selec-
tion of the most reliable interest rate.
The APA Program also requires that financial data be
compared on a consistent accounting basis. For example,
although financial statements may be prepared on a first-in
first-out (FIFO) basis, cross-company comparisons are less
meaningful if one or more of the comparables use last-in
first-out (LIFO) inventory accounting methods. This adjust-
ment directly affects costs of goods sold and inventories,
and therefore affects both profitability measures and inven-
tory adjustments.
In some cases, the APA Program has made an adjust-
ment to account for differences in relative levels of PP&E
between a tested business activity and the comparables.
Ideally, comparables and the business activity being tested
will have fairly similar relative levels of PP&E, since major
differences can be a sign of fundamentally different func-
tions and risks. Typically, the PP&E adjustment is made
using a medium-term interest rate. During the course of
2009, the APA Program often used the Corporate Bonds
(Moody’s) Baa rate as the interest rate for purposes of cal-
culating adjustments for inventory and PP&E for U.S. com-
panies. Again, however, the facts and circumstances sur-
rounding a given case will ultimately determine the reli-
ability of making balance sheet adjustments and the
selection of the most reliable interest rate.
Additional adjustments used less frequently include
those for differences in other balance sheet items, operat-
ing expenses, R&D, or currency risk. Accounting adjust-
ments, such as reclassifying items from cost of goods sold
to operating expenses, are also made when warranted to
increase reliability. Often, data are not available for both
the controlled and uncontrolled transactions in sufficient
detail to allow for these types of adjustments.
The adjustments made to comparables or tested parties
in APAs executed in 2009 are reflected in Table 24 above.
Ranges, Targets, and Adjustment Mechanisms
[§521(b)(2)(D)(viii)–(ix)]
The types of ranges, targets, and adjustment mecha-
nisms used in APAs executed in 2009 are described in
Tables 26 and 27 below.
Number
50
21
11
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Other 9
Specific point (royalty) 7
Full range 3
Ceiling (i.e., result must be no more than x) 3

Table 27: Adjustments When Outside the Range

Adjustment mechanism Number

Taxpayer makes an adjustment: to specified point or royalty rate 40

Taxpayer makes an adjustment: to closest edge of multi-year average 29
Taxpayer makes an adjustment based on subsequent Competent Authority negotiations 6
Taxpayer makes an adjustment: to median of multi-year average 5
Taxpayer makes an adjustment: to closest edge of single year 5
Taxpayer makes an adjustment: to a specific dollar amount 3
Taxpayer makes an adjustment: to median of current year 3

Discussion
Treas. Reg. §1.482-1(e)(1) states that sometimes a pric-
ing method will yield ‘‘a single result that is the most reli-
able measure of an arm’s length result.’’ Sometimes, how-
ever, a method may yield ‘‘a range of reliable results,’’
called the ‘‘arm’s length range.’’ A taxpayer whose results
fall within the arm’s length range will not be subject to ad-
justment.
Under Treas. Reg. §1.482-1(e)(2)(i), such a range is nor-
mally derived by considering a set of more than one com-
parable uncontrolled transaction of similar comparability
and reliability. If these comparables are of very high qual-
ity, as defined in the section 482 regulations, then under
Treas. Reg. §1.482-1(e)(2)(iii)(A), the arm’s length range
includes the results of all of the comparables (from the
least to the greatest). However, the APA Program has only
rarely identified cases meeting the requirements for the full
range. If the comparables are of lesser quality, then under
Treas. Reg. §1.482-1(e)(2)(iii)(B), ‘‘the reliability of the
analysis must be increased, when it is possible to do so, by
adjusting the range through application of a valid statisti-
cal method to the results of all of the uncontrolled compa-
rables.’’ One such method, the ‘‘interquartile range,’’ is or-
dinarily acceptable, although a different statistical method
‘‘may be applied if it provides a more reliable measure.’’
The interquartile range is defined as, roughly, the range
from the 25th to the 75th percentile of the comparables’ re-
sults. See Treas. Reg. §1.482-1(e)(2)(iii)(C). The interquar-
tile range was used 50 times in 2009.
Twenty-eight Covered Transactions reflected on Table
26 were tested against a single, specific result. Some APAs
– deliberately infrequent – specify not a point or a range,
but a ‘‘floor’’ or a ‘‘ceiling.’’ When a floor is used, the tested
party’s result must be greater than or equal to some par-
ticular value. When a ceiling is used, the tested party’s re-
sult must be less than or equal to some particular value.
Three or fewer APAs executed in 2009 used a floor or a
ceiling.
Some APAs look to a tested party’s results over a period
of years (multi-year averaging) to determine whether a tax-
payer has complied with the APA. In 2009, rolling multi-
year averaging was used for four Covered Transactions. All
four of these Covered Transactions used four-year aver-
ages. Two Covered Transactions used cumulative multi-
year averaging, while 42 Covered Transactions used term
averages and seven Covered Transactions used partial-
term averages.
Adjustments
Where a taxpayer’s actual transactions do not produce
results that conform to the TPM, a taxpayer must nonethe-
less report its taxable income in an amount consistent with
the TPM (an APA primary adjustment), as further dis-
cussed in §11.02 of Rev. Proc. 2006-09. When the TPM
specifies an arm’s length range, an APA primary adjust-
ment is necessary only if the taxpayer’s actual transac-
tional result falls outside the specified range.
Under Treas. Reg. §1.482-1(e)(3), if a taxpayer’s results
fall outside the arm’s length range, the Service may adjust
the result ‘‘to any point within the arm’s length range.’’ Ac-
cordingly, an APA may permit or require a taxpayer to
make an adjustment after the year’s end to put the year’s
results within the range, or at the point specified by the
APA. Similarly, to enforce the terms of an APA, the Service
may make such an adjustment. When the APA specifies a
range, the adjustment is sometimes to the closest edge of
the range, and sometimes to another point such as the me-
dian of the interquartile range. Depending on the facts of
each case, automatic adjustments are not always permit-
ted. APAs may specify that in such a case there will be a
negotiation between the competent authorities involved to
determine whether and to what extent an adjustment
should be made. APAs may permit automatic adjustments
unless the result is far outside the range specified in the
APA. Thus, APAs provide flexibility and efficiency, permit-
ting adjustments when normal business fluctuations and
uncertainties push the result somewhat outside the range.
APA Term and Rollback Lengths
[§521(b)(2)(D)(x)]
The various term lengths for APAs executed in 2009 are
set forth in Table 28 below:
Table 28: Terms of APAs

APA Term in Years Number of APAs

3 3
4 8
5 27
6 13
7 4
8 7

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9 3
10 or more 3

The number of rollback years to which an APA TPM was

applied in 2009 is set forth in Table 29 below:

Table 29: Number of Years Covered by Rollback of APA TPM

Number of Rollback Years Number of APAs
1 3
2 5
3 7
4 5
5 or more 3

Together, Tables 28 and 29 indicate that the 63 APAs
completed in 2009 covered more than 410 taxable years. In
terms of dollar value, 46 of the 63 completed APAs in-
volved Covered Transactions exceeding $100 million per
year, with 34 APAs covering transactions exceeding $250
million per year. Combining the total covered years and the
total dollar-value of Covered Transactions represents one
measure of the effectiveness of the APA Program.
Nature of Documentation Required
[§521(b)(2)(D)(xi)]
APAs executed in 2009 required that taxpayers provide
various documents with their annual reports. These docu-
ments are described in Table 30 below:

Table 30: Nature of Documentation Required

Documentation Number

Statement identifying all material differences between Taxpayer’s business operations during APA Year and 63
description of Taxpayer’s business operations contained in Taxpayer’s request for APA, or if there have been no
such material differences, a statement to that effect.
Statement of all material changes in the Taxpayer’s accounting methods and classifications, and methods of 63
estimation, from those described or used in Taxpayer’s request for the APA. If there has been no material
change in accountings methods and classifications or methods of estimation, a statement to that effect.
Description of any failure to meet Critical Assumptions or, if there have been none, a statement to that effect. 63
Copy of the APA 63
Financial analysis demonstrating Taxpayer’s compliance with TPM. 63
Organizational chart 63
Any change to the taxpayer notice information in section 14 of the APA. 63
The amount, reason for, and financial analysis of any compensating adjustment under Paragraph 4 of Appendix A 63
and Rev. Proc. 2006-9, §11.02(3), for the APA year, including but not limited to: the amounts paid or received
by each affected entity; the character (such as capital or ordinary expense) and country source of the funds
transferred, and the specific line item(s) of any affected U.S. tax return; and any change to any entity
classification for federal income tax purposes of any member of the Taxpayer’s group that is relevant to the
APA.
The amounts, description, reason for, and financial analysis of any book-tax difference relevant to the TPM for 63
the APA Year, as reflected on Schedule M-1 or Schedule M-3 of the U.S. return for the APA Year.
Financial Statements and any necessary account detail to show compliance with the TPM, with a copy of the 63
opinion from an independent CPA required by paragraph 5(f) of the APA.
Certified public accountant’s opinion that financial statements present fairly the financial position of Taxpayer 5
and the results of its operations, in accordance with a foreign GAAP.
CPA review of Taxpayer’s financial statements 5
Other 4
Financial statements prepared in accordance with a foreign GAAP. 3
Pertinent intercompany agreements 3
Various work papers 3

Approaches for Sharing of Currency or Other Risks
[§521(b)(2)(D)(xii)]
During 2009, there were 30 tested parties that faced fi-
nancial risks, including interest rate and currency risks. In
appropriate cases, APAs may provide specific approaches
for dealing with currency risk, such as adjustment mecha-
nisms and/or critical assumptions.
Efforts to Ensure Compliance with APAs
[§521(b)(2)(F)]
As described in Rev. Proc. 2006-09, §11.01, APA taxpay-
ers are required to file annual reports to demonstrate com-

