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IBC - TPP Rules of Engagement

September 30, 2013

FROM: Sergio E. Arellano
Director, International Business Compliance

Samuel M. Maruca
Director, Transfer Pricing Operations
SUBJECT: IBC - TPP Rules of Engagement



General Guidelines

This document provides general guidelines and rules of engagement for IBC and TPP. It does not prescribe rules for every possible situation. In the absence of specific instructions, decisions will be made with these general guidelines in mind.

It is imperative that TPP and IBC work transfer pricing issues together, as a unified team. This means that responsibility for the selection, identification, development and resolution of transfer pricing issues is shared. Neither TPP nor IBC “controls” transfer pricing issues; in every case, the best answer from the standpoint of the U.S. government will prevail. Open and inclusive communication by all IBC and TPP personnel is expected. Meetings and conference calls will be scheduled so as to accommodate all personnel required to be involved under these guidelines. Any disagreements that remain after full discussion and debate, whether substantive or procedural, will be elevated to the next level of management. In all cases, disagreement will be addressed and resolved internally, never in front of the taxpayer.

The TPP is not able to assist in every transfer pricing case, and in many cases, examination teams will examine transfer pricing issues without the direct involvement of the TPP. However, the TPP must have visibility into the entire inventory. TPP will advise IBC of any direct request for assistance received by TPP from the Industries, and vice versa.

References herein to the “International team” refer collectively to all TPP and IBC personnel involved in the pertinent matter.

Case Selection, Risk Assessment, and Staffing

Any referral of transfer pricing work will be treated as a joint referral to IBC and the TPP. In the event one organization receives the referral and the other does not, it is incumbent on the receiving organization to reach out to their counterpart in the other organization. IBC and the TPP will jointly perform an initial risk assessment and, if they determine that the case is meritorious, IBC and the TPP will make the appropriate staffing decisions.

It is understood that, in many or even most cases, the TPP, as a result of its limited resources, will have no involvement in the day-to-day management of the issue. However, the IBC and TPP management teams have joint responsibility for the national transfer pricing inventory. Accordingly, they will conduct risk assessment and case reviews, and assess staffing needs, on an ongoing basis, as a team, with the understanding that issue development is a dynamic process.

Level of TPP Involvement: General

The specific roles of the team members and level of engagement of each should be established by the IBC and TPP managers as the team forms, risk is assessed and early audit planning activities proceed. It is understood that the TPP must determine whether it has sufficient resources in any given circumstance. The roles and levels of engagement need to be flexible and dynamic to adjust to the circumstances of the audit, which may change over time.

The level of TPP involvement in any particular case can range from limited to extensive, depending on the assessment of the case/issue – there is no one size fits all. In most cases in which the TPP is involved, it is envisioned that the TPP team member, the IE, the economist, other internal experts, and the other members of the examination team will work “shoulder-to-shoulder” to perform the core work. No team member – whether economist, IE, or TPP – “owns” the transfer pricing issue, and the participation of an economist or TPP practitioner does not mean that the other team members have no role in the case. In all cases, the TPP and IBC team members and managers must promote open and honest communication and strive to work as a team.

Just as the examination process is dynamic, staffing decisions are subject to modification. At any point in the audit process, the TPP and IBC managers may determine based on new information and/or updated risk assessments that the mix of personnel on the team should change. For example, a case that has not included TPP may have evolved to the point that TPP resources should be introduced. These decisions will be properly communicated to internal and external stakeholders.

See Appendix A for Sequencing in Specific Circumstances

Levels of TPP Involvement: Specific

Extensive Involvement

Extensive involvement is a direct, continuing and significant role in the day-to-day management and execution of the examination, including overall guidance and direction for key activities. The TPP is a full member of the exam team and as such participates in all decision-making and taxpayer communications. The TPP team member(s) and manager(s) participate in all elements of audit planning and execution, such as setting the ECD, elevating issues, managing the IDR process, determining whether to issue a summons, and the like.

