ABA Section of Taxation Transfer Pricing Committee Panel APMA: Past, Present and Future May 10, 2013 Washington, DC

ABA Section of Taxation Transfer Pricing Committee Panel APMA: Past, Present and Future May 10, 2013 Washington, DC

Your Presenters David Canale -Moderator Ernst & Young LLP, Washington, DC david.canale@ey.com + 1 202 327 7653 Richard McAlonan Director, IRS Advance Pricing and Mutual Agreement Program, Washington, D.C. Richard.J.McAlonanJr@irs.gov +1 202 283 8594 (changing April 25) Robert Green Skadden, Arps, Slate, Meagher & FlomLLP, Washington, D.C. robert.green@skadden.com +1 202 371 7840 Michael Durst mdurst@intlegal.com +1 240 832 0134 1

Panel Agenda 1. Advance Pricing Agreement ( APA ) and Competent Authority ( CA ) Programs: Brief History Background APA Program Competent Authority Program 2. Advance Pricing and Mutual Agreement Program ( APMA ): Current Structure and Objectives LB&I Revised Structure APMA Program under Transfer Pricing Operations ( TPO ) TPO Structure & Highlights APMA Structure APMA Purpose and Scope Procedural Changes 3. APMA Program: Future Expectations MAP Arbitration Impact Future Expectations -Points for Discussion 2

APA and CA Programs: Brief History

Background Transfer Pricing Disputes Factually intensive Frequently contentious and controversial Time consuming Adversarial Arbitrary resolutions Expensive from both taxpayer s and IRS perspectives IRS needed an alternative dispute resolution process - APA Program born in 1991 4

APA Program Purpose: The APA process was designed to be a flexible problem-solving process, based on cooperative and principled negotiation between taxpayers and the Service. APA objectives: 1. To arrive at an understanding on three basic issues: The factual nature of the intercompany transactions to which the APA applies An appropriate transfer pricing method ( TPM ) applicable to those transactions The expected arm s length range of results from applying the TPM to the transactions 2. To reach an understanding in an environment that encourages common understanding and cooperation 3. To come to an agreement in an expedited fashion 4. To come to an agreement in a cost effective fashion Organized under Counsel; first Rev. Proc. issued in 1991 5

Competent Authority Program Purpose : The CA process was designed assist taxpayers to avoid the denial of treaty benefits and avoid double taxation, encouraging free trade between treaty partner countries All U.S. income tax treaties include a Mutual Agreement Procedure ("MAP") article that allows the taxpayer to request assistance when the actions of the United States, the treaty country, or both, result in taxation that is contrary to the treaty Organized under Commissioner; first Rev. Proc. issued in 1970 6

APMA Program: Current Structure and Objectives

LB&I International Function Revised structure EOI Program TAIT Deputy Commissioner (International) Assistant Deputy Comm r (Int l) JITSIC Foreign Posts Service-wide Strategy Director, Transfer Pricing Operations Director, APMA Deputy Director Transfer Pricing Practice Combined MAP/APA team

APMA Program APA merged with CA to form APMA in early 2012 Added staff Eliminated handoff issue in bilateral APAs Allowed negotiating position to be considered sooner Renewed focus on working cases more efficiently, closing cases sooner The revised APMA structure includes 11 groups with a country focus: Group # Country 1 China, India, Indonesia, Japan, Korea & Thailand 2 Economists 3 Australia, Germany, Israel, Kazakhstan, Netherlands, New Zealand, Russia & Ukraine 4 Japan & South Africa 5 Austria, Belgium, Canada & Italy 7 Denmark, Ireland, Norway, Sweden, Switzerland & UK 8 Argentina, Canada, Caribbean, Jamaica, Mexico, Portugal, Puerto Rico, Spain & Venezuela 9 Canada, France, Greece, Hungary, Romania & Turkey 10 Guam, Japan, Morocco & Philippines 11 Economists 12 Economists 9

TPO Structure Nanette Hamilton Executive Assistant,Technical Sam Maruca Director, Transfer Pricing Operations (TPO) Carla Langland Executive Assistant, Operations (acting) John Kaffenberg IPN Manager Howard Berger Senior Tax Advisor Bill Morgan Senior Economic Advisor Transfer Pricing Practice (TPP) Dick McAlonan Director, APMA Eli Hoory Special Projects Deputy Bob Cole Special Projects Deputy Nancy Bronson Territory Tax Manager (West) Tom Ralph Territory Tax Manager (Central) Matt Hartman Territory Tax Manager (East) Stan Perry Special Projects Deputy 10

TPO Highlights TPO fully integrates the IRS s transfer pricing expertise and resources and facilitates communication and collaboration TPO develops and coordinates LB&I s transfer pricing strategies and operational approaches across mutual agreement and advance pricing agreement activities via APMA and field examination via the Transfer Pricing Practice ( TPP ) Shared International Practice Networks ( IPN s) will facilitate knowledge sharing across APMA, TPP, and International Business Compliance ( IBC ) on all transfer pricing matters Although now under the same operation, APA and TPP have different objectives: APMA Carrot TPP Stick 11

APMA Structure Dick McAlonan Director, APMA Tina Masuda Deputy Director, APMA Ann O Bryan Sr. Manager, APMA Group 1 Judith Cohen Sr. Manager, APMA Group 3 Peter Rock Sr. Manager, APMA Group 4 David Marion Sr. Manager, APMA Group 5 Barbara Mantegani Sr. Manager, APMA Special Projects John Hughes Sr. Manager, APMA Group 7 Kenneth Wood Sr. Manager, APMA Group 8 Patricia Fouts Sr. Manager, APMA Group 9 Fred Johnson Sr. Manager, APMA Group 10 Russell Kwiat Sr. Manager, APMA Group 2 (Economists) Hareesh Dhawale Sr. Manager, APMA Group 11 (Economists) Victor Thayer Sr. Manager, APMA Group 12 (Economists) 12

APMA Purpose and Scope Purpose Minimize double taxation and taxation inconsistent with tax treaties based upon principled application of treaty provisions, US tax rules, the OECD Guidelines Negotiate and interface with foreign CAs to anticipate and address areas of common interest in furthering global tax and transfer pricing administration Motto: Certainty sooner Focused due diligence to conclude cases on a timely manner Handoff delay eliminated Prioritization: strategic v. routine transactions/cases Leverage experience to review routine cases more efficiently Scope of Activities Transfer Pricing International Domestic Permanent Establishments and Attribution of Income to PEs 13

Procedural Changes Both APA and MAP Revenue Procedures being updated Expected changes? APA: model submission request format to ensure consistent and comprehensive information provided to IRS MAP: self-initiated adjustment consideration MAP: 3-country CA discussion consideration 14

APMA Program: Future Expectations

MAP Arbitration Impact Baseball-style binding arbitration in US treaties with Canada, Germany, France and Belgium Arbitration provisions are pending ratification with Switzerland, Spain and Japan Expect that Treasury will add arbitration provision into other treaties Generally, arbitration commences two years after case is brought to CAs Anticipated to facilitate more efficient settlement of dispute between CAs 16

Future Expectations - Points for Discussion Opportunity for IRS to see practical application of TP guidance to inform update of transfer pricing regulations More selective approach to accepting APA requests? More public disclosure of APA and CA results? May help avoid negative public speculation e.g., Secret pact with IRS May be used as basis for resolving future disputes 17

Questions?