Nonacquiescence to the holding that buildings built to operate as retail stores are placed in service for depreciation purposes when substantially completed to house and secure racks, shelving and merchandise.

This Announcement is issued pursuant to § 521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act of 1999, which requires the Secretary of the Treasury to report annually to the public concerning advance pricing agreements (APAs) and the Advance Pricing and Mutual Agreement Program (APMA Program), formerly known as the Advance Pricing Agreement Program (APA Program). The first report covered calendar years 1991 through 1999. Subsequent reports covered each calendar year 2000 through 2015 separately. This eighteenth report describes the experience, structure, and activities of the APMA Program during calendar year 2016. It does not provide guidance regarding the application of the arm’s length standard.

This notice invites comments on a proposed revenue procedure that, if finalized, will provide procedures by which a taxpayer may request consent to change a method of accounting for recognizing income when the change is made for the same taxable year for which the taxpayer adopts the new financial accounting revenue recognition standards and the change is made as a result of, or directly related to, the adoption of the new revenue recognition standards.

It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings in certain cases. An Action on Decision is the document making such an announcement. An Action on Decision will be issued at the discretion of the Service only on unappealed issues decided adverse to the government. Generally, an Action on Decision is issued where its guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.

Actions on Decisions shall be relied upon within the Service only as conclusions applying the law to the facts in the particular case at the time the Action on Decision was issued. Caution should be exercised in extending the recommendation of the Action on Decision to similar cases where the facts are different. Moreover, the recommendation in the Action on Decision may be superseded by new legislation, regulations, rulings, cases, or Actions on Decisions. Prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions. The Service has expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. Accordingly, the Service now may acquiesce or nonacquiesce in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal. Regardless of the court deciding the case, the recommendation of any Action on Decision will be published in the Internal Revenue Bulletin.

The recommendation in every Action on Decision will be summarized as acquiescence, acquiescence in result only, or nonacquiescence. Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. However, “acquiescence” indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions; whereas, “acquiescence in result only” indicates disagreement or concern with some or all of those reasons. “Nonacquiescence” signifies that, although no further review was sought, the Service does not agree with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a “nonacquiescence” indicates that the Service will not follow the holding on a nationwide basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.

The Commissioner does NOT ACQUIESCE in the following decision:

Stine, LLC v. United States,^[1]

No. 13–03224, 2015 WL 403146 (W.D. La. Jan. 27, 2015)

Shea Homes, Inc. and Subs. v. Commissioner,^[2]

834 F.3d 1061 (9th Cir. 2016), aff’g 142 T.C. 60 (2014)

The Commissioner ACQUIESCES IN RESULT ONLY in the following decision:

Scott Singer Installations, Inc. v. Commissioner,^[3]

T.C. Memo 2016–161

This notice invites comments on a proposed revenue procedure that, if finalized, will provide procedures by which a taxpayer may request consent to change a method of accounting for recognizing income when the change is made for the same taxable year for which the taxpayer adopts the new financial accounting revenue recognition standards and the change is made as a result of, or directly related to, the adoption of the new revenue recognition standards (a qualifying same-year method change).

On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) jointly announced new financial accounting standards for recognizing revenue (new standards), titled “Revenue from Contracts with Customers.” See FASB Update No. 2014–09 and IASB International Financial Reporting Standard (IFRS) 15.

The new standards are effective for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans for annual reporting periods beginning after December 15, 2017. For all other entities, the new standards are effective for annual reporting periods beginning after December 15, 2018. Early adoption is allowed for reporting periods beginning after December 15, 2016. See FASB Update No. 2015–14, “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date.”

Since the joint announcement, FASB and IASB have revised the new standards and provided guidance on how to implement the new standards in certain situations. See, e.g., FASB Update No. 2015–14; FASB Update No. 2016–10, “Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing.”

On June 15, 2015, the Department of Treasury (Treasury Department) and the Internal Revenue Service (IRS) published Notice 2015–40, 2015–24 I.R.B. 1057, which requested comments on federal tax accounting issues related to the adoption of the new standards, including, whether the new standards are permissible methods of accounting for federal income tax purposes, the types of accounting method change requests that might result from adopting the new standards, and whether the current procedures for obtaining IRS consent to change a method of accounting are adequate to accommodate those requests. Very few comments were received. Some commenters requested additional time to respond and others reported that, as a result of adopting the new standards, taxpayers might request multiple changes in accounting method. This notice addresses only the procedures for obtaining IRS consent to a qualifying same-year method change. The Treasury Department and the IRS continue to invite comments on issues of conformity between the new standards and the Internal Revenue Code (Code) and the Treasury Regulations (Regulations), and are considering addressing these issues in separate guidance.

Qualifying same-year method changes may include automatic changes for which existing guidance, including Revenue Procedure 2015–13, 2015–1 I.R.B. 419, and Revenue Procedure 2016–29, 2016–21 I.R.B. 880, already provides automatic change procedures. Taxpayers requesting consent for automatic changes for which existing guidance already provides automatic change procedures must use the existing automatic change procedures to make a request. For qualifying same-year method changes for which existing guidance does not provide automatic change procedures but which comply with § 451 of the Code or other guidance regarding the taxable year of inclusion of income, the taxpayer must make the change under the proposed revenue procedure.

