Part IV. Items of General Interest

for imposition of the penalty as well as by establishing an alternative threshold based on gross receipts. Id. See also H.R. Rep. No. 103–213 (Conference Report), 103d Cong., 1st Sess. 648–650 (1993), 1993–3 C.B. 526-28. See also Treas. Reg. § 1.6662–6(d)(2)(iii) and (3)(ii).

For those taxpayers that can benefit, the existence of the possibility of a dividend offset lessens the incentive built into the section 482 and 6662(e) regulations to comply upfront and conform their transfer pricing to the arm’s length standard in the first instance, since they are able to mitigate the tax effect of non-arm’s length pricing by means of the dividend offset. Moreover, allowing a dividend offset arbitrarily and unfairly places a taxpayer that received a dividend in the year of the adjustment in a better position with respect to a net adjustment than a taxpayer that did not receive a dividend in the year of the adjustment.

Further, while Rev. Proc. 65–17 may have been viewed as a means for obtaining “relief” from the consequences of an incorrect pricing policy and a section 482 allocation, that notion is not reflected in the proposed revenue procedure. The treatment provided by the revenue procedure will be available to all taxpayers, not just the taxpayers that by happenstance are able to offset a dividend by a section 482 allocation. Taxpayers will still be able to repatriate the amount of a primary adjustment by an account receivable and then reduce future dividend distributions accordingly.

Fourth, the proposed revenue procedure clarifies that a foreign tax credit is allowed for any foreign withholding tax with respect to the repayment of the principal or interest on a cash repatriation account to the extent and subject to the limitations provided under section 901 of the Code. The taxpayer would be obligated to exhaust all effective and practical remedies, including invocation of competent authority procedures available under applicable tax treaties, with regard to the imposition of the foreign withholding tax and the repayment of the principal of the account would not of itself create any section 904 limitation. See generally Treas. Reg. §§ 1.901–2(e)(5), 1.904–6(a)(1)(iv).

Modification of Rev. Proc. 65–17

Announcement 99–1

BACKGROUND

Rev. Proc. 65–17, 1965–1 C.B. 833, has been in place for more than 30 years and has been amended, amplified and clarified, and modified. The Internal Revenue Service intends to update its position with respect to the extent to which taxpayers whose income has been adjusted under section 482 of the Internal Revenue Code may make certain adjustments to conform their accounts to reflect the section 482 allocation.

Included with this announcement is the proposed update of Rev. Proc. 65–17. The Service wishes to receive comments from interested members of the public prior to publishing the final update.

Comments (eight copies) should be sent to Associate Chief Counsel (International) CC:INTL:FO, Internal Revenue Service, 1111 Constitution Avenue, NW, Room 3501, Washington, DC, 20224, making reference in the comments to Control Number RP-114650-97. To ensure that comments are given full consideration, they should be submitted by April 12, 1999. The proposed revenue procedure makes a number of changes to the Service position published in several administrative pronouncements. See Rev. Proc. 65–17, 1965–1 C.B. 833; Rev. Proc. 70–23, 1970–2 C.B. 505; Rev. Proc. 71–35, 1971–2 C.B. 573; Rev. Rul. 82–80, 1982–1 C.B. 89. Generally, the proposed changes reflect the current policy under sections 482 and 6662(e) to foster taxpayers’ upfront compliance with the arm’s length standard in transfer pricing.

Among the significant changes, first, entitlement to treatment under Rev. Proc. 65–17 is dependent on a finding by the Service that the pricing transaction did not have as one of its principal purposes the avoidance of Federal income tax. The factual nature of the tax avoidance standard causes significant difficulty for both taxpayers and the Service. In its place, the proposed revenue procedure simply

requires that the taxpayer not be subject to a penalty under section 6662(e)(1)(B) or (h) of the Code by reason of the primary adjustment. This change focuses the inquiry on the objective adequacy of the taxpayer’s documentation.

Second, cash repatriation treatment is extended to adjustments initiated by taxpayers pursuant to section 1.482–1(a)(3) of the Treasury Regulations, including downward as well as upward adjustments. The Service believes it appropriate to make revenue procedure treatment available for taxpayer-initiated adjustments only if the taxpayer complies with certain information reporting requirements as explained in section 5.02 of the proposed revenue procedure. Taxpayer-initiated adjustments for the treatment under the revenue procedure would be subject to review and adjustment, and to possible imposition of the section 6662(e) or (h) penalty, by the Service upon examination.

Third, the proposed revenue procedure eliminates dividend offset treatment. Dividend offset treatment is inconsistent with the current policy under sections 482 and 6662(e) that taxpayers should strive upfront to price their related party transactions in compliance with the arm’s length standard.

The legislative history of the Revenue Reconciliation Act of 1993, P.L. 103–66, § 13236, evidences Congress’ concern “about any case where a taxpayer uses related party transfer prices or other arrangements with no apparent consideration as to whether the taxable income reported, and the tax paid, conforms with the standards made applicable under section 482.” H.R. Rep. 103–111, 103d Cong., 1st Sess. 719–20 (1993), 1993–3 C.B. 295–96. Accordingly, Congress incorporated contemporaneous documentation requirements into the statute under section 6662(e) so that a section 482 adjustment that exceeds the threshold generally should not escape the penalty “unless the taxpayer can show that the return position was arrived at after bestowing a reasonable amount of attention to the issue.” Id. Congress underlined the seriousness of its concern that all taxpayers should comply upfront with the arm’s length standard by lowering the threshold

1999–2 I.R.B 41 January 11, 1999

justments made under sections 61 or 162 of the Code provided the adjustment could have been made under section 482 of the Code. All references in this revenue procedure to section 482 of the Code will be deemed to include sections 61 and 162 of the Code, except when the context or express language indicates or provides otherwise.

Any reference in this revenue procedure to an increase, or decrease, in taxable income shall also be deemed a reference, in an appropriate case, to a reduction, or increase, in a taxpayer’s loss.

Any reference in this revenue procedure to the Service shall be deemed a reference to the District Director of Internal Revenue Service or a reference to the Assistant Commissioner (International), depending on the office that has jurisdiction over the Federal income tax return filed for the taxable year for which the primary adjustment is made.