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pliance with the terms and conditions of the APA. The fil-
ing and review of annual reports is a critical part of the
APA process. Through annual report review, the APA Pro-
gram monitors taxpayer compliance with the APA on a
contemporaneous basis. Annual report review provides
current information on the success or problems associated
with the various TPMs adopted in the APA process.
All reports received by the APA Program are assigned to
a designated APA team leader. Whenever possible, annual
report reviews are assigned to the team leader who negoti-
Table 31: Statistics of Annual Reports
Number of APA annual reports pending as of December 31, 2009
Number of APA annual reports closed in 2009
Number of APA annual reports requiring adjustment in 2009
Number of taxpayers involved in adjustments
Number of APA annual report cases over one-year old
Attachment A
Model APA - Based on Revenue Procedure 2006-9
ADVANCE PRICING AGREEMENT
between
[Insert Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
ADVANCE PRICING AGREEMENT
between
[Insert Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
PARTIES
The Parties to this Advance Pricing Agreement (APA)
are the Internal Revenue Service (IRS) and [Insert Taxpay-
er’s Name], EIN ________.
RECITALS
[Insert Taxpayer Name] is the common parent of an af-
filiated group filing consolidated U.S. tax returns (collec-
tively referred to as ‘‘Taxpayer’’), and is entering into this
APA on behalf of itself and other members of its consoli-
dated group.
Taxpayer’s principal place of business is [City, State].
[Insert general description of taxpayer and other relevant
parties].
This APA contains the Parties’ agreement on the best
method for determining arm’s-length prices of the Covered
Transactions under I.R.C. section 482, any applicable tax
treaties, and the Treasury Regulations.
\If renewal, add\ [Taxpayer and IRS previously entered
into an APA covering taxable years ending _____ to ______,
executed on ________.]
AGREEMENT
The Parties agree as follows:
1. Covered Transactions. This APA applies to the Cov-
ered Transactions, as defined in Appendix A.
2. Transfer Pricing Method. Appendix A sets forth the
Transfer Pricing Method (TPM) for the Covered Transac-
tions.
3. Term. This APA applies to Taxpayer’s taxable years
ending __________ through ________ (APA Term).
4. Operation.
a. Revenue Procedure 2006-9 governs the interpretation,
legal effect, and administration of this APA.
b. Nonfactual oral and written representations, within
the meaning of sections 10.04 and 10.05 of Revenue Proce-
dure 2006-9 (including any proposals to use particular
TPMs), made in conjunction with the APA Request consti-
tute statements made in compromise negotiations within
the meaning of Rule 408 of the Federal Rules of Evidence.
5. Compliance.
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
TEXT
ated the case, since that person will already be familiar
with the relevant facts and terms of the agreement. Other
team leaders and economists may assist the assigned team
leader as well. Once received by the APA Program, the an-
nual report is also sent to the field personnel with exam ju-
risdiction over the taxpayer.
The statistics for the review of APA annual reports are
reflected in Table 31 below. As of December 31, 2009, there
were 259 pending annual reports. In 2009, 414 reports
were closed.
259
414
7
7
186
a. Taxpayer must report its taxable income in an amount
that is consistent with Appendix A and all other require-
ments of this APA on its timely filed U.S. Return. However,
if Taxpayer’s timely filed U.S. Return for an APA Year is
filed prior to, or no later than 60 days after, the effective
date of this APA, then Taxpayer must report its taxable in-
come for that APA Year in an amount that is consistent
with Appendix A and all other requirements of this APA ei-
ther on the original U.S. Return or on an amended U.S. Re-
turn filed no later than 120 days after the effective date of
this APA, or through such other means as may be specified
herein.
b. \Insert when U.S. Group or Foreign Group contains
more than one member.\ [This APA addresses the arm’s-
length nature of prices charged or received in the aggre-
gate between Taxpayer and Foreign Participants with re-
spect to the Covered Transactions. Except as explicitly pro-
vided, this APA does not address and does not bind the IRS
with respect to prices charged or received, or the relative
amounts of income or loss realized, by particular legal en-
tities that are members of U.S. Group or that are members
of Foreign Group.]
c. For each taxable year covered by this APA (APA Year),
if Taxpayer complies with the terms and conditions of this
APA, then the IRS will not make or propose any allocation
or adjustment under I.R.C. section 482 to the amounts
charged in the aggregate between Taxpayer and Foreign
Participant[s] with respect to the Covered Transactions.
d. If Taxpayer does not comply with the terms and con-
ditions of this APA, then the IRS may:
i. enforce the terms and conditions of this APA and make
or propose allocations or adjustments under I.R.C. section
482 consistent with this APA;
ii. cancel or revoke this APA under section 11.06 of Rev-
enue Procedure 2006-9; or
iii. revise this APA, if the Parties agree.
e. Taxpayer must timely file an Annual Report (an origi-
nal and four copies) for each APA Year in accordance with
Appendix C and section 11.01 of Revenue Procedure
2006-9. Taxpayer must file the Annual Report for all APA
Years through the APA Year ending [insert year] by [insert
date]. Taxpayer must file the Annual Report for each sub-
sequent APA Year by [insert month and day] immediately
following the close of that APA Year. (If any date falls on a
weekend or holiday, the Annual Report shall be due on the
next date that is not a weekend or holiday.) The IRS may
request additional information reasonably necessary to
clarify or complete the Annual Report. Taxpayer will pro-
vide such requested information within 30 days. Additional
time may be allowed for good cause.
TMTR ISSN 1063-2069
TEXT
f. The IRS will determine whether Taxpayer has com-
plied with this APA based on Taxpayer’s U.S. Returns, Fi-
nancial Statements, and other APA Records, for the APA
Term and any other year necessary to verify compliance.
For Taxpayer to comply with this APA, an independent cer-
tified public accountant must \use the following or an alter-
native\ render an opinion that Taxpayer’s Financial State-
ments present fairly, in all material respects, Taxpayer’s fi-
nancial position under U.S. GAAP.
g. In accordance with section 11.04 of Revenue Proce-
dure 2006-9, Taxpayer will (1) maintain its APA Records,
and (2) make them available to the IRS in connection with
an examination under section 11.03. Compliance with this
subparagraph constitutes compliance with the record-
maintenance provisions of I.R.C. sections 6038A and
6038C for the Covered Transactions for any taxable year
during the APA Term.
h. The True Taxable Income within the meaning of Trea-
sury Regulations sections 1.482-1(a)(1) and (i)(9) of a
member of an affiliated group filing a U.S. consolidated re-
turn will be determined under the I.R.C. section 1502 Trea-
sury Regulations.
i. \Optional for US Parent Signatories\ To the extent that
Taxpayer’s compliance with this APA depends on certain
acts of Foreign Group members, Taxpayer will ensure that
each Foreign Group member will perform such acts.
6. Critical Assumptions. This APA’s critical assumptions,
within the meaning of Revenue Procedure 2006-9, section
4.05, appear in Appendix B. If any critical assumption has
not been met, then Revenue Procedure 2006-9, section
11.06, governs.
7. Disclosure. This APA, and any background informa-
tion related to this APA or the APA Request, are: (1) con-
sidered ‘‘return information’’ under I.R.C. section
6103(b)(2)(C); and (2) not subject to public inspection as a
‘‘written determination’’ under I.R.C. section 6110(b)(1).
Section 521(b) of Pub. L. 106-170 provides that the Secre-
tary of the Treasury must prepare a report for public dis-
closure that includes certain specifically designated infor-
mation concerning all APAs, including this APA, in a form
that does not reveal taxpayers’ identities, trade secrets, and
proprietary or confidential business or financial informa-
tion.
8. Disputes. If a dispute arises concerning the interpreta-
tion of this APA, the Parties will seek a resolution by the
IRS Associate Chief Counsel (International) to the extent
reasonably practicable, before seeking alternative rem-
edies.
9. Materiality. In this APA the terms ‘‘material’’ and ‘‘ma-
terially’’ will be interpreted consistently with the definition
of ‘‘material facts’’ in Revenue Procedure 2006-9, section
11.06(4).
10. Section Captions. This APA’s section captions, which
appear in italics, are for convenience and reference only.
The captions do not affect in any way the interpretation or
application of this APA.
11. Terms and Definitions. Unless otherwise specified,
terms in the plural include the singular and vice versa. Ap-
pendix D contains definitions for capitalized terms not
elsewhere defined in this APA.
12. Entire Agreement and Severability. This APA is the
complete statement of the Parties’ agreement. The Parties
will sever, delete, or reform any invalid or unenforceable
provision in this APA to approximate the Parties’ intent as
nearly as possible.
13. Successor in Interest. This APA binds, and inures to
the benefit of, any successor in interest to Taxpayer.
14. Notice. Any notices required by this APA or Revenue
Procedure 2006-9 must be in writing. Taxpayer will send
notices to the IRS at the address and in the manner set
forth in Revenue Procedure 2006-9, section 4.11. The IRS
will send notices to:
Taxpayer Corporation
Attn: Jane Doe, Sr. Vice President (Taxes)
1000 Any Road
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1245
Any City, USA 10000
(phone: _________)
15. Effective Date and Counterparts. This APA is effec-
tive starting on the date, or later date of the dates, upon
which all Parties execute this APA. The Parties may ex-
ecute this APA in counterparts, with each counterpart con-
stituting an original.
WITNESS,
The Parties have executed this APA on the dates below.
[Taxpayer Name in all caps]
By: ___________________________ Date: _______________,
20___
Jane Doe
Sr. Vice President (Taxes)
IRS
By: ___________________________ Date: _______________,
20___
Craig A. Sharon
Director, Advance Pricing Agreement Program
APPENDIX A
COVERED TRANSACTIONS AND TRANSFER PRICING
METHOD (TPM)
1. Covered Transactions.
[Define the Covered Transactions.]
2. TPM.
\Note: If appropriate, adapt language from the following
examples.\
[The Tested Party is __________.]
s CUP Method
The TPM is the comparable uncontrolled price (CUP)
method. The Arm’s Length Range of the price charged for
_________ is between _______ and ___________ per unit.
s CUT Method
The TPM is the CUT Method. The Arm’s Length Range
of the royalty charged for the license of ______is between
____% and ___ % of [Taxpayer’s, Foreign Participants’, or
other specified party’s] Net Sales Revenue. [Insert defini-
tion of net sales revenue or other royalty base.]
s Resale Price Method (RPM)
The TPM is the resale price method (RPM). The Tested
Party’s Gross Margin for any APA Year is defined as fol-
lows: the Tested Party’s gross profit divided by its sales
revenue (as those terms are defined in Treasury Regula-
tions section 1.482-5(d)(1) and (2)) for that APA Year. The
Arm’s Length Range is between ____% and ___ %, and the
Median of the Arm’s Length Range is ___%.
s Cost Plus Method
The TPM is the cost plus method. The Tested Party’s
Cost Plus Markup is defined as follows for any APA Year:
the Tested Party’s ratio of gross profit to production costs
(as those terms are defined in Treasury Regulations section
1.482-3(d)(1) and (2)) for that APA Year. The Arm’s Length
Range is between ___% and ___%, and the Median of the
Arm’s Length Range is ___%.
s CPM with Berry Ratio PLI
The TPM is the comparable profits method (CPM). The
profit level indicator is a Berry Ratio. The Tested Party’s
Berry Ratio is defined as follows for any APA Year: the
Tested Party’s gross profit divided by its operating ex-
penses (as those terms are defined in Treasury Regulations
section 1.482-5(d)(2) and (3)) for that APA Year. The Arm’s
Length Range is between ____ and ___, and the Median of
the Arm’s Length Range is ___.
s CPM using an Operating Margin PLI
The TPM is the comparable profits method (CPM). The
profit level indicator is an operating margin. The Tested
Party’s Operating Margin is defined as follows for any APA
Year: the Tested Party’s operating profit divided by its
sales revenue (as those terms are defined in Treasury
Regulations section 1.482-5(d)(1) and (4)) for that APA
Year. The Arm’s Length Range is between ____% and ___
%, and the Median of the Arm’s Length Range is ___%.
s CPM using a Three-year Rolling Average Operating Mar-
gin PLI
BNA TAX 4-8-10
1246 (Vol. 18, No. 22)
The TPM is the comparable profits method (CPM). The
profit level indicator is an operating margin. The Tested
Party’s Three-Year Rolling Average operating margin is de-
fined as follows for any APA Year: the sum of the Tested
Party’s operating profit (within the meaning of Treasury
Regulations section 1.482-5(d)(4) for that APA Year and
the two preceding years, divided by the sum of its sales rev-
enue (within the meaning of Treasury Regulations section
1.482-5(d)(1)) for that APA Year and the two preceding
years. The Arm’s Length Range is between ____% and
____%, and the Median of the Arm’s Length Range is ___%.
s Residual Profit Split Method
The TPM is the residual profit split method. [Insert de-
scription of routine profit level determinations and re-
sidual profit-split mechanism].
[Insert additional provisions as needed.]
3. Application of TPM.
For any APA Year, if the results of Taxpayer’s actual
transactions produce a [price per unit, royalty rate for the
Covered Transactions] [or] [Gross Margin, Cost Plus
Markup, Berry Ratio, Operating Margin, Three-Year Roll-
ing Average Operating Margin for the Tested Party] within
the Arm’s Length Range, then the amounts reported on
Taxpayer’s U.S. Return must clearly reflect such results.
For any APA year, if the results of Taxpayer’s actual
transactions produce a [price per unit, royalty rate] [or]
[Gross Margin, Cost Plus Markup, Berry Ratio, Operating
Margin, Three-Year Rolling Average Operating Margin for
the Tested Party] outside the Arm’s Length Range, then
amounts reported on Taxpayer’s U.S. Return must clearly
reflect an adjustment that brings the [price per unit, royalty
rate] [or] [Tested Party’s Gross Margin, Cost Plus Markup,
Berry Ratio, Operating Margin, Three-Year Rolling Aver-
age Operating Margin] to the Median.
For purposes of this Appendix A, the ‘‘results of Taxpay-
er’s actual transactions’’ means the results reflected in Tax-
payer’s and Tested Party’s books and records as computed
under U.S. GAAP [insert another relevant accounting stan-
dard if applicable], with the following adjustments:
(a) [The fair value of stock-based compensation as dis-
closed in the Tested Party’s audited financial statements
shall be treated as an operating expense]; and
(b) To the extent that the results in any prior APA Year
are relevant (for example, to compute a multi-year aver-
age), such results shall be adjusted to reflect the amount of
any adjustment made for that prior APA Year under this
Appendix A.
4. APA Revenue Procedure Treatment
If Taxpayer makes a primary adjustment under the terms
of this Appendix A, Taxpayer may elect APA Revenue Pro-
cedure Treatment in accordance with section 11.02(3) of
Revenue Procedure 2006-9.
[Insert additional provisions as needed.]
APPENDIX B
CRITICAL ASSUMPTIONS
This APA’s critical assumptions are:
1. The business activities, functions performed, risks as-
sumed, assets employed, and financial and tax accounting
methods and classifications [and methods of estimation] of
Taxpayer in relation to the Covered Transactions will re-
main materially the same as described or used in Taxpay-
er’s APA Request. A mere change in business results will
not be a material change.
[Insert additional provisions as needed.]
APPENDIX C
APA RECORDS AND ANNUAL REPORT
APA RECORDS
The APA Records will consist of:
1. All documents listed below for inclusion in the Annual
Report, as well as all documents, notes, work papers,
records, or other writings that support the information pro-
vided in such documents.
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
TEXT
ANNUAL REPORT
The Annual Report will include two copies of a properly
completed APA Annual Report Summary in the form of Ex-
hibit E to this APA, one copy of the form bound with, and
one copy bound separately from, the rest of the Annual Re-
port. In addition, the Annual Report will include a table of
contents and the information and exhibits identified below,
organized as follows.
1. Statements that fully identify, describe, analyze, and
explain:
a. All material differences between any of the U.S. Enti-
ties’ business operations (including functions, risks as-
sumed, markets, contractual terms, economic conditions,
property, services, and assets employed) during the APA
Year and the description of the business operations con-
tained in the APA Request. If there have been no material
differences, the Annual Report will include a statement to
that effect.
b. All material changes in the U.S. Entities’ accounting
methods and classifications, and methods of estimation,
from those described or used in Taxpayer’s request for this
APA. If any such change was made to conform to changes
in U.S. GAAP (or other relevant accounting standards),
Taxpayer will specifically identify such change. If there has
been no material change in accounting methods and clas-
sifications or methods of estimation, the Annual Report
will include a statement to that effect.
c. Any change to the Taxpayer notice information in sec-
tion 14 of this APA.
d. Any failure to meet any critical assumption. If there
has been no failure, the Annual Report will include a state-
ment to that effect.
e. Any change to any entity classification for federal in-
come tax purposes (including any change that causes an
entity to be disregarded for federal income tax purposes)
of any Worldwide Group member that is a party to the Cov-
ered Transactions or is otherwise relevant to the TPM.
f. The amount, reason for, and financial analysis of any
compensating adjustments under paragraph 4 of Appendix
A and Revenue Procedure 2006-9, section 11.02(3), for the
APA Year, including but not limited to:
i. the amounts paid or received by each affected entity;
ii. the character (such as capital, ordinary, income, ex-
pense) and country source of the funds transferred, and
the specific affected line item(s) of any affected U.S. Re-
turn; and
iii. the date(s) and means by which the payments are or
will be made.
g. The amounts, description, reason for, and financial
analysis of any book-tax difference relevant to the TPM for
the APA Year, as reflected on Schedule M-1 or Schedule
M-3 of the U.S. Return for the APA Year.
2. The Financial Statements, and any necessary account
detail to show compliance with the TPM, with a copy of the
independent certified public accountant’s opinion required
by paragraph 5(f) of this APA.
3. A financial analysis that reflects Taxpayer’s TPM cal-
culations for the APA Year. The calculations must recon-
cile with and reference the Financial Statements in suffi-
cient account detail to allow the IRS to determine whether
Taxpayer has complied with the TPM.
4. An organizational chart for the Worldwide Group, re-
vised annually to reflect all ownership or structural
changes of entities that are parties to the Covered Transac-
tions or are otherwise relevant to the TPM.
5. A copy of the APA.
APPENDIX D
DEFINITIONS
The following definitions control for all purposes of this
APA. The definitions appear alphabetically below:
TMTR ISSN 1063-2069
TEXT (Vol. 18, No. 22) 1247

