ADVANCE PRICING AGREEMENTS: FAIR TO ALL

TAXPAYERS?
KATHRYN PAWLICKI
I. INTRODUCTION .................................................................................. 195
II. BACKGROUND .................................................................................. 197
A. International Tax Generally ...................................................... 197
B. Origin of Transfer Pricing and the Advance Pricing Agreement
Program ................................................................................... 198
1. Transfer Pricing Generally .................................................. 198
2. Why Regulate Transfer Pricing? ......................................... 204
3. Emergence of the Advance Pricing Program ...................... 205
C. APAs Generally ......................................................................... 206
1. What is an APA? .................................................................. 206
2. Advantages and Disadvantages ........................................... 207
D. Formation, Administration and Enforcement of APAs .............. 209
III. ANALYSIS ........................................................................................ 210
A. Fairness in Tax Law................................................................... 211
B. Fairness in the Case of APAs..................................................... 213
1. Cost to Participate ............................................................... 213
2. Specific Tax Result ............................................................... 214
3. Failure to Comply ................................................................ 216
C. Resolution .................................................................................. 216
IV. CONCLUSION ................................................................................... 220
I. INTRODUCTION
The IRS has printed over 13,350 publications, 1,500 forms, and 5,000
sets of instructions for U.S. business taxpayers operating abroad.1 Despite
the seemingly vast amount of resources, or perhaps as a result of these

B.S., 2011, cum laude, Wayne State University; J.D., 2015, Wayne State University
Law School.
1. TAXPAYER ADVOCATE SERVICE, 2011 ANNUAL REPORT TO CONGRESS 133 (2011),
http://www.irs.gov/pub/tas/2011_arc_internationalmsps.pdf (The IRS has 43 publications
pertaining to U.S. business taxpayers involved in economic activity abroad, totaling 1,212
pages. These publications refer to additional publications totaling 13,346 pages, 1,500
pages of forms, and another 5,018 pages of form instructions.).

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resources, multinational corporations claim to face numerous difficulties

in complying with U.S. federal tax reporting requirements.2
One of the top, controversial compliance issues is transfer pricing.3
Transfer pricing refers, generally, to the price set by a taxpayer on goods
and services sold, purchased, and shared between two or more entities.4
This concept is particularly relevant in the case of multinational
corporations, where there are cross-border transactions between related
entities within the same corporate tax group.5 Here, an inappropriate
transfer price may allow the corporate group to lower its tax liability due.6
Taxing agencies are quick to address this form of tax avoidance.7
In the U.S., if a taxpayer fails to comply with IRS transfer reporting
requirements, the taxpayer may be subject to a substantial and unexpected
adjustment to its income tax liability, as well as large penalties.8 In an
attempt to address transfer pricing compliance difficulties, the IRS
designed the Advance Pricing Agreement Program (the Program).9 An
advance pricing agreement (an APA), in short, is an agreement between
the IRS and a taxpayer in which the parties agree to a transfer pricing
method to be applied for a set period of time.10
However, while the Program may be very beneficial to large
corporations, it has several flaws.11 Most significantly, the Program is
virtually unavailable to small businesses and individuals,12 which

2. Zeki Doan et al., Factors Influencing the Selection of Methods and Determination
of Transfer Pricing in Multinational Companies: A Case Study of United Kingdom, 3 INTL
J. ECON. & FIN. ISSUES 734, 734 (2013).
3. Id.; see also John McKinley, & John Owsley, Transfer Pricing and Its Effect on
Financial Reporting: Multinational Companies Face High-Risk Tax Accounting, J. ACCT.,
(Oct. 1, 2013), http://journalofaccountancy.com/issues/2013/oct/20137721.html.
4. BRIAN J. ARNOLD & MICHAEL J. MCINTYRE, INTERNATIONAL TAX PRIMER 55
(Kluwer Law International Ltd., 2d ed. 2002).
5. Jeffrey Trey & Kafui Asembri, International Tax Issues for Newly Multinational
Corporations: A Due-Diligence Perspective, 44 TAX ADVISER 215 (April 1, 2013),
http://www.aicpa.org/publications/taxadviser/2013/april/pages/clinic-story-04.aspx.
6. Yehonatan Givati, Resolving Legal Uncertainty: The Unfulfilled Promise of
Advance Tax Rules, 29 VA. TAX. REV. 137, 142 (2009).
7. See, e.g., Agnes W.Y. Lo & Raymond M.K. Wong, Tax Compliance and Audit
Adjustment An Investigation of the Transfer Pricing Methodologies, 33 INTL TAX J. 59,
(2007) (comparing transfer pricing in the U.S. and China); see also Kristin E. Hickman,
Comment, Should Advance Pricing Agreements be Published?, 19 NW. J. INTL L. & BUS.
171, 179 (1998).
8. Givati, supra note 6, at 142.
9. JOS MANUEL CALDERN, ADVANCED PRICING AGREEMENTS: A GLOBAL ANALYSIS
22 (1998).
10. 26 U.S.C.A. 482 (West 2014).
11. See infra notes 115119 and accompanying text.
12. See infra notes 115119 and accompanying text.

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represent a substantial portion of the U.S. income tax base.13 Limited

taxpayer access to the Program hinders the fairness of the U.S. taxing
system, which has long been recognized as a fundamental and desirable
attribute of any tax system.14 Given the Programs lack of universal
availability and the importance of fairness, the IRS should modify the
APA Program requirements to make APAs more readily available to all
taxpayers.
II. BACKGROUND
A. International Tax Generally
Unlike its name suggests, international tax refers, more precisely, to
the international aspects of the national income tax laws of sovereign
states.15 In actuality, there are no tax laws that apply internationally to all
nations.16 Consequently, state taxing systems are largely a product of
national governments,17 which means each state will likely employ its own
varying rules and requirements, resulting in inconsistency and overlapping
across borders.18
The central problem of having several state taxing agencies attempting
to coexist, rather than a blanket international taxing agency, is overlapping
claims of taxing authority.19 This is commonly referred to as juridical
double taxation and occurs where various governments claim to have full
taxing authority on the same transaction.20 The generally accepted
resolution jurisdictionally limits a nations taxing authority by source,
residence, and citizenship.21 Under U.S. tax law, for example, income tax
13. See, e.g., infra note 116 and accompanying text.
14. Leo P. Martinez, The Trouble with Taxes: Fairness, Tax Policy, and the
Constitution, 31 HASTINGS CONST. L.Q. 413, 417 (2004) (This requirement of fairness (or
at least the perception of fairness) has long been a veritable constant, and it is rare that
discourse on taxation does not emphasize fairness as a fundamental and desirable attribute
of any tax system.).
15. ARNOLD & MCINTYRE, supra note 4, at 2.
16. Id. at 23. Exceptions exist in the case of tax treaties; however, tax treaties, by no
means, encompass all nations. RICHARD L. DOERNBERG, INTERNATIONAL TAXATION IN A
NUTSHELL 6 (7th ed. 2007).
17. Nancy H. Kaufman, Fairness and the Taxation of International Income, 29 LAW &
POLY INTL BUS. 145, 167 (citing Alan G. Choate et al., Federal Tax Policy for Foreign
Income and Foreign Taxpayers: History, Analysis and Prospects, 44 TEMP. L.Q. 441, 441
42 (1971)).
18. DOERNBERG, supra note 16, at 6.
19. Id. at 2.
20. Id. at 23.
21. Kaufman, supra note 17, at 148 (Opinions differ about whether these established
jurisdictional bases rise to the level of customary international law. Nevertheless, it is

