On October 28, the IRS’s Advance Pricing and Mutual Agreement programme (APMA), a US competent authority office that handles advance pricing agreement (APA) and mutual agreement procedure (MAP) cases, announced policy changes that will make it harder for taxpayers to telescope adjustments in multi-year MAP cases.
Telescoping involves making adjustments pertaining to earlier years in a later year. Historically, APMA has generally been amenable to requests for telescoping, which can eliminate the need for potentially burdensome amended returns for multiple years while generally producing the same overall tax effect. However, the adoption of the Tax Cuts and Jobs Act (TCJA) in late 2017 introduced obstacles to effective telescoping, both by reducing the US corporate income tax rate and by introducing a host of new provisions, such as § 965 repatriation and the global intangible low-taxed income (GILTI) rules.
Post-TCJA, it is still theoretically possible to accurately telescope results into a later year and arrive at the same US federal income tax result as one would obtain by amending returns, but it is much more difficult for taxpayers to do. It is equally difficult for the IRS to ensure that GILTI, repatriation, and other issues have been appropriately accounted for in determining the amount of the telescoped adjustments.
To avoid this difficulty, the recent APMA announcement generally requires taxpayers with MAP cases that involve adjustments for multiple years across the TCJA divide (including years beginning before and after January 1 2018) to file amended returns for each year. Telescoping across this divide is permitted only in small cases with an adjustment of $10 million or less, and then only at APMA’s discretion.
Importantly, however, the announcement would still permit telescoping of pre-TCJA years, as long as the year into which the adjustments are telescoped is also a pre-TCJA year (i.e. a year beginning before January 1 2018). While not addressed in the announcement, there is no express prohibition on – and no reason APMA should discourage – telescoping of post-TCJA years into later post-TCJA years as well, which therefore apparently remains available.
Similar issues arise in other tax contexts. Recent developments in the stock-based compensation (SBC) context have triggered reverse clawback provisions under many cost-sharing arrangements (CSAs), which now require retroactive sharing of SBC costs that were omitted under the CSAs for earlier years. While a reverse clawback provision may implement this through a single payment in the present year, contractual provisions do not govern the tax treatment of omitted SBC costs, and the IRS may demand that taxpayers file amended returns. The IRS is working on guidance that may address these timing issues. Again, the TCJA divide may pose an issue.
Another issue, while superficially similar, is fundamentally distinct. APAs provide flexibility for the taxpayer, the IRS, and any participating foreign tax administration(s) to agree how compliance with the transfer pricing method(s) adopted under the APA will be determined. This may be done through annual testing, or through the application of a term test (which evaluates compliance with the APA by evaluating the tested party’s overall results for the APA term) or multiple subterm tests (which operate like a term test, but divide the APA term into two or more sections).
The availability of term testing is an important feature of the APA programme, and is reflected as an option in APMA’s official APA template. It may prove particularly valuable for taxpayers seeking to smooth out the impacts of COVID-19. While term testing resembles telescoping in as much as it frequently applies to the last year of the APA term, term tests are means to determine compliance. Telescoping, on the other hand, is a means of collapsing multiple adjustments into a single tax year for administrative convenience. The recent announcement does not mention term tests, which therefore are expected to remain available for APAs.
While the announcement may be disheartening to some, its indication that telescoping remains available within pre-TCJA years, and the lack of any bar on telescoping among post-TCJA years, provide an undercurrent of hope, suggesting that APMA’s concerns are not with telescoping as such, but with the difficulty and uncertainty involved in attempting to span the TCJA divide. Telescoping and term tests remain important tools, and taxpayers should be aware of how and when they may apply.
Mark Martin
Principal
Thomas Bettge
Manager
