n-98-10.pdf

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Part III - Administrative, Procedural and Miscellaneous
Small Business Taxpayer Advance Pricing Agreements
Notice 98-10
PURPOSE
The Internal Revenue Service ("Service") instituted the
Advance Pricing Agreement (AAPA@) Program to assist all taxpayers
in their efforts to comply with I.R.C. §482. Under an APA, the
Service and a taxpayer agree on a transfer pricing methodology
(ATPM@) to be prospectively applied to an apportionment or
allocation of income, deductions, credits, or allowances between
or among two or more organizations, trades, or businesses owned
or controlled, directly or indirectly, by the same interests.
Provided the taxpayer complies with the terms and conditions of
the APA, the Service will regard the results of applying the TPM
as satisfying the arm’s length standard under §482. Rev. Proc.
96-53, 1996-2 C.B. 375, explains how a taxpayer may secure an APA
from the Service.
To date, the Service has concluded over 100 APAs with U.S.
taxpayers, the majority of which have been large business
taxpayers with substantial income and/or assets. In an effort to
reduce the §482 compliance burden of, and to make the APA Program
more accessible to, small business taxpayers (ASBTs@), the
Service is proposing special APA procedures for SBTs. For
purposes of this Notice, a "small business taxpayer" is any U.S.
taxpayer with total gross income (determined pursuant to §5.14(7)

of Rev. Proc. 96-53 or its successor) of the amount set forth in
§5.14(3) of Rev. Proc. 96-53 (or its successor), currently less
than $100 million.
The special procedures seek to address the SBT’s need to
achieve the compliance certainty an APA provides at a cost that
is reasonable relative to the size and complexity of the
transactions involved. This Notice describes the circumstances
under which an SBT may request special procedures in seeking an
APA, the nature of the special procedures, and other provisions
designed to assist SBTs in the APA process. (The Service will
consider implementing similar procedures, on a case by case
basis, for the small transactions described in §5.14(4) of Rev.
Proc. 96-53.)
The Service wishes to receive comments from interested
members of the public prior to publishing the final procedures
for SBT APAs. Comments (eight copies) should be sent to
Associate Chief Counsel (International) CC:INTL:FO, Internal
Revenue Service, 1111 Constitution Avenue, N.W., Room 3501,
Washington, D.C. 20224, making reference in the comments to
Control Number INTL-OGI-117383-97. To ensure comments are given
full consideration, they should be submitted by April 10, 1998.
BACKGROUND
The Service has indicated a desire to alleviate the §482
compliance burden for SBTs. For example, under the 1993
temporary regulations, §1.482-1T set forth a safe harbor for
small taxpayers. That provision, however, was not retained in
the final regulations due to deficiencies with the safe harbor.

See AExplanation of Revisions and Summary of Comments@ of the
§482 final regulations, T.D. 8552, 1994-2 C.B. 93, 104. At that
time, the Service solicited suggestions from the public for
alternative approaches to assist small taxpayers with their §482
compliance burden. Id. No comments were received as a result of
this solicitation.
The Service also attempted to assist all taxpayers,
including SBTs, with their §482 compliance efforts by
implementing the APA Program under Rev. Proc. 91-22, 1991-1 C.B.
526. The Program’s experience, however, indicates that SBTs are
not participating in the Program to the same extent as larger
taxpayers, due at least in part to cost concerns (in terms of
internal staff time, external legal, accounting, and consulting
fees, and Service user fees).
As a consequence, the Service established additional
incentives for SBTs to seek APAs. Section 3.09 of Rev. Proc. 96-
53 provides that the Service and a small business taxpayer may
agree to special procedures for obtaining an APA, including
simplified procedures that depart from standard procedures, to
meet the needs of the particular SBT. In addition, §5.14 of Rev.
Proc. 96-53 establishes a reduced user fee for an SBT seeking an
APA. The APA Program has successfully applied the approach
referenced in §3.09 in several cases to assist SBTs in receiving
APAs.
The Service believes that maintaining the ability to adapt
procedures to the facts and circumstances of a particular SBT is
better than establishing formal procedures that may not be