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is imposed on a U.S. citizens total worldwide income.22 Therefore, a nonU.S. citizen would not be taxed by the U.S. taxing authority.
However, jurisdictional limits do not fully resolve the issues that arise
as a result of cross-border trade of goods, cross-border investments, and
cross-border services.23 In the case of each of these types of transactions,
the taxpayer is potentially subject to a tax in two jurisdictions.24
Keeping the international tax scheme in mind, this Note begins with a
discussion on the origin of transfer pricing,25 follows with a general
overview of APAs and the U.S. APA Program,26 and continues with more
specific detail as to the formation, administration, and enforcement of
APAs.27 The background sets the stage for an evaluation of whether or not
the APA Program is on par with standards of fairness28 and finishes with
a brief analysis of various proposals suggested to improve the current
Program.29
B. Origin of Transfer Pricing and the Advance Pricing Agreement
Program
1. Transfer Pricing Generally
Transfer pricing commonly arises in the case of large, multinational
corporations having U.S. parent-operations and smaller, foreign
subsidiaries.30 Transfer pricing is the value assigned to transactions for

reasonable to assert that source and residence taxation, if not also citizenship taxation, now
constitute customary norms.); see also Suzanne M. Paquette, Discussion of Who Benefits
from Inconsistent Multinational Tax Transfer-Pricing Rules?, 23 CONTEMP. ACCT. RES.
133, 133 (2006) (Governments are . . . encouraged to increase international cooperation
in transfer pricing to avoid double taxation.).
22. INTERNAL REVENUE SERV., PUB. NO. 54, TAX GUIDE FOR U.S. CITIZENS & RESIDENT
ALIENS ABROAD 2 (Dec. 4, 2014), http://www.irs.gov/pub/irs-pdf/p54.pdf (If you are a
U.S. citizen or a resident alien, your worldwide income generally is subject to U.S. income
tax, regardless of where you are living.); see also INTERNAL REVENUE SERV., PUB. NO.
525, TAX GUIDE FOR U.S. CITIZENS & RESIDENT ALIENS ABROAD (Jan. 15, 2015),
http://www.irs.gov/pub/irs-pdf/p525.pdf; 26 U.S.C.A. 61 (West 2014).
23. ARNOLD & MCINTYRE, supra note 4, at 3.
24. Id. This is commonly referred to as double taxation. [D]ouble tax burdens can
become onerous and interfere substantially with international commerce. The necessity for
relief is clear on grounds of equity and economic policy. Id. at 27.
25. See infra notes 3093 and accompanying text.
26. See infra notes 94119 and accompanying text.
27. See infra notes 120131 and accompanying text.
28. See infra notes 132180 and accompanying text.
29. See infra notes 181197 and accompanying text.
30. ARNOLD & MCINTYRE, supra note 4, at 3.

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goods and services that are shifted between related entities.31 Transfer
pricing may also refer to transactions of intercompany commission
payments, loans, interest, royalties, or dividends flowing from one entity
to another.32 The concept of transfer pricing is especially relevant where
there are corporate entities related by a similar parent entity.33
Problems occur when one entity within the corporation transfers goods
or services to another entity, failing to do so at an arms-length price or
failing to provide adequate support for the transfer price used.34 An armslength price, according to the IRS, is the price that would be used to reflect
the same transaction, under the same circumstances, between unrelated
taxpayers.35
Multinational corporations may be motivated to not report the
transaction at an arms-length price for tax purposes36 in order to avoid tax
liability.37 This manipulation occurs by shifting the income and expenses
of an intercompany transaction between jurisdictions using artificially
high or low prices.38 The taxpayer reports a majority of the income from
the transaction as income attributable to the entity located in the nation
31. Doan, supra note 2, at 734 (citing MANFRED DAVIDMANN, COMMUNITY
ECONOMICS, MULTINATIONAL OPERATIONS: TRANSFER PRICING (1996); Gerald Aranoff,
Transfer Pricing With Technology Choice and Demand Fluctuations in a Simple
Manufacturing Model, QUARTERLY J. OF BUS. & ECON., Spring 2000, at 3, 3; Zeki Doan,
Transfer Fiyatlama Politikalarnn Belirlenmesinde Faaliyet Esasna Dayal Maliyetleme
Ynteminin nemi, 29 MUHASEBE VE FINANSMAN DERGISI 79, 80 (2003); Zeki Doan, ok
Uluslu Isletmelerde Transfer Fiyatlama Uygulama Nedenleri ve Verilerin Analizi, 22
MUHASEBE VE FINANSMAN DERGISI 71, 71 (2004); Jian Li, International Transfer Pricing
Practices in New Zealand, 7 UNIV. OF AUK. BUS. REV 59, 65 (2005)) (Transfer pricing
can be used for goods and services transferred between units or profit centres within the
same firm, as well as for goods and services transferred between related companies located
in different countries. Transfer pricing, in general, is defined as a term used in order to
represent the value of transactions among the subsidiaries operating in different countries.
In other words, transfer pricing is defined as the price charged for transferring a
corporations tangible and intangible assets, goods or services, raw materials, know-how
and technology to its subsidiaries or branches.).
32. Trey & Asembri, supra note 5, at 215.
33. Id.
34. Id. (In many cases, multinational companies have substantial intercompany
transactions with transfer prices that do not reflect appropriate arms-length rates or lack
contemporaneous supporting documentation.).
35. Treas. Reg. 1.482-1 (2013).
36. Paquette, supra note 21, at 134 (Firms have an incentive to shift part of their
income to the low-tax-rate country through transfer pricing.).
37. ARNOLD & MCINTYRE, supra note 4, at 81. Transfer pricing manipulation is usually
classified as tax avoidance, rather than tax evasion, which is illegal and usually involves
either fraud or use of international scheme to conceal of income. Id.
38. Paquette, supra note 21, at 134; see also ARNOLD & MCINTYRE, supra note 4, at
82.

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with a lower tax rate.39 Likewise, the taxpayer reports a majority of the
expense from that transaction as expense attributable to the entity located
in a nation with the higher tax rate.40 As a result, the gross income from
the transaction is taxed at a lower rate than if the transaction was recorded
at an arms-length price.41
For example, assume a parent taxpayer (Parent), with its
subsidiaries (collectively, the Company), operates internationally,
manufacturing and selling widgets.42 The cost to manufacture the widget
is $50, the widget typically wholesales between unrelated parties for $100,
and the widget retails for $200. Parents manufacturing facility, belonging
to Sub-M, is located in Country M, which has a very high tax rate of 90%.
Parents retail facility, belonging to Sub-R, is located in Country R, which
has a very low tax rate of 10%. In the absence of regulations, the Company
may manipulate the appropriate transfer price by failing to charge the full
wholesale price for the transfer of the widget from Sub-M to Sub-R.
Assume, for example, that Sub-M charges Sub-R only half the appropriate
wholesale price, $50, for one widget. This means Sub-M would recognize
$50 of expense and $50 of income, equaling $0 of gross income taxed at
90%.43 Sub-R would recognize $50 of expense and $200 of income,
equaling $150 of gross income taxed at 10%.44 The total tax liability for
Sub-M and Sub-R would be $15.45 Accordingly, Country M would receive
$0 of tax revenue, and Country R would receive $15 of tax revenue.
Now, assume the same facts, with the exception that the
manufacturing entity and retail entity, respectively M-Co. and R-Co., are
unrelated.46 As unrelated entities, not manipulating the tax system, both
M-Co. and R-Co. will recognize the full and appropriate price for the
wholesale and purchase of the widget, $100. In other words, for the
manufacture and wholesale of one widget to R-Co., M-Co. would
39. See Paquette, supra note 21, at 134.
40. See id.
41. See id. Less tax expense will be paid on an amount of income subject to a lower tax
rate, compared to the same amount of income subject to a higher tax rate, assuming all
other things are equal. See Givati, supra note 6, at 142.
42. Please note, this example is very elementary and considers no domestic tax laws or
other international factors, including treaties. Further, this example assumes both nations
follow basic U.S. tax laws and operate in U.S. currency.
43. 26 U.S.C.A. 61 (West 2014). Gross income, at its most basic level, is income
reduced by business expenses. $50 $50 = $0.
44. See supra note 43 and accompanying text. $200 $50 = $150.
45. 26 U.S.C.A. 11 (West 2014). The tax liability is, at its most basic level, gross
income multiplied by the tax rate. $0 0.90 = $0. $150 0.10 = $15. $0 + $15 = $15 total
tax.
46. In other words, in this example there is no parent taxpayer and there is no collective
corporate group.

