Proposed small business taxpayer APA procedures.

Notice 98-10 provides special

procedures for advance pricing
agreement (APA) negotiations for small
business taxpayers (SBTs). These
procedures are designed to allow SBTs
with less than $100 million of total gross
income and reasonably straightforward
transactions to negotiate APAs in a
shorter time frame than is normal for
larger taxpayers. The procedures also
include special provisions to simplify and
hasten APA negotiations for SBTs.
Formal SBT APA procedures are a very
positive development that should make
the APA route for gaining transfer pricing certainty and resolving transfer pricing audit issues
available to a group of companies that have previously lacked access to APAs.
SBT APAs will normally be limited to cases with relatively uncomplicated transactions (i.e., with
routine intangibles or research and development cost-sharing arrangements) and to APAs that
propose a specified method as the "best method." Special provisions aimed at simplifying and
speeding up SBT APAs can include any or all of the following:
* Earlier and more substantive analysis and feedback from the APA team prior to the prefiling
conference. SBTs are expected to submit information on their transactions, functions and proposed
transfer pricing methods at least 60 days prior to the initial prefiling conference. For SBTs, this may
be as simple as providing their Sec. 6662 documentation study to the APA program.
* At the prefiling conference, the IRS and the taxpayer will negotiate a case management plan for
reaching an APA agreement within six months after the SBT files its APA request. SBT APAs may
also require fewer prefiling conferences than normal APAs.
* Simplified procedures for reaching an APA agreement may also be negotiated, including
simplifying (or eliminating) some normally required elements, such as an economic study of the
industry, a detailed presentation of how the comparables were chosen, a detailed explanation of any
adjustments used to increase comparability, the contents of the annual reports and the term of the
APA agreement.
* APA meetings will be held at a location convenient to the SBT, and teleconferences may replace
some face-to-face meetings.
* The Service will assist the SBT in selection and evaluation of comparables or the computation of
adjustments.
* The initial term of the APA will be three years, with a potential to renew for a longer term.

* For unilateral APAs, the SBT may submit its proposed draft APA using the current model APA
agreement, in both hard copy and computer disk form. (A copy of the current APA model agreement
is attached to Notice 98-10.)
The idea of resolving smaller tax-payers' transfer pricing issues through the APA process is not new.
The APA Program has had an informal practice of being more reasonable in its demands on smaller
taxpayers seeking APAs. SBT APAs formalize this practice and constitute an IRS commitment to a
shortened time frame for agreement. Thus, SBT APAs should help attract more smaller businesses
into APA negotiations. There are, however, several potential problems with the notice:
* An SBT is defined as a company with less than $100 million of total gross income (determined by
reference to Rev. Proc. 96-53). This definition is vague as to whether the $100 million cutoff applies
to US. receipts only or to worldwide income of the multinational. To, be useful, the cutoff must be
based only on U.S. receipts, or only very small SBT that would be unlikely to seek APAs will be
eligible for the SBT APA procedures.
* The definition of an SBT is also unduly restrictive, because it fore-doses from automatic access to
the SBT APA procedures those companies with small and simple related-party transactions. The
definition should be expanded to include a company that meets either the gross income definition or
a "small transactions" definition based on Section 5.14(4) of Rev. Proc. 96-53 (i.e., transactions
involving tangible property and/or services with total annual value not in excess of $50 million or
payments for intangible property (such as royalties) not in excess of$10 million annually).
* The language in Rev. Proc. 96-53, which indicates that the scale of the transactions must be
"apparent on the face of the APA request," should refer to the information submitted by the taxpayer
prior to the initial prefiling conference, rather than the amounts described in the company's formal
APA request; small taxpayers need to know from the start of the APA process whether they qualify
for an SBT APA.
* SBTs may not be comfortable relying on IRS selection and evaluation of comparables and
computation of adjustments without independent verification.
http://www.thefreelibrary.com/Proposed+small+business+taxpayer+APA+procedures.-a020899214