developing improved tactics advance pricing … · an advance pricing agreement ("apa")...

DEVELOPING IMPROVED TACTICS FORADVANCE PRICING AGREEMENTS TO

DECREASE NEGOTIATION LEAD TIME

Ryan Vines*

I. INTRODUCTION

Google, Walmart, and Apple are multinational corporationsoriginally based in the United States of America. Multinationalcorporations play a significant role in the global economy and canprovide a home country with a significant amount of tax revenue.'Some countries only tax individuals, but the United States leviestaxes on both corporations and individuals. 2 Thanks to globaliza-tion,3 taxing corporations has become even more challenging. Tax-ing authorities, such as the U.S. Internal Revenue Service ("IRS"),must determine the multinational corporation's fair share of corpo-rate and employment taxes.4

A multinational corporation does not want to pay taxes on thesame income in multiple jurisdictions.' Corporations can negotiatean Advance Pricing Agreement ("APA") with the IRS in hope ofmitigating such risk.6 There are many hurdles before a corporationcan complete an Advance Pricing Agreement, and the two mostrelevant challenges include time and cost.7 Though AlternativeDispute Resolution ("ADR") tactics, such as negotiations are sup-posed to be a cheaper alternative to litigation, it does not appear tobe the case with Advance Pricing Agreement negotiations. Theability to improve the program is hindered by a desire to keep cor-

* Editor-in-Chief, Cardozo Journal of Conflict Resolution; B.S. Darla Moore School of Busi-ness at The University of South Carolina; J.D. Candidate 2018, Benjamin N. Cardozo School ofLaw. The Author would like to thank his family and friends, especially his parents David andLori, his sisters Alexa and Skylar, his grandparents for their love and support, and his friendJustin Fleischacker for encouraging the Author to go outside of his comfort zone. The Authorwould also thank Professor Laura Cunningham for her mentorship and guidance.

1 See infra Part II.2 See U.S.C.A. 11 infra note 31.3 See Whitford infra note 29.4 See infra Part II-A.5 See infra Part II-B.6 Id.7 See infra Part III-D-1.8 See infra Part IV.

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porate information private and not collect valuable data.9 Scholarshave debated over the idea of publicizing such agreements, buthave received much push back from the corporations and theIRS.10

This Note seeks to investigate the inefficiencies of the Ad-vance Pricing Agreement negotiation process and how inequitablenegotiations adversely affect the American taxpaying community,and small and medium sized corporations."1 The results of this in-vestigation point to the necessity for the IRS to collect data andperform trend analyses.1 2 Although marginal improvements havebeen made by the Advance Pricing and Mutual Agreement("APMA") Office, the data show that the real issues of AdvancePricing Agreement negotiations have yet to be resolved. The cur-rent practices and procedures of a typical Advance Pricing Agree-ment negotiation does not promote horizontal equity amongtaxpayers. These issues enable larger corporations to take advan-tage of our tax system and reap the benefits.14 Unless changes aremade, these large corporations will continue to take advantage of afinancial opportunity only they can take advantage of, which ad-versely affects U.S. taxpayers.

Part II discusses the development of multinational corpora-tions and why transfer pricing became relevant in the first place.15

It goes on to describe the differences between multinational corpo-rations that need transfer pricing and APA to avoid costly litigationand to sustain operations1 6 and multinationals that have figuredout how to use our tax system advantageously.1 7 Finally, Part IIexplores some discussions on why APA are confidential and notreleased to the public.1 8 It identifies an inverse relationship be-tween corporations' desire to maintain their highly sensitive inter-nal information and the public's need to prevent a private body oflaw from forming.

9 See infra Part III-D-2.10 See infra Part I-C.11 See infra Part IV.12 See Trend Analysis as a Method, OECD, https://www.oecd.org/site/schoolingfortomorrow

knowledgebase/futuresthinking/trends/trendanalysisasamethod.htm (last visited Feb. 3, 2017).13 See infra Part I-C.14 For a general discussion of the issues associated with the American Jobs Creation Act, see

Thomas Brennan, What Happens After a Holiday?: Long-Term Effect of the Repatriation Provi-sions of the AJCA, 5 Nw. J. L. & Soc. POL'Y 1 (2010).

15 See infra Part II.16 See infra Part II-C.17 See infra Part II-B.18 See infra Part II-D.

ADVANCE PRICING AGREEMENTS

Part III discusses the APA data analyzed and how the negotia-tion process could be improved.' 9 The data analyzed in this Notewere collected from IRS annual APA reports each year from 2007through 2015. Due to external political factors that would skewthis Note's analyses (though the results were extremely favorable),the Author excluded the 2016 calendar year APA data from thisstudy. Part III also explains bilateral agreements, let alone multi-lateral agreements, are inherently difficult to negotiate because ofthe necessity for two taxing authorities to complete a mutually ben-eficial agreement. By negotiating more tax treaties, totalizationagreements, and merging the Transfer Pricing Office and U.S.Competent Authority, the competent authority phase of the nego-tiations was guaranteed to improve exponentially.20 It then dis-cusses other possibilities such as the difficulty of valuingintellectual property. Nonetheless, Part III then identifies the realbottleneck as the risk factors and critical assumptions phase ofAPA negotiations.2 ' It calls to question how there is an absence ofrelevant public information, and argues that the raw data could bereasonably and discretely analyzed to improve this phase of thenegotiation.

Part IV defends the use of data analysis as a tool in the negoti-ation process and identifies the value it provides.2 2 It investigatesthe potential stakeholders of the APA negotiation process andidentifies the benefits and costs of the proposed improvements.2 3

It recognizes the level of impact APAs have on U.S. taxpayers andproposes solutions to improve the circumstances. It concludes byarguing that data analyses would make the negotiations more effi-cient, less costly, and provide equality among parties interested inparticipating in an Advanced Pricing Agreement.

II. BACKGROUND

When a corporation has multiple facilities and other assets in ahome country and another country abroad, it is known as a mul-tinational corporation. 24 There are several reasons why a corpora-

19 See infra Part III.20 See infra Parts III-A, III-B, III-C.21 See infra Part III-D-2.22 See infra Part IV.23 J24 Corporations, BLACK'S LAw DICTIONARY (10th ed. 2014), at multinational corporation.

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tion may opt to become a multinational conglomerate, forexample, demand planning,25 risk-pooling,2 6 securing resources, oreliminating negotiations with foreign corporations for goods andservices.

Demand planning is a supply chain management process usedto better predict market trends, sales forecasts, and to help corpo-rations meet financial goals.2 7 For example, a corporation maywish to acquire a foreign supplier to better control inventory fordemand planning purposes. Risk-pooling has become increasinglypopular for corporations with major demand volatility. 28 By risk-pooling multiple markets, a multinational corporation is morelikely to find higher demand in one or more markets and thereforeensure its product or services are sold. 2 9 Another reason forglobalization may relate to an interest in securing expensive or oth-erwise unobtainable raw materials. Furthermore, the corporationmay simply wish to ease uncertainty or the economic burden oflengthy negotiations with a foreign entity.3 0

However, not all multinational corporations enter foreignmarkets for honest business purposes. As of 2015, the UnitedStates of America has one of the highest corporate income taxrates in the world.3 1 The Consumer Price Index Adjustments for2016 currently imposes a 39% tax rate on taxable income over$100,000 and less than $335,000.32 If a corporation distributes in-come to a shareholder, the shareholder is also taxed for receiving acapital gain from the corporation.3 3 Although capital gains aretaxed at a favorable rate,3 4 some shareholders might feel scorned

25 INDUSTRYWEEK, DEMAND-DRIVEN FORECASTING AND PLANNING 5 (2015), https://

www.sas.com/content/dam/SAS/en-us/doc/whitepaper2/demand-driven-forecasting-planning-107477.pdf.

26 Amanda J. Schmitt et al., Centralization Versus Decentralization: Risk Pooling, Risk Di-versification, And Supply Chain Disruptions, 52 OMEGA 201 (2015), https://ise.lehigh.edulsites/ise.lehigh.edu/files/11w 002.pdf.

27 See INDUSTRYWEEK, supra note 25.28 See Schmitt, supra note 26 at 3.29 Andrew B. Whitford, The Reduction of Regulatory Uncertainty: Evidence from Transfer

Pricing Policy, 55 ST. Louis U. L.J. 269 (2010).30 Id.31 See generally 26 U.S.C.A. § 11 (1993).32 26 U.S.C.A. § 11(b)(1) (1993).33 Michael Doran, Managers, Shareholders, And The Corporate Double Tax, 95 VA. L. REV.

517, 519 (2009).34 Currently, dividends are taxed at 20%; see 26 U.S.C.A. §1(h) (2014).

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because both the corporation and shareholder were taxed for whatone could argue is the same income.

Taxable income, the amount of income that determines an in-dividual's tax liability, is equal to gross income less allowable de-ductions.3 6 Gross income is the sum of compensation, fees,commissions, etc. which is paid to an individual. Because of thehigh tax rates,38 and taxes at both the entity and shareholderlevel,3 9 some multinational corporations may look to "avoid" taxesby shifting profits abroad. Assuming a corporation could moveprofits without triggering tax consequences,4 0 a corporation cansave a significant amount of profits. This would be done by movingprofits from a country with a high corporate income tax rate to acountry with a low corporate income tax rate.4 1

Shifting profits without tax consequences is not as simple asopening a bank account in the Cayman Islands and writing acheck. 42 A transfer price is the price two divisions of the same cor-poration agree to transact at.4 3 A transfer price is in contrast withan arm's length agreement by two unrelated corporations. For ex-

35 Yariv Brauner, The Non-Sense Tax: A Reply to New Corporate Income Tax Advocacy,2008 Mic. ST. L. REv. 591 (2008) (arguing that the corporate tax rate should be repealed); butsee, Meredith R. Conway, Money, Money, Money; It's a Rich Man's World: Making the Corpo-rate Tax Fair, 17 U. PA. J. Bus. L. 1181 (2015) (arguing the corporate tax rate is inequitable andthat it should be repealed, but further argues that dividends should be taxed at the ordinaryincome tax rate).

36 26 U.S.C.A. § 63(a) (2014).3 26 U.S.C.A. § 61(a)(1) (1984) ("[Gross income is] all income from whatever source de-

rived, including (but not limited to) the following items: (1) compensation for services, includingfees, commissions, fringe benefits and similar items.").

38 26 U.S.C.A. § 11 (1993) (depending upon taxable income, the corporate tax rate can be aslow as 15% to as high as 39%.).