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recognize $50 of expense and $100 of income, totaling $50 of gross

income taxed at 90%.47 For the purchase from M-Co. and retail-sale of one
widget, R-Co. would recognize $100 of expense and $200 of income,
totaling $100 of gross income taxed at 10%.48 The tax liability for M-Co.
and R-Co. would be $45 and $10, respectively.49 Accordingly, Country M
would receive $45 of tax revenue and Country R would receive $10 of tax
revenue. The total tax from this transaction, using an appropriate transfer
price, is $40 more than it was in our first example where the parties failed
to use an appropriate transfer price.50 From this scenario, it is evident that
when a corporation has the ability to shift its worldwide income without
restriction, the corporation can lessen its worldwide tax liability and has
significant fiscal incentive to do so.51
Given the obvious tax savings, multinational corporations may risk
engaging in a method of allocation where either no transfer price is
recognized or the transfer price used is less than arms-length.52 However,
if one or more of the taxing government agencies disagrees with the
chosen allocation, the corporation exposes itself to the possibility that each
governmental agency will disallow the taxpayer jurisdictional relief.53
That is to say, the corporation may be required to pay tax on the total
income earned from the transaction in both nations, which again results in
double taxation.54 The U.S. taxing authority is one that regulates the
method of allocation using the arms-length standard.
Section 482 of the Internal Revenue Code regulates transfer-pricing
rules in the United States.55 Its stated purpose is to ensure that taxpayers
clearly reflect income attributable to controlled transactions and to prevent
the avoidance of taxes with respect to such transactions, as exemplified
in the illustrations above.56 In order to affect its stated purpose, 482
requires that intercompany transactions be made using an arms-length
47. See supra note 43 and accompanying text. $100 $50 = $50.
48. See supra note 43 and accompanying text. $200 $100 = $100.
49. See supra note 45 and accompanying text. $50 0.90 = $45. $100 0.10 = $10.
$45 + $10 = $55 total tax.
50. See also DOERNBERG, supra note 16, at 265. $55 $15 = $40 tax difference.
51. Givati, supra note 6, at 142 (By setting the transfer prices of international
transactions between related companies, income is shifted to the legal entity located in a
low tax rate jurisdiction, and tax payments are thereby reduced.).
52. Paquette, supra note 21, at 134.
53. Id. ([I]f either country audits, the countries may or may not agree on the transfer
price and, thus, on the income that should be taxed by a particular country. When countries
disagree because they apply transfer-pricing rules inconsistently, firms face the potential
for double taxation.).
54. Id.
55. 26 U.S.C.A. 482 (West 2014).
56. Treas. Reg. 1.482-1(a) (2013).

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standard.57 The arms-length standard, defined by the Internal Revenue

Code, requires a transfer price as if the parties to the transaction were
dealing with each other as independent or uncontrolled parties.58 In total,
there are six legally acceptable transfer-pricing methods for tangible and
intangible property.59 These methods include: (1) the comparable
uncontrolled price method,60 (2) the resale price method,61 (3) the costplus method,62 (4) the comparable profits method,63 (5) the profits split
method,64 and (6) the comparable uncontrolled transactions method.65 The
Code of Federal Regulations provides that, while there is no strict priority
of methods, the method chosen should be that which provides the most
reliable measure of an arms-length result.66 A taxpayer should consider
legal factors, social and political factors, external economic factors, and
internal economic factors, in deciding the appropriate transfer pricing

57. INTERNATIONAL BUREAU OF FISCAL DOCUMENTATION, OECD TRANSFER PRICING

GUIDELINES FOR MULTINATIONAL ENTERPRISES & TAX ADMINISTRATIONS (2010 EDITION)
& TRANSFER PRICING FEATURES OF SELECTED COUNTRIES 730, 734 (Kamesh Susarla &
Antoine Glaize eds., 2012) (Under 482 of the IRC, tangible property, intangible
property, and services that are transferred (or where use is transferred) between related or
controlled parties must be priced on an arms length basis.).
58. Treas. Reg. 1.482-1(b)(1) (2013).
59. Robert F. Reilly, Considerations in the Advanced Pricing Agreement Application
Process: Transfer Pricing Issues for Taxpayers, 81 CPA J. 22, 28 (2011).
60. Id. The comparable uncontrolled price method uses the transfer price of a
comparable product, from which the taxpayer can identify an arms-length price and make
appropriate, subsequent adjustments. Id. This method can only be used for tangible
property. Id.
61. Id. The resale price method uses the difference between the distributor resale price
to the distributor profit margin of a comparable product. Id. at 2829. This method can
only be used for tangible property. Id.
62. Id. at 29. The cost-plus method uses the sum of the corporations cost to make the
product and an arms-length gross profit margin. Id. This method can only be used for
tangible property. Id. at 28.
63. Id. at 29. The comparable profits method uses profit-level indicators derived from
the transactions of similar, uncontrolled companies, applied to one or more profit margin
ratios. Id. This method can be used for both tangible and intangible property. Id. at 28.
64. Id. at 29. The profits split method allocates the gross profit or loss among the
controlled parties in a regulated fashion. Id. This method can be used for both tangible and
intangible property. Id. at 28.
65. Id. at 29. The comparable uncontrolled transaction method uses the transfer price
of comparable intellectual property, from which the taxpayer can identify an arms-length
licensing price and make subsequent, appropriate adjustments. Id. This method is used for
determining the arms-length price of intangible property only. Id. at 28.
66. Treas. Reg. 1.482-1(a) (2013). At the same time, it has been suggested that the
Tax Court finds discomfort with valuation methodologies that are heavy on finance theory
and light on taxpayer specific facts. Paul M. Dau & John G. Ryan, The Tax Court Fires a
Shot Through the IRSs Bow: Veritas Software Corp., INTL TAX J., Mar. 2010, at 27, 27.

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method.67 For example, in terms of legal factors, the taxpayer should

consider the shares of the local partnership;68 in terms of social and
political factors, the taxpayer should consider any religious or human
rights violations in the countries where the corporation operates;69 in terms
of external economic factors, the taxpayer should consider exchange rate
controls;70 and in terms of internal economic factors, the taxpayer should
consider the market shares of the corporation.71
Nevertheless, determining an arms-length price may be difficult,
especially for foreign entities.72 In the case of a foreign entity, there is often
important information missing to determine an appropriate arms-length
price, such as the best method for determining a transfer price.73 Further,
there is often little information to help foreign entities determine what
prices are normally charged by unrelated parties and to understand
industry-specific pricing standards.74 To make matters worse, even if
foreign entities fully understand third-party pricing, changes in such
pricing standards may require the foreign entity to implement similar
adjustments.75
If taxpayers fail to follow this requirement, 482 authorizes the IRS
to distribute, apportion, or allocate gross income, deductions, credits, or
allowances between two or more organizations in order to prevent tax
evasion.76 And, if such failure results in an understatement of income tax,
the IRS may impose penalties totaling 2040% of the misstated portion of
income.77 Such penalty may apply even if the taxpayer makes a good-faith

67. Doan, supra note 2, at 737 (The factors that affect determination of transfer
prices and selection methods in terms of parent corporations and subsidiaries are separated
into four groups; legal factors, political and social factors, external economic factors, [and]
internal economic factors.).
68. Id.
69. Id.
70. Id.
71. Id. at 738.
72. Givati, supra note 6, at 142 (noting the arms length principle is difficult to employ
in many cases due to the scarcity of comparable transactions, leading to frequent
controversy between taxpayers and tax authorities and significant uncertainty regarding a
corporations ultimate tax liabilities); DOERNBERG, supra note 16, at 318.
73. Id.
74. Id.; see also ARNOLD & MCINTYRE, supra note 4, at 68 (The difficulty arises in
part because unrelated corporations do not share comparable resources very often.).
75. Alan Shapiro, Luis Coronado & Axel Nientimp, Post-Transaction Adjustments:
Managing Global Transfer Pricing While Reducing Ripple Effects, J. ACCT., May 2008, at
66, 66.
76. 26 U.S.C.A. 482 (West 2014).
77. IBFD, supra note 57, at 746 (In the case of a substantial valuation misstatement,
a penalty of 20% of the misstated portion is applied in addition to the adjustment by the