Term Definition
Annual Report A report within the meaning of Revenue Procedure 2006-9, section 11.01.
APA This Advance Pricing Agreement, which is an ‘‘advance pricing agreement’’ within the meaning of Rev-
enue Procedure 2006-9, section 2.04.
APA Records The records specified in Appendix C.
APA Request Taxpayer’s request for this APA dated _________, including any amendments or supplemental or addi-
tional information thereto.
Covered Transaction(s) This term is defined in Appendix A.
Financial Statements Financial statements prepared in accordance with U.S. GAAP and stated in U.S. dollars.
Foreign Group Worldwide Group members that are not U.S. persons.
Foreign Participants [name the foreign entities involved in Covered Transactions].
I.R.C. The Internal Revenue Code of 1986, 26 U.S.C., as amended.
Pub. L. 106-170 The Ticket to Work and Work Incentives Improvement Act of 1999.
Revenue Procedure 2006-9 Rev. Proc. 2006-9, 2006-1 C.B. 278.
Transfer Pricing Method (TPM) A transfer pricing method within the meaning of Treasury Regulations section 1.482-1(b) and Revenue
Procedure 2006-9, section 2.04.
U.S. GAAP U.S. generally-accepted accounting principles.
U.S. Group Worldwide Group members that are U.S. persons.
U.S. Return For each taxable year, the ‘‘returns with respect to income taxes under subtitle A’’ that Taxpayer must
‘‘make’’ in accordance withI.R.C. section 6012. \Or substitute for partnership: For each taxable year,
the ‘‘return’’ that Taxpayer must ‘‘make’’ in accordance withI.R.C. section 6031.\
Worldwide Group Taxpayer and all organizations, trades, businesses, entities, or branches (whether or not incorporated,
organized in the United States, or affiliated) owned or controlled directly or indirectly by the same inter-
ests.

