Implementation of Competent Authority Resolutions

 

 

October 28, 2020

The IRS is updating parameters that the Advance Pricing and Mutual Agreement program (APMA), a representative office of the U.S. competent authority, will follow in implementing resolutions it has reached on behalf of U.S. taxpayers in mutual agreement procedure (MAP) and advance pricing agreement (APA) cases negotiated under U.S. income tax treaties. 

The updates significantly curtail so-called “telescoping” of the results of these cases into current tax years; U.S. taxpayers will generally be required to amend the applicable year’s (or years’) federal income tax return(s) to reflect the changes in taxable income per competent authority resolutions instead of reflecting the changes to taxable income in current tax years.  

The update reflects the IRS’s efforts to promote compliance with changes brought to U.S. tax law by the Tax Cuts and Jobs Act (TCJA) and its many interlocking provisions that require careful determination (and redetermination, as needed) of a U.S. taxpayer’s taxable income and tax attributes. The IRS anticipates that in many cases spanning TCJA implementation years, changing the U.S. taxpayer’s taxable income pursuant to a competent authority resolution is likely to impact the substantive calculation of tax. Hundreds of U.S. taxpayers currently have competent authority cases involving one or more taxable years beginning before January 1, 2018. Requiring generally that these taxpayers amend their applicable federal income tax returns to implement competent authority resolutions in these cases contributes to the IRS’s efforts to effectively administer and ensure compliance with the provisions of TCJA.

The updated parameters have three main elements:

  1. At the conclusion of its competent authority case, the U.S. taxpayer will be instructed as to the taxable year(s) in which the resolution is to be reflected in the taxpayer’s U.S. taxable income. The U.S. taxpayer will generally be instructed to amend its U.S. federal income tax returns for each of the individual years covered by its case.    
  2. When the competent authority case involves multiple years beginning before January 1, 2018, e.g., an audit cycle involving consecutive tax years, the U.S. taxpayer may request that the change to taxable income for each year of the case be aggregated, netted, and reflected in the last of those taxable years. Thus, for example, if a MAP case involved the U.S. taxpayer’s 2014, 2015, and 2016 tax years, the taxpayer may request that the changes to the respective years be netted and reflected in an amended U.S. federal income tax return for 2016.  
  3. If the change to the U.S. taxpayer’s taxable income resulting from a competent authority resolution is $10 million or less, the IRS may permit the U.S. taxpayer to reflect the aggregate change in a taxable year beyond the last year (or last of the years) covered by the case. The exact year in which the change will be permitted will depend upon various factors, but in making its determination, the IRS will consider the amount of the change in taxable income and the administrative burden on the taxpayer in otherwise following the general approach. 

These parameters will continue to be reviewed and updated as needed in order to ensure that the IRS is maintaining balance between the interests of U.S. taxpayers in mitigating the administrative cost of implementing competent authority resolutions and the needs of sound tax administration.

Questions about this announcement may be directed to any APMA Assistant Director or the APMA Director per the APMA contacts webpage (https://www.irs.gov/businesses/corporations/apma-contacts).