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effort to comply with 482.78 Moreover, even if a penalty is not imposed,

the taxpayer may still be required to forfeit millions in the case of a
settlement.79 For example, in 2006, GlaxoSmithKline Holdings
(Americas) Inc. paid $3.4 billion to settle a transfer-pricing dispute with
the IRS; the largest settlement in IRS history.80 Recently, companies like
Amazon, AOL, Adobe, Hewlett-Packard, and Microsoft have also made
headlines regarding transfer-pricing disputes with the IRS, concerning
sums from tens of millions to upward of a billion dollars.81
2. Why Regulate Transfer Pricing?
Nations regulate transfer pricing to address three primary concerns:
existing competition between taxing agencies, taxpayer manipulation of
the tax system, and equality among taxpayers.82 First, transfer pricing
trigger[s] harmful competition at a global level among tax jurisdictions
attempting to protect or increase their taxable revenue bases.83 Jose
Manuel Caldern labels this harmful competition a global tax war.84 He
argues that national taxing agencies have taken aggressive approaches to
protecting the tax bases from which they derive tax revenues.85 Such action
by one country harms the tax base of other countries and encourages
aggressive responses.86 If unregulated, transfer pricing is one mechanism
that contributes to this circular problem, building resentment among
nations.87
Second, transfer-pricing regulations aim to address improper taxpayer
manipulation.88 Such manipulation creates large tax gapsestimated at
IRS. In the case of a gross valuation misstatement, the penalty is increased to 40% of the
misstated portion in addition to the adjustment made by the IRS.).
78. McKinley & Owsley, supra note 3, at 51.
79. See, e.g., id. at 52.
80. Id.
81. Id. at 51.
82. Eduardo Baistrocchi, Tax Disputes Under Institutional Instability: Theory and
Implications, 75 MOD. L. REV. 547, 552 (2012) (citing Harmful Tax Competition: An
Emerging Global Issue, OECD.ORG, http://www.oecd.org/dataoecd/33/0/1904176.pdf
(last visited 9 August 2011)). Taxpayer manipulation of the tax laws is often a means of
tax avoidance and, therefore, lessened tax revenue for the government. Id.
83. Id.
84. CALDERN, supra note 9, at 1718.
85. Id.; see also, e.g., Lo & Wong, supra note 7, at 61 (In summary, [in China] the
legislative framework for transfer pricing is continually being developed to resolve
ambiguous rule definitions, meet the governments demand to collect adequate tax revenue,
and tackle tax evasion cases more effectively.).
86. CALDERN, supra note 9, at 1718.
87. Id.
88. See Hickman, supra note 7, at 17273.

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$30 billion for the U.S. in 2001for nations where the taxpayer is
allocating expenses, rather than income.89 For example, in 1990 the United
States reported that non-compliance with transfer pricing rules resulted in
lost government revenue of 100 billion U.S. dollars.90 Such revenues
would typically be used for both mandatory and discretionary government
spending, including Social Security, Medicaid, Medicare, and defense.91
Finally, transfer-pricing regulations aim to foster equality between
multinational taxpayers and solely domestic taxpayers, who cannot use
such tactics to avoid tax liability.92 Solely domestic taxpayers are unable
to shift income among entities located in countries with lower tax rates;
rather, the income earned by a solely domestic entity will be taxed fully at
the U.S. corporate rate.93
3. Emergence of the Advance Pricing Program
Early U.S. regulations attempted to address the problems with transfer
pricing; however, there proved to be glitches with the IRSs traditional
means of enforcing related regulations.94 Critics have argued that preexisting statutes governing international tax were too complex, uncertain,
and ambiguous, resulting in wasted time and money for taxpayers and the
government.95

89. Jane Gravelle, The Corporate Income Tax: A Persistent Policy Challenge, 11 FLA.
TAX REV. 75, 89 (2011) (The tax gap for corporations was estimated in 2001 at about $32
billion, or about fifteen percent of revenues at that time, but some authors estimate another
$30 billion of revenue was lost in international profit shifting.).
90. CALDERN, supra note 9, at 19 (citing COMMITTEE ON WAYS AND MEANS, TAX
UNDERPAYMENTS BY U.S. SUBSIDIARIES OF FOREIGN COMPANIES, , H.R. REP. NO. 101-123,
pt. 3, at 1012 (1990)).
91. Jonathan Schwabish & Courtney Griffith, The U.S. Federal Budget, CONG. BUDGET
OFF., http://www.cbo.gov/sites/default/files/cbofiles/attachments/budgetinfographic.pdf
(last visited March 31, 2014).
92. Baistrocchi, supra note 82, at 552 (noting it provides a substantial advantage to
MNEs in comparison with nonmultinational firms because only the former can use this
type of international tax planning strategy).
93. Id.
94. CALDERN, supra note 9, at 21.
95. Id. at 2021. In the field of international tax, there has developed a national, and
even international consensus that traditional mechanisms for administering the law and
resolving disputes have virtually collapsed in the area of transfer pricing (which plays an
important role in allocating a taxpayers income among taxing jurisdictions). Diane M.
Ring, On The Frontier of Procedural Innovation: Advance Pricing Agreements and the
Struggle to Allocate Income for Cross Border Taxation, 21 MICH. J. INTL L. 143, 145
(2000) (citing U.S. GEN. ACCOUNTING OFFICE, GGD-95-101, INTERNATIONAL TAXATION:
TRANSFER PRICING AND INFORMATION ON NONPAYMENT OF TAX (April 1995),
http://www.gao.gov/assets/230/221228.pdf.

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To address both issues with unregulated transfer pricing and

subsequent statutory confusion, the IRS established the APA Program in
March 1991.96 While the Program has grown substantially since its
inception, its purpose has remained the same.97 According to the IRS,
[t]he APA Programs central goal is the prompt, proper, and fair
resolution of APA requests and renewals consistent with the principles of
[a] sound tax administration.98 Today, the APA Program is the most wellknown alternative dispute resolution procedure offered by the IRS.99
C. APAs Generally
1. What is an APA?
According to the APA Program website, an APA is an agreement
between the IRS and a taxpayer by which the IRS agrees not to seek a
transfer pricing adjustment . . . for a covered transaction if the taxpayer
files its tax return for a covered year consistent with the agreed transfer
pricing method.100 In other words, an APA is a private contract between
a taxpayer and the IRS, where the parties agree to the transfer price
assigned to the goods and services that move between entities within the
taxpayers corporate group. However, that is a simplified explanation; in
fact, there are several additional important characteristics of APAs that
taxpayers should understand.101 An APA is voluntary; although taxpayers
are always required to follow the provisions of 482, they are not required
to participate in the APA Program.102 An APA may be unilateral, where
the only parties to the APA are the IRS and the taxpayer; bilateral, where
the parties to the APA are the IRS, the taxpayer, and a foreign taxing
authority; or multilateral, where the parties to the APA are the IRS, the
taxpayer, and two or more foreign taxing authorities.103 Finally, for 2013
the user fee for an APA request was $50,000 for large business
96. David J. Canale & Steven C. Wrappe, Advance Pricing Agreements A Strategic
Tool in Global Transfer Pricing Management, 60 TAX EXECUTIVE 193, 193 (2008).
97. Id. at 205 (In its seventeen years of existence, the APA Program has changed in
staff size, popularity, level of procedural formality, and experience. The basic opportunity
to achieve transfer pricing certainty in a non-adversarial forum, however, has not changed
substantially.).
98. Rev. Proc. 2006-9, 2006-2 I.R.B. 482.
99. Nicholas Fiore, From the Tax Adviser: Alternative Dispute Resolution With the IRS,
J. ACCT., Feb. 1, 2000, at 92, 92.
100. INTERNAL REVENUE SERV., ANNOUNCEMENT AND REPORT CONCERNING PRICING
AGREEMENTS, (2008), http://www.irs.gov/pub/irs-drop/a-08-27.pdf.
101. See infra notes 102106.
102. Reilly, supra note 59, at 29.
103. Canale & Wrappe, supra note 96, at 193.