APPENDIX E AR = average trade accounts receivable, net of allow-

APA ANNUAL REPORT SUMMARY FORM ance for bad debt
The APA Annual Report Summary on the next page is a cogs = cost of goods sold
required APA Record. The APA Team Leader has supplied INV = average inventory, stated on FIFO basis
some of the information requested on the form. Taxpayer opex = operating expenses (general, sales, administra-
is to supply the remaining information requested by the tive, and depreciation expenses)
form and submit the form as part of its Annual Report. PPE = property, plant, and equipment, net of accumu-
Attachment B lated depreciation
EXAMPLE FORMULAS FOR BALANCE SHEET ADJUSTMENTS sales = net sales
h = average accounts payable or trade accounts receiv-
The formulas below provide examples of the balance
able holding period,
sheet adjustment formulas used in the APA Program’s
stated as a fraction of a year
CPM spreadsheet model.14 The formulas below are appli-
i = interest rate
cable to the operating margin profit level indicator. The
APA Program’s calculations measure balance sheet inten- t= entity being tested

sity by reference to the denominator of the profit level in- c= comparable

Equations:
dicator (e.g., for the Berry ratio, the denominator used is
Example Assuming Profit Level Indicator is Operating Margin:
operating expenses). Therefore, the formulas vary for each
Receivables Adjustment (‘‘RA’’): RA = \[(ARt / salest) x
profit level indicator.
salesc] - ARc\ x \i/[1+(i x hc)]\
Definitions of Variables: Payables Adjustment (‘‘PA’’): PA = \[(APt / salest) x
AP = average accounts payable salesc] - APc\ x \i/[1+(i x hc)]\
Inventory Adjustment (‘‘IA’’): IA = \[(INVt / salest) x
salesc] - INVc \ x i
14
Copies of the APA Program’s CPM spreadsheet model PP&E Adjustment (‘‘PPEA’’): PPEA = \[(PPEt / salest) x
are available from the APA Program by calling (202) 435-5220 salesc] - PPEc\ x i
(not a toll-free number) or by writing to the Office of Associate Then Adjust Comparables as Follows:
Chief Counsel (International), Advance Pricing Agreement adjusted salesc = salesc + RA
Program, Attn: CC:INTL:APA, MA2-266, 1111 Constitution adjusted cogsc = cogsc + PA - IA
Ave. NW, Washington DC, 20224. adjusted opexc = opexc - PPEA

TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 4-8-10
1248 (Vol. 18, No. 22)
In Practice
Should You Use Chinese Private Comparables?
BY GLENN DESOUZA AND SOPHIA YAN
he taxpayer looking for an edge over the tax bu-
T reau may want to consider the use of private com-
parables. By using private company data, it is pos-
sible to increase the data universe by a factor of more
than 100. For example, in China a search for listed com-
panies in the automotive industries turns up 57 compa-
nies, while a search for private companies generates
8,952 hits.
Qin Database
The Qin database contains balance sheet and profit
and loss account information on over 300,000 compa-
nies in mainland China. The financial information is
given in both a standardized layout and a local ‘‘as re-
ported’’ format. The data comes from Sinosure, also
known as the China Export & Credit Insurance Corpo-
ration, a quasi-government institution. Sinosure gets its
data from the National Bureau of Statistics and State
Administration for Industry & Commerce. Please note
that the data obtained by Sinosure from these organiza-
tions is not available to the public.
Interestingly, and perhaps unique to China, the Qin
database also contains data on other types of Chinese
entities including:
1. State-owned enterprises (SOEs) which are a
legacy of the country’s communist system;
2. Foreign investment enterprises (FIEs); and
3. Joint ventures set up as collaborations between
foreign investors and Chinese entities.
The Case against Using Private Comparables
There are three significant arguments against using
private company data:
1. Information on private companies in China is not
reliable. The data in Qin is frequently out of date
and/or incomplete;
2. Business descriptions on private companies in
China are almost non-existent;
3. Tax bureaus usually expect a so called Accept-
Reject Matrix (ARM) which contains a justification
why certain companies were selected and others
rejected. It is impossible to prepare an ARM for
private companies because (i) the set can contain
Glenn DeSouza is the managing director and
Sophia Yan is an economic associate at
Transfer Pricing Management Consulting
(TPMC) in Shanghai. TPMC has an exclusive
strategic alliance with Baker & McKenzie in
China.
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
as many as 10,000 companies; and (ii) the business
descriptions provide no basis for the acceptance or
rejection.
The Case for Using Private Comparables
The case for using private company data can be sum-
marized as follows:
1. A company that is listed will normally have intan-
gible assets and a broad product range; otherwise,
it probably would not even have gone for listing.
Therefore, it is generally not comparable to the
tested party;
2. In statistics, larger is always better and the uni-
verse of information available for private compa-
nies is vast.
Legislative vs. Statistical Considerations
Transfer pricing rules have been written by legisla-
tors but must be applied by economists. Therefore,
some of the guidelines, such as the use of the accept-
reject matrix can sometimes constrain and inhibit the
quality of the analysis.
In statistics, the general rule is that all relevant infor-
mation should be considered. Hopefully as tax examin-
ers become better versed in the nature of statistical rea-
soning, there will be a greater willingness on their part
to accept comparable companies and larger samples
even if the process under which these companies are se-
lected cannot be justified by the use of an accept-reject
matrix.
Truth from the Facts
China is Asia’s most challenging tax jurisdiction, and
the tax director should get ready to deal with it. In a sur-
vey, a majority of the tax executives cited China as the
clear number one in the list of countries that provide
the greatest tax challenges in the region. It is advisable
to use multiple lines of defense and as many facts as
possible to convince the local authorities who are prag-
matists, not theorists? There is a famous Chinese saying
‘‘discover truth from the facts’’ promoted by Chairman
Deng Xiao Ping as part of the official ideology of prag-
matism. For transfer pricing, this means focusing on
building a compelling and persuasive case.
Frankly, many of the pan-Asian comparable studies
out there fail even a layman’s view of comparability and
are unlikely to be persuasive in a Chinese audit situa-
tion. These studies typically do not match up with the
tested party on function or product and many of the
comparables are from outside China. Rather than rely-
ing strictly on one set of comparable companies, it is
helpful to present corroborative data to show the tax
authorities that all roads lead to the same conclusion.
TMTR ISSN 1063-2069
IN PRACTICE (Vol. 18, No. 22) 1249

Exhibit 1
5 Chinese Non-listed Auto & Vehicle Companies (FY06-08, 3-year average)1
Sales(in Mil- Rankedby Operating
Company Name lion USD) Sales Margin Main Products
Shanghai General Motors Co., Ltd. 8,105 5 7.19% Buick and Chevrolet
Shanghai Volkswagen Automotive Co., Ltd. 6,072 7 6.43% Santana and Passat
Guangzhou Honda Automobile Co., Ltd. 5,354 8 11.25% Accord and Odyssey
Tianjin FAW Toyota Automobile Co., Ltd. 4,928 9 4.58% Vios, Corolla and Rav4
Dongfeng Nissan Passenger Vehicle Company 4,376 11 8.99% Teana
1
Data Source: Qin 2010 January disc

While the tax authorities may opt to disregard or even
dismiss the private company data, there is no doubt that
it does have some credibility and that to some extent it
does get them more comfortable with the conclusions
you are trying to get them to accept.
Other Jurisdictions
While this article is focused on China, the issues
raised have relevance for other countries as well. Gen-
erally speaking, there are certain countries in the world,
such as the United States, where private company data
remains private. However, in other parts of the world it
is the obligation of private companies to file their finan-
cial data with the so-called registrar; and this data is
then available to the public.
But note in dealing with certain jurisdictions, like
Malaysia and Thailand, that the data filed with the reg-
istrar is not well-catalogued and manual processes are
necessary to sift through the data to locate compa-
rables. And of course there is still the problem that the
business descriptions on these private companies is vir-
tually non-existent.
Automotive Example
To illustrate the type of data available in Qin, we
have prepared an automotive case study. Qin database
contains 8,952 companies in automotive industry, we
present a profile of the leading companies in exhibit 1.
For example, Shanghai General Motors is the 5th larg-
est auto venture in China with over US$ 8 billion in rev-
enue and Shanghai Volkswagen Automotive is the 7th
with about US$ 6 billion in revenue. Both are very prof-
itable as is Honda, whose high profit rate triggered one
of the largest cases in Japanese TP audit history.
Toyota Case Study
Qin database allows the analyst to evaluate what
other multinationals who are operating in this industry
are doing. So for example, if General Motors is doing its
transfer pricing study it might be interested to find out
the profit rate for Toyota. The next exhibit illustrates
this type of information.
Conclusion
As a final note, the authors are not necessarily rec-
ommending the use of private comparables but taxpay-
ers should be aware of this option and consider using it
in special cases.
Ultimately, taxpayers should be ready to deal with an
audit situation. Since tax authorities are usually not
economists, they tend to reject studies they cannot un-
derstand or find unpersuasive. Generic comparables
clearly do not command much credibility. Therefore, to
better convince the tax bureau, it may be helpful to use
private company data so as to get a close match on
product and function. It is also sometimes the case in
China that the tax bureau will use secret comparables.
The use of private company databases allows the tax
payer to have access to the same types of information,
thereby leveling the playing field.