applicable to all SBTs. However, it is important for the Service
to furnish guidance regarding the types of procedures it deems
appropriate for SBT APAs. Accordingly, the provisions in this
Notice expand upon §3.09 of Rev. Proc. 96-53 by providing
examples of simplified procedures the Service believes may be
appropriate. It is hoped that the flexibility underlying this
approach will encourage more small business taxpayers to
participate in the APA Program.
PRINCIPLES FOR SMALL BUSINESS TAXPAYER APA REQUESTS
The Service intends to maintain flexibility in the APA
process to address the particular needs of SBTs. Accordingly,
the special procedures set forth below are the types of
procedures the Service will entertain for SBT APA requests; they
are not exclusive, and the Service will consider other procedures
that harmonize with the objectives of the APA Program and the
SBT. In addition, different procedures may apply to different
SBTs, depending upon the facts and circumstances of each APA
case.
To address the concern that the perceived costs to secure an
APA are high in proportion to the size of the transactions
involved, the special procedures focus on simplifying the APA
process for the SBT transactions. This simplification is
intended to reduce costs in terms of the amount of time required
to evaluate the request, while permitting the Service to satisfy
its due diligence requirements.

This objective can be accomplished when the SBT proposes to
cover less complicated transactions with which the APA Program
has had experience (such as those involving the manufacture or
distribution of tangible property under §1.482-3 and the
performance of administrative and technical services under
§1.482-2(b)) and proposes a Abest method@ that is specified under
the regulations. Transactions involving non-routine intangibles,
including research and development cost sharing arrangements
under §1.482-7, would not ordinarily be amenable to such special
procedures due to the complexity of valuing such intangibles.
In addition, to the extent practical, the Service will
coordinate the special procedures with the SBT’s other tax
compliance efforts so as to minimize the costs to the SBT. For
example, the documentation that SBTs are required to maintain
under I.R.C. §6662(e) may be accepted as the APA submission
materials, and such documentation could form the primary
foundation for the Service’s evaluation of the SBT’s APA request.
SPECIAL PROVISIONS FOR SBT APAs
At the request of an SBT, the Service will apply any or all
of the following provisions under the principles of this Notice,
if deemed appropriate by the APA Director:
1. Under ordinary conditions, a taxpayer contemplating an APA
may (but is not required to) request a prefiling conference
with the Service. If a prefiling conference is requested,
the Service provides informal advice to the taxpayer
regarding the taxpayer’s proposal, but ordinarily does not
begin its due diligence evaluation in earnest until the

taxpayer formally files an APA request along with the
appropriate user fee. Once the formal APA request is
received, the APA Program targets finalizing the negotiating
position for bilateral APAs in nine months and concluding
unilateral APAs in 12 months. In contrast, for SBT
transactions the Service intends, if requested, to commence
its due diligence analysis at the front-end of the process
to accelerate the conclusion of the APA negotiations.
(a) The Service and SBT may hold a prefiling conference
(before a user fee is paid) to determine as early as
possible the best method for the SBT’s proposed covered
transactions. To accomplish this, the Service will
need a detailed description of the underlying facts of,
and the proposed TPM for, the SBT’s requested covered
transactions at least 60 days prior to the scheduled
conference. For purposes of this Notice, the SBT may
provide the information it is required to maintain
under I.R.C. §6662(e) to satisfy this requirement.
Prior to its prefiling submission, the SBT must consult
with APA Program personnel to determine the information
the Service deems necessary to evaluate the SBT’s
particular covered transactions.
(b) An APA Team will evaluate the SBT APA prefiling
submittal to determine items of concern and the
additional documentation, if any, needed to evaluate
the request. The SBT will be advised of the APA Team’s
initial conclusions before the prefiling conference so

that it can address these items before or at the
conference.
(c) At the prefiling conference, the SBT and Service will
negotiate the case management plan with the objective
of concluding a unilateral APA, or finalizing the
recommended negotiating position for a bilateral APA,
within six months of the date the SBT files its APA
request. The Service’s efforts to perform more of its
analysis earlier in the process should result in a
reduced number of post-filing meetings and supplemental
information requests.
2. The Service and SBT may negotiate the reduction or
elimination of specific elements otherwise required under §5
of Rev. Proc. 96-53. Examples of the types of information
the Service may determine the SBT could exclude from its APA
request include those described in the following subsections
of Rev. Proc. 96-53: (a) §5.04(3); (b) §5.04(5); (c)
§5.04(6); (d) §5.08; and (e) §5.09.
3. The Service will hold all meetings with the SBT at a
location convenient to the SBT. To minimize the number of
meetings, teleconferences will be employed whenever
feasible.
4. The Service will reasonably assist the SBT in the selection
and evaluation of comparables or the computation of
adjustments to comparables under §1.482-1(e), as well as, if
appropriate, assist the SBT in determining other
adjustments.