Where the TPP is extensively involved, it will participate directly in:

  • Identifying the transfer pricing issue(s) selected for examination

  • All discussions and negotiations with the taxpayer and its representatives

  • Preparation of the audit plan and initial and mid-cycle risk analyses

  • Developing and meeting timelines, milestones and ECD

  • Functional and economic analyses, including drafting IDR’s and evaluating IDR responses

  • Developing the “working hypothesis” of how to approach the case

  • Coordinating the preparation and conduct of taxpayer interviews

  • Assisting in the selection of, and working with, outside experts

  • Drafting, reviewing and presenting the NOPA and rebuttal

  • Preparing and participating in Appeals conferences and alternative resolution processes

Notwithstanding the TPP’s extensive participation, it is understood that the issues will be worked by the TPP and IBC collectively, with each team member performing his or her role as determined by IBC and TPP managers working as partners and assuming continuing and joint responsibility for the issues.

Moderate Involvement

Moderate involvement may entail regular interaction between the IBC and TPP members of an examination team. The TPP will assist the examination team throughout the transfer pricing issue development process but not as expansively as extensive involvement. The TPP’s involvement may also vary at different stages of the exam, depending on the exam team’s needs and available resources. However, the TPP will participate in any substantive interactions with the taxpayer and any significant strategic decisions, such as whether to engage outside experts.

Specific areas where the TPP may actively assist include but are not limited to:

  • Advising on preparation of the audit plan and initial and mid-cycle risk analyses

  • Developing the ‘working hypothesis’ for the issue

  • Developing the functional and economic analyses,

  • Participating in the selection of outside experts

  • Drafting, reviewing and presenting the NOPA and rebuttal

  • Participating in issue resolution discussions with the taxpayer

  • Supporting the exam team throughout the Protest, Rebuttal, pre-Appeals and Appeals process

In all cases, IBC and TPP managers will remain in close communication and will ensure that IBC and TPP resources are being used appropriately under the circumstances.

Limited Involvement

Limited involvement entails occasional or periodic interaction, in the nature of advisory services. The exam team may contact the TPP for assistance on an ad hoc basis. Typically there will be limited or no direct taxpayer engagement by the TPP.

Areas of assistance could include:

  • Providing initial feedback on the taxpayer’s transfer pricing results and analytic approach

  • Assessing the viability of a challenge to taxpayer’s position (a “sanity check”)

  • Consulting at critical junctures on facts needed to be developed; what transfer pricing method might be most appropriate; the reasonableness of any potential resolution, and the like

  • Providing feedback/ assistance on draft NOPAs and other written presentations

The following apply to cases with Moderate to Extensive TPP Involvement

  • Estimated Completion Date (ECD) 

    1.  The TPP and IBC TMs should be fully engaged in the processes by which the ECD is established and should ensure that each team member contributes. The Roadmap should be used as a tool to guide these discussions.

    2.  At all times throughout the audit, the International team will keep the TC apprised of the status of the transfer pricing issues.

    3. The International managers must ensure the domestic team adjusts any relevant milestone dates associated with ECD changes.

    4.  When TPP becomes involved in an issue midstream, TPP and IBC should jointly develop an amended time line as necessary to proper development of the transfer pricing issue(s).

  • Issue Management 

    1.  The International team must ensure that both TPP and IBC personnel participate at the outset of the examination, if not before. See the Roadmap. This will facilitate timely development of plans for examination of transfer pricing issues.

    2.  Any TPP employee(s) officially assigned to the case will be added to IMS.

    3.  The initial and mid-cycle risk analysis by the International team will be reviewed and approved by the relevant TPP and IBC TMs.

    4.  The audit time line and related milestone dates will be set after coordination with the TPP and IBC manager(s).

    5.  The TPP will review all NOPAs that relate to transfer pricing.

  • Information Document Request (IDR) Management Process 

    1.  The IBC and TPP TMs will participate in IDR progress meetings and must be involved in discussions with the taxpayer when transfer pricing IDR’s are delinquent.

