On July 27, 2011, the IRS announced further organizational changes intended to improve the agency's administration of the U.S. international tax and transfer pricing rules. The latest changes are intended to expedite processing of Advance Pricing Agreements and resolution of bilateral transfer pricing and other competent authority disputes. The changes also should facilitate easier IRS coordination with U.S. treaty partners. Although the changes and incidental increase in resources appear promising, as with any restructuring, only time will tell whether the IRS will achieve its objectives.

Integration of the Advance Pricing Agreement Program and Transfer Pricing Mutual Agreement Program Under the LB&I Transfer Pricing Director

The IRS Advance Pricing Agreement (APA) Program will shift from the office of IRS Chief Counsel to an office under the Transfer Pricing Director (currently Sam Maruca) in the Large Business & International (LB&I) division's international operation. The Mutual Agreement Program (MAP) will be split along functional lines, combining the handling of transfer pricing disputes (and presumably other allocation disputes) and the APA Program in one office. These moves will unite for the first time the development of APAs and the bilateral resolution of transfer pricing disputes with U.S. treaty partners under the direction of a single executive. The new "Advance Pricing and Mutual Agreement Program" (the APMA Program) will be led by an APMA director serving under the Transfer Pricing Director. The IRS intends to fill this position through its normal recruiting process and also anticipates hiring additional staff for the APMA Program. The enhanced resources of the combined office are expected to reduce the time to complete advance pricing agreements and resolve transfer pricing and other allocation disputes with treaty partners.

The new structure is intended to reduce delays in the APA process by eliminating the need for a formal hand-off of bilateral APA cases from the APA Program to the Competent Authority function. The structure should also more efficiently process transfer pricing disputes with tax treaty partners by allowing U.S. negotiators to draw from transfer pricing experts in the same office. Ultimately, this integration of functions may allow the IRS to decrease processing times and thereby make progress against the large and (for now) ever-increasing backlog of APA and MAP cases.

As with any restructuring, it may be some time before any benefits of the new structure and increased resources are fully realized. APA and MAP employees moving into the combined program will need time to adjust to new roles. It remains to be seen how the collaborative culture of the APA program, with its focus on the advance agreement of methodologies on a principled basis, will mesh with the culture of the competent authority office, with its focus on the resolution of issues after the fact, often following contentious and adversarial examinations in the U.S. or abroad. Observers also will want to monitor the medium-term impact of the transfer pricing examination function, which also is located within the Transfer Pricing Practice, on the culture of both the APA Program and the Competent Authority function (and vice versa). Finally, the planned new hires will require training.

Changes over the last year foreshadowed this restructuring. To address staffing shortages and rising inventories in the APA Program, the APA Program and Competent Authority began pooling resources earlier this year. In an effort to increase efficiency in this process, Competent Authority personnel have been taking part in the front-end APA process, and APA Program personnel have been taking part in the back-end negotiations with treaty partners. A single team leader was assigned to steward a case throughout the process. The formalization of this arrangement by combining the Mutual Agreement and APA Programs is the logical next step in the IRS's efforts to create a more cohesive administrative structure for handling transfer pricing issues. It is noteworthy that the new structure will match up better with the organizational structures of many treaty partners, who typically have one office handling the entire APA request.

Adjustment to Non-Transfer Pricing Competent Authority and International Coordination

To facilitate IRS coordination with treaty partners in an increasingly global environment, the IRS plans to adjust its non-transfer pricing competent authority and international coordination functions under an Assistant Deputy Commissioner (International) in LB&I (as opposed to a Director-level position as is currently the case). The IRS expects to appoint the new assistant deputy commissioner soon. The new Assistant Deputy Commissioner (International) will:

• coordinate international activities across all IRS operating divisions,
   
• oversee the IRS Exchange of Information program and IRS participation in the Joint International Tax Shelter Information Centre (JITSIC),
   
• manage the activities of the IRS Tax Attachés in the agency's foreign posts of duty,
   
• coordinate IRS participation at the Organization for Economic Cooperation and Development (OECD) and other non-governmental organizations,
   
• support the Treasury Department in its negotiations of tax treaties and tax information exchange agreements, and
   
• administer tax treaties with respect to substantive issues other than transfer pricing, including for example limitation on benefits issues or disputes regarding the application of withholding tax. As discussed above, transfer pricing disputes with treaty partners, which represented the majority of Competent Authority's inventory of cases (approximately 68% at the end of fiscal year 2010), will be handled by the combined Advance Pricing and Mutual Agreement Program.

Latest in a Series of Changes

These changes are only the latest in a series of changes that the IRS has initiated over the last two years to form a more robust, integrated, and accountable international tax and transfer pricing practice. The first was the announcement in early 2010 of the establishment of a Transfer Pricing Practice within LB&I (then LMSB) to "strategically and systematically administer transfer pricing issues." The IRS instituted a pilot audit program later that spring. A realignment of functions in LMSB (and the change in name to LB&I) was announced that summer. As part of that change, the IRS created the office of LB&I Deputy Commissioner (International), a position currently held by Michael Danilack.

Earlier this year, Danilack announced plans to establish an "international knowledge management network" to allow all IRS employees engaged in international activities to access the expertise, legal support, and tools they need to do their jobs. In April, Danilack announced that the Transfer Pricing Program would be led by a Transfer Pricing Director and that the IRS also planned to hire an "IRS Chief Economist" to work with the Transfer Pricing Director. Sam Maruca was named the Transfer Pricing Director in May. The IRS has yet to fill the IRS Chief Economist role.

With the most recent changes, Maruca's organization now will handle the APA Program and the resolution of transfer pricing disputes with treaty partners, as well as transfer pricing case identification and management within Exam. The increased resources accompanying the announced changes are welcome given the delays in processing time experienced by the APA and Competent Authority programs in recent years. Other than the attorneys remaining in the Chief Counsel's office, all transfer pricing personnel within IRS are part of, and report into, the IRS Transfer Pricing Practice. The IRS intends the increased coordination of the various aspects of transfer pricing administration, coupled with greater resources, to result in greater efficiency and consistency for transfer pricing matters. Only time will tell whether the IRS can achieve these laudable objectives.

Miller & Chevalier Chartered has handled transfer pricing, tax treaty, and other international tax matters for significant clients for many years and stands ready to assist clients in responding to the IRS's increased focus on these issues.

For more information, please contact:

Rocco Femia, rfemia@milchev.com, 202-626-5823

Kevin Kenworthy, kkenworthy@milchev.com, 202-626-5848

Kathryn Morrison Sneade

Sat Nam Khalsa

David Blair

George Clarke

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