39 Doran, supra note 33.The corporate income tax is now 100 years []old, and there have been two levels oftax on corporate profits for most of that period. The first tax applies at the corporatelevel when profits are earned, and the second tax applies at the shareholder levelwhen profits are distributed as dividends. By contrast, profits earned by non-corpo-rate businesses incur only a single level of tax. This double tax on corporate income iswidely regarded as "unusual, unfair, and inefficient," and numerous government andacademic proposals would repeal it.

Id.40 Generally speaking, this is easier said than done. See 26 U.S.C.A. § 482 (1986).41 E.g., Floyd Norris, Apple's Move Keeps Profit Out of Reach of Taxes, NY TimEs (May 2,

2013), http://www.nytimes.com/2013/05/03/business/how-apple-and-other-corporations-move-profit-to-avoid-taxes.html.

42 Jacques Peretti, The Cayman Island-Home to 100,000 Companies and the 18.50 Packet ofFish Fingers, GUARDIAN (Jan. 18, 2016, 12:58 PM), https://www.theguardian.com/us-news/2016/jan/18/the-cayman-islands-home-to-100000-companies-and-the-850-packet-of-fish-fingers.

43 Price, BLACK'S LAw DICTIONARY (10th ed. 2014), at transfer price.


ample, Corporation A would like to buy a product or service at acertain price from Corporation B; the two corporations negotiate afair price and agree. This is an arm's length transaction." Com-pare this to a transfer price in which a sector of Corporation Anegotiates and comes to an agreement to buy a product or servicefrom a different sector of Corporation A. It should be apparenthow this type of system might inadvertently promote abuse.4 5 Howcan a truly fair negotiation take place when both sectors of Corpo-ration A are managed by the same individuals? 46

To illustrate, a multinational corporation located in the UnitedStates may want to pay a subsidiary for a product or service at asubstantially higher price if the subsidiary is in a country with alower corporate tax rate. By doing this, a corporation could trans-fer a substantial amount of profits by claiming the high transferprice the subsidiary charged was "fair." Thus, the parent corpora-tion can shrink its profit margin when, in fact, the cost of makingthe product is significantly cheaper because the product is made inhouse. Nonetheless, like corporation A and corporation B, itshould be well within the rights of a subsidiary to receive a profitfor providing a product or service. Though that subsidiary isowned by the same corporation, both the parent and subsidiarycorporation need to make a profit to be sustainable.

The United States ("U.S.") government, under the direction ofthe IRS, does not allow income to leave the country so easily.4 7 Aprovision in the Internal Revenue Code, 26 U.S.C.A. § 482, allowsthe IRS to reallocate income to a U.S. corporation and charge backtaxes for current and prior years if the purpose was to avoid paying

44 Transaction, BLACK's LAw DICTIONARY (10th ed. 2014), at arm's-length transaction.45 Reuven Avi-Yonah et al., Allocating Business Profits for Tax Purposes: A Proposal to

Adopt a Formulary Profit Split, 9 FL.A. TAX REv. 497 (2009) (arguing that the arm's lengthtransaction method is incapable of producing useful results and the entire transfer pricing systemneeds to be reformed).

46 Id.47 See 26 U.S.C.A. § 482 (1986):

In any case of two or more organizations, trades, or businesses (whether or not incor-porated, whether or not organized in the United States, and whether or not affili-ated) owned or controlled directly or indirectly by the same interests, the Secretarymay distribute, apportion, or allocate gross income, deductions, credits, or al-lowances between or among such organizations, trades, or businesses, if he deter-mines that such distribution, apportionment, or allocation is necessary in order toprevent evasion of taxes or clearly to reflect the income of any of such organizations,trades, or businesses. In the case of any transfer (or license) of intangible property(within the meaning of section 936(h)(3)(B)), the income with respect to such trans-fer or license shall be commensurate with the income attributable to the intangible.

Id.


taxes. 4 8 Regrettably, the transfer price regime has caused many is-sues for the IRS and the government.4 9 Once U.S. money isabroad, it becomes difficult to repatriate the funds to the UnitedStates because of the tax consequences.5 0 In order for a corpora-tion to bring the funds back to America, it must pay itself a divi-dend which will likely trigger tax liability." Generally speaking, acorporation may take taxes paid in a foreign jurisdiction as a taxcredit in the United States.5 2

However, the purpose of moving profits abroad to a lower taxjurisdiction defeats the benefits of a corporation taking a taxcredit. To illustrate, A and B are owned by the same corporation.A is a corporation located in New York and legally allocates $1000via transfer pricing to B, a wholly owned subsidiary 54 located in acountry with an effective corporate tax rate of 10%. B will pay$100 of taxes on that income, but if B pays a dividend5 5 to A, moretaxes will be due.5 6 A will owe the IRS an additional $250 in taxesbecause it must make up the difference in taxes between the U.S.rate of 35% and the foreign country's tax rate of 10%.11

48 Id.49 Brennan, supra note 14.50 Though 26 U.S.C.A. § 901 (2004) allows for tax credits, the general idea is to move profits

to a country with a lower tax rate than the United States. As a result, there is not much benefitto this section of the internal revenue code.

51 See 26 U.S.C.A. § 951 (2007).52 26 U.S.C.A. § 901(a) (2004).53 26 U.S.C.A. § 951(a)(1)(A) (2007):

If a foreign corporation is a controlled foreign corporation for an uninterrupted pe-riod of 30 days or more during any taxable year, every person who is a United Statesshareholder . . . of such corporation and who owns . . . stock in such corporation onthe last day, in such year, on which such corporation is a controlled foreign corpora-tion shall include in his gross income, for his taxable year in which or with which suchtaxable year of the corporation ends . . . the sum if . .. (i) his pro rata share (deter-mined under paragraph (2)) of the corporation's subpart F income for such year.

Id.54 26 U.S.C.A. § 901 (2004).55 See generally 26 U.S.C.A. § 1248 (2007).56 26 U.S.C.A. § 901 (2004).57 For a more in-depth explanation see Martin Sullivan, Economic Analysis: U.S. Drug Firms

Bring Home $98 Billion, 42 TAx NOTES INT'L 321 (Apr. 24, 2006).


A. The Transfer Pricing System Promotes Tax AvoidanceAmong the Wealthiest of Multinational Corporations

Apple and Starbucks are two multinational corporations thatutilize transfer pricing.58 Apple is believed to have over $200 bil-lion abroad in taxable income and it is far from alone in that re-gard.5 9 Some of the more notable corporations which have incometrapped abroad include Fortune 500 companies, such as Nike, Ci-tigroup, Pfizer, Goldman Sachs, Google, and Walmart. 6 0 Since2015, estimates of how much taxable income is trapped abroadhave ranged from conservative estimates of $2.1 trillion61 to, morerecently, $2.5 trillion.62 Compared to the United States corporatetax rate of almost 40%,63 Apple is levied an annual 2% corporateincome tax by Ireland. 6 4 Legal scholars have voiced concern re-garding the transfer pricing system.65 In particular, the arm'slength principle that is utilized when developing a transfer price isrooted on deeply flawed logic. 6 6 It has been argued that unlessthere is significant reform to the current system, the internationaltax crisis will be further exacerbated. 6 7

When dealing with a tangible product such as a tire, determin-ing a fair transfer price should be relatively easy. However, this is

58 See Norris, supra note 41.59 RicHARD PHILLIPS ET AL., OFFSHORE SHELL GAMES 2016, THE USE OF OFFSHORE TAx

HAVENS BY FORTUNE 500 COMPANIEs 2 (2016), http://ctj.org/pdf/offshoreshellgames2016.pdf.6o Id.61 David Alexander, Big U.S. Firms Hold $2.1 Trillion Overseas to Avoid Taxes: Study,

REUTERS (Oct. 6, 2015) http://www.reuters.com/article/us-usa-tax-offshore-idUSKCNOS008U20151006 (last visited Jan. 31, 2017).

62 See Phillips, supra note 59.63 26 U.S.C.A. § 11 (1993).64 Tim Worstall, Ireland To Close Apple's Tax Break, Not That It Will Make The Slightest

Difference To Anything At All, FORBES (Oct. 16, 2013) http://www.forbes.com/sites/timworstall2013/10/16/ireland-to-close-apples-tax-break-not-that-it-will-make-the-slightest-difference-to-an-ything-at-all/#7f5ff3f7723f.

65 Robert Bloink, Is United States Corporate Tax Policy Outsourcing America? A CriticalAnalysis of the Proposed Holiday from Trapped CFC Earnings, 56 VILL. L. REV. 833 (2012)(arguing that the fungibility of dollars and the lack of constraints led to the failure of theAmerica Jobs Creation Act); Brennan, supra note 14 (questioning whether the purpose of theAmerican Jobs Creation Act was achieved from the first tax holiday); Stephen Loomis, TheDouble Irish Sandwich: Reforming Overseas Tax Havens, 43 ST. MARY'S L.J. 825 (2012)(describing in detail the process multinational corporations use to avoid paying taxes on intellec-tual property); Avi-Yonah et al., supra note 45 (arguing that the arm's length transaction methodis incapable of producing useful results and the entire transfer pricing system needs to bereformed).

66 Avi-Yonah et al., supra note 45.67 Id.


not always the case because sometimes products are unique to acorporation. 68 Transfer pricing may become extremely challengingif a corporation and the IRS are trying to value intellectual prop-erty.69 Some multinational corporations, through the help ofothers, have developed elaborate transfer pricing systems involvingincorporation in multiple countries in an effort to avoid payingtaxes on income.7 0 The most common system, dubbed the"[D]ouble Irish with a Dutch sandwich," involves three subsidiarycorporations that are formed or operated in three different coun-tries for the benefit of the parent.7 ' The Double Irish with a DutchSandwich is an increasingly common mechanism utilized by tech-nology companies. Inter alia, as of 2014, Google has "paid" over$12 billion to its subsidiaries.7 2 The destination of the income isBermuda, a country which has zero corporate taxes.7 3 This subsidi-ary does nothing more than own intellectual property and licensesthose rights to Google.7 4

B. Advance Pricing Agreements Role in Tax AvoidanceUncertainty

Transfer pricing may appear trivial to alternative dispute reso-lution, but in actuality, it plays a significant role. Corporations

68 See generally Eaton Corp. v. Comm'r, 140 T.C. 410, 412 (2013).69 Andrew Whitford, The Reduction of Regulatory Uncertainty: Evidence from Transfer Pric-

ing Policy, 55 ST. Louis U. L.J. 269 (2010).70 See Eric L. Talley, Corporate Inversions and the Unbundling of Regulatory Competition,

101 VA. L. REV. 1649, 1669 (2015) ("Many of these arrangements hinge on a flavor of jurisdic-tional arbitrage, employing ... licenses [of intangible] property to exploit anomalies or inconsis-tencies among foreign tax jurisdictions. The effect is to [reduce or eliminate] foreign tax liability[known as a Double Irish].").

