Executive summary

On April 27, 2016, the US Internal Revenue Service (IRS) released the Large Business & International (LB&I) Division Competent Authority Statistics for the period covering January 1, 2015 through December 31, 2015. These statistics provide a window into the 2015 Mutual Agreement Procedure (MAP) results for the Advance Pricing and Mutual Agreement Program (APMA),¹ including information on requests received and pending and resolved cases. These statistics also show the 2014 competent authority results for the Treaty Assistance and Interpretation Team (TAIT), which has primary responsibility for cases concerning residence, dividends, income from employment, etc. This Alert focuses exclusively on the APMA statistics.

Detailed discussion

MAP background

A US citizen or resident can request assistance from the US Competent Authority and its treaty partner when the actions of one or both of the contracting states result or will result in taxation that is contrary to the provisions of the tax treaty. The competent authority process is a remedy to avoid the denial of treaty benefits and to avoid double taxation. Although resolution of an issue through the competent authority procedures may result in full relief from double taxation, the full range of outcomes includes:

1. Full relief of double taxation when:

— Correlative relief is granted for the entire amount of the agreed adjustment
— Competent authorities agree on an amount less than the originally proposed adjustment, or
— The full adjustment is withdrawn by the taxing authority that originally proposed the adjustment

2. Partial relief of double taxation when both countries do not fully agree on the adjustment

3. No relief of double taxation when competent authority assistance is denied or a resolution is not achieved

The US Competent Authority cannot consider requests involving countries with which the US does not have an applicable tax treaty.

2015 MAP case closings

The number of cases resolved in 2015 (193) reflects a significant increase over 2014 (133). In fact, the 2015 closures maintain the positive trend started in 2013 after a significant drop to 90 closed cases in 2012. Interestingly enough, US-initiated adjustments constituted 17% of the total combined number of cases resolved in 2012 and 25% in 2013, before jumping to 36% in 2014 and then falling to just 11% in 2015.

Decreased US-based adjustments

In 2015, the US Competent Authority received a total of 237 allocation (transfer pricing) cases. Of this total, 187 (79%) of the cases were due to foreign-initiated transfer pricing audit adjustments and 50 (21%) of the cases were due to US-initiated transfer pricing audit adjustments. Foreign-initiated transfer pricing case adjustments were 70% of total cases filed in fiscal 2014. This increase in the percentage of foreign-initiated transfer pricing cases is driven by a relatively flat number of foreign-initiated cases, combined with a steep decrease in the number of US-initiated cases filed.

Inventory allocation: transfer pricing cases only

Steady elimination of double tax/ increased MAP processing time

In 2015, the MAP program fully eliminated double taxation in the vast majority of the cases resolved (94%) and achieved partial relief in 4.8% of the cases, whereas only 1.6% of case resolutions resulted in no relief for the taxpayer. During 2015, US-initiated competent authority cases were processed in 27.7 months on average, a significant increase from the 2014 processing time of 15.0 months on average. In addition, the average time to process foreign-initiated competent authority cases also increased from 25.3 months in 2014 to 32.7 months in 2015, largely due to resolution of 93 Indian cases which had been in inventory for many months waiting for agreement between the US and India on a framework for resolution.²

Processing time on all closed transfer pricing cases (average months)

Implications

The most important highlight of the 2015 Competent Authority statistics is that the significant increase seen in 2014 in the number cases in which taxpayers received full relief from double taxation held steady in 2015 (above 90% in 2014 and 2015, up from 82% in 2013). For clients wondering whether the MAP process works, the 2015 statistics demonstrate the answer is a resounding yes. Another important highlight is the large number of Indian cases being settled shows that the long-awaited framework agreement between the US and India is bearing fruit. While it's too soon to see the impact of BEPS in these statistics, we fully expect the share of foreign-initiated cases to increase in subsequent years as more countries begin to apply the BEPS principles in audits.

———————————————

———————————————
ENDNOTES

¹ As of February 2012, the IRS's Competent Authority and Advance Pricing Agreement (APA) programs were merged into the newly created APMA.

² See, 25 Tax Mgmt. Trans. Pricing Rep., "United States: India cases drive increase in double tax resolution."