US outbound: IRS CAP programme reopens with attention to transfer pricing

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US outbound: IRS CAP programme reopens with attention to transfer pricing

Sponsored by

sponsored-firms-kpmg.png
ib-us-outbound.jpg

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.

KPMG

E: mhorowitz@kpmg.com

W: www.us.kpmg.com

more across site & shared bottom lb ros

More from across our site

The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
The tax agency has increased compliance yield from wealthy individuals but cannot identify how much tax is paid by UK billionaires, the committee also claimed
Saffery cautioned that documentation requirements in new government proposals must be limited if medium-sized companies are not exempted from TP
The global minimum tax deal is not viable without US participation, Friedrich Merz has argued
Section 899 of the ‘one big beautiful’ bill would have spelled disaster for many international investors into the US, but following its shelving, attention turns to the fate of the OECD’s pillars
DLA Piper’s co-head of tax for the US and Latin America tells ITR about her fervent belief in equal access to the law, loving yoga, and paternal inspirations
Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
Gift this article