Exhibit 2
5 Chinese Toyota Entities (FY06-08, 3-year average)2
Sales(in Mil- Operating Mar-
Company Name lion USD) gin Main Products
Tianjin FAW Toyota Automobile Co., Ltd. 4,928 4.58% Vios, Corolla and Rav4
Guangzhou Toyota Automobile Co., Ltd. 1,529 4.16% Cars, such as Camry, etc.
Sichuan FAW Toyota Automobile Co., Ltd. 493 15.60% Bus and off-road vehicles
Toyota Industry (Kunshan) Co., Ltd. 65 8.02% Forklift parts
Tianjin Toyota Steel Processing Co., Ltd. 53 11.93% Steel plate, steel products, and au-
tomobile parts
2
Data Source: Qin 2010 January disc

TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 4-8-10
1250 (Vol. 18, No. 22)
Analysis
Transfer Pricing in Uruguay
BY MOISES CURIEL, CARLOS LINARES, AUGUSTO
CAMARERO, AND CLAUDIA GONZALEZ-BENDIKSEN
hile Uruguay has had transfer pricing rules in
W place since December 2006, the regulations ini-
tially did not specify when taxpayers were re-
quired to comply with the obligations or compliance
deadlines set forth in the regime. Taxpayer obligations
are clearer now thanks to decrees issued in January and
August of 2009, as well as a December 1, 2009, resolu-
tion. The new guidance, together with the 2006 regula-
tions, will provide the tax administration with all tools
necessary to audit taxpayers, attenuate the effects of
transfer pricing management by major multinational
groups, and enhance collections.
Decree 56, published in January 2009,1 clarifies
which taxpayers are subject to the regime, the specific
formal obligations they must meet, the considerations
for demonstrating arm’s-length compliance, and the
date the provisions enter into force (Jan. 1, 2009). The
decree also specifies the documentation to be filed with
the General Tax Bureau within eight months of the clos-
ing date of the tax year at issue.
Decree 392, issued in August 2009, amended Decree
56 and introduced additional definitions such as the
term ‘‘customs exclaves,’’ specifying how the modified
comparable uncontrolled price method is applied when
the good is traded on stock markets or similar transpar-
ent markets, and clarifying that the transfer pricing re-
gime applies to transactions carried on in tax years be-
ginning on or after Jan. 1, 2009.
Resolution No. 2,084
Lastly, Resolution No. 2,084, published Dec. 1, 2009,2
provides the threshold amounts at which taxpayers are
subject to compliance (approximately US$1 million)
1
For a translation of the decree, see 17 Transfer Pricing Re-
port 922, 4/2/09.
2 specify the applicable due date, but has committed to drawing
For prior coverage, see 18 Transfer Pricing Report 956,
1/14/10.
Moises Curiel, based in Mexico City, is direc-
tor of Baker & McKenzie’s transfer pricing
practice in Mexico and Latin America. Carlos
Linares is a principal with Baker & McKen-
zie in Monterrey. Augusto Camarero of Bue-
nos Aires is a senior analyst with the firm’s
transfer pricing practice in Argentina, and
Claudia Gonzalez-Bendiksen, based in Lima,
is director of the firm’s transfer pricing
practice in Peru.
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
and broadly, but not exhaustively, defining the concept
of ‘‘related parties.’’ It further lists certain representa-
tive commodities markets and states which information
should be included in the transfer pricing report to be
filed by taxpayers, with a deadline falling in the ninth
month following the close of the tax year.3
According to the new resolution, taxpayers under Ar-
ticle 1 of Decree 56 are required to file annual informa-
tion when they:
s are included in the Large Taxpayer Division;
s carry on listed transactions in amounts exceeding
approximately US$1 million;4 or
s have been notified by the General Tax Bureau.
Taxpayers Subject to Rules
Under Article 1 of Decree 56, the taxpayers subject
to the Uruguayan transfer pricing rules are:
s those who, for income tax purposes, carry on
transactions with nonresident related parties;
s those who, for income tax purposes, derive in-
come from the performance of independent personal
services and engage in transactions with nonresident
related parties; and
s persons who carry on transactions with entities
residing in low- or no-tax countries5 or benefit from a
low- or no-tax regime, including customs exclaves.6
Information
In the ninth month following the closing date of the
corresponding tax year, these taxpayers must file:
s an information return detailing and quantifying
the transactions included in the transfer pricing regime;
s a copy of the financial statements for the corre-
sponding fiscal year; and
s a transfer pricing report with the minimum infor-
mation required by the resolution.
3
As of this writing, the General Tax Bureau has yet to
up deadlines per groups of taxpayers.
4
The approximate amount of US$1 million is obtained by
dividing 10 million indexed units by an exchange rate of
$19.93 per dollar, and considering 2,008 indexed units per
Uruguayan peso.
5
Article 3 Bis of Decree 56, incorporated by Article 1 of De-
cree 392/2009, defines low- or no-tax countries as those whose
effective income tax rates are less than 40 percent of the rate
provided in Article 15 of the Income Tax Law (25 percent),
making the minimum rate 10 percent. Article 3 of Decree 56
also defines a list of 33 countries meeting these characteristics,
as well as another other as defined by the General Tax Bureau.
6
Article 3 Bis of Decree 56, incorporated by Article 1 of De-
cree 392/2009, defines customs exclaves as free zones or geo-
graphical areas where customs provisions do not apply,
whether in Uruguay or abroad.
TMTR ISSN 1063-2069
ANALYSIS
The minimum information to be provided in the re-
port includes the details of the activities and functions
performed, the risks assumed, and the assets used to
perform such activities; a detailing and quantification of
the transactions included in the transfer pricing regime;
identification of the entities involved in the transac-
tions; the method used to determine the transaction
prices; identification of each comparable selected; iden-
tification of the sources of information from which com-
parables were taken; the quantification and methodol-
ogy used to make the necessary adjustments to the se-
lected comparables; and the determination of the
interquartile range and conclusions.
Recordkeeping Period
Taxpayers required to file annual information re-
turns must keep the documents and evidence justifying
the transfer pricing report for the statutory tax inspec-
tion period. Taxpayers not required to file such infor-
mation should keep all documentation and evidence
justifying the transfer pricing determination for the
same period, to support the proper pricing determina-
tion and the reported consideration or profit margins.
Related Parties
The resolution further establishes when parties will
be deemed related. In general terms, parties are related
when they carry on transactions with each other and
any of the circumstances listed in the resolution are
present, such as a linkage by capital, control, and man-
agement.
Key Issues
1. Commodities transactions through
international intermediaries
Article 43 of the Income Tax Law provides for a
modified CUP method in the case of import or export
transactions carried on between related taxpayers in-
volving primary farm products and commodities in gen-
eral, in which a foreign intermediary who is not the ac-
tual recipient of the merchandise is involved.
The CUP method is ‘‘modified’’ in the sense that,
while ‘‘prices’’ are ultimately being compared, taxpay-
ers should consider the trading price of the good on a
transparent market as the compared price, correspond-
ing to the day the merchandise is loaded on whatever
means of transportation used, not considering the price
agreed upon with the intermediary.
Article 13 of Decree 567 allows for the possibility of
adjustments to the trading price for the insurance and
shipping necessary to dispose of the goods in the local
market, thereby increasing the transaction’s compara-
bility for transfer pricing purposes.
Articles 13 and 13 Bis of Decree 568 state that when
the contracts are registered with the Chamber of Com-
merce and Export of Agriproducts,9 taxpayers may de-
termine their taxable income using the market trading
7
Text replaced by Article 5 of Decree 392.
8
Text replaced by Article 5 and sanctioned by Article 6 of
Decree 392, respectively.
9
This is the agency responsible for recording commodities
contracts set by the General Tax Bureau in Article 4 of Resolu-
tion 2,084.
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1251
price corresponding to the contract date rather than the
merchandise loading or shipping date.
2. Transparent markets
Article 9 of Resolution 2,084 illustratively lists a se-
ries of transparent markets by product type (oils, rice,
barley, malt, cereals, and oilseeds and their by-
products, among others).
3. Analysis of parties involved
Article 5 of Decree 56 provides that the analysis may
be done with respect to either the Uruguayan or foreign
company.
Under Organization for Economic Cooperation and
Development guidelines, the company whose transac-
tions are less complex or involve fewer intangibles that
are difficult to value or quantify in the transactions must
be used as the tested party. In line with the OECD re-
quirement, Decree 56 allows an analysis of the foreign
taxpayer insofar as taxpayers provide documentation
certified in the country of origin, certified by an inde-
pendent auditor of recognized prestige, duly translated
and legalized.
While the concept of ‘‘recognized prestige’’ has not
been regulated, it would seem to be discriminatory to
reject documentation certified by trained and licensed
auditors, since the main focus of the assessment is the
suitability, experience, and quality of the working pa-
pers of the auditors and not whether the auditor simply
belongs to a large auditing firm measured in terms of
staff size or years in practice. Recall that in the United
States, Enron Corp.’s auditor belonged to a firm of ‘‘rec-
ognized prestige.’’
4. Creation of safe harbor regime
Article 44 of the Income Tax Law authorizes the ex-
ecutive branch to create special regimes or constructive
income thresholds considering a taxpayer’s operations,
trade, or business. Article 11 Bis of Decree 5610 del-
egates this authority to the General Tax Bureau, but
only with respect to import and export operations in-
volving properties traded on securities markets or
transparent markets, whether directly or through inter-
mediaries.
The period to apply these stability thresholds cannot
exceed three years, applicable to tax years closed as
from the effective date of the regime.
5. Advance pricing agreements
Article 15 Bis of Decree 5611 authorizes the General
Tax Bureau to enter into advance pricing agreements
with taxpayers. An APA must be executed prior to the
respective transaction and cannot exceed three tax
years closed as from the effective date of the agree-
ment.
As of this writing, the formalities for taxpayers to ap-
ply this regime are still pending regulation.
Controversial Issues
1. Burden of proof for transactions
Article 41 establishes the taxpayer’s burden of proof
for the transaction, requiring the taxpayer to submit a
10
Text sanctioned by Article 4 of Decree 392.
11
Text sanctioned by Article 7 of Decree 392/2009.
BNA TAX 4-8-10
1252 (Vol. 18, No. 22)
transfer pricing report and annual information return to
the General Tax Bureau to determine whether its prices
are reasonably at arm’s length. In some cases, the bur-
den may be shared or even shifted to the tax adminis-
tration. Article 38 of the law provides that the adminis-
tration must show that the consideration and conditions
are not at arm’s length and use an accepted transfer
pricing method to adjust the transactions accordingly.
2. Definition of related parties
Articles 1 and 2 of the resolution seek to define the
concept of related party by enumerating situations that
imply the existence of control—not necessarily corre-
sponding to the actual controlling relationship, but
rather to address the business relationships between
taxpayers.
Taxpayers should therefore refer to the end of Ar-
ticle 39 of the Income Tax Law, which expressly pro-
vides that functional influences are those having
‘‘decision-making power to guide or define the activities
of the taxpayer.’’
In this regard, the terms and conditions and other
evidentiary aspects that taxpayers may provide on their
related-party transactions are fundamental to demon-
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
ANALYSIS
strate the existence (or nonexistence) of such func-
tional influences, possibly releasing the taxpayer from
the heavy tax burden of the transfer pricing report and
annual return to prove compliance with the transfer
pricing rules.
3. Calculation of statistical (interquartile) range
The resolution lacks specific instructions on calculat-
ing the statistical, or interquartile, range in those cases
where the taxpayer has found more than one compa-
rable transaction to prove arm’s-length compliance.
Conclusion
The establishment of a transfer pricing regime where
companies belonging to a single economic group or that
are functionally related must act as unrelated enter-
prises would in comparable situations require, to a cer-
tain extent, a change in taxpayers’ mentality and ad-
vance planning to set prices at arm’s length. An APA
plus a contemporaneous review of related-party trans-
actions versus transactions with unrelated parties will
not only meet the legal requirements but also help to
avoid adjustments and related fines.
TMTR ISSN 1063-2069