71 Loomis, supra note 65.72 Toby Sterling, Google Accounts Show 11 Billion Euros Moved via low Tax 'Dutch Sand-

wich' in 2014, REUTERS (Feb. 19, 2016), http://www.reuters.com/article/us-google-tax-idUSKCNOVS1GP ("The tax strategy is known to accountants as the '[D]ouble Irish, Dutch Sandwich'. Itallows Google, now part of holding company Alphabet Inc, to avoid triggering U.S. income taxesor European withholding taxes on the funds, which represent the bulk of the group's overseasprofits.").

73 See generally Gov. oi, BERMUDA, https://www.gov.bm/types-taxes-bermuda (last viewedJan. 29, 2016).

74 See Sterling, supra note 72.75 See generally I.R.S. Announcement & Report Concerning Advance Pricing Agreements,

Announcement 2016-12, 2016-14 I.R.B. 589. The entire APA process is a lengthy negotiationbetween a corporation and the IRS.

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that can afford the astronomical costs 7 6 will attempt to negotiate7 7

an Advance Pricing Agreement with the IRS to avoid the risk78 ofpenalties and back taxes.79 This negotiation process with the IRS isnotably unusual because the process is typically ex-ante and volun-tary.80 As of 2016, the typical APA takes an average of 36.7months to complete.81

There are three types of APAs: a unilateral agreement,82

which is between a corporation and the IRS; a bilateral agree-ment, which is between the corporation, the IRS, and anotherforeign taxing authority; and a multilateral agreement," which isbetween the corporation, the IRS, and multiple foreign taxing au-thorities. The purpose of the APA is to define the specific stan-dards that govern the agreement. More importantly, the APAwill fix the valuation 8 6 method of the property or service.87 The

76 See Christopher J. Kotarba, Better Than the "Best": Transfer Pricing Methodology in theWake of Roche, 48 COLUM. J. TRANSNAT'L L. 140 (2009) (describing some of the major cost

burdens that a corporation must take on to complete the Advanced Pricing Agreement process).77 The negotiation is optional and the corporation may inevitably have to abandon the nego-

tiation if it does not achieve the results it desires.78 See Loomis, supra note 65.79 See Eaton Corp. v. Comm'r, 140 T.C. 410, 412 (2013); Microsoft Corp., v. Office of Tax

and Revenue, 2012 DCOAH 00012 (May 1, 2012); GlaxoSmithKline Holdings Inc., v. Comm'r,117 T.C. 1 (2001).

80 Diane M. Ring, On the Frontier of Procedural Innovation: Advance Pricing Agreementsand the Struggle to Allocate Income for Cross Border Taxation, 21 MICH. J. INT'L L. 143, 159(2000).

81 See I.R.S., supra note 75.82 See BORIS BITTIKER & LAWRENCE LOKKEN, FEDERAL TAX'N OF INCOME, EST., AND

Gwrs, $ 79.14, ADVANCE PRICING AGREEMENTS 79.14.13 (3d ed. 2000), Westlaw 439928(database last visited Jan. 31, 2017).

83 Id.84 Id.85 Id.86 Valuation, BLACK'S LAW DicrlONARY (10th ed. 2014) ("The process of determining the

value of a thing or entity [or t]he estimated worth of a thing or entity.").87 Ted Hagelin, Valuation of Property Assets: An Overview, 52 SYRACUSE L. REv. 1133,

1133-34 (2002)There are three basic methods of valuation: the cost method, the market method, andthe income method. The cost method of valuation measures the value of an asset bythe cost to replace the asset with an . . . identical or equivalent asset. The assumptionunderlying the cost method of valuation is that the cost to purchase or develop a newasset is commensurate with the economic value that the asset can provide during itslife. The market method values an asset based upon comparable transactions be-tween unrelated parties. The income method values an asset based upon the presentvalue of the net economic benefit (net future income stream) expected to be received.over the life of the asset.

Id.


valuation method is critical88 because there are many differentmethods to valuing property, and each method can obtain substan-tially different results.89 This may affect the corporation if it uses amethod that values its property at a higher rate and the IRS uses amethod that lowers the value of the corporation's property." Forexample, in a now overruled 2013 Tax Court decision,9' Eaton Cor-poration had its total taxable income over a two year period in-crease by $368,654,000.00.92

Generally, ADR methods,93 such as negotiations are cost andtime effective; 94 however, this is not the case for the APA process.Currently, the APA process is extremely lengthy 95 and costly. 9 6

Aside from requiring an initial user fee to participate in the APAprocess,97 the participant must also pay for representation. 98 Forexample, the APA request must be accompanied by a detailedanalysis of economic risks, costs, contractual terms;9 9 financial andtax data of the parties to the transaction for three preceding taxa-ble years;'" research efforts undertaken by the taxpayer and itsadvisors to identify independent comparables including the factorsused to determine comparatives;"o1 detailed financial data;1 02 and

88 See cases cited, supra note 79.89 Ted Hagelin, Valuation of Property Assets: An Overview, 52 SYRACUSE L. REv. 1133

(2002).90 See Eaton Corp. v. Comm'r, 140 T.C. 410 (2013) (upholding the IRS' application of § 482

that increased Eaton's 2005 taxable income to $102,014,000 and 2006 taxable income to$266,640,000).

91 Id (originally assessed Eaton with a tax deficiency for years 2005 and 2006).92 Id93 RoBERT L. HAIG, 4 N.Y. PRAC. SERIEs-CoM. LITIG. IN N.Y. ST. Cs. § 35.25, AiTERNA-

TIVE DispuTE REsoLUTION (4th eds. 2009), Westlaw (database updated Sept. 2016).94 Id. at 1 ("The overall purpose of ADR is to offer litigants the potential opportunity to

settle a lawsuit and end matters without a waste of significant time and money in court.").95 Remember, the average APA agreement takes 36.7 months and this doesn't count for the

fact that the typical company needs a large accounting firm to represent it during this process.Furthermore, there are application fees, consulting costs, and much more needed for a companyto complete the APA process.

96 Kathryn Pawlicki, Advance Pricing Agreements: Fair to All Taxpayers?, 61 WAYNE L.REV. 195, 213 (2015) ("The initial APA user fee ranges from $22,500 to $50,000, depending onthe size of the corporation.").

97 Id.98 See id. (arguing that the APA program is practically unavailable to small businesses and

individuals, which creates a fundamental unfairness in the design of the program).99 See Rev. Proc. 2006-9, 2006-9 I.R.B. 278.

100 Id.

101 Id.102 Id.

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an economic study of the general industry.o3 In 2014 the averagetime to complete a new APA was 40.5 months. 104

C. Though Some Have Justly Fought for Change, AdvancePricing Agreements Remain Confidential

In 1991, the IRS passed a new revenue procedure, 0 whichauthorized the APA process. Two separate Offices initially ran theprogram-the Office of the Associate Chief Counsel and the Of-fice of the U.S. Competent Authority.'" This is no longer the casebecause in the first months of 2012, the programs merged'0 7 andare now called the Advanced Pricing and Mutual Agreement Of-fice ("APMA").10s This was done to simplify the APA process.

The first step in the process' 0 9 is for either a corporation or theIRS to request a pre-filing conference with the other.110 The tax-payer, who does not have to identify itself during this meeting, orits attorney must pre-submit a brief that describes some of the is-sues that will be discussed during the pre-filing meeting and thespecific people who will attend the meeting."' If the representa-tives and the IRS determine that an APA is an appropriate op-tion,11 2 the corporation then requests a formal APA hearing andprovides the IRS with relevant data and analyses" 3 that identifyhow the corporation thinks its service or property, real or intellec-tual, should be valued." 4 The IRS then evaluates the corporation's

103 BORIS BIcrKER & LAWRENCE LOKKEN, FEDERAL TAX'N OF INCOME, EST., AND Gi-rs, ¶79.14, ADVANCE PRICING AGREEMENTS, 1 79.14.2 (3d ed. 2000), Westlaw 439928 (database last

visited Feb. 3, 2017).104 I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announcement

2015-11, 2015-15 I.R.B. 883.105 See Rev. Proc. 91-22, 1991-11 I.R.B. 1.106 Id.107 I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announcement

2012-13, 2012-16 I.R.B. 805.108 Id.109 See Ring, supra note 80.110 See BIrrlKER & LOKKEN, supra note 103.111 Id.112 But see Kathryn Pawlicki, Advance Pricing Agreements: Fair to All Taxpayers?, 61 WAYNE

L. REV. 195, 213 (2015).113 See Crm H. LOWELL & PETER L. BRIGER, U.S. INT'L TRANSFER PRICING, 1 12.03, AREAS

OF SPECIFIC FOCus, Westlaw 257523 (database last visited Feb. 4, 2017).114 See BoRIS BIrrIKER & LAWRENcE LOKKEN, FEDERAL TAX'N OF INCOME, EST., AND

Givrs, $ 79.14, ADVANCE PRICING AGREEMENTS (3d ed. 2000), Westlaw 439928 (database last

visited Nov. 12, 2016).


data, provides it with recommendations, and schedules a confer-ence with the corporation in which both sides attempt to negotiatean understanding." If the APA is a unilateral1 16 agreement, oncethe IRS and the corporation come to an understanding, the agree-ment may be signed. Should the agreement not be satisfactory, thecorporation may elect to withdraw and not complete the process.' 1 7

If a corporation seeks a bilateral or multilateral agreement,""the IRS will convene a private meeting with the competent foreigntaxing authority.119 This part of the process is completed withoutthe corporation present.1 2 0 During this private meeting, the IRSrepresents the negotiating position that it and the corporationagreed to and will normally come to an understanding with the for-eign taxing authority.121 Finally, the IRS will return to the corpora-tion and present the agreement it and the foreign taxing authorityagreed to. The corporation may sign and agree to the APA or re-ject it.1 2 2 At such time, the corporation may either elect to start theprocess all over or alternatively agree to a unilateral agreementwith the IRS.1 23

Some have voiced concerns about the APA structure becausethe process from start to finish is a complete secret. 1 24 Little infor-

The request must include the following: (1) a detailed analysis for each party to thecovered transactions of the functions and economic activities it performs, the assets itemploys, the economic costs it incurs, the risks it assumes, relevant contractual terms,and relevant economic conditions; (2) a broad range of financial and tax data of theparties to the transactions for the preceding three taxable years; (3) a "detailed pres-entation" on "research efforts" undertaken by the taxpayer and its advisors to iden-tify "possible independent comparables" and the criteria the taxpayer used to selectcomparables; (4) "detailed financial data" on the selected comparables; and (5) aneconomic study of "general industry pricing practices and economic functions per-formed within the markets and geographical areas covered by the APA request.