5. The initial term of an SBT APA will be three years, with the
potential to renew the APA for a longer term.
6. For unilateral APA requests, an SBT may submit a proposed
draft APA in a form substantially identical to the current
APA model agreement attached to this Notice (the APA model
is subject to change; SBTs should check with the APA Program
for updated versions). To expedite review of the proposed
draft APA, the SBT should also include a Aredline@ version
showing the differences between the APA model and the SBT’s
proposed draft. In addition, SBTs should also submit the
draft on a computer disk in a word processing format
acceptable to the Service.
7. The Service will consider other procedures suggested by the
SBT to reduce the SBT’s administrative and financial burden,
consistent with the objectives of the APA Program and the
requirements of §482.
DRAFTING INFORMATION
The principal author of this Notice is David J. Canale of
the Advance Pricing Agreement Program, Office of Associate Chief
Counsel (International). For further information regarding this
Notice, contact Mr. Canale or Mr. Karl Kellar at (202) 874-4360
(not a toll-free call).

ADVANCE PRICING AGREEMENT
between
TAXPAYER
and
THE INTERNAL REVENUE SERVICE

ADVANCE PRICING AGREEMENT
between
TAXPAYER
and
THE INTERNAL REVENUE SERVICE
THIS ADVANCE PRICING AGREEMENT ("APA") is made by and between Taxpayer
and the Internal Revenue Service ("Service"), acting through the Associate Chief Counsel
(International).
WHEREAS, Taxpayer and the Service (the "Parties") wish to establish a method for
determining whether certain prices used in international transactions involving Taxpayer are in
accordance with the principles of section 482 of the Internal Revenue Code of 1986 as amended (the
"Code") and attendant Regulations and, to the extent applicable, income tax conventions to which
the United States is a party;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties
agree as follows:
1.Identifying Information
.Taxpayer’s EIN is __________. [Taxpayer is included
in the consolidated federal income tax return filed by ________________, EIN ________. All
references to Taxpayer’s United States income tax return in this APA refer to that consolidated
return, and all references in this APA to "Taxpayer" shall refer to the ______________ consolidated
return group.]
2.Covered Transactions
.This APA governs the pricing of the transactions
specified in Appendix A (the "Covered Transactions").

3.Legal Effect.
3.1.Taxpayer agrees to comply with the terms and conditions of this APA, including the
transfer pricing methodology ("TPM") that is described in Appendix A. If Taxpayer complies with
the terms and conditions of this APA, then the Service will not contest the application of the TPM
t o t he Co vered Transactions and will not make or propose any reallocation or adjustment under
section 482 of the Code with respect to Taxpayer concerning the Transfer Prices in Covered
Transactions for the years covered by this APA (the "APA Years").
3.2.Regardless of the date on which Taxpayer filed its request for this APA, Taxpayer and
the Service agree, unless otherwise specified to the contrary in this APA, that Rev. Proc. 96-53,
1996-2 C.B. 375, and not any predecessor to Rev. Proc. 96-53, governs the interpretation and
administration of this APA.
3.3.If, for any APA Year, Taxpayer does not comply with the terms and conditions of this
APA, then the Service may:
i.enforce the terms of this APA and propose adjustments to the income, expenses,
deductions, credits, or allowances reported on Taxpayer’s U.S. federal income tax
return in keeping with the terms of this APA;
ii.cancel or revoke this APA pursuant to section 11.05 or 11.06 of Rev. Proc. 96-53;
or
iii.revise this APA, upon agreement on revision with Taxpayer.
3.4. [This APA addresses the arm’s length nature of prices charged or received in the
aggregate between Taxpayer and [name of foreign group], and except as explicitly provided in this
APA does not address, and does not bind the Service with respect to, prices charged or received, or
the relative amounts of income or loss realized, by particular legal entities that are members of

