SEC. 11. ADMINISTERING — Internal Revenue Bulletin 1996-49

.01 Annual Reports. (1) For each taxable year covered by the APA, the taxpayer must file a timely and complete annual report describing the taxpayer’s actual operations for the year and demonstrating good faith compliance with the terms and conditions of the APA. The report must include all

items called for by the APA, must describe any pending or contemplated requests to renew, modify or cancel the APA, and must describe any compensating adjustments made pursuant to section 11.02 of this revenue procedure.

(2) The taxpayer shall file an original and four copies of each report, no later than 90 days after the time prescribed by law (including extensions) for filing the taxpayer’s Federal income tax return for the year covered by the report, or by such other date as is specified in the APA, with the APA Director at the address indicated in section 5.13(2) of this revenue procedure. The taxpayer may also be required to file a copy of the annual report with the treaty partner or partners with respect to a bilateral or multilateral APA. The report must comply with sections 5.11 and 5.12 of this revenue procedure.

(3) The Service will contact the taxpayer regarding an annual report only if it is necessary to clarify or complete the information contained in the annual report. Additional information must be supplied by the date specified by the Service, as extended for good cause. Any contact between the taxpayer and the Service for the purpose of clarifying the information contained in the annual report will not constitute an examination, or the commencement of any examination, of the taxpayer for purposes of § 7605(b) or any other provision of the Code.

.02 Compensating Adjustments. (1) If the results of applying the TPM differ from those contemplated by the APA, the APA may permit the taxpayer and its related foreign entity to make a compensating adjustment. For example, if the APA provides for a range of expected operating results, and the actual operating results are outside that range (but within any limits specified in the APA), the APA may permit the parties to make a compensating adjustment to bring the results to an agreed upon point within the described range. Such compensating adjustment should be reflected on the taxpayer’s timely filed (with extensions) federal income tax return; if the taxpayer is not able to make such adjustments in its original return, the required compensating adjustment must in any event be made and paid within 90 days of the date prescribed for filing such return (with extensions), and reflected on an amended return filed within such period and the timely filed annual report required by

section 11.01 of this revenue procedure. To the extent the APA covers years for which federal income tax returns were filed before the APA was executed, the taxpayer must make any required compensating adjustments in an amended return or returns filed within, and pay such compensating adjustments within, 90 days of entering into such APA. (2) The taxable income and earnings and profits of both the taxpayer and its related foreign entity for a taxable year covered by an APA will include all income generated as a result of the TPM as increased or decreased by any compensating adjustment for that year. A compensating adjustment will be deemed to have been made as of the last day of the taxable year to which it applies. For all U.S. income tax purposes, after taking into consideration any compensating adjustment, the adjusted figures will be used. Provided that the taxpayer has made a good faith effort to comply with the TPM in such manner as to avoid the need for compensating adjustments, and payments of compensating adjustments are made within the time specified in section 11.02(1) of this revenue procedure, (i) the compensating adjustment will not be taken into account in the computation of any required estimated tax installments for such year, (ii) the taxpayer will not be subject to the failure to pay penalties under § § 6651 and 6655 by reason of the compensating adjustment, and (iii) no interest will accrue on any receivable or payable established to settle such compensating adjustment. A compensating adjustment may, however, be taken into account for purposes of redetermining any foreign tax credits in accordance with § 901. Subject, where applicable, to agreement between competent authorities, the taxpayer or the related foreign entity may employ any method that accords with section 4 of Rev. Proc. 65–17, 1965–1 C.B. 833 (as modified), or any successor, for paying compensating adjustments, including checks, wire transfers, offsets through intercompany accounts, or recharacterized dividends. All actions taken with respect to such compensating adjustments must be documented and disclosed in the annual report.

(3) A ‘‘subsequent compensating adjustment’’ arises when the taxpayer or the Service makes normal and routine adjustments (for example, correction of computational errors) to the determination and computation of the taxpayer’s TPM during the taxable year or years

under the APA, as determined in accordance with the TPM. The generally applicable Code rules relating to assessment, collection and refund of tax and the principles of Rev. Proc. 65–17 (as modified), or any successor, apply to any resulting change in Federal income tax liability because of a subsequent compensating adjustment.

(4) When an agreement between competent authorities is sought as part of the APA request, the principles stated in this section will be discussed with the appropriate foreign competent authority to seek to ensure substantially identical treatment of the taxpayer’s related foreign entity.