Id.115 BoRis BIrrIKER & LAWRENCE LOKKEN, FEDERAi. TAX'N OF INCOME, EST., AND Gw-rs, ¶

79.14, ADVANCE PRICING AGREEMENTS (3d ed. 2000), Westlaw 439928 (database last visitedNov. 12, 2016).

116 See BrrFIKER & LOKKEN, supra note 82.117 See Lowell, supra note 113.118 See BrIKER & LOKKEN, supra notes 83, 84.119 Blake Currey, A Shrouded Remedy: Increasing Transparency in the IRS Advance Pricing

and Mutual Agreement Program by Releasing Redacted Advance Pricing Agreements and In-creasing Administrative Disclosures, 50 SAN Dn:G3o L. REV. 1005 (2013).

120 Id.121 This is not always the case and may sometimes be the reason the corporation opts for a

unilateral agreement instead of a bilateral agreement.122 BiTrIKER & LOKKEN, supra note 115 (database last visited Jan. 22, 2017).123 Id.124 See, e.g., Kristen Hickman, Should Advance Pricing Agreements be Published?, 19 Nw. J.

INT'l. L. & Bus. 171 (1998) (discussing the Bureau of National Affairs ("BNA") lawsuit against

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mation is published1 2 5 about any details of an agreement orwhether a company requested a meeting in the first place. Thoughscholars have argued for publication, 1 2 6 corporations who haveagreed to an APA and the IRS disagree. 127 Corporations must re-veal highly sensitive information during this process, such as tradesecrets, and commercial and financial information.'" The IRS andthe corporations are concerned that competitors may use this privi-leged information, which may cause substantial harm to the corpo-ration.1 2 9 The Internal Revenue Code provides support forkeeping the information private.13 0 Nonetheless, it could be ar-gued that private rulings create legal ambiguities because privaterulings prevent the establishment of legal precedence. Some be-lieve that APA information should not be protected by as confi-dential information by § 6103, and thus a change in the law wouldmitigate and dispel the private body of law.13 1

In the mid-1990s, The Bureau of National Affairs filed a free-dom of information lawsuitl 3 2 against the IRS to release APA in-

the IRS in which BNA argued that the Freedom of Information Act requires the details of APAsto be public).

125 But see Robert Feinschreiber & Margaret Kent, Dissecting the 2007 Annual APA Report,9 CORP. Bus. TAX'N MONTHLY 31 (2008) (analyzing one of the earlier and more "in-depth"reports submitted by the IRS that discusses APAs).

126 See Hickman, supra note 124; Blake Currey, A Shrouded Remedy: Increasing Trans-parency in the IRS Advance Pricing and Mutual Agreement Program by Releasing Redacted Ad-vance Pricing Agreements and Increasing Administrative Disclosures, 50 SAN DIEGO L. REV.1005 (2013); Robert G. Clark, Transfer Pricing, Section 482, and International Tax Conflict: Get-ting Harmonized Income Allocation Measures From Multinational Cacophony, 42 AM. U. L.REV. 1155 (1993).

127 John Turro, IRS Official Says No APA Disclosure, But Generic Information to Be Pro-vided, 4 TAX NoTHs INT'L. 709 (1992) (discussing former Chief Counsel, Robert Culbertson'spoint of view on why the APA process should remain confidential).

128 Critical Mass Energy Project v. Nuclear Reg. Comm'n, 975 F.2d 871 (1992).129 See Hickman, supra note 124 at 185.130 See generally 26 U.S.C.A. § 6103(a), (b)(2)(C) (2016):

Returns and return information shall be confidential ... shall disclose any return orreturn information obtained by him in any manner in connection with his service assuch an officer or an employee or otherwise or under the provisions of this section... any advance pricing agreement entered into by a taxpayer and the Secretary andany background information related to such agreement or any application for anadvance pricing agreement

Id131 See Robert G. Clark, Transfer Pricing, Section 482, and International Tax Conflict: Getting

Harmonized Income Allocation Measures From Multinational Cacophony, 42 AM. U. L. REV.1155 (1993) (arguing that, "By opening the operative details of APAs to review by competentauthorities and taxpayers, the often confusing details of U.S. transfer pricing policy and themeans to satisfy the requirements of § 482 will be made far clearer to all involved.").

132 5 U.S.C.A. § 552 (2016).


formation.'3 3 The Bureau of National Affairs claimed that APAswere written decisions that were covered under § 6110134 andtherefore must be disclosed to the public.13 5 Furthermore, they dis-agreed with the IRS' argument in favor of keeping APAs privateby arguing that publicizing information would be useful and benefi-cial to taxpayers trying to develop their own APA.1 3 6 Though theIRS admitted that APAs were likely subject to § 6110137 and there-fore subject to publication, Congress enacted changes to § 6103138in late 1999 as a counter measure by including APAs in protectedprivate information.1 3 9 As a result, the IRS does not publish spe-cific information regarding APAs.

However, amendments to the law in late 1999,4o required theIRS to create year-end reports summarizing the Advance Pricing

133 See Clark, supra note 131.134 26 U.S.C.A. § 6110(a) (2007) ("Except as otherwise provided in this section, the text of

any written determination and any background file document relating to such written determina-tion shall be open to public inspection at such place as the Secretary may by regulationsprescribe").

135 John L. Abramic, Advance Pricing Agreements: Confidential Return Information or Writ-ten Determinations Subject to Release, 76 Cin.-Kzr L. REV. 1823 (2001).

136 See Hickman, supra note 124.137 26 U.S.C.A. § 6110 (2007).138 26 U.S.C.A. § 6103(b)(1), (b)(2)(C) (Dec. 17, 1999).139 Abramic, supra note 135.140 Ticket to Work And Work Incentives Improvement Act of 1999, PL 106-170, 113 Stat

1860 (1999):Not later than 90 days after the end of each calendar year, the Secretary of the Trea-sury shall prepare and publish a report regarding advance pricing agreements. (2)CONTENTS OF REPORT. - The report shall include the following for the calen-dar year to which such report relates: (A) Information about the structure, composi-tion, and operation of the advance pricing agreement program office. (B) A copy ofeach model advance pricing agreement. (C) The number of - (i) applications filedduring such calendar year for advance pricing agreements; (ii) advance pricing agree-ments executed cumulatively to date and during such calendar year; (iii) renewals ofadvance pricing agreements issued; (iv) pending requests for advance pricing agree-ments; (v) pending renewals of advance pricing agreements; (vi) for each of the itemsin clauses (ii) through (v), the number that are unilateral, bilateral, and multilateral,respectively; (vii) advance pricing agreements revoked or canceled, and the numberof withdrawals from the advance pricing agreement program; and (viii) advance pric-ing agreements finalized or renewed by industry. (D) General descriptions of - (i)the nature of the relationships between the related organizations, trades, or busi-nesses covered by advance pricing agreements; (ii) the covered transactions and thebusiness functions performed and risks assumed by such organizations, trades, orbusinesses; (iii) the related organizations, trades, or businesses whose prices or re-sults are tested to determine compliance with transfer pricing methodologies pre-scribed in advance pricing agreements; (iv) methodologies used to evaluate testedparties and transactions and the circumstances leading to the use of those methodol-ogies; (v) critical assumptions made and sources of comparables used; (vi) compara-ble selection criteria and the rationale used in determining such criteria . . . (E)


and Mutual Agreement Program's activity. APAs still sit atop apowder keg among scholars,14 1 but the information that the IRSdoes reveal at the end of the year paints a very strange picture.14 2

D. The Growing Inefficiencies of the APA Negotiation ProcessHave Created Vertical Inequity

Though the program has grown in work force and experiencesince 2000, the reports show inefficiencies percolate throughout theentire process.14 3 The purpose of a negotiation is to save time andmoney," but as the negotiation process takes longer, the moremoney a corporation must spend. The APA negotiation processhas progressively taken more time to complete due to these ineffi-ciencies. Thus, smaller corporations and individuals are having aharder time participating in the negotiations because they cannotafford the proper representation. 1 4 5

A major corporation has little concern paying the bill to nego-tiate an APA, but a small corporation likely will have difficultypaying a major accounting firm's 38-month bill. 14 6 Equity treats allmembers of a class on an equal footing and imposes burdens anddistributes rights without preference, either equally or in propor-

Statistics regarding the amount of time taken to complete new and renewal advancepricing agreements.Id.

141 See Avi-Yonah et al., supra note 45 (arguing that keeping APAs private is unhealthy forthe tax system).

142 For a more comprehensive breakdown of each year-end summary, see Annual A PA Statu-tory Report, INTERNAL REVENUE SERVICE (Apr. 21, 2016), https://www.irs.gov/businesses/corpo-rations/annual-apa-statutory-report.

143 Id.144 See HAIG, supra note 93.145 Avi-Yonah et al., supra note 45

The contemporaneous documentation rule adopted by Congress, which requires tax-payers to develop documentation of their transfer pricing methods at the time thetransactions are undertaken rather than when they are challenged on audit, as well asthe complexity of the new SA methods (such as the Comparable Profits Method, orCPM), have led the major accounting firms to develop huge databases and expertisein preparing transfer pricing documentation for clients. This imposes large costs onmajor U.S. multinational corporations (Durst and Culbertson, 2003). Meanwhile,small and medium businesses, which cannot afford the major accounting firms, areleft to fend for themselves.

Id.146 See I.R.S. Announcement & Report Concerning Advance Pricing Agreements, Announce-

ment 2016-12, 2016-14 I.R.B. 589.


tion to the several interests.' 4 7 Nonetheless, the APA negotiationprocess is not equitable.

III. DISCUSSION

In the early 2000s, the IRS began releasing detailed year-endreportsl48 every March or April that provide data collected fromthe Program's activity for the prior calendar year. For example,the 2011 APA year-end report provides data collected from APAactivity in 2010; the 2016 year-end report provides data collectedfrom APA activity in 2015. Additionally, each report included asummary of the history of the APA program, which may includesubstantive policy, organizational, or other changes made duringthe most recent calendar year.1 4 9

The 2008 APA year-end report, which recorded data from the2007 calendar year, stated that 81 new15 0 APAs were executed.1 5 1

The average completion time in the 2008 report1 5 2 of a new APAwas 38.2 months per agreement.1 53 Furthermore, 29 renewals wereexecuted taking an average of 25.5 months to complete.15 4 Overthe next seven APA reports, the number of upper level employeeswho worked on APAs significantly increased from 37155 in 2007 (asdescribed from the 2008 APA year-end report) to 93156 in 2015 (asdescribed from the 2016 APA year-end report). Nonetheless, thetime to complete an APA has staggered in certain areas and in-creased in others. Most recently, the 2016 report stated that theAPMA Office15 7 executed 110 new APAs. In the 2008 report, 81

147 Equity is Equality, and Equality is Equity, BALLENTINE'S LAw DIcTIONARY (3d ed. 1969).148 See Annual APA Statutory Report, supra note 142.149 See I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announce-

ment 2008-27, 2008-15 I.R.B. 751.150 Of the 81 new APAs completed, 26 were unilateral agreements, 54 were bilateral agree-

ments, and 1 was a multilateral agreement.151 An APA is executed when the corporation and IRS come to a final agreement.152 I.R.S., supra 149.153 Id.