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taxpayers104 and $22,500 for small business taxpayers.105 Additional fees

are due in the case of amendment or renewal.106
2. Advantages and Disadvantages
Both the taxpayer and government seek several benefits from the APA
process. First, both parties aim to benefit from the reduced cost, which
comes in the form of time and money.107 Without the APA Program, each
party risks incurring more expensive costs related to audits and IRS
investigations, which may result in a traditional, adversarial transferpricing dispute,108 itself taking over two years to close.109 Taxpayers may
also pursue an APA in order to gain certainty with the IRSs position on a
given transaction and gain the purported guarantee from the risk of double
taxationpossibly saving hundreds of thousands, if not millions, of
dollars for the company.110 Moreover, if the taxpayers APA is approved,
this guarantees that the IRS will respect the transfer pricing method used
for tax reporting purposes.111 U.S. federal income tax certainty may extend
to certainty regarding the taxpayers SEC financial reporting
104. Rev. Proc. 2004-40, 2004-29 I.R.B. (noting a small business taxpayer is any U.S.
taxpayer with total gross income of $200 million or less, as determined under section
4.12(1)(g)).
105. Rev. Proc. 2006-9, 2006-2 I.R.B.
106. Id. The user fee for an APA renewal is $35,000. Id. Requests to amend a completed
APA require the taxpayer to submit an additional $10,000 user fee. Id.
107. ARNOLD & MCINTYRE, supra note 4, at 58.
108. Id. (A major objective of the advance approval system is to reduce the high costs
that the taxpayers and the tax authorities typically incur in litigating disputes over transfer
prices.); see also CALDERN, supra note 9, at 123 (From an administrations perspective,
the APA process reduces the use of government (and taxpayer) resources dedicated to
resolving transfer pricing issues.); Canale & Wrappe, supra note 96, at 19495
(Explaining that transfer pricing examinations require large amounts of both time and cost
from the taxpayer; however, the APA process typically results in both time and cost
savings).
109. James M. OBrien & Mark A. Oates, Transfer Pricing: Why Is the Simultaneous
Appeals/Competent Authority Procedure So Unloved?, INTL TAX J. 25, 26 (2011).
110. Canale & Wrappe, supra note 96, at 193 (Historically, taxpayers have chosen to
pursue APAs to avoid transfer pricing uncertainty and freedom from exposure to double
tax and penalties.).
111. Reilly, supra note 59, at 31 (The APA application process can be demanding, but
it does provide substantial assurance that the IRS will respect the intercompany transfer
prices used by the taxpayer corporation.); see also Rev. Proc. 2006-9, 2006-2 I.R.B..
(The prospective nature of APAs lessens the burden of compliance by giving taxpayers
greater certainty regarding their transfer pricing methods.). Note, however, that [t]he case
[Veritas Software Corporation] is also interesting to the broader transfer-pricing
community in that it once again shows the Tax Courts discomfort with valuation
methodologies that are heavy on finance theory and light on taxpayer specific facts. Dau
& Ryan, supra note 66, at 27.

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requirements.112 Finally, taxpayers enter into APAs because, by pursuing

an APA in the U.S., other nations may be more likely to respect the
outcome and give similar treatment to entities in their own foreign
jurisdictions.113 Other taxpayer objectives include simplicity of method,
specific tax result, and rehabilitation of the exam relationship with the
IRS.114
There are also disadvantages to APAs. For example, in the case of
many small multinational entities (SMEs) and individuals, the financial
resources required to pay APA fees and hire experts to help with the APA
process prohibits them from using the Program.115 To emphasize the effect
of this injunction, it is important to understand that SMEs comprise 97%
of all U.S. exports.116 Yet, as of 2010, SMEs having less than $200 million
dollars comprised only 10% of the IRSs active APA cases.117
Additionally, in certain cases, the time to contract an APA can be over
four years,118 during which time the taxpayer may face lengthy
negotiations with the IRS, accrue substantial legal bills, and risk exposure
of previous years tax misstatements that result in additional undesirable
tax adjustments.119

112. Canale & Wrappe, supra note 96, at 193. However, while intercompany
transactions are eliminated when consolidating the financial results of controlled foreign
corporations and their domestic parents, for tax purposes such entities are not consolidated
. . . , and the transactions are therefore not eliminated. McKinley & Owsley, supra note
3, at 51.
113. Canale & Wrappe, supra note 96, at 193. ([G]reatly increased global enforcement
efforts have encouraged both U.S.-based and non-U.S.-based MNCs to pursue APAs to
avoid examinations, or develop a representative arms-length outcome on a fact pattern
repeated in other countries.).
114. Id. at 19596. The APA process may help the taxpayer achieve certainty with a
simple transfer pricing method, which achieves an acceptable arms-length result, and
which the taxpayer can apply to other cross-border transactions. Id. Taxpayers may also
use the APA process to achieve a specific non-tax goal, such as compensation for
management. Id. at 196. Finally, the APA process may aid in restoring a positive
relationship between the taxpayer and IRS, especially where there exists previous, hostile
transfer-pricing disputes. Id.
115. Reilly, supra note 59, at 29.
116. Alistair M. Nevius, Advance Pricing Agreements for SMEs, J. ACCT., Oct. 1, 2010,
at 86, 86 (In todays global economy, small and medium-size enterprises (SMEs) compete
not only to make sales but to employ labor, consume raw materials, and obtain low-cost
capital. SMEs now comprise some 97% of all U.S. exporters and produce almost one-third
of all goods and services exported.).
117. Id.
118. Lynnley Browning, The Tax break That Corporate America Wants Kept Secret,
FORTUNE, (July 22, 2013, 9:00 AM), http://finance.fortune.cnn.com/2013/07/22/irscorporate-tax-deal/.
119. CALDERN, supra note 9, at 6671.

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D. Formation, Administration, and Enforcement of APAs

David J. Canale & Steven C. Wrappe divide the APA process into five
steps: (1) preparation and APA strategy; (2) pre-filing conference; (3)
preparing and filing the APA request; (4) evaluating, negotiating, and
drafting the APA; and (5) administration and renewal.120 The resulting
APA generally includes a description of the controlled intercompany
transaction, the APA term, any analytical assumptions used, the taxpayer
records that must be maintained, and the taxpayer reporting
responsibilities.121
Once the APA is approved, Revenue Procedure 2004-40 gives the IRS
discretion to enforce, revise, cancel, or revoke the APA if the taxpayer
fails to comply with any of its requirements.122 In the case that the IRS
audits the APA, the burden of proof falls on the taxpayer.123 The IRS also
has the administrative discretion to cancel an APA if it believes there to
be misrepresentation, mistake as to a material fact, failure to state a
material fact, failure to file a timely annual report or lack of good faith
compliance.124
In Eaton Corp. v. Commissioner of Internal Revenue, decided in June
2013, the United States Tax Court upheld the IRSs administrative
discretion in cancellation of APAs.125 The IRS made an administrative
determination that Eaton had not complied with the terms of its APA.126
The IRS thereby canceled the APA and issued Eaton a notice, increasing
Eatons income allocation to the United States by over $350 million.127
The Tax Court held its only responsibility was to review the IRSs decision
for abuse of discretion,128 while Eaton had the burden of showing that the
increased allocations were arbitrary, capricious or without sound basis of
law or fact.129 Absent a showing of abuse, the court found that the IRS
Commissioner had discretion to make an administrative determination to
cancel the APA, as reserved in the agreement and stated in applicable
revenue procedures.130 Finally, the court held that general contract
120. Canale & Wrappe, supra note 96, at 195.
121. Reilly, supra note 59, at 29.
122. Rev. Proc. 2004-40, 2004-29 I.R.B. 482.
123. IBFD, supra note 57, at 744.
124. Id.
125. Eaton Corp. v. Commr of Internal Revenue, 140 T.C. 410 (2013).
126. Id.
127. Id.
128. Id. at 415. The IRS commissioners allocation under Section 482 must be sustained
absent a showing of abuse of discretion. Id.
129. Id. at 418 (citing Veritas Software Corp. & Subs. v. Commr, 133 T.C. 297, 318
(2009)).
130. Id. at 41819.