Perspective
Intangible Property Migration: Germany’s Recent Draft
Administration Principles on Transfer of Business Functions
BY ROBERT ACKERMAN, DIANA ORGANISTA, AND
CARLOS M. MALLO
n a globalized world, where an increasing level of in-
I tercompany transactions are occurring, the transfer
of intangibles within an organization may take place
as a result of diverse corporate decisions. The recent
German draft of administration principles addressing
the intercompany cross-border transfer of business
functions presents a challenging approach to the valua-
tion and transfer of these intangibles, while following a
trend among tax authorities around the globe toward an
increased focus on intangible property migration.
This article presents an overview of the German
draft while discussing some of the principal challenges
that it introduces for taxpayers. It also compares the
German draft and an Internal Revenue Service coordi-
nated issue paper on cost sharing, giving an example of
each approach. Finally, examples illustrate three differ-
ent scenarios that taxpayers may encounter when
evaluating proper compensation for the transfers of
functions in cases of business restructurings.
The German Draft: Overview
The German Federal Ministry of Finance July 17,
2009, released a draft document outlining the adminis-
tration principles regarding the examination of the in-
come allocation between related parties in cases of the
cross-border transfer of business functions—
Administrative Principles for the Examination of In-
come Allocation between International Related Enter-
prises with Cross-Border Transactions in Respect of
Bob Ackerman (bob.ackerman@ey.com) is a
partner and the Americas director of transfer
pricing global accounts and controversy with
Ernst & Young LLP, Diana Organista
(diana.organista@ey.com) is a manager with
the firm’s international tax services and trans-
fer pricing practice, and Carlos M. Mallo
(carlos.mallo@ey.com) is senior with that
practice. All three are based in Washington,
D.C. The authors give special thanks to
Peyton H. Robinson, a senior manager in
Ernst & Young’s tax services and transfer
pricing practice in Irvine-Salt Lake.
The views expressed are those of the authors
and do not necessarily reflect the views of
Ernst & Young LLP.
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1253
Business Relocations.1 The draft includes clarifications
concerning the application of Section 1, subsection 3 of
the Foreign Tax Code and the Order Decree Law on
Transfer of Business Functions.
Business Functions
According to the draft document, a function is a busi-
ness activity that consists of a combination of similar
business tasks performed by a certain position or de-
partment. In general, all types of operating activities,
such as distribution, production, research and develop-
ment, or purchasing, are considered relevant business
functions. Also, when defining functions, the German
rules employ an output-oriented approach that classes
the production of two different products as two differ-
ent functions.
The draft establishes that a transfer of functions oc-
curs when an entity transfers to a related party assets
and other advantages, as well as the associated oppor-
tunities and risks. A transfer results if the function in
the transferring entity is limited by the transfer. To de-
termine whether a function has been limited, the draft
focuses on revenues earned. For example, if by trans-
ferring a product the revenues of the transferor are re-
duced, then a limitation of the function has taken place,
regardless of whether the decrease in revenues is offset
by new products.
Also, a transfer of functions may take place notwith-
standing that the transferor remains in a legal or eco-
nomic position to continue the performance of the func-
tion, and it is irrelevant to consider whether the receiv-
ing entity performs the function in the same manner as
the transferring company. Moreover, a transfer of func-
tions exists when a transferee performs tasks that were
first performed only for the transferor—for example,
the situation where a contract manufacturer becomes a
full-fledged manufacturer (that is, an expansion of func-
tions).
According to the draft, no transfer of functions oc-
curs when a function is duplicated across borders, and
the duplication does not lead to a limitation of a func-
tion (that is, revenue reduction). If the duplication of a
function results in a revenue reduction for the trans-
feror within five years after the acceptance of the func-
tion by the transferee, it will be considered a transfer of
a function unless the taxpayer demonstrates that the
decrease in revenues is not a direct economic result of
the duplication of the function. However, if the duplica-
tion of functions produces an immaterial or temporary
1
See 18 Transfer Pricing Report 398, 9/10/09.
BNA TAX 4-8-10
1254 (Vol. 18, No. 22)
reduction in the transferor’s functions2 with no related
effects on profits, the duplication is not considered a
transfer of functions.
The draft asserts that a transfer of functions does not
exist when a parent company, acting as a service pro-
vider for the subsidiary production entities, undertakes
the centralized production control for the entire group,
or when the transferee exclusively carries out the trans-
ferred function on behalf of the transferor and receives
a cost-plus remuneration; this would imply that the
transfer package did not include any significant IP or
other advantages, or that the IP was made available for
use only. This includes transfers to entities on a con-
tractual basis like contract R&D, contract manufactur-
ing, and other internal service providers. In such cases,
a valuation of the transfer package is not required.
Valuation of Business Functions
The arm’s-length price in cases of transferred busi-
ness functions is to be based on a transfer package
valuation. The draft recognizes that transfer packages
are highly individualized and contain unique intangible
property. The valuation of the transfer package should
be based on the net present value of the expected prof-
its from the transferred function that is realizable by the
parties involved.
Currently, under German transfer pricing rules any
gain on a so-called transfer of business function is cal-
culated on the basis of the profit expectations for the
business function as a whole (so-called transfer pack-
age approach).3 A proposed change to the Foreign Tax
Act intends to soften the potential negative impact that
the current regulations could have on Germany’s attrac-
tiveness as an R&D location. The planned revision
would allow taxpayers, under certain conditions, to cal-
culate the arm’s-length compensation payment for a
transfer of business functions by applying an individual
asset approach rather than the currently prescribed
transfer package approach. The revisions are intended
to come into effect with retroactive effect for the tax
year 2008.4
The German Draft: Principal Challenges
Taxpayers are expected to conduct a functional and
risk analysis for both the transferor and transferee, and
to determine the profit potential from the function. The
net present value of the after-tax expected profits will
be the expected value of the transfer package. Where a
direct valuation is not possible, an indirect valuation
should be used. The indirect method looks to the total
value of the participating entities (before and after the
transfer). This approach would represent a burdensome
task for taxpayers due to the significant amount of time
2
According to the draft of July 2009, an immaterial reduc-
tion is one that does not exceed a1 million or 10 percent of rev-
enue achieved with that function in the last full fiscal year pre-
ceding the duplication of functions in any of the fiscal years
during the five-year period.
3
As per §1 Section 3 Clause 9 of the German Foreign Tax
Act, the calculation of separate transfer prices for individual
components of a transfer package, following appropriate ad-
justments, would now be permissible if the transfer package
includes as a component at least one significant intangible as-
set.
4
See 18 Transfer Pricing Report 1093, 1110, 2/25/10.
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
PERSPECTIVE
needed to produce and analyze the data, as well as to
evaluate the implications for corporate resources.
The draft approach to the valuation of a transfer
package presents several additional challenges for tax-
payers entering into such transactions. The draft stipu-
lates that the discount rate is determined by adding
functional and risk premiums to a quasi risk-free inter-
est rate. A comparable risk-free investment rate is ex-
pected to be a government bond rate and the premiums
are to be based on comparable expected rates of return;
if such comparable returns cannot be determined, and
no other more reasonable returns can be verified, the
premiums should be established from the expected
profits of the entire entity or the remaining business ac-
tivities.
Determining the risk and function premiums of a
transfer package by using the whole entity as a fallback
option may then produce a significant deviation from
the reality of the transaction. The transferred package
may incorporate risks that significantly differ from
those of the entire organization. The proposed method-
ology does not take into consideration the participants’
cost of capital when it assumes that in cases of higher
debt financing, the expected rate of return would be
greater; nor does it consider the volatility of the cash
flows in determining a higher or lower discount rate.
Please note that given the proposed change in the
German legislation for transfer of business functions,
taxpayers could apply an individual asset approach in
compliance with the arm’s-length principle, which
would avoid a valuation on the basis of a transfer pack-
age, an approach that is considered as costly and un-
conventional.
The draft describes the discount period as an impor-
tant focal point in a tax audit, and it specifies that a dis-
count period into perpetuity is regularly to be employed
when the transferred function is an entire business, an
operational unit, or a stand-alone economically viable
unit. Taxpayers have a better possibility of supporting a
limited discount period to the extent to which the trans-
ferred function resides under the threshold of an opera-
tional unit.
The potential of an infinite life for a transferred func-
tion should not be the rule, but rather the exception. An
entire corporation may have an unlimited life due to its
capacity and desire to reinvest sufficient amounts in
new assets, or through developing functions that will
produce cash flows into perpetuity. A function, how-
ever, viewed as a component of the organization might
not have the same potential due to factors as diverse as
changes in the marketplace, budget constraints, or
simple dependency on other functions within the com-
pany.
A presumption of an unlimited life denotes an infi-
nite series of cash flows that can be achieved only if the
asset is properly maintained. The life term of the trans-
ferred function should always be captured through an
economic analysis that considers the long-term strate-
gic and business environment surrounding the func-
tion. As every transferred function has different cash
flow potential and risks, the discount period should
vary accordingly.
The draft administration principles state that the le-
gal and economic bargaining position of the partici-
pants in the transaction is to be considered in the arm’s-
length test. The bargaining position is primarily deter-
mined with respect to the available action alternatives
TMTR ISSN 1063-2069
PERSPECTIVE
(for example, continuing to execute the function versus
transferring it to a contract provider).
The draft does not specify who determines the num-
ber or types of available actions alternatives. The con-
tracting entities’ available actions in cases of a trans-
ferred function may be numerous, especially when the
production of each product is considered a separate
function. Business restructuring plans may incorporate
several variations to the current performance of the
contracting entities, and for both the transferor and
transferee. Numerous combinations of available actions
under different scenarios, with diverse risks and possi-
bilities of success, will produce a mixture of results that
will not facilitate the burden of compliance. However
the draft assumes that transferor and transferee would
agree on one option out of the many existing, and then
bargain this option.
According to the draft, if the taxpayer does not in-
clude an arm’s-length adjustment clause to the trans-
ferred package, the tax authorities will have the oppor-
tunity to impose an adjustment once within an exami-
nation period of 10 years in case the actual future
profits materially deviate from the originally expected
future profits derived from the function transferred. Al-
though, and importantly, the draft permits a revenue or
profit-based license as an acceptable price adjustment
clause, this type of stipulation represents a significant
departure from third-party behavior, particularly when
the examination period is so extended.
Taxpayers have a duty to cooperate and are required
to produce documentation in cases where there has
been a transfer of functions. If the taxpayer fails to ful-
fill this duty, the tax authorities may estimate the tax-
able income and impose penalties. The tax authorities
may value the transferred function assuming an infinite
discount period, with an estimated premium to the
quasi-risk-free interest rate of not more than 50 percent
of the risk-free base rate, reduced by the nominal tax
rate applicable to the entities in question. A valuation
under estimation principles with such assumptions will
obviously lead to an overestimated value of the trans-
ferred functions, with the corresponding tax conse-
quences.
The draft establishes that the Order Decree Law on
Transfer of Business Functions applies for all cases of
transfers of functions that were completed in the fiscal
year ending in the tax assessment period of 2008, or
any subsequent tax assessment period. Further, it stipu-
lates that the business valuation methodology will also
be applicable to transfers of functions for tax assess-
ment periods prior to 2008 based on the argument that
the Business Tax Reform of 2008 is merely a clarifica-
tion of the already effective arm’s-length principle, and
that under the arm’s-length principle business manag-
ers would have used this methodology for valuing trans-
fers of functions also already in prior years.
German Draft,
U.S. Cost Sharing CIP Compared
The draft’s valuation approach presents some simi-