154 Id

155 See I.R.S., supra note 149.156 See I.R.S., supra note 146.157 I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announcement

2013-17, 2013-16 I.R.B. 911In the first quarter of calendar year 2012, the APA Program was moved from theOffice of Chief Counsel and merged with that portion of the Office of the U.S. Com-petent Authority (USCA) that resolves transfer pricing cases under the mutualagreement procedures of the United States' bilateral income tax conventions. As the

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new APAs were executed. Yet the time to complete an APA from2007 to 2015 has improved by an average of one month peragreement.

Though upper level employment has increased by more than250% ,158 the negotiation process has only improved by an averageof one month per agreement. Remember that to participate in theAPA negotiation process, a corporation needs representation fromwell-established accounting firms.1 5 9 This is not something averageto small size firms can typically do. As a result, it causes manymore issues for the negotiation process.16 0 In light of the difficul-ties surrounding the negotiation process, relevant data from theAPA year-end summaries can show where to improve the systemand make the negotiations fairer for all participants. By doing this,corporations who truly need to utilize transfer pricing can avoidserious litigation and continue to grow on a global scale.

The 2015 report is the first APA year-end report that showsthe program made any progress since its inception. However, theimprovements are marginal and not capable of improving the ne-gotiation process for corporations that need to participate, but aretoo small. If upper level employment in the APMA Office in-creased by 250% from 2007 to 2015, why did the total number ofnew APAs executed only increase by 29? It does not make sense.However, several factors seem to be involved. First, the 2016 re-port1 6 1 stated the average time of completion for a new APA im-proved by an average of one month per agreement from the 2008APA report. 1 6 2 Second, during the same period, renewal time foran APA increased by an average of 10.8 months per agreement.Third, the average time to complete a unilateral APA has increasedby an average of 7.4 months per agreement. Finally, the averagetime to complete a bilateral APA improved by only 0.3 months peragreement.

successor to the APA Program, the new Advance Pricing and Mutual Agreement(APMA) Program has prepared and finalized this report.

Id.158 This is calculated by taking the number of employees in 2015, 93, and the number of

employees in 2007, 37.159 See Avi-Yonah, supra note 145.160 Amy J. Cohen, Dispute System Design, Neoliberalism, and the Problem of Scale, 14 HARV.

NEGOT. L. REV. 51 (2009) (discussing how the dispute resolution design has similarities anddifferences among the levels of social organizations that participate in dispute resolution).

161 See I.R.S., supra note 146.162 See I.R.S., supra note 152.


There may be several reasons why this negotiation process re-mains inefficient: 1) It takes time for both competent authoritiesand the corporation to come to a resolution; 2) The amount of re-newals filed has increased, and the APA process has been run bydifferent Offices; 3) Unilateral agreements are taking more time tocomplete as a result of failed bilateral negotiations; and 4) The idi-osyncratic nature of each risk factors and critical assumptions, ineach APA.

Bilateral or multilateral agreements are critical to a corpora-tion that wishes to mitigate any risk of double taxation. 1 63 One ofthe primary functions of the meeting between the IRS and the for-eign competent authority is to come to a resolution in which theyagree not to tax the same income earned by a corporation. Fur-thermore, both taxing authorities want to ensure its fair share oftax revenue, and this process can be time consuming. For example,the authorities must agree on who is an employee of which countryand therefore pays that country's social security tax. 164 This is amajor issue that a small corporation needs to know beforehand toavoid expensive litigation.

Although a corporation benefits from both taxing authoritiescoming to a resolution, the corporation may not find that resolu-tion to be in its best interest. If such is the case, the corporationwill have three options: 1) Renegotiate with a better understandingof what both taxing authorities' positions are; 2) Accept a unilat-eral deal only with the IRS on the terms that it and the IRS origi-nally agreed to; or 3) Elect to walk away from the negotiations withno deal. This is a major burden on a corporation with limited re-sources because it will inherently be at a disadvantage as comparedto a significantly larger corporation.1 6 5

Because a small corporation must invest a significant amountof time and money in this process, it becomes difficult to walk awayfrom the negotiations without a deal. This may be why unilateralagreements need more time to complete. A larger company hasmore bargaining power with respect to the excessive costs of thenegotiations.

Furthermore, it is reasonable to argue that intellectual prop-erty is difficult to value and is becoming a more common feature in

163 Conway, supra note 35.16 Otherwise known as a totalization agreement. See Worstall infra note 172.165 Kathryn Pawlicki, Advance Pricing Agreements: Fair to All Taxpayers?, 61 WAYNE: L.

Rnv. 195, 213 (2015).

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transfer pricing and APAs.16 Some scholars have criticized theOrganization for Economic Cooperation and Development be-cause the guidelines the agency set forth provide little assistance invaluing highly uncertain intellectual property. 16 7 For example, abottle of Coca-Cola is considerably easier to value than the Coca-Cola brand. Coca-Cola might believe that its goodwill 1 6 8 is ex-tremely valuable for brand recognition, but the IRS might have asubstantially different view. This raises the question, how does onedetermine what the Coca-Cola brand's true worth is?

Finally, the most probable cause of the lengthy APA process isevaluating risk factors and critical assumptions. This is a centralarea of dispute during the negotiation process between the IRSand the corporation. Risk factors and critical assumptions cancause significant changes in the transfer price value of the product,service, or intangible. In several APA reports the IRS indicatedthat this part of the process is the most time consuming and diffi-cult task for both sides. 1 6 9 For example, building a factory in Co-lombia has substantially different risk factors than a factory inIndonesia. A major concern in Colombia might be cartel interven-tion, whereas a factory in Indonesia may be concerned about themonsoon season. Both cartel intervention and monsoon seasonare substantial risk factors that can cause serious work concerns,but have significantly different implications.

A. Negotiating Time Spent Between Competent Authorities HasImproved

The competent authority negotiation phase was one of thechief concerns when the new APMA Office took over the APAprogram. 170 Before the 2012 APA year-end report, the time spenton negotiating position was included in the data set. The average

166 Thomas Pearson, Proposed International Legal Reforms for Reducing Transfer PricingManipulation of Intellectual Property, 40 N.Y.U. J. INr'L L. & POL. 541 (2008) ("The most egre-gious tax avoidance has taken place in the transfer pricing manipulation of IP and in the reloca-tion of IP to tax havens. Such abusive tax avoidance has unfairly drained significant tax revenue... and has created an enormous challenge for the global economy.").

167 See Margaret Kent & Robert Feinschreiber, OECD Transfer Pricing Guidelines and the'Highly Uncertain' Valuation of Intangibles, 23 J. INT'L TAX'N 47 (2012).

168 See Goodwill BLACK'S LAw DICfiONARY (10th ed. 2014).169 I.R.S. Announcement & Report Concerning Advance Pricing Agreements, Announcement

2016-12, 2016-14 I.R.B. 589.170 See I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announce-

ment 2012-13, 2012-16 I.R.B. 805.


time spent on negotiating position is the time initially spent be-tween the corporation requesting an APA and the IRS. This "ne-gotiating position phase""'7 takes place before the foreigncompetent authority is approached. Thereafter, the IRS and theforeign competent authority negotiate a variety of issues, such ashow the product, service, or intangible will be valued, currencyconversions, and effects of totalization agreements.1 7 2 This "com-petent authority phase" 7 3 is done because both taxing agencieswant to ensure their fair share of taxing revenue.

The 2008 APA report shows that the average time spent onthe negotiating position for the corporation and IRS was 17months. The numbers from the 2008 report suggest that most ofthe time spent on the average APA was during the competent au-thority negotiating phase. 1 7 4 From 2008 to 2012, both the averagetime to complete a new APA and the time spent on negotiatingposition for the APA increased. In the 2012 report, the averagetime to execute a new APA was 40.9 months per agreement. Re-markably, the average time the IRS and corporation spent negoti-ating its position increased from 17 months to 29.5 months peragreement in the 2012 report.17 5 That means the remaining 11.4months were spent between the competent authorities phase or thefinal amendment phase of the negotiations.

From 2008 to 2012, the average time spent to execute a newAPA increased by 2.7 months. However, the average time spent onnegotiating positions also increased by 12.5 months. The data showthat each year subsequent to the 2008 report required less timeduring the competent authority phase and the final amendmentphase. Bear in mind that the United States has negotiated severalmore tax treaties 76 and totalization agreements with foreign gov-ernments during this same period.

Furthermore, members of the IRS and the same members orassociates of the foreign taxing authorities likely developed rela-

171 [Hereinafter the "negotiating position phase"].172 See generally Tim Worstall, The India, US Totalisation Agreement; Difficult to Argue

Against Really, FORBES (Nov. 24, 2014), http://www.forbes.com/sites/timworstall/2014/11/24/the-india-us-totalisation-agreement-difficult-to-argue-against-really/#5953b2b54e27.

173 [Hereinafter the "competent authority phase"].174 See I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announce-

ment 2008-27, 2008-15 I.R.B. 751.175 See I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announce-

ment 2012-13, 2012-16 I.R.B. 805.176 See generally INT'L. INCOME TAX & EST. PLAN., app. 2, U.S. TAX TREATY TABLES,

Westlaw (2d ed.) (last visited Feb. 2, 2017). https://1.next.westlaw.com/Link/Document/FullText?findType=& pubNum=167155&cite=INTLINCTAXAPP2&.

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tionships with one another through repeated contact. For example,Japan has accounted for 51% of all APAs completed from 2012 to2014 while Canada accounted for approximately 17% during thesame period. The United Kingdom was the third most commonpartner to an APA, averaging approximately 9% of all APAs from2012 to 2014. Considering that most APAs involve Japan, Canada,and the United Kingdom, it is not surprising that the time spentduring the competent authority phase has decreased.