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principles did not apply to the Commissioners discretion to cancel

APAs.131 The result of Eaton demonstrates the potentially severe financial
impact a transfer-pricing dispute may have on a taxpayer, even after the
taxpayer has reached an agreement with the IRS.
III. ANALYSIS
Brian J. Arnold and Michael J. McIntyre specify four goals that are
important to a successful international tax system.132 For purposes of this
Note, I will address only the second goalpromotion of fairness. I find
fairness to be the most important goal in the case of APAs because, on its
face, the Program does not seem to promote equality among taxpayers.
Particularly interesting is the disparity the Program appears to create
between large, wealthy corporations and smaller, more financially-modest
corporations. Therefore, the question to be answered is whether the IRSs
APA Program promotes fairness among taxpayers in the United States.133
A. Fairness in Tax Law
The United States Supreme Court has labeled the power to tax as an
inherent power of government.134 Like other powers of the U.S. federal
government, the ultimate authority of the IRS to tax is regulated by an
important constitutional norm: fairness.135 Fairness is, as a result, reflected
in several aspects of the tax system.136 For example, [t]he decision to
adopt income as a tax base [in the United States] flows from a decision
about equity.137 An income tax base is used because it is believed to

131. Id. at 419.

132. ARNOLD & MCINTYRE, supra note 4, at 45 (noting the four goals of international
tax rules include: (1) getting its fair share of revenue from cross-border transactions, (2)
promoting fairness, (3) enhancing the competitiveness of the domestic economy, and
(4) capital-export and capital-import neutrality).
133. Ring, supra note 95, at 189.
134. William B. Barker, The Three Faces of Equality: Constitutional Requirements in
Taxation, 57 CASE W. RES. L. REV. 1, 1 (2006) (citing Providence Bank v. Billings, 29 U.S.
(4 Pet.) 514, 563 (1830)).
135. Id. at 12 ([T]he power to tax, like other government powers, is naturally
circumscribed by constitutional norms that define the relationship between government and
citizen. One such constitutional norm that is considered essential to a just system is
equality.).
136. Or at least there is an attempt to achieve fairness in other areas of the U.S. taxation
system, such as state income tax and state property tax. See, e.g., Barker, supra note 134,
at 14, 18.
137. Kaufman, supra note 17, at 152.

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distribute the tax burden in proportion with each taxpayers ability to

pay.138
On a more elementary level, fairness can be understood as important
to a tax system because it increases taxpayers morale and enhances
voluntary compliance.139 In an era of globalization, cross-border
transactions between businesses and individuals have become more
frequent, and competition among tax administration agencies for tax bases
and sources of revenue has increased.140 Because tax systems are widely
voluntarily, government revenue attributed to taxation significantly
depends on taxpayers willingness and ability to comply.141 Fairness is
recognized as an important goal of international tax rules because it serves
as a means of encouraging good-faith participation.142

138. Id.
139. Martinez, supra note 14, at 416 (citing Jonathan Skinner & Joel Slemrod, An
Economic Perspective on Tax Evasion, 38 NATL. TAX J. 345, 348349 (1985); JOINT
COMM. ON TAXATION, 99TH CONG., GENERAL EXPLANATION ON THE TAX REFORM ACT OF
1986 7 (1986)); see also Barker, supra note 134, at 2 ([E]quality might be perceived as a
logical outcome of a democratic order.).
140. TAXPAYER ADVOCATE SERVICE, supra note 1, at 130 (citing U.S. Dept. of State,
Immigrant and Nonimmigrant Visas Issued at Foreign Service Posts FYs 2006 2010,
www.travel.state.gov/content/dam/visas/Statistics/FY10AnnualReport-Table1.pdf (last
visited MAY 24, 2015); Office of Immigration Statistics, Persons Obtaining Legal
Permanent Resident Status: FYs 1820 to 2010, DEPARTMENT OF HOMELAND SECURITY
(March 30, 2015), http://www.dhs.gov/files/statistics/immigration.shtm.) (In fiscal year
2010 alone, approximately 6.4 million foreign individuals were issued nonimmigrant U.S.
visas, and 1.2 million aliens obtained legal permanent resident status.). An estimated five
million to seven million American citizens reside abroad. Id. (citing Reaching Out to
Americans Abroad, IRS.GOV (Apr. 2009), http://www.irs.gov/Businesses/Reaching-Outto-Americans-Abroad; W&I RESEARCH STUDY REPORT, UNDERSTANDING THE
INTERNATIONAL TAXPAYER EXPERIENCE: SERVICE AWARENESS, USE, PREFERENCES, AND
FILING BEHAVIORS (2010)). According to the Small Business Administration, from 2003
to 2010, U.S. small businesses exporting activity increased about 80 percent to account
for nearly $500 billion in annual sales and about 30 percent of Americas export
revenues. Id. (citing Karen Gordon Mills, Administrator of the U.S. Small Business
Administration (SBA), Taking Your Small Business Customers International, U.S. SMALL
BUSINESS ADMINISTRATION (Oct. 15, 2010), https://www.sba.gov/content/taking-yoursmall-business-customers-international).
141. TAXPAYER ADVOCATE SERVICE, supra note 1, at 129.
142. ARNOLD & MCINTYRE, supra note 4, at 4; see also TAXPAYER ADVOCATE SERVICE,
supra note 1, at 178 (Voluntary compliance also depends on the fairness of tax
administration, where service options are easily available and affordable for those making
a good faith effort to comply.). Note that voluntary compliance refers to compliance even
if it indirectly results from enforcement mechanisms. Id.

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For taxation purposes, fairness means an equal tax for taxpayers with
the same income.143 Where there is a multinational corporation, the
corporations worldwide, aggregate income should be taxed the same as a
similarly-situated, single-entity corporation.144 It would be unfair to other
taxpayers, for example, if multinational corporation A earned income in
both countries Y and Z, yet the total tax imposed by Y and Z amounted to
a tax on less than As total, worldwide income.145 Likewise, it would be
unfair to A if Y and Z each imposed a tax on As total, worldwide
income.146
While sometimes an unfair outcome is the direct result of tax imposed,
it may also result when taxpayers are not afforded equal administrative
resources, such as IRS services, to adequately comply with tax rules.147 In
the U.S., administrative resources can serve to mitigate the otherwise
complex and highly technical requirements and limitations of international
tax policies.148 Administrative inequality can mean either that the taxpayer
pays more tax than another taxpayer in a similar situation or the taxpayer
pays less tax and faces harsh penalty.149
B. Fairness in the Case of APAs
Despite the significance of fairness in the taxing system,
administrative restraints in the APA Program may jeopardize this
constitutional norm.
1. Cost to Participate
The cost to participate in the U.S. APA Program may prevent some
taxpayers from participating.150 As previously discussed, the initial APA
user fee ranges from $22,500151 to $50,000, depending on the size of the
143. ARNOLD & MCINTYRE, supra note 4, at 45 (Fairness is achieved by imposing
equal tax burdens on taxpayers with equal income, without reference to the source of
income.).
144. Id. at 5.
145. Id. (For domestic taxpayers operating abroad, fairness requires the full taxation of
both domestic and foreign-source income; moreover, foreign-source income must be taxed
whether the income is earned directly or through some foreign entity.).
146. Id. The result would yield what is commonly known as double taxation. Id.
147. See Ring, supra note 95, at 19697.
148. TAXPAYER ADVOCATE SERVICE, supra note 1, at 131.
149. Id. at 129. Due to regulatory confusion, [a] recent IRS study of taxpayer needs and
preferences showed that international taxpayers may have a greater current need for IRS
services that the general taxpayer population. Id.
150. Reilly, supra note 59, at 29.
151. Rev. Proc. 2006-9, 2006-2 I.R.B.