Taxpayer or that are members of [foreign group]. The true taxable income of a member of an
affiliated group filing a U.S. consolidat ed ret urn shall be det ermined under t he regulat io ns go verning
consolidated returns. See, e.g., Treas. Reg. section 1.1502-12. Similarly, to the extent relevant for
United States tax purposes, and except as explicitly provided in this APA, the relative amounts of
income of different entities that are members of [foreign group] shall be determined under the arm’s
length standard of section 482 without reference to this APA.]
3.5.The Parties agree that nonfactual oral and written representations, within the meaning
of sections 10.4 and 10.5 of Rev. Proc. 96-53 (including any proposals to use particular TPMs), made
in conjunction with this request constitute statements made in compromise negotiations within the
meaning of Rule 408 of the Federal Rules of Evidence.
4.Term
.This APA shall apply only to the APA Years, which shall include only
________________.
5.Financial Statements and APA Records
.The determination whether Taxpayer has
complied with this APA will be based o n it s Unit ed St at es inco me t ax ret urn; it s financial st at ement s
as prepared in accordance with generally accepted accounting principles ("GAAP") on a consistent
basis (the "Financial Statements"); the additional records ("APA Records") specified in Appendix B;
and all information referenced in section 8 of this APA. Taxpayer will be in compliance with the
TPM only if a certified public accountant renders an opinion that the Financial Statements present
fairly, in all material respects, the financial position of Taxpayer and the results of its operations, in
accordance with GAAP. Taxpayer agrees to maintain the Financial Statements and APA Records
and to make them available within thirty days of a request by the Service in connection with an
examination described in section 11.03 of Rev. Proc. 96-53. Compliance with this section 5 will
constitute compliance with the provisions of sections 6038A and 6038C of the Code, with respect

to the Covered Transactions during the APA Years.
6. Critical Assumptions
.The Critical Assumptions of this APA, within the
meaning of section 11.07 of Rev. Proc. 96-53, are listed in Appendix C.
7.Compensating Adjustments
.To the extent necessary to bring Taxpayer into
compliance with this APA, Taxpayer may make Compensating Adjustments as described in and
subject to the rules of section 11.02 of Rev. Proc. 96-53, and subject to any restrictions stated
elsewhere in this APA.
8. Annual Report
.Taxpayer shall file a timely Annual Report for each APA Year
pursuant to the rules of section 11.01 of Rev. Proc. 96-53. The Annual Report shall contain the
information described in Appendix D. In connection with an examination described in section 11.03
of Rev. Proc. 96-53, the District Director may request and Taxpayer shall provide additional facts,
computations, data or information reasonably necessary to clarify or verify the Annual Report.
9.Disputes.Should a dispute arise concerning the interpretation, application or
enforcement of this APA, the Parties agree to seek resolution of the dispute by the Associate Chief
Counsel (International), to the extent reasonably practicable, prior to seeking alternative remedies.
10.Section Captions.The section captions contained in this APA are for convenience
and reference only and shall not affect in any way the interpretation or application of this APA.
11.Notice.Any notices required by this APA or Rev. Proc. 96-53 shall be in
writing. Taxpayer shall send notices to the Service at the address and in the manner prescribed in
section 5.13(2) of Rev. Proc. 96-53. The Service shall send notices to Taxpayer at:
12.Effective Date
.This APA shall become binding when both Parties have
executed the APA.

13.Counterparts.This APA may be executed in counterparts, with each
counterpart deemed an original.
IN WITNESS WHEREOF, the Parties have executed this APA on the dates indicated
below.
TAXPAYER
By:_________________________________Date:__________________________
INTERNAL REVENUE SERVICE
By:_________________________________Date:__________________________
Associate Chief Counsel (International)

APPENDIX A
TRANSFER PRICING METHODOLOGY
For each APA Year:
A.Covered Transactions.
The Covered Transactions for this APA consist of _______________________.
B.Transfer Pricing Methodology (“TPM”).

APPENDIX B
APA RECORDS
1.All documents listed in, and supporting the information provided in, Appendix D for
inclusion in the Annual Report.
2.[Insert here other records].

APPENDIX C
CRITICAL ASSUMPTIONS
1.The business activities, and financial and tax accounting methods and classifications,
of Taxpayer shall remain materially the same as described in Taxpayer’s request for
this APA.
2.[Insert here other Critical Assumptions.]

APPENDIX D
ANNUAL REPORT
Taxpayer shall include the following in its Annual Report for each APA Year:
1.A statement identifying all material differences between Taxpayer’s business
operations during the APA Year and the description of Taxpayer’s business operations
contained in Taxpayer’s request for this APA, or if there have been no such material
differences a statement to that effect.
2.A statement identifying all material changes in the Taxpayer’s accounting methods and
classifications, from those described in Taxpayer’s request for this APA, or if there
have been no such material changes a statement to that effect.
3.The Financial Statements.
4.A financial analysis demonstrating Taxpayer’s compliance with the TPM.
5.A description of any failure to meet Critical Assumptions or, if there have been no
such failures, a statement to that effect.
6.A description of the reason for, and financial analysis of, any Compensating
Adjustments with respect to the APA Year, including the means by which any such
Compensating Adjustment has been or will be satisfied.
7.A copy of the certified public accountant’s opinion, described in section 5 of this APA,
for the APA Year.
8.[Insert here other items to be included in Annual Report.]