The data from 2007 to 2011 show that something has causedthe time spent on the negotiating position to significantly increase.In one of the footnotes of the 2013 annual APA report, the IRSacknowledged that the Office of the Chief Counsel did not collectdata on time spent during the competent authorities phase of nego-tiations before 2012.177 By the 2015 report, the IRS stated that thecombining of the Transfer Pricing Office with the U.S. CompetentAuthority Office has significantly improved the time spent resolv-ing issues with treaty partners.' 7' Therefore, the IRS and the APAdata collected lead to the conclusion that the amount of time spentnegotiating between the competent authorities does not cause asignificant delay in the APA process.

B. Flaws with Unilateral Agreements Must Be Exposed

Unilateral agreements are significantly important to small cor-porations who need to have a transfer pricing agreement with theIRS. A bilateral agreement will be more beneficial, but becausecosts are a significant driver, the small corporation is better offcompleting a Unilateral agreement with the IRS. The 2008 reportshows the average unilateral agreement17 9 for a new unilateralAPA was 18.7 months per agreement and 13.3 months per renewal.In the 2016 report, the average time to complete a new unilateral

177 See I.R.S. Announcement and Report Concerning Advance Pricing Agreements, An-nouncement 2013-17, 2013-16 I.R.B. 911

In the past, no systematic effort was made to measure how much of the time fromsubmission to agreement of a bilateral APA was spent on the discussions with treatypartners, but anecdotal evidence from the APMA Program's experience with Japan,the treaty partner responsible for more than half of the bilateral APAs in 2012, sug-gests that there was a reduction in the number of meetings needed to reach an agree-ment in 2012, and this trend can be expected to continue.

Id.178 See I.R.S. Announcement and Report Concerning Advance Pricing Agreements, An-

nouncement 2015-11, 2015-15 I.R.B. 883.179 This is an agreement only between the IRS and the corporation.


APA took 28 months per agreement and 20.2 months per renewal.More likely than not, the reason unilateral agreements are takingmore time to complete is because of the difficulties of successfullynegotiating a bilateral agreement.1 80

After the competent authorities' phase of the negotiations, theIRS returns an amended agreement to the corporation. At whichtime, the corporation may decide that the agreement is not in itsbest interest and subsequently reject the bilateral APA. The cor-poration may choose to walk away with no deal or opt to negotiatea unilateral treaty solely with the IRS. Again, this process is ex-tremely costly and a corporation without large cash reserves maybe forced to accept a deal that is less than favorable. The corpora-tion would rather have some deal than waste a significant amountof capital only to walk away empty-handed. A corporation doesnot want to run the risk of double taxation 8 1 by not coming to abilateral agreement. Most corporations would prefer some agree-ment and guidelines compared to none. The APA sets standardsfor how the corporation will report income and expenses and pro-vides rules and regulations for documentation. All of this will helpa corporation, especially one that cannot afford to pay a major ac-counting firm to manage its affairs.

Furthermore, after a certain point in the negotiation process, itbecomes significantly difficult for a corporation to walk away fromthe table. It is not impossible, but a large portion of the APA ne-gotiation process involves the corporation disclosing highly sensi-tive and confidential information that the IRS generally would notlearn unless it performed an audit of the corporation. It is ex-tremely difficult for a corporation to walk away if it is not satisfiedwith the bilateral APA proposal after the competent authorityphase. By that phase, the corporation has disclosed a significant

180 BrrrIKER & L)KKI;N, supra note 103.A bilateral or multilateral APA may result from a taxpayer's request to the U.S.APA Program or from a mutual agreement proceeding initiated by a foreign compe-tent authority, typically pursuant to a taxpayer's request to the tax authority of thatcountry.[] Despite the preference for bilateral and multilateral APAs, more than 40percent of all APAs have been unilateral. . . The taxpayer, however, has no right toparticipate in competent authority negotiations.[] If competent authority negotia-tions do not result in an agreement satisfactory to the taxpayer, the taxpayer and theIRS may make a unilateral APA, but either party is free to withdraw in this situation.

Id.181 See generally Taxation, BLACK'S LAw DICrIONARY (10th ed. 2014), at double taxation

("The imposition of two taxes on the same property during the same period and for the sametaxing purpose.").

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amount of private information that may have provide the IRS aroadmap to audit it. 18 2

For that reason, a corporation may prefer to negotiate for aunilateral agreement with the IRS. It is unclear if the data for av-erage completion time includes the aforementioned situation, but ifso, likely it is the cause of the substantial increase in time spent oncompleting a new unilateral agreement. More likely than not, theincrease in unilateral renewals filed is correlated with the averagerenewal time increase.as

The average time to complete a new unilateral agreement took28 months in the 2016 report. The average bilateral agreement inthe 2016 report took 40.6 months per agreement. As previouslystated, a corporation does not have to accept a bilateral APA if thecorporation finds the agreement unacceptable. Because it is un-clear how long the competent authority phase is now, it is difficultto estimate how much time is left after the phase is complete.However, the 2012 report stated that approximately 30 months ofthe negotiations are spent in the initial position phase. The aver-age time to complete a new unilateral agreement in the 2012 reporttook 31.2 months per agreement.

Therefore, it seems reasonable that a correlation exists be-tween the time to complete a bilateral agreement and the time tocomplete a unilateral agreement. This is supported by the fact thatover the past five years approximately 35 APAs have been with-drawn, most of which were bilateral agreements. It is unclearwhether the word "withdrawn" means withdrawn entirely from theprocess or withdrawn only from the bilateral process. Once a bilat-eral agreement is withdrawn, the average time to complete a newunilateral APA would significantly increase because of the lengthof time spent attempting to negotiating a bilateral agreement. Thewithdrawal of a bilateral agreement seems to be skewing the uni-lateral data.

C. Issues with Renewing APAs After They Expire

Not only are there issues with negotiating a new APA, re-newing one has increasingly become problematic. The 2008 reportshows the average time to renew an APA was 25.5 months, but by

182 26 U.S.C.A. § 482 (1986) (The Secretary may adjust gross income to reflect the income ofthe organization, which may result in a substantial tax bill for the corporation.).

183 See Infra Part III-C.


the 2016 report, the average renewal time substantially increasedto 37.2 months per agreement. It should be noted that the totalrenewals pending'" increased from 79 in the 2008 report to 188 inthe 2016 report. Furthermore, time must also be devoted to com-pleting new APA requests as well.

It is apparent that the IRS is dealing with a substantial in-crease in renewal requests and this has likely caused an increase inthe average time to complete one. The number of renewal re-quests are at an unprecedented level for the APMA Office. Thesubstantial volume of work the APMA Office is currently facingwould cause any ordinary office to fall behind in work.

This may be due to the APMA Office's inability to keep upwith the volume of new and renewal APA requests. From 2007 to2015 the amount of renewals in the APMA Office's queue has in-creased by over 230%. Perhaps the renewal agreements have be-come more complex. One possibility for the substantial increase inrenewal completion time is that the former APA program an-nounced in the mid-2011 that it would move from the Office ofChief Counsel to the Transfer Pricing Office and merge with theU.S. Competent Authority Office. As a result, the merger may bethe primary cause of the increase in average time to complete arenewal APA.

In general, the average APA is designed to last approximatelyfive years and may thereafter be renewed by the corporation. Thiscan be best illustrated in the 2009 to 2011 APA reports which re-spectively state that 42, 27, and 30 of the APAs completed were forfive years in length. This trend is still evident in the most recentAPA year-end summary. Although that does not entirely explainthe increase in renewal time, the APMA Office assumed the dutyof negotiating APAs from the Office of the Chief Counsel at thestart of 2012.

It is possible that there is a difference of opinions betweennew and former management. The differences may likely be thecause of why the time to complete negotiations for a renewal havesubstantially increased over the past few years. This issue will notbe clearly identifiable for at least three to four years from now.However, this difference of opinion may require the APMA Officeto spend more time negotiating difference of opinions between thecurrent and former IRS representatives. Five years from now,most renewal negotiations will come from an APA that reflects the

184 A renewal pending is a renewal that is not yet executed, but rather in the negotiatingprocess.

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APMA Office's preferences for designing APAs and not the Officeof the Chief Counsel. At this point, the data will begin to identifywhether there was a difference of opinions between the IRS repre-sentatives or if something else was causing renewal negotiations totake more time.

D. The Pre-Filing Phase Has a Bottleneck Which CausesInefficiencies in Negotiations

1. Valuing Intellectual Property is Complex, but Not the MainFactor

There is little doubt that intellectual property is difficult tovalue. However, it is unlikely that this lengthens the time to com-plete the "typical" APA. Something different appears to be theroot cause of increased negotiating time. The past four year-enddata sets show that more than 75% of APAs are tangible productsor services rendered. Though services and tangible products aremuch easier to value than intellectual property, both are not neces-sarily easy to value. From the 2013 to 2016 report, the percentageof APAs executed related to intellectual property transfers were24% in the year of 2012, 18% in 2013, 24% in 2014, and 24% in2015.85 Therefore, most APAs executed are for tangible productsor services and likely not the main source of inefficiencies in thetypical APA negotiation process. 1 8 6

2. Clear Inefficiencies Arise in the Risk and CriticalAssumptions Phase

One of the most contentious areas of an APA is the criticalassumptions and risk factors phase because of the sensitive infor-mation used. A critical assumption 87 to an APA is synonymous to

185 The IRS collects data from corporations who agree to participate in its test groups. Al-though the percentages are relevant, the data does not account for corporations who do not wishto participate as a test group. It is unclear how many corporations do participate in the testgroup. See Annual APA Statutory Report, supra note 142.

186 In the 2015 report, 36% of executed APAs were tangible products and 40% were services.See I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announcement2015-11, 2015-15 I.R.B. 883.

187 I.R.S., Announcement & Report Concerning Advance Pricing Agreements, Announcement2012-13, 2012-16 I.R.B. 805

A critical assumption is any fact the continued existence of which is material to thetaxpayer's proposed TPM, whether related to the taxpayer, a third party, an industry,or business and economic conditions. Critical assumptions might include, for exam-ple, a particular mode of conducting business operations, a particular corporate or


a material fact in a publicly traded corporation's proxy state-ment.'"8 The occurrence of an omission or misleading statement ofa critical assumption or material fact results in liability for the cor-poration. It is necessary that a corporation follow the guidelinesset forth in its APA and that it makes sure no information is with-held from the IRS. To encourage corporations to participate in theAPA process, § 6103189 requires that all information related to anAPA remains confidential.

In each year-end APA report, the IRS states the most com-mon risks borne in the tested groups who' negotiate APAs. Onemajor concern is that the IRS does not explain every risk includedin an APA, nor does it collect data on parties that do not wish toparticipate in the tested group. Finally, the greatest concern is thatthe IRS only includes the least complex APA agreements in thetested group. As a result, the tested group is far too narrowly tai-lored to effectively provide the typical corporation with relevantinformation because most APAs are kept confidential. Under theassumption the tested group is not too narrowly tailored, there isstill the issue of smaller corporations' access to the relevant or con-structive information.