    2.  IDR modifications may be made only after collaboration between the TPP and IBC TMs.

    3. Progress meetings will be scheduled to allow the critical parties to be at the table.

  • Quarterly/Status meetings with the Taxpayer and related internal meetings 

    1. The TPP and IBC team members, TMs, and the appropriate Territory Managers (TTMs) will participate in all Quarterly/Opening/Status meetings.

    2.  For internal status meetings, TPP and IBC team members must be prepared to discuss the status and progress of international issues and assess milestone and ECD targets.

    3.  The scheduling of transfer pricing meetings will be coordinated so all key participants are available,

  • Delegation Order (DO) 4-24 and DO 4-25 

    1.  For transfer pricing issues, the TPP TM, in collaboration with IBC, will have the authority to accept or decline settlement offers under DO 4-24 and DO 4-25.

    2.  Review of decisions under DO 4-24 and DO 4-25 on transfer pricing issues will be made by both the TPP and IBC TTM. Final decisions made in this regard will be discussed with all International team members and then communicated to the taxpayer, as necessary, in a discussion in which the TPP and IBC TMs are involved.

  • International Penalties 

    1. The TPP and IBC TMs will decide whether to assert transfer pricing penalties.

  • CAP Taxpayers with transfer pricing issues 

    1.  The TPP and IBC TMs will confer with and provide comments to the Industry TM when documenting taxpayer cooperation and transparency on transfer pricing issues.

  • Advanced Pricing Agreements (APA) and Competent Authority Cases 

    1.  TPP, IBC, and the Advanced Pricing and Mutual Agreement group (APMA) will collaborate to determine the appropriate staffing of an APA or Competent Authority case. The IBC or TPP TM will be the initial point of contact with APMA for APA processes.

    2.  The IBC TM will periodically update the Domestic TM on the APA process and status, including any impact on the current cycle, future cycles, and rollback years.

  • Fast Track 

    1.  All TPP and IBC team members and managers will participate in any Fast Track proceeding involving a transfer pricing issue.

    2.  For transfer pricing issues in Fast Track, the TPP and IBC TMs and TTMs will together make decisions on behalf of LB&I.

  • Closing Agreement/Form 906 

    1. Transfer pricing issues addressed in a Form 906 must be reviewed by TPP, counsel and IBC.

    2. The agreed Form 906 will be signed by the appropriate IBC DFO.

  • Appeals 

    1.  The International team will collaborate and concur on any Appeals matters and processes. This includes pre-appeals meetings and related planning sessions, post-appeals conferences, and decisions regarding return of cases from Appeals for further development and review of ACMs.

  • Outside Experts 

    1. The TPP and IBC TTMs will decide on whether to engage an outside expert for a transfer pricing issue and will collectively manage the engagement.

Appendix A: Sequencing in Specific Circumstances

Transfer Pricing Identified at the Start of the Examination: 

  1. The IBC and TPP managers schedule a meeting to risk assess the referred transfer pricing issue.

  2. TPP and IBC perform risk analysis on transfer pricing issue.

  3. TPP and IBC determine appropriate staffing, including the initial level of TPP involvement (extensive, moderate, limited).

  4. TPP manager and IBC manager work to establish timelines, milestone and ECD. The timelines, milestones, and ECD are approved by IBC TTM and TPP TTM.

  5. IBC manager communicates the results of number 4 (above) to the domestic team manager.

Transfer Pricing Issues needing additional TPP assistance are identified during the examination (i.e., TPP has limited or no involvement at the start of the examination):

  1. IBC TM contacts TPP manager (or vice versa) to discuss the issue based on new and/or additional facts and circumstances and/or legal arguments that arise during the examination. li>

  2. IBC and TPP managers determine whether TPP’s level of involvement should change or whether additional TPP resources are needed. They also designate necessary additional resources.

  3. TPP manager and IBC manager jointly determine if the issue timelines, milestones, ECD need to be modified. If changes are recommended they need to be approved by IBC TTM and TPP TTM.

  4. IBC manager informs Domestic TM if TPP level of involvement changes and if timeline, milestones, and ECD need modification.