January 28,2005

Grassley, Baucus Send Inquiry on Advanced Pricing Agreement

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen.Max Baucus, ranking member, today sent the following letter to the Internal Revenue Service on the Advanced Pricing Agreement program.

January 28, 2005

The Honorable Mark Everson
Commissioner
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Dear Mr. Everson:

We applaud you for seeking constructive discussions regarding the Advanced PricingAgreement (APA) program, including the hearings you have scheduled in February. Concerns havebeen raised about the IRS administration of the program. We know you share our view thatparticipants must price their intercompany transactions at arm’s length, in accordance with the taxlaw, and pay their fair share of taxes. We anticipate these hearings will serve as a step forward inlooking substantively at the APA program. We also hope certain issues raised by the Committee’songoing review could be discussed at the hearings, as follows:

(1) What are the methodologies, practices and procedures on how a case is handled to ensureconsistency (ex. administrative, tracking, timelines, contacts, documentation, recordkeeping, pricingand valuation methods)?

(2) Current APA procedures require the IRS to consider a taxpayer’s proposal on itsindividual merits. Given that taxpayers in the same line of business may make different proposalsto the Service, how does the APA program ensure that “similarly situated” taxpayers are treatedconsistently?

(3) How does the APA program plan to work through the backlog of cases in its inventory,while ensuring that each agreement protects the interests of all taxpayers and the proper amount oftax is paid?

(4) How does the APA program handle issues involving global business for which U.S. law,code and regulation conflict with international law?

(5) Does the APA program allow foreign subsidiaries to “buy-in” to U.S. technologytransferred offshore after the risks of investment/development have been borne by the U.S. parent(and subsidized by the U.S. taxpayers) when it is already clear that the technology is likely to besuccessful in the marketplace? If so, what is the policy for supporting it? How does the APAprogram ensure that the “buy-in” price yields an arm’s length result?

(6) How does the APA program ensure that prospective pricing models are appropriatelyapplied and comply with the arm’s length standard?

(7) When is it not in the interest of tax administration to continue negotiating or agreeing toan APA?

We think it would be beneficial for these matters to be discussed at the February hearing, andwe would also appreciate your responses to these points. The APA program provides multinational taxpayers the opportunity to negotiate an agreement with the IRS on the future prices of their intercompany transactions and the associated taxable income. Given the increasing number of APAs in recent years, the billions of dollars worth of transactions covered, and the discretion granted to theIRS in these matters, the Finance Committee is encouraged to see the IRS recognizing the need toreview the program. We look forward to working with you to improve this program in the monthsto come.

Sincerely yours,

Charles E. Grassley 
Chairman

Max Baucus
Ranking Member