Tangible property and services are determined by a TransferPrice Method, 190 and critical assumptions are what determine thetype of TPM to be used. In the 2016 APA report,191 the three mostcommon risk factors were general business risk at 29%, marketrisks at 27%, and credit and collections at 20%.192 Among the lastthree tested groups included in the year-end report, those threerisk factors were the top concerns for each tested group. Scholarsoutside of the process have explained that other common factorsinclude market conditions, competitors, business structure, changes

business structure, a range of expected business volume, or the relative value of for-eign currencies.

Id.188 Securities Exchange Act of 1934, 17 C.F.R. § 240.10b-5 (1951).

It shall be unlawful for any person, directly or indirectly, by the use of any means orinstrumentality of interstate commerce, or of the mails or of any facility of any na-tional securities exchange . . . to make any untrue statement of a material fact or toomit to state a material fact necessary in order to make the statements made, in thelight of the circumstances under which they were made, not misleading.

Id.189 26 U.S.C.A. § 6103 (2016).190 [Hereinafter TPM].191 I.R.S. Announcement & Report Concerning Advance Pricing Agreements, Announcement

2016-12, 2016-14 I.R.B. 589.192 Id.

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in product lines, and several others.1 93 Another critical assumptionis that an APA critical assumption can be violated by thecorporation. 1 9 4

Though it's helpful for a corporation to know the most com-mon risks, there is no formal breakdown of the likelihood of a riskoccurring in a certain industry or a certain country. Furthermore,although a corporation looking to create a proposal knows that29% of APAs agreed to in the previous year had general businessrisks, it is unclear what a general business risk is. Unless the corpo-ration is represented by one of the major accounting firms with in-house databases, the corporations will likely have a hard time fig-uring out what to do. 9 A large corporation will have no issueparticipating in this negotiation process because it can afford topay a major accounting firm which has all these critical assumptionand risk factors available, but the smaller corporations will havedifficulty participating because the information is not publiclyavailable.

NASDAQ defines business risk as the risk that cash flow willbe impaired making it difficult for the issuer to meet operatingcosts.1 9 6 But is that truly what the IRS means when it says generalbusiness risk? It would be beneficial for the IRS to make APAspublicly available or create a database that protects the taxpayer'sidentity, but includes all the relevant information involved in eachAPA so as to improve negotiation efficiency. The APMA Officehas over twenty-five years' worth of APAs and though some maybe less relevant, the information each APA contains is extremelyvaluable. If the IRS were to compile all this data, smaller corpora-tions would benefit by having some guidance from the IRS. Fur-thermore, because there is so much data available to the IRS, itwould be difficult to disseminate what information belongs towhich corporation.

Because the Internal Revenue Code views an APA as confi-dential information, details of the agreement are protected by se-crecy. Corporations argue that this is necessary because it preventsits competitors from using its private information to benefit thecompetitor. Others have responded by arguing the process be-

193 See Cym H. LowEU.L & PETHR L. BRIGER, U.S. INT'L TRANSFER PRICING, T 12.03, AREAS

OF SPECHIc Focus, Westlaw 257523 (database last visited Feb. 4, 2017).194 Id.195 See Avi-Yonah, supra note 145.196 Business Risk, NASDAQ http://www.nasdaq.com/investing/glossary/b/business-risk (last

visited Dec. 12, 2016).


comes inherently flawed by withholding information and unfair tothe smaller corporations who may truly need an APA for fair pur-poses and not tax avoidance.1 97 The data the IRS should haveavailable would allow it to develop trend analyses. The trend anal-yses would allow the IRS to become aware of common factorsthroughout a particular industry, country, and could even deter-mine whether certain factors are dependent upon another factoroccurring first. For example, a corporation that wants to open abank in Colombia could spend months arguing the importance ofcritical factors relating to cartel intervention. However, if the cor-poration cannot open a bank in Colombia because of regulationson financial institution, months will have been wasted debating anirrelevant critical assumption. A trend analysis would allow theIRS to be aware of the most efficient order to discuss a particularcorporation's risk factors and critical assumptions.

IV. PROPOSAL

Until Congress improves the law, this Note argues that theIRS must recognize its role in sustaining an unequal environmentfor those that seek international expansion and amend its role incausing harm to U.S. taxpayers. This can be done by discretelycompiling raw data from previous APAs, analyzing the quantifiabledata, and building an APA critical factor and risk assumptiondatabase. This database could be utilized by the IRS to evaluatepreliminary negotiations with corporations, while allowing the IRSto provide the public more accurate and useful information. Thedatabase will not conflict with § 6103 because only the IRS willhave access to the raw confidential information, which it had in itspossession already; the information disseminated to the public willbe in the aggregate and not identifiable to one corporation.

197 See generally Blake Currey, A Shrouded Remedy: Increasing Transparency in the IRS Ad-vance Pricing and Mutual Agreement Program by Releasing Redacted Advance Pricing Agree-ments and Increasing Administrative Disclosures, 50 SAN Diiuo L. Rv. 1005 (2013) (arguingthat transparency would make the APMA program more attractive and reduce regulatory uncer-tainty); Susan Morse, A Corporate Offshore Profits Transition Tax, 91 N.C. L. Rinv. 549 (2013)(arguing that the equitable approach towards improving our tax system is a change in law andrequiring the taxpayer to disclose information, but only to the IRS in yearly financial state-ments); but see Christopher Capuzzi, Transfer Pricing and Fin 48: Removing UncertaintyThrough Advanced Pricing Agreement Process, 30 Nw. J. INr'k, L. & Bus. 721 (2010) (arguingthat corporations shouldn't have to provide the IRS with such sensitive documentation becauseit provides them a roadmap for auditing).

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Considering trillions of U.S. taxable income is trapped abroad,it is not surprising how widespread the effect of the APA process is.Currently, participants in the APA process must seek highly spe-cialized representation or risk serious financial consequence. Thisrepresentation requires a significant amount of capital. Even afteragreeing to an APA, one careless mistake by the corporation mayresult in fines worth hundreds of millions. However, this "carelessmistake" might actually be a ploy to take advantage of AmericanTaxpayers. Even unintended consequences may cause harm be-cause the corporation may not have been paying its fair share oftaxes from the start.

Surely, access to information about what is typical and normalcould be beneficial to those "stakeholders" who are effected byAPAs. Assuming the Eaton decision was not overturned, Eaton'stotal taxable income over a two-year period was retroactively in-creased by $368 million.1 9 8 Assuming the income was evenly dis-tributed between the two years and a 35% tax rate, $64,400,000.00in taxes per year were lost. The taxes assessed because of the casecould have benefitted a federally aided program that assists U.S.citizens. Some of those programs may still exist, but some, in oper-ation during the time such taxes should have been collected, maynot exist anymore. Furthermore, it costs the U.S. government a lotof money and time to prosecute a case. The salaries paid to IRSemployees involved, the opportunity cost of working one case com-pared to working on something else, all come at the expense of theU.S. taxpayer.

There is little doubt that corporations will not want certainpersonal factors to be shared with the public. However, if a largeamount of old APAs were broken down into basic categories ofrisk factors and critical assumptions and tallied, that data couldprovide a tremendous amount of relevant and discrete information.This is because, the data made available to the public can be con-strained by sample size; if a factor occurred once or was solely withone corporation, it does not necessarily have to be shared with thepublic. Furthermore, there is so much information available fromthe thousands of APAs that could be used in the samples, that itwould be sufficiently difficult to identify one unique risk factorwith a company.

From 2007 to 2015, the IRS collected and compiled a smallamount of data each year to assemble a year-end summary of ad-

198 See Eaton, supra note 90.


vance pricing agreements. The data showed that the competent au-thority phase was by far the most apparent bottleneck from theinception of the program. However, the APMA and Chief Coun-sel's Offices did not need data to know that there was a problemwith that phase. While, some of these data have been helpful,much more must be done to make the negotiations fairer for allparticipants. One of the first accomplishments of the APMA andChief Counsel's Office was to reduce the time spent during thecompetent authority phase of the negotiations.

Raw data collection is the first step in developing data analysistools to evaluate processes and subsequently improve the APA ne-gotiation process. The collection of empirical data will eventuallyhelp to make the negotiation process fair across the board for cor-porations who want to participate. 199 This is because the informa-tion in the aggregate can help reduce wasted time and focusnegotiations tactically on what is most imperative to a particularAPA. There is little doubt that there are consequences to makingAPA negotiations more efficient. The most recent presidentialelection showed how concerned Americans are about the severaltrillions of dollars in trapped cash abroad. The cause of thistrapped cash is at least related to the use of APAs that allow mul-tinational corporations to participate in tax avoidance. Making ne-gotiations more efficient will invariably reduce costs forcorporations that desire to participate in the APA process. Thereis little doubt that certain wrongdoers will attempt to negotiate anAPA with the intent of employing a tax aggressive scheme. How-ever, the purpose of improving the negotiation process is to helpprovide a more cost and time effective process for smaller corpora-tions who truly need an APA.

A reduction in costs will encourage more corporations to par-ticipate in this negotiation processes. However, until a substantialchange is made in the U.S. and international tax system, it is neces-sary to make sure corporations participate in APA negotiationsand come to an agreement with the IRS as opposed to hiding fundsfrom them. Furthermore, the APA negotiation process is onlyavailable to the top of the corporate food chain and inequitablyprevents smaller corporations from being able to use the process aswell. The smaller corporations would likely prefer to participate in

199 Laura I. Langbein, Regulatory Negotiation and the Legitimacy Benefit, 9 N.Y.U. ENvrt.L.J. 60, 133 (2000) (stating how empirical data supports the data may help reduce conflict andincreases agreement).

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an APA rather than risk litigation that could cause operations toshut down.

Many corporations lack concern about the consequences oftransferring income without an APA. Even if the IRS assesses sub-stantial back taxes through costly litigation, it is still cheaper thanthe APA negotiation process currently is, and the IRS must catchthe corporation first. Generally, the purpose of negotiations are tosave time and money. 200 Though the APA process was not de-signed for tax avoidance, it appears to be the more predominantfeature today. The APA was designed to give small companies anability to negotiate a fair deal and eliminate uncertainty.