(5) The Service and the taxpayer may agree in an APA to modify the foregoing provisions relating to compensating adjustments.

.03 Examination. (1) If the District Director examines a tax year covered by an APA, the examination of matters covered by the APA will be limited to the factors in section 11.03(2) of this revenue procedure. The District Director will not re-evaluate the TPM itself.

(2) The District Director may require the taxpayer to establish that (a) the taxpayer has complied in good faith with the terms and conditions of the APA; (b) the material representations in the APA and the annual reports remain valid and accurately describe the taxpayer’s operations; (c) the supporting data and computations used in applying the TPM were correct in all material respects; (d) the critical assumptions underlying the APA remain valid; and (e) the taxpayer has consistently applied the TPM and met the critical assumptions.

(3) If the District Director determines that any requirement in section 11.03(2) of this revenue procedure has not been satisfied, the issue will be submitted to the Associate Chief Counsel (International) for resolution. The Associate Chief Counsel (International) will decide either to continue to apply the APA; revoke the APA (see section 11.05 of this revenue procedure); cancel the APA (see section 11.06); or revise the APA (see section 11.07).

(4) The District Director may, without securing the consent of the Associate Chief Counsel (International), propose normal and routine audit adjustments, which are not related to interpretation of the TPM, to the determination and computation of the operating results of the taxpayer’s TPM during

the taxable year or years under examination (as determined in accordance with the TPM) without affecting the continued validity or applicability of the APA. If the taxpayer agrees with the proposed adjustments, they will be given effect through payment of additional compensating adjustments. If the taxpayer does not agree, the taxpayer may contest the proposed adjustments through normal administrative and judicial proceedings. Any changes to compensating adjustments previously made by the taxpayer, in respect of the taxable year or years under examination, that arise as a result of the audit adjustments made by the District Director will be made within ninety days of a final determination of the audit adjustments. Any compensating adjustments and changes to compensating adjustments described in this section 11.03(4) will be treated as subsequent compensating adjustments for purposes of section 11.02 of this revenue procedure.

.04 Record Retention. (1) The taxpayer must maintain books and records sufficient to enable the Service to examine the taxpayer’s compliance with the APA. The APA may specify the books and records that are necessary to fulfill this objective and may specify that compliance with the applicable provisions of the APA will constitute compliance with the provisions of § § 6038A and 6038C with respect to transactions covered by the APA.

(2) Upon examination, information requested by the Service must be made available to the Service upon written request within 30 days, and translations must be provided within 30 days of a request for translation of specific documents, both as extended for good cause. The fact that a foreign jurisdiction may impose a penalty upon the taxpayer or other person for disclosing the material will not constitute reasonable cause for noncompliance with the Service’s request.

.05 Revoking the APA. (1) The Associate Chief Counsel (International) may revoke the APA if there has been fraud or malfeasance (as defined in § 7121) or disregard (as defined in § 6662(b)(1) and (c)) by the taxpayer in connection with the APA, including but not limited to fraud, malfeasance or disregard involving any of the following: the material facts set forth in the request or subsequent submissions (including the annual report),

or lack of good faith compliance with the terms and conditions of the APA. Material facts are those that, if known by the Service, could reasonably have resulted in a significantly different APA (or no APA at all). The Associate Chief Counsel (International) is not required to revoke the APA and may require the taxpayer to continue to abide by it.

(2) If the APA is revoked for any reason, the revocation may be retroactive to the first day of the first taxable year for which the APA was effective.

(3) If the APA is revoked for any reason, the Service may determine deficiencies in income taxes and additions thereto in accordance with applicable provisions of the Code. In addition, (a) relief under Rev. Proc. 65–17 may be denied; (b) if the Service determines that the taxpayer may avail itself of the relief under Rev. Proc. 65–17, interest on any account receivable established under section 4.03 of that revenue procedure may be determined not to be subject to mutual agreement or correlative relief; (c) the revocation of the APA may be treated as an ‘‘egregious case’’ under Rev. Rul. 80–231, 1980–2 C.B. 219, with the result that the taxpayer may be denied a foreign tax credit in accordance with that ruling; and (d) the unilateral relief provisions of Rev. Proc. 96–14, 1996–3 I.R.B. 41, may not be available. When an APA has been the subject of negotiation with a foreign competent authority, the Service will seek to coordinate any action concerning revocation of the APA with the foreign competent authority.

