Competently negotiating the U.S. competent authority process

Tax Executive, The, May-June, 2007 by Kerwin Chung, Richard McAlonan

D. How Long Does It Take? The competent authority process can be lengthy. Based on IRS statistics, it takes from two to three years to reach a competent authority settlement. The length of time to obtain a settlement (set forth in Table F) is the most common complaint about the process.

E. Interest, Penalties, and Conforming Adjustments. Once a settlement is reached, the IRS will send the taxpayer a letter describing the terms of the competent authority settlement and asking whether the taxpayer will accept it. A case disposition memorandum describing the competent authority settlement will also be sent to the IRS examination team. The taxpayer will be contacted by the examination team to implement the settlement. In the case of a foreign-initiated adjustment, the IRS typically requests that the taxpayer file amended tax returns. If the taxpayer is currently under audit, the IRS sometimes agrees to implement the settlement through the audit adjustment process.

Competent authority settlements cover only the amount of the adjustment; interest and penalties are subject to domestic law rules. If an IRS-initiated adjustment included the assessment of transfer pricing penalties, the competent authority process can eliminate the penalty only if the settlement sustains an adjustment below the penalty thresholds described in section 6662(e) or (h).

Conforming adjustments include the transfer of cash to match the transfer pricing adjustments. Not making a conforming adjustment can result in a deemed distribution or contribution to capital. The procedures for making conforming adjustments are described in Rev. Proc. 99-32 and are incorporated by reference in the competent authority revenue procedure. (28) Competent authority settlements, however, sometimes allow taxpayers to make the conforming adjustments without following all the provisions of Rev. Proc. 99-32. Notably, settlements sometimes allow for conforming adjustments without the payment of interest. In addition, some countries, such as Australia, may not require conforming adjustments.

How Much Does It Cost?

The competent authority process is not very expensive and tax adviser engagements are typically on a time and materials basis. The competent authority request is a relatively straightforward document containing required factual disclosures and an analysis of the relevant issues, which should have been developed previously during the examination process. Although the process takes two to three years to complete, most of the time is spent waiting for the U.S. and foreign competent authority to process the case with little taxpayer input. The process can be expensive if the taxpayer wants the competent authorities to agree to a specific result, since extra time will be spent to explain and advocate the taxpayer's position to both competent authorities.

Conclusion

The competent authority process will continue to become increasingly important as the IRS and foreign tax authorities increase their transfer pricing enforcement activities and the resulting adjustments potentially affecting companies reported financial results under FIN 48. Although most tax executives do not have experience with the U.S. competent authority process, the authors hope this article helps taxpayers negotiate the process.