By having more corporations complete APAs, the IRS effec-tively can put a cap on lost taxable income. This is because themarket value will be more easily ascertainable because more cor-porations can negotiate and not cheat the system by avoiding taxes.This system is a better representation of free market principles inthat the participants are not necessarily influencing the price. TheIRS will be a participant in each agreement and can cap how muchcorporate funds may go abroad. This will serve the U.S. govern-ments interest. Moreover, audits are difficult to execute, time con-suming and costly to the IRS, whereas a typical negotiation is muchquicker and cheaper. Though focus has been on the corporation'sability to afford negotiations, the IRS must be able to afford nego-tiations as well. The community stakeholders, in this case U.S. citi-zens, are relevant when government entities such as the IRS areinvolved. The American community is losing tax dollars to bothcorporations that do not wish to participate in the agreement andavoid paying taxes, and large corporations that are taking advan-tage of an economic market that it manipulates. 2 0 1 Even after theIRS assesses back taxes, the corporation will likely challenge themin court, and this too costs time and money to U.S. taxpayers.

U.S. taxpayers should not be on the hook to pay for salariesbecause the government runs an inefficient process and will not usedata easily accessible to them. By mining the data and creating adatabase, the IRS will save time and money, create a fair processthat more accurately represents free market principles, and hope-fully create an inclusive environment that promotes participation.Litigation, investigations, or audits are expensive processes thatcan be avoided by employing basic process improvement strategies.

200 See HAlG, supra note 93.201 See Cohen, supra note 160 (explaining how community stakeholders can play a role in

negotiations).


For example, because APA information is not publicly availa-ble, many corporations must guess as to what the APMA Office islooking for or hire a major accounting firm that has privatedatabases it can utilize during APA negotiations. If an accountingfirm can develop databases to make the negotiation more efficientfor its clients, so should the IRS. The most recent year-end APAreport stated that the average bilateral APA agreement takes 40.6months. The filing fees range from $22,500 to $50,000 per agree-ment. The time taken by the corporation and the lawyers and ac-countants are astronomical. Most small and medium sizedcorporations do not have that kind of capital on hand to participatein negotiations, whereas large corporations benefit. For that rea-son, it is not surprising that small and medium sized firms wouldrather take the risk of being caught by the IRS and having incomereallocated under § 482 than participate in an APA negotiation. 20 2

However, if the Commissioner of the IRS assesses deficienciesunder § 482, the community stakeholders, the U.S. taxpayers, hadbeen adversely impacted in the years the corporation avoided pay-ing taxes. This is not a favorable outcome.

There are good reasons why corporations are hesitant to allowthe IRS to compile its closely held and private information in apublic database. Publishing one document with sensitive informa-tion, such as an internal dispute, could completely destroy a com-pany. Nonetheless, this concern can be balanced by not releasingthe data to the public. The data will be more comprehensive thanthose the IRS currently reports in its year-end summary on APAsand will reduce negotiation lead time spent during the critical as-sumption and risk factor process. If the negotiation process takesless time and the IRS can provide corporations more guidance, thetime and cost of negotiations will become more reasonable andequitable.

Many of the recent APA reports have suggested that the criti-cal assumption and risk factor phase is the most time-consumingportion of the negotiations. Instead of using a blank model forevery single APA negotiation, certain baselines can be made stan-dard to a general agreement type. This will help streamline thenegotiation process and save both sides time and money. For ex-ample, clothing manufacturer X wants to open a manufacturingplant in Sudan to lower production costs. Additionally, bank Ywants to open a branch in Sudan to explore new markets. ClearlyX and Y are completely different corporations and will have sub-

202 26 U.S.C.A. § 482 (1986).

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stantially different critical assumptions and risk factors. However,both will have substantial foreign market risk factors relating topolitical instability. If the IRS compiled data from the database,this factor would not require a significant amount of time in anAPA negotiation. The IRS could save time by informing thosewishing to create APAs with subsidiaries in Sudan, that a substan-tial foreign market risk factor should be included in this particularAPA.

In another example of how this database can effectively im-prove negotiations, take food and beverage ("F&B") company Alocated in the United Kingdom and a different F&B corporation Bin India. A and B will have different critical assumptions and riskfactors. Nonetheless, crop diseases and other food shortages willbe common major risk factors that both A and B will be concernedabout. Though causes and the name of the disease/shortages maybe different, it is still an obvious that A and B will both have thoseconcerns.2 0 3 A trend analysis would show the IRS that any F&Bcorporation will have some risk of diseases destroying produce andcan also track the more common diseases amongst certain foodgroups in certain areas. Though this seems like common knowl-edge, if the IRS compiled these data, they would always be availa-ble for each negotiation and would not require additional timespent researching the types of diseases in a particular region andthe types of diseases that affect a particular kind of produce.

This proposal would keep the general process of the APA pro-gram intact. First, the corporation creates a proposal that ispresented to the staff and then the two parties begin to negotiate.It is at this point the data will make significant improvements tothe process. As opposed to each negotiation starting with a blankslate, the IRS could improve negotiation lead time by developing adatabase with the 2000 plus APAs2 04 already completed. Each pro-posal must include critical assumptions, risk factors, why one valua-tion method was preferred by the corporation as opposed toanother, etc. By building a database of every critical assumptionand risk factor ever approved, the APMA staff can better identifywhich issues are relevant to the negotiation and which are moot.

This data would be able to develop trends that can be tracked,likelihoods of a certain factor occurring, and provide an overall his-

203 Consider also that growing seasons are very different, as well as soil properties, access towater, etc.

204 See I.R.S. Announcement & Report Concerning Advance Pricing Agreements, Announce-ment 2016-12, 2016-14 I.R.B. 589.


tory of factors and assumptions in a specific country, industry, orspecific industry within a specific country. A corporation that canafford a major accounting firm likely has access to this type of in-formation, but the smaller companies would now be put on equalfooting. This would be helpful to the IRS because it would seewhen it permits a corporation to transfer more money for a prod-uct than a competitor with a similar product. If that occurred, theIRS would know that it must adjust one of the agreements or afterthe most recent deal expires, require a change to the originalagreement. This would prevent the community stakeholders frombeing cheated out of taxes that should have been collected from acorporation.

Return to F&B corporation A. Without a doubt, some stan-dard baseline critical assumptions and risks for the F&B industryand the United Kingdom will not apply to A or will vary in signifi-cance. Instead of the IRS and A arguing, the applicability; the sig-nificance of an assumption or risk, or how a corporation can violatea critical assumption, one look at the database and the IRS willconfirm that a certain factor is sufficiently standard within F&B orthe United Kingdom. Furthermore, the database may also providethe IRS with the ability to key in on assumptions or factors thathad not previously been suggested or approved. This may be a ma-jor time constraint in the current negotiation process.

The IRS and A may waste time negotiating factors that are deminimis or not recognize factors that are unique to A that will takethe most time to negotiate because of A's unique position. Mostcorporations have a clear identity. If the IRS becomes aware thatthis is relevant to a certain corporation, spend time can be effi-ciently spent negotiating this unique factor. Additionally, certainfactors may depend upon other risks or assumptions. Trend analy-ses of the data can show one factor, D, exists only when anotherspecific assumption or risk, I, is present, but that I can exist withoutD. Therefore, the APMA team will know that before they negoti-ate D, they must first negotiate I unless I is a standard for the F&Bindustry, the United Kingdom, or the F&B industry in the UnitedKingdom. In that case, much wasted time will be eliminated andthe negotiation can operate more efficiently.

Finally, the database will provide the IRS with an ability tostandardize a certain portion of APAs. This would balance con-cerns of inequality among corporations looking to participate inAPAs. Some corporations may have better negotiators thanothers, or may have a more favorable matchup with APMA team

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members it is negotiating with. By having a database, senior offi-cials may discover that certain team members may need a careerchange, be committing crimes or acting inequitably in negotiations.

Because of the extensiveness of APAs and the sheer volume, itis not hard to imagine that some employees might take certain lib-erties. This risk can be mitigated by having technology detect ab-normalities that fall outside the normal standard deviations andeliminate the need for senior managers or officials to check eachagreement. Even though something in the agreement may falloutside the norm, it does not mean that the employee was takenadvantage of or is committing a crime. Certain corporations haveunique risks or critical assumptions that might even differ amongits own product lines. If that is the case, a simple explanation cansolve the dispute and end the inquiry. Creating parameters createsa fairness within the market, and the benefits of negotiations arenot superseded by an employee.

Data collection and trend analyses would be extremely benefi-cial to improving APAs and creating equality among all corpora-tions and the IRS. The purpose of APAs was to provide corporatetaxpayers a legal alternative to avoiding taxes. It has become anegotiation available to only the largest corporations and no longerserves its original purpose. Improving the negotiation process hasflaws, but also provides equality to the entire market and protectsthe public stakeholders until Congress makes the necessarychanges to the tax system.

V. CONCLUSION

In summary, the APA negotiation process can be improved forthe benefit of multiple stakeholders, cost less, take less time, andcreate equality among all participants.2 0 5 Although improving ne-gotiations may encourage more corporations to shift profitsabroad,2 0 6 until universal changes are made to the tax system, itshould be equitable for all participants and kept in accordance withfree market principles.2 0 7 Furthermore, the true purpose of trans-fer pricing is not to shift income and evade taxes.20 8 Though thesystem enables a larger corporation to move income abroad, many

205 See supra Part IV.206 Brennan, supra note 14.207 See supra Part IV.208 See supra Part II-B.


smaller corporations and individuals need transfer pricing to per-form business.2 0 9

Currently, small and medium sized corporations have a verydifficult time participating in APA negotiations because of the ex-orbitant costs. 2 1 0 By improving lead time, collecting data and de-veloping trend analyses, much wasted time can be eliminated fromthe negotiation process. 2 1 1 If more small and medium sized corpo-rations can participate in APA negotiation, it would mitigate therisk of double taxation, reduce regulatory uncertainty, and notwithhold taxes that belongs to the American public.2 1 2

Finally, larger corporations taking advantage of the system willhave a difficult time arguing for a more favorable rate when datashows that competitors are paying more money for a similar prod-uct or service.21 3 This creates a cap on the permanently reinvestedincome abroad2 14 that avoids taxation by the IRS and creates eq-uity amongst all participants in the APA process on both sides ofthe negotiation table. Though there are concerns that data collec-tion may expose confidential corporate information, the sheeramount of APAs that will be included in the data set from 1991until now will create a level of protection for the corporations.2 1 5

Furthermore, the IRS can maintain the database for itself and onlyuse the data as a guiding tool when it negotiates with a corporation.Therefore, the data can be maintained only by the entity, the IRS,that already has the raw data available. This will protect corpora-tions' private interests and will make the APA negotiations valua-ble to more stakeholders and those that truly need to participate inthe process.

209 See supra Part II.210 See Avi-Yonah et al., supra note 45.211 See supra Part III-D-2.212 See supra Part IV.213 Id214 26 U.S.C.A. § 482 (1986).215 See supra Part II-D.

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developing improved tactics advance pricing … · an advance pricing agreement ("apa")...

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