.06 Cancelling the APA. (1) The Associate Chief Counsel (International) may cancel the APA if the District Director, with the concurrence of the Associate Chief Counsel (International), determines that there was a misrepresentation, mistake as to a material fact, failure to state a material fact, or lack of good faith compliance with the terms and conditions of the APA (but not fraud, malfeasance or disregard) in connection with the request for the APA, or in any subsequent submissions (including the annual report). Material facts are those that, if known by the Service, would have resulted in a significantly different APA (or no APA at all).

(2) The Associate Chief Counsel (International) may waive cancellation if the taxpayer can show good faith and reasonable cause to the satisfaction of the Associate Chief Counsel (Interna

tional), and if the taxpayer agrees to make any adjustment proposed by the Associate Chief Counsel (International) to correct for the misrepresentation, mistake as to a material fact, failure to state a material fact, or noncompliance. The Associate Chief Counsel (International) is not required to cancel the APA and may require the taxpayer to continue to abide by it.

(3) If the APA is cancelled under section 11.06(1) of this revenue procedure, the cancellation will be effective as of the beginning of the year in respect of which the misrepresentation, mistake as to a material fact, failure to state a material fact, or noncompliance occurs. If, however, the cancellation results from a change in law or treaty, as provided in section 11.07(1) of this revenue procedure, the cancellation normally will be effective as of the effective date of the change in law or treaty.

(4) If the APA is cancelled for any reason, then as of the effective date of the cancellation the APA will cease to be of any further force and effect with respect to the taxpayer and the Service for U.S. income tax purposes. After the effective date of the cancellation, the tax treatment of the transactions covered by the APA will be subject to all U.S. tax rules (including treaty rules) that otherwise apply. When an APA has been the subject of negotiation with a foreign competent authority, the Service will seek to coordinate any action concerning cancellation of the APA with the foreign competent authority.

.07 Revising the APA. (1) If a critical assumption has not been met, or there has been a change in law or treaty as described in section 11.09 of this revenue procedure, the APA may be revised by agreement of the parties. If such agreement cannot be achieved, the APA will be cancelled.

(2) If a critical assumption has not been met, the taxpayer must notify the APA Director, including with the notification supporting documentation and a statement whether a revision appears appropriate. The taxpayer shall file the notification at any time prior to the last date permitted for filing the annual report for the year in which the failure to meet a critical assumption occurred. In providing the notification, the taxpayer must follow the procedures contained in sections 5.11 through 5.13 of this revenue procedure.

(3) If a critical assumption has not been met, the taxpayer and the Service

will discuss how to revise the APA. If the taxpayer and the Service cannot execute a revised agreement, the APA will be cancelled as of the beginning of the taxable year in which the failure to meet a critical assumption occurred. If the Service and the taxpayer can agree on a revised APA, the effective date of the revised APA will be stated in the new APA.

(4) If the Service and the taxpayer agree to revise an APA that has been subject to competent authority agreement, the revised APA will be submitted to the U.S. competent authority in order to seek the consent of the foreign competent authority to the revised APA. If the foreign competent authority refuses to accept the revised APA, or if the competent authorities cannot agree on a revised APA agreeable to all parties, the taxpayer and the Service may: (a) agree to continue to apply the existing APA, (b) agree to apply the revised APA or agree to further revision thereof, or (c) agree to cancel the APA as of an agreed date. If such agreement cannot be achieved, the APA will be cancelled pursuant to section 11.07(1) of this revenue procedure.

.08 Renewing the APA. A taxpayer may request renewal by following the form and procedures that apply to initial APA requests. The taxpayer must submit the user fee as required under section 5.14 of this revenue procedure, and must provide appropriate supporting documentation with the request. Unless otherwise agreed by the Service, the taxpayer should file the request to renew no later than nine months before the expiration of the initial term or any renewal term.

.09 Change in Law or Treaty. If there is a change in any applicable U.S. law or treaty that changes the Federal income tax treatment of any matter covered by the APA, the new law or treaty provision supersedes the APA to the extent the APA is inconsistent therewith. The parties may revise the APA under section 11.07 of this revenue procedure to reconcile it with the new law or treaty provision.