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corporation.152 While the IRS recognizes that small business taxpayers

have lesser transfer pricing experience and resources,153 this fee requires
all entities having zero to $200 million of income to pay $22,500.154 Such
a grouping essentially equates an international corporation grossing only
$100,000 of income, for example, to a corporation grossing $150 million
of income.155 Each must pay the same fee to receive access to the same
service.156 In some cases, these costs can be significant enough to
discourage [taxpayer] participation.157 The effect of these costs is evident
in data published by the IRS.158 Of the 1,155 APAs entered into since
1991, [t]he biggest users are financial services companies with large
cross-border trade, and technology and pharmaceutical companies.159 As
mentioned previously, note also that in 2010 only 10% of the IRSs active
APA cases involved SMEs grossing income less than $200 million.160
2. Specific Tax Result
Still another concern regarding fairness is that participating taxpayers
may achieve a specific tax result by entering into an APA.161 Taxpayers
who can afford the cost of entering into an APA also have the unique
opportunity of receiving the IRS administrations expertise and
negotiating the terms of the APA.162 Meanwhile, non-participating
152. Rev. Proc. 2004-40, 2004-29 I.R.B.
153. TAXPAYER ADVOCATE SERVICE, supra note 1, at 169. The IRS also recognizes that
the size of the corporation or dollar value of transactions does not necessarily dictate
complexity. Id.
154. Id. Note, this number excludes the cost of amendments and renewals, as well as
any internal costs accrued in connection with compliance.
155. Ring, supra note 95, at 194 ([D]ifferential participation poses concerns for
horizontal equity to the extent that there seems no relevant distinction between larger and
smaller taxpayers.).
156. Id.
157. Id. at 19495 (For example, if the conclusions reached in APA negotiations with
taxpayer A are not disclosed or are disclosed in a fairly limited form, then taxpayer B who
does not seek an APA may receive different treatment than taxpayer A through the process
of audit, appeal and litigation . . . . If taxpayer B could have sought an APA but simply
chose not to, the subsequent discrepancies might not imply unfairness. But, if we believe
that taxpayer B may have valid reasons for not pursuing an APA (e.g., cost, limited internal
resources, operations in a nontreaty country), then we may be particularly concerned about
different outcomes).
158. Browning, supra note 118.
159. Id.
160. Nevius, supra note 116, at 86.
161. Canale & Wrappe, supra note 96, at 195.
162. CALDERN, supra note 9, at 126; see also Ring, supra note 95, at 173 (Moreover,
having the APA discussion in advance may enable a taxpayer to shape the transfer pricing
rules it faces. Where a current rule is very unclear, or in the extreme, prohibits a desired

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taxpayers are forced to muddle through the tax rules with no one-on-one
guidance. This may produce uncertainty, and result in lengthy tax audits,
appeals, and litigation,163 which amount to large administrative and legal
expenses.164
The specific result afforded to taxpayers participating in the APA
Program can be viewed as allowing the taxpayer to contract the specific
terms of the taxpayers tax regime. For example, an attractive feature of
the APA Program is the opportunity of roll-back, which allows the
taxpayer to retroactively apply the transfer pricing method, affording them
the benefit of increased tax relief.165 For example, in 2013, Oracle,166 a
multinational corporation with $13.9 billion in pre-tax income, was taxed
at a 19% tax rate16% below the standard 35% corporate tax rate.167 No
similar opportunity is afforded to non-participating taxpayers. In other
words, taxpayers unable to pay the user fee must pay the full 35% tax
imposed.168 The IRS argues, however, that APAs wont either increase
or reduce companies tax billsinstead, an APA will achieve the same
result that a company would have reached after audit and possible
litigation, but without all of the uncertainty and transaction costs.169

result, the taxpayers ability to discuss and negotiate on the point before it decides to engage
in the transaction is very much like negotiating with the Service for a particular rule to be
applied prospectively.).
163. CALDERN, supra note 9, at 126 In the case of an adversarial transfer-pricing
dispute, if the taxpayer chooses to first protest to the IRS Appeals, the appeals process may
take two or more years to close. OBrien & Oates, supra note 109, at 24. If the taxpayer
chooses to first litigate the dispute in the U.S. Tax Court, a final opinion may take three to
five years. Id. at 26. On the other hand, in 2007, the average time to reach a unilateral APA
and bilateral APA was 16 months and 17 months, respectively. Canale & Wrappe, supra
note 96, at 195.
164. Ring, supra note 95, at 17172 (noting substantial transaction costs in terms of
lawyer and accountant fees, internal resources, as well as the lost opportunity to modify or
change the transaction).
165. CALDERN, supra note 9, at 66 (APA roll-backs constitute one of the most
attractive opportunities provided by the APA procedure. This is true to the extent that some
taxpayers negotiate the APA mainly in order to obtain a roll-back. The Revenue Procedure
96-53 has recently enhanced the taxpayers possibilities of applying the APA [transfer
pricing method] to tax years prior to those covered by the APA roll-backs.).
166. Oracle is a hardware and software company. Oracle Fact Sheet, ORACLE (Sept.
2014), http://www.oracle.com/us/corporate/oracle-fact-sheet-079219.pdf.
167. Browning, supra note 118.
168. Rev. Proc. 2006-9, 2006-2 I.R.B.
169. Browning, supra note 118 (quoting Michael Durst, former director of IRS APA
program).

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Additionally, non-participating taxpayers are not given access to the

negotiations, terms, or analyses of issued APAs.170 Rather, APAs, and the
provisions therein, are not published due to taxpayer confidentiality
laws.171 This will almost definitely result in different tax treatment for
taxpayers in similar situations.172 For instance, non-participating taxpayers
will be unable to predict any leniency the IRS gives APA users when
interpreting the Internal Revenue Code, and as a result, non-participating
taxpayers will be forced take more conservative approaches when
calculating their own tax liability.173 Alternatively, small non-participating
taxpayers may be forced to shell-out large sums of money to employee
professionals to properly interpret and advise on information that,
arguably, should be freely available to everyone.174
3. Failure to Comply
Lastly, the fairness issue is also illustrated by the penalties imposed
on taxpayers who fail to comply with international tax policies. This issue
was recently highlighted in the 2011 Annual Report to Congress 175
published by the Taxpayer Advocate Service (the TAS), an independent
organization within the IRS, responsible for ensuring that fairness is
afforded to all taxpayers.176 One of the most serious problems noted by the
TAS was that the IRSs international tax administration strategy has
focused on stepped-up enforcement without adequate coordination or a
corresponding increase in service to international taxpayers.177 Such lack
of coordination has created trouble for U.S. taxpayers whointentionally,
or, more importantly, unintentionallyfail to comply with complex
information reporting requirements. These taxpayers may be forced to pay

170. Hickman, supra note 7, at 190 (citing Peter J. Meadows & William A. Dobrovir,
Who Killed Guidance?, 96 TAX NOTES TODAY 201, 245 (1996)); see also Browning, supra
note 118.
171. 26 U.S.C.A. 6103 (West 2014) (Returns and return information shall be
confidential[.]).
172. Hickman, supra note 7, at 190. Further, it is likely that this secrecy is breeding
grounds for suspicion, public distrust, and corruption. Joseph J. Thorndike, Historical
Perspective: APA Program Highlights IRS Struggle to Balance Privacy and Secrecy, TAX
ANALYSTS
(Feb.
3,
2004),
http://www.taxhistory.org/thp/readings.nsf/ArtWeb/A3E959D0325F3CDF85256E43007
3ABF7?OpenDocument.
173. See, e.g., Hickman, supra note 7, at 190.
174. Thorndike, supra note 172.
175. TAXPAYER ADVOCATE SERVICE, supra note 1.
176. Taxpayer
Advocate
Service,
INTERNAL
REVENUE
SERVICE,
http://www.irs.gov/Advocate (last visited March 31, 2014).
177. TAXPAYER ADVOCATE SERVICE, supra note 1, at 176.

