MITT and APA Frequently Asked Questions

 

MITT and APA
Frequently Asked Questions (FAQ)
As of March 2021

 

A “material” intercompany transaction is any new or recurring intercompany transaction for which the amount reported in Column J of the MITT is greater than the last agreed upon permanent materiality threshold which is outlined in the taxpayer’s specific MOU.

No. Transactions should generally be listed individually. To the extent the transfer pricing documentation aggregates similar transactions using the same method, aggregation is allowed.

Disregarded entity transactions should be reported with the Controlled Foreign Corporation (CFC) that owns the disregarded entity. Concerning disregarded entities owned directly by the US, please refer to FAQ #20.

Transactions should be reported the same as any other foreign related entity.

IRS CAP teams will decide on case-by-case basis. The Account Coordinator (AC) should elevate this question to the case manager.

No. The MITT was created to enable quick and efficient risk assessment of related party transactions given CAP's time constraints.

After the initial MITT is prepared, the taxpayer only needs to update it (thus, much less work going forward). The page numbers are very important to save exam time in locating the analysis in the study.

The tested party operating margin helps Transfer Pricing Risk Assessment (TPRA) understand how the related party transactions contribute to the overall profitability of the company. Column r requests the PLI used for the taxpayer's analysis.

The MITT should be updated if there is a change to a transaction, such as a change in method, PLI, or tested party. The MITT should also be updated if the amount reported for a new transaction, or the change in the amount reported for a recurring transaction, is greater than the last agreed upon permanent materiality threshold.

Yes. These transactions have the potential to be transfer pricing and foreign tax credit issues see CCA 201349015 “Treatment Under Sections 482 and 901 of Transactions with Foreign Branches or Disregarded Entities”. These related party transactions are not required to be disclosed on a Schedule M per Form 8858 instructions, but the IRS would like to see these transactions listed on the MITT for risk assessment purposes. Include the transfer pricing policy, method, PLI, etc. and reference to any transfer pricing study completed for the foreign jurisdiction if one was not completed for the US.

Yes. An attachment to the MITT with a short explanation as to why the transaction no longer exists or has been replaced would be helpful and may avoid a request for additional information.

If a policy is in place, list the PLI and benchmark range. If no policy exists, then the taxpayer should place an "N" in the PLI and Benchmark range. If the transaction is material the IRS may request additional information and or request that a study be prepared in a subsequent year.

Yes. The taxpayer should be prepared to provide an English translation upon request.

The PLI/rate may be what is prescribed in the policy but may not be the actual result of the transaction for various reasons.

The sale of debt and securities should be reported on the MITT. Aggregation is permitted, see FAQ #3. In the case of debt and securities only, the taxpayer should indicate in column O the OM % of the foreign related party.

The taxpayer may attach any relevant information to the MITT that they believe would help exam perform a risk analysis. A brief description accompanied by pertinent documents would be very useful and result in time savings for both the taxpayer and exam.

The taxpayer has a transfer pricing policy for a transaction e.g. cost plus 5%. In column T exam would like the actual amount charged for the year which may be different from the policy e.g., cost plus 4.7%.

Entering into an APA is not mandatory but will be strongly encouraged for transfer pricing issues that cannot be resolved in pre-filing and may result in the Taxpayer having multiple open years going forward. The taxpayer’s choice not to apply for an APA may affect suitability for remaining in CAP.

LB&I is evaluating different treatment streams and alternative resolution paths for a variety of issues and various compliance programs such as CAP and is committed to allocating resources where the most strategic issues have been identified. As this is a new process and the focus is to shift resources from the post-filing to a pre-filing environment, we will monitor the process and assess the impact on resources. The Advance Pricing and Mutual Agreement (APMA) program will welcome CAP taxpayers’ applications to enter the APA program, and will provide the same customer service and attention that it provides to all taxpayers.

For CAP cases, transfer pricing issues continuously provide challenges to both the Service and Taxpayers in a pre-file environment. Historically, significant, complex transfer pricing issues are resolved in post-file, either in Appeals or a post-file examination. In some instances, this resource intensive process can result in multiple tax years being unresolved and opened long after the tax return has been filed. The goal of CAP is to review and resolve issues during the pre-file phase prior to the filing of the tax return and we strive to achieve this goal, but certain issues such as transfer pricing may require longer to develop and resolve. Where we can identify these instances, we can have an upfront discussion with the taxpayer early in the CAP year to decide the most efficient way to work and resolve significant, complex transfer pricing issues.
When a taxpayer applies for an APA, the issue and associated risk, is removed from the CAP examination which allows the team and taxpayer to proceed within the CAP timeline and avoid delays and “open years” which may lead to the taxpayer becoming ineligible to participate in CAP. Once an APA has been finalized the transfer pricing risk associated with the issue has been eliminated for current and future years given the taxpayer complies with the APA.

Yes, in principle. It would be a “unilateral APA.” APMA has many of these in its program.

An APA in 2021 would typically cover five years (2021-2025). Assuming the Taxpayer remains in compliance with the APA, a concluded Bilateral APA gives the Taxpayer certainty that its covered transfer pricing will not be challenged by the IRS or the foreign tax authority, for the period of the covered years. This is an effective resolution tool and can provide CAP taxpayers with certainty for several tax years once completed rather than having the local CAP team resources deployed on a year-by-year basis. In addition, the covered years are not considered as open years affecting eligibility while the APA is in process and the years are in APMA’s jurisdiction.

Yes. APA user fees are required to be paid at the time of the APA application. The fee for APA requests is $113,500. A lower fee structure exists for renewal APAs and for small case APAs. A small case user fee applies if the controlled group has sales revenues of less than $500 million in each of its most recent three back years and meets other criteria.

While there are some exceptions that could result in an earlier or later date, generally a complete APA application must be received by the Advance Pricing and Mutual Agreement (APMA) program no later than the date on which the U.S. return is timely filed for the applicable year.

Yes. APA user fees are required to be paid at the time of the APA application.  The IRS announced scheduled increases in the user fees earlier this year, as follows.  The fee for APA requests submitted through December 31, 2018 is $86,750.  The fee for APA requests submitted on or after January 1, 2019 is $113,500.  A lower fee structure exists for renewal APAs and for small case APAs.  A small case user fee applies if the controlled group has sales revenues of less than $500 million in each of its most recent three back years, and meets other criteria.

APMA | Internal Revenue Service (irs.gov)