Compliance Assurance Process (CAP) Frequently Asked Questions (FAQ) As of December 13, 2018 1. For 2019, are CAP taxpayers required to apply for Advanced Pricing Agreements (APAs) if requested by the CAP team? For the CAP 2019 transition year, 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. For the 2020 CAP year and subsequent years, the requirement to apply for an APA, when requested by the CAP team and the taxpayer fails to comply, may affect suitability for remaining in CAP going forward and could also lead to termination from CAP during that year. 2. For purposes of the Material Intercompany Transaction Template (MITT), what is a “material” intercompany transaction? For the 2019 transition year, 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. 3. 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. 4. 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. 5. How should foreign partnership transactions be reported on the MITT? Transactions with related foreign partnerships should be reported separately from their CFC owners. 6. Should domestic controlled transactions with non-consolidated entities be included in the MITT? Yes 7. Taxpayer cannot get the MITT completed by 11/30/2018 – 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. 8. 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. 9. 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. 10. For Operating Margin (OM) in Column Q, is this the OM of the overall entity, or for the intercompany transaction (segment?) under analysis? Overall Entity 11. For OM in column Q, do you want the OM if a different Profit Level Indicator (PLI) is used in the analysis? Yes 12. We are a May year-end fiscal year taxpayer. Our 201805 will be filed in March 2019. We already have our final transfer pricing numbers for 201805. But, the MITT asks for the most recently filed return, which for us is 201705. For the MITT filed by 11/30/2018 with our CAP application, do you want the 201705 figures or the 201805 ones? 201705, per the instructions. The risk assessment will probably be delayed, since the CAP opening conference for this particular case won’t happen until August 2019. By then, taxpayer can update the MITT with the 201805 data, so that the IRS risk assessment team can take it into account. 13. Why is tested party profit margin (column q) 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 request the PLI used for the taxpayer's analysis. 14. The heading of MITT column v reads ‘Actual Results (2018)’ What data is that asking for? The 2018 should be removed as it was from a prior version of the MITT. For the application the actual results should be the results of 2017. For future MITT's the actual results should be the actual results of the transaction for time period for which the MITT is prepared. 15. 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. 16. 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. 17. 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. 18. 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. 19. 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 2019 would typically cover five years (2019-2023). 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 counted against the CAP taxpayer while the APA is in process and the years are in APMA’s jurisdiction. 20. 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. 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. 21. If an intercompany transaction no longer exists for 2019, does the taxpayer need to disclose 2017 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. 22. If a TP policy is adjusted, but it is still the same TP method and tested party, is a taxpayer required to disclose a change in TP method? Yes 23. 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 24. 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 years. 25. Can the taxpayer reference a foreign transfer pricing report or APA? Yes. The taxpayer should be prepared to provide an English translation upon request. 26. 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 result for various reasons. 27. Column q - Tested Party OM, should this be the actual operating profit or a percent? Percent. 28. In 2017 BEAT does not apply so this should not be applicable for the application. BEAT does not apply to 2017, but to the extent the taxpayer expects BEAT to apply to the transaction in 2018-forward please indicate with an "X" that BEAT applies on the application MITT. 29. Should foreign to foreign transactions be reported on the MITT? No. 30. 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 q the OM % of the foreign related party. 31. The taxpayer and exam currently have an agreement with regard to 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. 32. What should be entered in column v actual results? The taxpayer has a transfer pricing policy for a transaction e.g. cost plus 5%. In column v exam would like the actual amount charged for the year which may be different from the policy e.g. cost plus 4.7%. 33. 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 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. 34. What is the 2019 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 2019 U.S. return is timely filed. 35. Where can I find the details of the APA application process? Please see Revenue Procedure 2015-41 PDF (PDF), or you may contact your case Account Coordinator or Charles Larson of the APMA program at (312) 292-3663, Charles.firstname.lastname@example.org. 36. Taxpayer does not have research credit, either in a prior year or in the current CAP application year, do they still have to complete the CRCQ? Yes , all CAP applicants must complete the CRCQ and submit it as part of their CAP application, even if they have not had research credit in a prior year or expect to have it in the current CAP year. 37. The CRCQ asks for the prior filed tax year research credit information and the current application year, however, what if there is a tax year with no research credit in between these two? Section A of the form requests the relevant information that is already known (the last filed tax year) while Section B pertains to the CAP Application year. The taxpayer would go back to the most recent prior year in which the research credit was known. Note also, that the CRCQ is expected to be completed contemporaneously (suggestion is no less than quarterly) during the CAP Year as additional information becomes available or changes. 38. Taxpayer did not have any research credit in the last filed tax year (2017) but expects to have it during the CAP Application year (2019) and the prior unfiled tax year (2018) but the amounts are both unknown at this time. Should the prior unfiled tax year information be reported in Section A? Yes. If this scenario exists, answer each question in Section A for both the last filed and unfiled years and identify each response as to the respective year. 39. CRCQ Questions B.2. and B.5. appear to be very similar, please explain. Question B.2. asks if there is a change in methodology for identifying respective business components (usually identified as projects or processes). Question B.5. asks if there is a change in methodology for identifying qualified research activities. Question B.5.’s focus is on any change in the way qualified research activities, as they would relate to specific business components, are identified. Because qualified research activities are performed under each discrete business component they are thereby a subset of the business component. 40. When will the IRS notify taxpayers of their acceptance into CAP for 2019? We plan to send letters to taxpayers informing them of their acceptance into the program and phase (CAP, CM, or Bridge), along with the MOU, from now through January 15, 2019. If an application was submitted incomplete, taxpayers may be asked to complete before issuance of an acceptance letter. The signed MOU is due on January 31, 2019.