As of March 2021 1. For purposes of the Material Intercompany Transaction Template (MITT), what is a “material” intercompany transaction? 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. 2. Can the taxpayer aggregate transactions? No. Transactions should generally be listed individually. To the extent the transfer pricing documentation aggregates similar transactions using the same method, aggregation is allowed. 3. What should be done about transactions with disregarded entities? 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. 4. How should foreign partnership transactions be reported on the MITT? Transactions should be reported the same as any other foreign related entity. 5. Should domestic controlled transactions with non- consolidated entities be included in the MITT? Yes 6. Taxpayer cannot get the MITT completed by 90 days after the end of the prior tax year – can they have more time? IRS CAP teams will decide on case-by-case basis. The Account Coordinator (AC) should elevate this question to the case manager. 7. Do we expect the MITT to take the place of Form(s) 5471, 5472 & 8865? No. The MITT was created to enable quick and efficient risk assessment of related party transactions given CAP's time constraints. 8. Doing the MITT is a lot of work. Will IRS use the MITT for something worthwhile? Why does it ask for page numbers? How will page numbers be used? 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. 9. For Operating Margin (OM) in Column O, is this the OM of the overall entity, or for the intercompany transaction (segment?) under analysis? Overall Entity of the Tested Party 10. For OM in column O, do you want the OM if a different Profit Level Indicator (PLI) is used in the analysis? Yes 11. We are a May fiscal year-end taxpayer. Our 2021 CAP year ends 202205 and will be filed in March 2023. For the 2021 CAP year, our Initial Prior Year MITT is for 202105. The Initial Prior Year MITT is due by 202108 and if IP transactions or financing transactions not using the APR are included on the MITT, the instructions ask for transfer pricing reports for the most recently filed return which would be 201905 which was filed in March 2020 and for which we have our final transfer pricing report. For the Initial Prior Year (202105) MITT due by 8/31/2021 with our CAP application, do you want the 201905 report or the 202005 report? 201905 transfer pricing report should be submitted with the MITT, per the instructions. 12. Why is tested party profit margin (column O) necessary when the taxpayer may have used another PLI? 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. 13. Should we instruct the taxpayer to update the MITT every time there is a change to a transaction or a new transaction? 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. 14. Should a US owned foreign disregarded entity report transactions on the MITT? 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. 15. If an intercompany transaction no longer exists for the current year, does the taxpayer need to disclose prior year information associated with this transaction? 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. 16. If a Transfer Pricing policy is adjusted, but it is still the same method and tested party, is a taxpayer required to disclose a change in policy? Yes 17. If the tested party does not utilize an operating margin to test TP results, how does a taxpayer complete Tested Party OM column? Operating Margin = Operating Income (EBIT) / Sales Revenue 18. If annual transfer pricing studies are not completed for every transaction, how does the taxpayer complete the PLI and benchmark range 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. 19. Can the taxpayer reference a foreign transfer pricing report or APA? Yes. The taxpayer should be prepared to provide an English translation upon request. 20. What is the difference in PLI/rate and actual results? The PLI/rate may be what is prescribed in the policy but may not be the actual result of the transaction for various reasons. 21. Column O - Tested Party OM, should this be the actual operating profit or a percent? Percent. 22. Should foreign to foreign transactions be reported on the MITT? No. 23. Should the sale of debt and securities be reported on the MITT? If so, should the transactions be aggregated? 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. 24. The taxpayer and exam currently have an agreement about certain related party transactions which is based on a Closing Agreement and or Notice of Proposed Adjustment. How should these transactions be handled with regards to the MITT? 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. 25. What should be entered in column T actual results? 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%. 26. Are CAP taxpayers required to apply for Advanced Pricing Agreements (APAs) if requested by the CAP team? 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 eligibility for remaining in CAP. 27. LB&I leadership has explained that they will be asking CAP taxpayers with transfer pricing issues to seek APAs going forward. Do you feel that the APA office is staffed in a way to handle this influx of work? 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. 28. LB&I leadership has explained that they will be asking CAP taxpayers with transfer pricing issues to seek APAs going forward. Could you offer some background on this decision? 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. 29. Can a CAP taxpayer get an APA if the foreign country is not a tax treaty partner of the U.S.? Yes, in principle. It would be a “unilateral APA.” APMA has many of these in its program. 30. How is an APA a good fit for CAP when APAs can take years to be finalized, and CAP is a pre-filing 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. 31. Does the government charge a fee for entering the Advance Pricing Agreement (APA) program? 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. 32. What is the application deadline for an APA? 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. 33. Where can I find the details of the APA application process? (updated August 25, 2023) The Advance Pricing and Mutual Agreement Program (APMA) provides guidance on the Advance Pricing Agreement (APA) application process on Advance Pricing and Mutual Agreement Program.