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large penalties that are disproportionate to the actual tax liability due.178
TAS highlighted further that lack of efficient IRS-wide coordination of
international taxpayer service may undermine international enforcement
initiatives and discourage future compliance by taxpayers . . . .179 In
response to the report, the IRS recognized that it needed to increase
administrative coordination for international taxpayer services and
contends it is working with W&I Research & Analysis to identify specific
problems.180
C. Resolution
Due to the ongoing tax war, globalization can have an adverse
impact on [governments] sovereign power to impose fair and efficient
taxes.181 Some scholars suggest tackling the global tax war head-on by
creating a completely new institution for dealing with transfer pricing on
an international level: an informal forum for coordination between
countries sharing similar interest.182 This type of international forum
presents several potential advantages including: suppression of
undesirable aims by taxpayers and nations, existing countermeasure
against domestic political pressures, and promotion of efficient and
effective policy choices.183 However, while this new institution may
address competition among nations and foster a uniform tax system, it
does not guarantee equal domestic treatment of all taxpayers. Moreover,
because complete fairness cannot be achieved without the combined effort
of worldwide taxing agencies,184 this solution may not be easily feasible.
To address the problem now, the U.S. can begin to create a fair system
by taking effective countermeasures,185 such as promoting fairness within
its own domestic policies.186 Here, the APA Program can advance the
178. Id. at 191.
179. Id. at 176.
180. Id. at 18384.
181. ARNOLD & MCINTYRE, supra note 4, at 143.
182. H. David Rosenbloom, Noam Noked & Mohamed S. Helal, The Unruly World of
Tax: Proposal for an International Tax Cooperation Forum, 15 FLA. TAX REV. 57, 58
(2014).
183. Id. at 84.
184. ARNOLD & MCINTYRE, supra note 4, at 143 (In the global economy, a wholly
unilateral approach to tax policy is obsolete, counterproductive, and ineffective.); see also
id. at 6 (The fairness and efficiency of income taxation ultimately depends not on the
income tax laws of any one country but on the cumulative effects of the income tax laws
of all countries.).
185. Id. at 143.
186. Id. at 142. ([Cooperation may be achieved by] contributing to the development of
fair and appropriate international tax standards, by imposing tax burdens that are consistent

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fairness objective by addressing the disparity between large, wealthy

corporations, and small, financially-modest corporations and individuals.
As the TAS suggests, it may be beneficial to modify the APA Program
to provide similar consulting services, subject to reduced user fees, for
taxpayers with assets of $10 million or less.187 The IRS may consider
assessing user fees in direct proportion with the taxpayers gross income.
Such an approach will mirror the fairness objective of the ability-to-pay
approach taken with the U.S. federal income tax.188
The IRS may also consider publishing all issued APAs after rescinding
all potentially sensitive information. This was the argument made by the
Bureau of National Affairs (BNA) in a previous suit against the IRS.189
The BNA argued that APAs constitute written determinations and
therefore are governed under 6110, rather than 6103.190 Publication of
APAs would benefit taxpayers who cannot participate in the Program due
to high user fees, by giving them access to the IRSs analyses and methods
used and alleviating the potentially considerable expense of their
compliance.191 Congress has since enacted legislation that classifies the
APA return information under 6103,192 thereby enforcing the practice of
not publishing APAs due to confidentiality laws. Yet, the potential
benefits to publishing APAs remain valid, and it has been suggested that
Congress and the IRS should reconsider their position.193
Regardless of the solution adopted by the IRS, most critics still
recommend that all taxpayersor at least most SMEs operating in the
global marketmake an effort to informally participate in the APA
application process.194 This will provide at least some level of assurance
that the taxpayer has complied with U.S. and foreign tax laws and

with these standards, and by otherwise cooperating with foreign countries in the assessment
and collection of tax on their residents and nationals.).
187. TAXPAYER ADVOCATE SERVICE, supra note 1, at 135.
188. Offer
in
Compromise,
INTERNAL
REVENUE
SERV.,
http://www.irs.gov/Individuals/Offer-in-Compromise-1 (last updated Apr. 2, 2015).
189. Hickman, supra note 7, at 174 (citing BNA Complaint Demanding APAs, 96 TAX
NOTES TODAY 4233 (1996) (publishing BNAs original complaint under IRC 6110);
IRS Issues Final Denial of Tax Analysts FOIA Request for APAs, 12 TAX NOTES INTL
1929, 1929 (1996) (reporting BNAs amendment to its complaint adding a claim for release
of the information under FOIA)).
190. Id.
191. Id.
192. John L. Abramic, Advance Pricing Agreements: Confidential Return Information
or Written Determinations Subject to Release?, 76 CHI.-KENT L. REV. 1823, 1824 (2001)
(citing Tax Relief Extension Act of 1999, Pub. L. No 106-170, 521, 113 Stat. 1860, 1925
27).
193. See generally id.
194. Nevius, supra note 116, at 86.

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potentially limit the taxpayers tax exposure.195 Further, this process will
provide taxpayers with greater certainty as to the appropriateness of their
transfer price, mitigating the risk of audit and potential for litigation.196 If
this extent of due diligence is not feasible, even taking the preliminary
steps to consider obtaining an APA may be helpful to taxpayers unable to
fully participate in the Program.197
IV. CONCLUSION
Because international income shifting has previously resulted in
upwards of $30 billion of lost revenue for the U.S. government,198 it is
understandable that the IRS wants to protect its revenue base by
encouraging taxpayers to voluntarily enter into agreements that regulate
transfer prices. APAs seem to do just that.199 However, an analysis of the
APA Program reveals that it has some flaws, particularly in regard to
equity.
Equity or fairness is a rudimentary objective that should not be
forgotten at the international level.200 As discussed, fairness means not
only a fair tax imposed,201 but also fair administration.202 In other words,
for fair administration, all taxpayers should be given access to the same
resources so they can better abide by the tax laws.203 As a result of this
objective, taxpayers are more willing to voluntarily comply with tax laws,
resulting in an increase of voluntarily-forfeited tax revenue for the U.S.
government.204
For the aforementioned reasons, the U.S. government should consider
structuring the APA Program so it is available to all taxpayers.
Specifically, the IRS should focus efforts on making the Program more
affordable for SMEs and individuals,205 publishing specific tax results

195. Id.
196. Marianne Burge, Marylouise Dionne & Kenneth Kral, IRS Agreement on Transfer
Pricing Now Possible, 171 J. ACCT. 23, 23 (1991).
197. James G. Collins, Small and Medium Enterprises Should Consider Making
Advance Pricing Agreements, 41 TAX ADVISER 679, 680 (2010).
198. See supra note 89 and accompanying text.
199. See supra notes 100114.
200. Kaufman, supra note 17, at 182 (Whether it is equitable for a particular country
to impose its tax on the worldwide incomes of its taxpayers and to determine the identities
of those taxpayers by its own domestic standards is a matter of international significance.).
201. See supra notes 143146 and accompanying text.
202. See supra note 147 and accompanying text.
203. Id.
204. See supra notes 139142.
205. See supra notes 150160.

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reached by the APAs of participating taxpayers,206 and lessening the

penalties imposed on taxpayers who make a good-faith effort but fail to
comply with existing transfer pricing regulation.207 Several solutions exist
to address these areas of focus.208 Regardless of which solution the IRS
pursues, it is important that APAs be made more readily accessible,
thereby increasing fairness afforded by the current APA Program. If the
IRS focuses on making the APA Program fair in this respect, not only will
it benefit the U.S. taxpayers, but it will also serve as a means for fighting
the global tax war.209

206.
207.
208.
209.

See supra notes 161174.

See supra notes 174179.
See supra notes 181197.
See supra note 84 and accompanying text.