larities with the income method described in the IRS’s
coordinated issue paper (CIP) on cost sharing released
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069
(Vol. 18, No. 22) 1255
Sept. 27, 2007.5 The German draft converges with the
CIP in presuming a life in perpetuity as the general rule
in cases of a transfer of intangibles. In both documents,
taxpayers are expected to prepare projections, includ-
ing operating costs and revenues anticipated from ex-
ploiting the subject intangibles with minor variances.
The CIP suggests projections should begin with the tax-
payer’s extrapolation from actual results, whereas the
German draft requires reconciled plan balance sheets,
plan profits and loss calculations, and general financial
planning documents.
The CIP suggests using the weighted average cost of
capital (WACC) of the U.S. parent where the scope of
the cost-sharing arrangement (CSA) is relatively broad,
while the German draft proposes using a quasi risk-free
investment rate adjusted by functional and risk premi-
ums of the transferring and receiving countries. In ad-
dition, the CIP states the developer of the intangibles is
supposed to be able to extract 100 percent of the eco-
nomic rents attributable to the IP, while the German
draft generally assumes that a bargaining range exists.
The following example provides some light on the
similarities and differences discussed above between
the CIP and the new German draft.
Company A, a German corporation, has developed
and currently markets version 1.0 of a new software ap-
plication, Germsoft, in Europe. Company A has devel-
oped financial projections for profits and losses for
Germsoft for a 10-year period. After period 10, Com-
pany A estimates that revenues will grow at 2 percent,
consistent with the overall long-term growth rate of the
economy.
Company B has also developed and markets its own
software, USsoft, in the United States. Both softwares
are very similar, though they have been developed inde-
pendently by Company A and Company B.
Company A was recently acquired by Company B, a
U.S. corporation. Company B informs Company A that
starting in 2010 (Year 1) it should stop distributing
Germsoft and start distributing USsoft in Europe. In ad-
dition, the R&D department in Germany will be closed
down to avoid duplicate costs. All future R&D will be
performed in the United States.
Because of the similarities between USsoft and
Germsoft, Company A believes that the financial projec-
tions for profits and losses for Germsoft are also valid if
it distributes USsoft instead of Germsoft. The only dif-
ference will be that all R&D expenses will drop to zero
as all R&D will be performed in the United States.
Company A performs a transfer pricing study and
concludes that, for the distribution of USsoft, it should
be entitled an 8 percent return on operating costs (ex-
cluding R&D expenses) for its routine functions, plus a
7 percent return on sales to account for valuable mar-
keting intangibles. Any additional profit is to belong to
the U.S. entity to account for returns derived from the
intangibles associated with USsoft.
Table 1 depicts an application of the CIP where the
German entity is compensated only for routine func-
tions and marketing intangibles, considers a terminal
value into perpetuity, and assumes a discount rate of 15
percent, which corresponds to the WACC of the Ger-
man entity. According to this calculation, the U.S. com-
5
LMSB-04-090762. See 16 Transfer Pricing Report 374,
10/4/07.
BNA TAX 4-8-10
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pany as the owner of USsoft intangibles is entitled to
the residual return of $770.
In line with a recent Organization for Economic Co-
operation and Development discussion draft on busi-
ness restructuring,6 under the new German draft, the
transfer pricing analysis performed by Company A will
be considered flawed as it does not consider the busi-
ness function associated with the R&D department and
the value of the R&D already developed by the German
entity. While the German draft is not without merit and
it raises a valid point in encouraging taxpayers to con-
sider what a third party would have done, it is clearly an
approach on which reasonable economists can dis-
agree.
From the U.S. perspective, there are no rules that
would directly consider a situation like the one de-
scribed in this example. However, it could also be ex-
pected that the IRS, faced with a similar situation,
would embrace a similar approach to the one adopted
by the German tax authorities.7
The CIP analysis depicted in Table 1 can be modified
to consider the realistic alternatives to the German en-
tity to stop production of Germsoft and adopt USsoft.
Under this approach, the German entity would agree to
close the R&D department and replace Germsoft by US-
soft only if it is compensated appropriately. The com-
pensation payment would be equal to the return that
would have been obtained for the R&D function. Table
2 depicts the cash flow that would have been generated
by the German entity if it had continued to function as
it had in the past, keeping the R&D team in place.
The following example will consider how the CIP
and the German draft would value this business func-
tion, assuming that the tax authorities would conclude
that compensation is due for the transfer of R&D func-
tions. This calculation also considers a terminal value
into perpetuity, and assumes a discount rate of 15 per-
cent based on Company A’s WACC rate.
It is clear from this simplified example that the meth-
ods do not differ substantially; however, the final result
may depend greatly on the specifics adopted for the
valuation. In particular, the fact that consideration of
each side’s bargaining position should be contemplated
according to the German draft may constitute a signifi-
cant difference with the CIP. The U.S. rules provide that
‘‘[T]he arm’s length result of a controlled transaction
must be determined under the method that, under the
facts and circumstances, provides the most reliable
measure of an arm’s length result.’’8 Thus, the taxpayer
may reasonably consider its relative bargaining posi-
tions; however, it will be required to prove the rel-
evance of taking this aspect into account; otherwise, the
default will be to provide all the bargaining power to the
owner of the intangibles, and as a result the transferee
will be entitled only to a routine return.
6
Transfer Pricing Aspects of Business Restructuring: Dis-
cussion Draft for Public Comment 19 September 2008 to 19
February 2009, OECD, available at http://www.oecd.org/
dataoecd/59/40/41346644.pdf (last accessed Oct. 14, 2009) or
link to text at: 18 Transfer Pricing Report 122, 6/11/09.
7
In this example, the U.S. benefits from the transfer pric-
ing analysis performed by Company A. However, even if the
situation were the other way around, with the German com-
pany taking over the U.S. company and closing down the U.S.
R&D department, it is not clear that the IRS would deem a pay-
ment from the German counterpart.
8 10
Regs. §1.482-4(c)(1) (the best method rule).
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
PERSPECTIVE
Table 3 arrives at a range of possible compensation
payments depending on the bargaining positions of
Company A and Company B. The German draft sug-
gests the use of a risk-free investment rate adjusted by
functional and risk premiums to discount cash flows. If
the taxpayer does not cooperate with legal documenta-
tion requirements and subsequently the tax authorities
estimate the value of the transfer package, then, accord-
ing to the draft, the German tax authorities may apply a
risk-free rate plus 50 percent, reduced by the nominal
tax rate of the two entities. In the simplified example it
shall now be assumed that the risk-free rate is 5 percent
and the adjusted rate is 7.5 percent (5 percent × 1.5).
This calculation also considers a terminal value into
perpetuity.
In contrast to the OECD, which recognizes business
restructuring as a ‘‘widespread phenomenon,’’9 the
German draft affirms that a transfer of functions is, as a
general rule, an extraordinary business transaction.
The recently released OECD discussion draft on
business restructurings states, ‘‘[T]he application of the
arm’s length principle is based on the notion that inde-
pendent enterprises, when evaluating the terms of a po-
tential transaction, will compare the transaction to the
other options realistically available to them, and they
will only enter into the transaction if they see no alter-
native that is clearly more attractive.’’10
Profit Potential
As taxpayers may possess different alternatives
when restructuring their businesses, a vital step in de-
termining arm’s-length payments is forming a clear un-
derstanding of the alternatives available to the taxpay-
ers and consequently of the profit potential of the assets
being transferred. It is not always the case that a trans-
fer of functions necessarily implies a need for compen-
sation from the transferor to the transferee. The follow-
ing examples will illustrate three different scenarios
that taxpayers may encounter when evaluating proper
compensation for the transfers of functions in cases of
business restructurings.
Under the first scenario, a taxpayer may decide to
close a manufacturing facility that is no longer operat-
ing competitively and is not profitable. Under those cir-
cumstances, the unprofitable plant should project its
cash flows to quantify its profit potential. The projected
cash flow should be discounted back to the present. As-
suming the discounted value to be negative, the closing
plant should not receive any payment from the trans-
feree. The transferee would be in a bargaining position
that would allow it, if desired, to require a payment
from the closing plant to assume the production of the
unprofitable facility. This is a scenario explicitly recog-
nized by the German Order Decree Law on Transfer of
Business Functions.
A taxpayer also may decide to close a profitable plant
to focus on an even more profitable line of products.
The plant that is closing should perform a discounted
cash flow analysis on its forecasted operations as if it
did not transfer the function. Several valuation assump-
tions could be made to determine an appropriate split of
the value between the transferor and the transferee, but
the maximum payment that the transferor would re-
9
OECD discussion draft page 2 (see note 6 above).
OECD discussion draft at para. 58.
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ceive would be determined by the present value of the
lost profits. Its minimum value acceptable would be
equivalent to its closing cost.
Under a third scenario, a taxpayer may decide to
transfer the manufacturing function to a lower-cost fa-
cility abroad. The receiving entity would act as an out-
sourcing company and would be compensated with a
cost plus scheme. In this example, the transferor would
continue bearing all of the risk in the transaction, as-
suming all of the remaining functions and owning all of
the associated intangibles. In this case, the transferor
should pay the entire cost needed to move to a lower-
cost manufacturing location, and the transferor and
transferee should decide how to divide the startup
costs, if any. After that, the transferor should discount
back to the present its profit potential assuming no
change to operations, and then discount the profit po-
4-8-10 Copyright 姝 2010 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc.
PERSPECTIVE
tential assuming the business restructuring. If the dif-
ference between the first and the second value is posi-
tive, the transferor would not be entitled to any pay-
ment. If the difference between the first and the second
value is negative, the transferee should pay the trans-
feror for the lost profit, assuming the transferee will
have a gain.
Conclusion
The value of an intangible asset should represent its
capacity to produce cash flows. All valuations need to
consider how the asset would be exploited in the future.
As the focus of tax authorities on IP migration in-
creases, all valuations conducted for planning and com-
pliance must include a detailed functional analysis that
accurately portrays the business purpose and the eco-
nomic substance of the transaction under analysis.
TMTR ISSN 1063-2069
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Journal
CONFERENCES, HEARINGS, AND MEETINGS
April 26-27 Fundamentals of Transfer Pricing London European-American Tax Institute, see
http://www.e-ati.com/home/courses/transfer-
pricing.php
May 14 Transfer Pricing New York Executive Enterprise Institute, see http://
www.eeiconferences.com
May 21 Advanced transfer pricing workshop: London European-American Tax Institute, see
financial transactions for non-financial http://www.e-ati.com/home/courses/transfer-
business pricing.php
June 7-8 The 2010 OECD International Tax Washington, Organization for Economic Cooperation and
Conference: OECD-U.S. Business Dialogue D.C. Development, Business and Industry Advisory
on International Tax Committee to the OECD, and the U.S. Council for
International Business, see www.uscibtax.org or
contact Erin Breitenbucher at ebreitenbucher@uscib-
dc.org
June 10 Transfer Pricing San Francisco Executive Enterprise Institute, see http://
www.eeiconferences.com
June 11 EATI’s 1st Annual Transfer Pricing Congress London European-American Tax Institute, see
http://www.e-ati.com/home/conferences.php
Sept. 15-16 10th Annual Global Transfer Pricing Forum Amsterdam Euromoney, e-mail
agovett@euromoneyplc.com
Sept. 16-17 U.S. Canadian Transfer Pricing Toronto Networking Seminars, see
http://www.networkingseminars.net
Oct. 8 Advanced transfer pricing workshop: London European-American Tax Institute, see
tangible goods/intangible property/services http://www.e-ati.com/home/courses/transfer-
pricing.php
Oct. 25-26 Transfer Pricing Washington, Networking Seminars, see
D.C. http://www.networkingseminars.net
Nov. 3 Transfer Pricing Masterclass: Practical Paris European-American Tax Institute, see
aspects of preparing TP documentation http://www.e-ati.com/home/courses/transfer-
pricing.php
Nov. 8-9 Fundamentals of Transfer Pricing London European-American Tax Institute, see
http://www.e-ati.com/home/courses/transfer-
pricing.php
Nov. 12 Advanced transfer pricing workshop: London European-American Tax Institute, see
financial transactions for non-financial http://www.e-ati.com/home/courses/transfer-
business pricing.php
Dec. 6-7 Transfer Pricing San Jose, Calif. Networking Seminars, see
http://www.networkingseminars.net
Dec. 9-10 23rd Annual Institute on Current Issues in Washington, George Washington University Law School, and
International Taxation D.C. Internal Revenue Service, see
http://www.law.gwu.edu/ciit

TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 4-8-10
1262 (Vol. 18, No. 22)

Directory
Private Sector Sources 88 Century Avenue Pudong (646) 471-3000
Shanghai 200121
Robert Ackerman China
Diana Organista Government Sources
86 21 6105 5966
Carlos M. Mallo Glenn.DeSouza@BakerNet.com David Ernick
Ernst & Young LLP Associate International Tax Counsel
1101 New York Ave. N.W. Claudia Gonzalez-Bendiksen Department of the Treasury
Washington, D.C. 20005-4213 Baker & McKenzie 1500 Pennsylvania Ave. N.W.
(202) 327-5944 (Ackerman) Avenida Pardo y Aliaga 699 Washington, D.C. 20220
(202) 327-8004 (Organista) Oficina 501-A, San Isidro (202) 622-1754
(202) 327-5689 (Mallo) Lima, Peru david.ernick@do.treas.gov
bob.ackerman@ey.com (51-1) 6165700 Ext. 5715
diana.organista@ey.com Claudia.Gonzalez- Craig Sharon
carlos.mallo@ey.com Bendiksen@bakermckenzie.com Director, Advance Pricing Agreement
Augusto Camarero Carlos Linares Program
Baker & McKenzie Baker & McKenzie Internal Revenue Service
1110, Leandro N. Alem Avenue Oficinas en el Parque-Piso 10 799 Ninth St. N.W.
13th Floor Buenos Aires City Blvd. Antonio L. Rodr guez 1884 Pte. Washington, D.C. 20001
Argentina Col. Santa Mar a Mailing: CC:PA:LPD:CRU
(54) 11 5776 2333 64650 Monterrey, Nuevo León 1111 Constitution Ave. N.W.
augusto.camarero@bakermckenzie.com Mexico Washington, D.C. 20224
52 (81) 8399 1385 (202) 435-5222
Moises Curiel-Garcia Carlos.Linares- Craig.A.Sharon@irscounsel.treas.gov
Baker & McKenzie Mexico S.C. Garcia@bakermckenzie.com
Edificio Scotiabank Inverlat Patricia Spice
Piso 12 Blvd. M. Avila Camacho 1 Richard Olivier Director, Competent Authority
Col. Lomas de Chapultepec VP of Tax Services Division
CP 11009 Mexico, D.F. Genzyme Corporation Canada Revenue Agency
52 55 5279 2992 Cambridge, Mass. 6th Floor, Canada Building
Moises.Curiel@bakernet.com Richard.Olivier@genzyme.com 344 Slater Street
Glenn DeSouza Barry Shott Ottawa, Ontario K1A 0L5
TP Management Consulting PricwaterhouseCoopers LLP Canada
(Shanghai) Co. Ltd. 300 Madison Avenue (613) 941-7831
Unit 1601, Jin Mao Tower New York, New York 10017-6204 patricia.spice@cra-arc.gc.ca

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