US outbound: IRS CAP programme reopens with attention to transfer pricing
Mark Horowitz, Thomas Bettge, Mark Martin, and Theresa Kolish of KPMG assess the IRS’s reopening of the CAP programme, noting that the updated programme seeks to address transfer pricing issues.
On June 14 2019, the Internal Revenue Service's (IRS) Large Business & International Division (LB&I) announced that the compliance assurance process (CAP) programme will consider new applicants for the first time since 2015. CAP, a programme for large corporate taxpayers, involves a real-time audit with the goal of reaching agreement on tax items prior to the filing of a tax return for the year. If the taxpayer's return is filed consistently with the agreed upon positions, it will be accepted without challenge via the LB&I's issuance of a "no change" letter, though for critical or controversial issues a closing agreement may be used for additional certainty. After a few years in the CAP, taxpayers may move into the "CAP maintenance" phase, where they receive less scrutiny but still receive a "no change" letter. CAP taxpayers who pose the least risk may enter a "bridge phase", in which they receive no scrutiny. While such taxpayers will not receive "no change" letters, the LB&I has assured taxpayers that subsequent audits are not anticipated and would occur only in exceptional cases.
Because the CAP programme aims to resolve issues prior to the filing of a return, transfer pricing issues have often posed difficulties for the CAP. Taking into account LB&I guidance on post-filing transfer pricing examinations and statistics promulgated by the IRS's advance pricing agreement (APA) programme, this is not surprising. The LB&I's guide on the transfer pricing examination process contemplates that examinations of transfer pricing issues will frequently take 2-3 years. Moreover, as of 2018, IRS APA programme statistics indicate that it takes an average of 33.4 months, or almost three years, to finalise a unilateral APA reflecting agreement on the treatment of transfer pricing issues between a taxpayer and the IRS. Clearly, attempting to reach agreement on such issues in the CAP on a yearly basis prior to filing each year's return poses extreme challenges, and may lead to results that are suboptimal from the perspective of both taxpayers and the IRS.
The LB&I has historically expressed concern regarding the viability of the the CAP programme for taxpayers with complex transfer pricing issues, and following a 2016 announcement that the CAP would not accept new participants, the future of the programme was cast in doubt. However, an August 2018 announcement affirmed that the IRS would continue and expand the CAP, while announcing new changes that helped to coordinate the CAP and transfer pricing issue resolution, among other things.
The June 2019 announcement explains that the LB&I intends to open the CAP to new applicants, and requests that new taxpayers who are considering applying for the programme submit a Statement of Interest by July 26 2019. This Statement of Interest must include a description of the taxpayer's transfer pricing. While submitting a Statement of Interest is the best practice, the LB&I's intent is simply to gauge interest in the CAP for resource allocation purposes, and the LB&I personnel have indicated that taxpayers may apply for the CAP in the autumn even if they have not filed a Statement of Interest by the July deadline.
The CAP application window for the 2020 CAP year runs from September 1 to October 31 2019. As part of the application, both new and existing CAP taxpayers will have to fill out and submit the model inter-company transaction template (MITT), which requires a variety of transfer pricing information and will be used to select or de-select transfer pricing issues for review in the CAP. Importantly, not all information required by the MITT will be relevant or sensible in every case, and taxpayers should take advantage of the IRS's invitation to supplement the MITT with additional information and analysis contextualising the data in the template.
Beginning in the 2020 CAP year, the LB&I's CAP teams have the authority to require taxpayers to pursue APAs for transfer pricing issues that they deem unsuitable for pre-filing resolution in the CAP. Failure to comply with such a requirement may result in a taxpayer's removal from the CAP programme. How taxpayers present their transfer pricing in the Statement of Interest (if applicable) and the MITT (together with any supplemental materials) will influence this decision. Taxpayers who are able to set forth convincingly their transfer pricing in a way that does not indicate undue risk will likely have a better chance of continuing in the CAP programme without being required to pursue an APA.
These recent updates to the CAP show that the LB&I is paying close attention to transfer pricing and its role in the CAP programme. The changes should provide much needed coordination, allowing taxpayers to obtain pre-filing certainty for transfer pricing issues coordinated through the CAP and, if necessary and desired, complementary certainty on transfer pricing through the APA programme.