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IRS clarifies mandatory consultation process regarding transfer pricing examinations

Washington DC - Large

The US IRS has revised its internal manual on TP examinations. Deloitte explores the memorandum’s impact on collaboration between large businesses and international taxpayers and the advance pricing and mutual agreement (APMA) programme.

In a memorandum dated February 19 2019, the US’s Internal Revenue Service (IRS) revised Internal Revenue Manual (IRM) 4.61.3 regarding examinations involving transfer pricing (TP).

The memorandum requires collaboration between TP issue teams and the Advance Pricing and Mutual Agreement (APMA) Program on TP adjustments involving a country with which the US has a double tax treaty (DTT).

This consultation requirement applies regardless of whether the taxpayer currently has a mutual agreement procedure (MAP) or advance pricing agreement (APA) case in the APMA Program, or whether APMA has an active relationship with the treaty partner. It also applies to issue teams staffed by Transfer Pricing Practice, Cross Border Activities or Geographic Compliance Practice Area personnel. 

The memorandum applies to TP examinations of Large Business and International (LB&I) taxpayers (taxpayers that have assets equal to or greater than $10 million, and are required to file Form 5471 or 5472 with their federal income tax returns). The memorandum does not preclude consultation on cases opened before it was issued.

The memorandum is consistent with the Transfer Pricing Examination Process (TPEP), released on June 29 2018, which also requires collaboration with the APMA Program when the transaction involves a treaty country.

The memorandum requires that the issue team consider APMA’s relevant treaty background and competent authority (CA) experience with the treaty partner, and/or TP issues early in the issue-development process to risk-assess the issue properly.

According to the memorandum, such background discussions are designed to help the issue team understand how certain facts and arguments might be best developed and supported, as well as to provide perspective on the history APMA may have with the type of case being pursued, particularly whether in similar situations an adjustment has been withdrawn in whole or in part before or after negotiations have begun.

The memorandum also notes that the issue team is ultimately responsible for the selection and development of all examination issues, and for ensuring that an appropriate degree of independence from the CA process is maintained.

Procedural requirements

An attachment to the memorandum sets forth the procedures that must be followed by LB&I employees for implementing the required consultations between the TP issue teams and APMA personnel.

In particular, the issue team must contact APMA at the beginning of the issue team’s review. During the consultation, APMA and the TP issue team are required to discuss the intercompany transactions and issues under review, and APMA is required to share its experience, both generally and as it pertains to the applicable treaty partner.

Among other things, the APMA team has been instructed to share its experience with similar cases, presentation of facts, and arguments that can often arise during the CA negotiations, and as appropriate, possible outcomes resulting from the negotiation process. 


APMA has extensive experience dealing with TP issues in the context of negotiations with tax treaty partners in APAs and MAPs. In addition, unlike the examination team, APMA can rely on the OECD TP guidelines when developing a position (if the intercompany transaction involves a treaty partner).

APMA may recommend that the examination team modify a TP adjustment that is under consideration, if APMA considers that the adjustment would be difficult or impossible to sustain in a MAP, for instance.

As a practical matter, it is unclear how much influence APMA will exercise in this regard, given that the issue team is ultimately responsible for the development of the TP examination.

Importantly, the memorandum does not indicate whether the results of the consultation will be discussed with the taxpayer, or whether any notification will be made to the taxpayer that such consultation has occurred or will occur. However, given the potential benefits of APMA’s early involvement during the TP examination, we recommend that taxpayers proactively discuss the potential involvement of APMA with the issue team during a TP audit.


Kerwin Chung


John Breen Deloitte Profile

John Breen

This article was written by Kerwin Chung, Kirsti Longley, Dave Varley, Darrin Litsky, John Breen, Cindy Hustad and Jamie Hawes of Deloitte Tax LLP.

Kerwin Chung, Tax Principal
Deloitte Tax LLP

John Breen, Tax Managing Director
Deloitte Tax LLP

Copyright © 2019 Deloitte Development LLC. All rights reserved. This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this article.

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