Adoption of the new standards may create or increase differences between financial accounting and tax accounting rules. The Treasury Department and the IRS recognize that there is interest in clarifying whether the new standards are permissible methods of accounting that may be used for federal income tax purposes. Accordingly, the Treasury Department and the IRS continue to seek comments on the specific issues identified in Notice 2015–40 regarding conformity between the new standards and the Code and the Regulations. Comments are specifically requested on the following issues:

1. To what extent would using the new standards for federal income tax purposes result in acceleration or deferral of income under § 451 or other income provisions of the Code?

2. What industry and/or transaction-specific issues might arise as a result of the new standards that may need to be addressed in future guidance?

3. To what extent do the new standards deviate from the requirements of § 451? In what situations should the IRS allow taxpayers who adopt the new standards to follow their book method of accounting for tax purposes (for example, where income is always accelerated)?

4. To what extent do the rules regarding allocation of standalone sales price and transaction price in the new standards affect taxpayers’ ability to satisfy their tax obligations?

This notice sets forth proposed procedures for obtaining IRS consent to a qualifying same-year method change. In connection with this notice, the Treasury Department and the IRS request comments on all aspects of the proposed procedures and on the specific method change issues identified in Notice 2015–40. Comments are specifically requested on the following issues:

1. Is the exception for small businesses in paragraph 5.02(2) of the proposed revenue procedure appropriate?

2. What types of changes in methods of accounting do taxpayers anticipate requesting?

3. Do taxpayers anticipate requesting changes in methods of accounting prior to the effective dates of the new standards?

4. Which procedures should taxpayers be required to use to request permission for a qualifying same-year method change, the automatic accounting method change procedures or the advance consent procedures?

5. What changes, other than those described in Section 5 of the proposed revenue procedure, do taxpayers expect will be requested in the year the taxpayer adopts the new financial standards, and should they be allowed as automatic changes?

6. What related accounting method changes do taxpayers anticipate requesting that may appropriately be made on a single Form 3115?

7. If multiple changes are requested on a single Form 3115, should the taxpayer report a separate § 481 adjustment for each change and should those adjustments be netted and a single spread period applied?

8. What alternatives to filing a Form 3115 would reduce the burden of compliance?

9. What transition procedures may be helpful?

10. What additional procedural changes would be appropriate and helpful?

Comments must be submitted by July 26, 2017. Comments, identified by Notice 2017–17, may be submitted using one of the following methods:

All submissions will be available for public inspection and copying in room 1621, 1111 Constitution Avenue, N.W., Washington, D.C., from 9 a.m. to 4 p.m.

PROPOSED REV. PROC. [2017–XX]

This revenue procedure provides procedures under § 446 of the Internal Revenue Code (Code) and § 1.446–1(e) of the Income Tax Regulations (Regulations) to obtain consent of the Commissioner of Internal Revenue (Commissioner) to change a method of accounting for recognizing income for federal income tax purposes when the change is a result of, or directly related to, adoption of the new financial accounting standards for recognizing revenue by the taxpayer and is made for the same taxable year as the adoption of the new financial accounting standards for recognizing revenue that were issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). See FASB Update No. 2014–09, “Revenue from Contracts with Customers (Topic 606),” and IASB International Financial Reporting Standard (IFRS) 15, “Revenue from Contracts with Customers.”

.01 Method of accounting generally.

(1) Section 446(a) of the Code and § 1.446–1(a)(1) of the Regulations provide that taxable income is computed under the method of accounting the taxpayer regularly uses to compute income in keeping the taxpayer’s books.

(2) Section 1.446–1(a)(4) of the Regulations requires a taxpayer to maintain accounting records that include the taxpayer’s regular books of account and other records and data necessary to support the entries on the taxpayer’s books of account and on the taxpayer’s return.

.02 Consent for a change in method of accounting. Section 446(e) of the Code and § 1.446–1(e)(2)(i) of the Regulations provide that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner before changing a method of accounting for any item for federal income tax purposes.

.03 Accounting for income generally. Section 451(a) of the Code and § 1.451–1(a) of the Regulations provide that any item of gross income must be included in gross income in the year in which it was received by the taxpayer unless it is includible for a different year pursuant to the taxpayer’s method of accounting.

.04 New revenue recognition standards.

(1) The FASB and the IASB have announced new financial accounting standards for recognizing revenue (new standards). See FASB Update No. 2014–09, IASB International Financial Reporting Standard (IFRS) 15, and section 3 of this revenue procedure.

(2) The new standards are effective for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans for annual reporting periods beginning after December 15, 2017. For all other entities, the new standards are effective for annual reporting periods beginning after December 15, 2018. Early adoption is allowed for reporting periods beginning after December 15, 2016. See FASB Update No. 2015–14, “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date.”

.05 Effect of new revenue recognition standards.

(1) The Internal Revenue Service (Service) anticipates that many taxpayers will request consent to change a method of accounting for one or more items of income as a result of, or directly related, to the adoption of the new revenue standards for the same taxable year that the new standards are adopted for financial accounting purposes.

(2) The Service must balance taxpayers’ need to comply with the new standards with the Service’s need to approve appropriate method changes.

.01 Change in Method of Accounting Definitions. The definitions in section 3 of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, or any successor, apply for purposes of this revenue procedure.

.02 New Standards. “New standards” refers to the financial accounting standards for recognizing revenue that were issued in FASB Update No. 2014–09, “Revenue from Contracts with Customers (Topic 606),” and IASB International Financial Reporting Standard (IFRS) 15, “Revenue from Contracts with Customers,” as updated and revised hereafter.

.03 Qualifying Same-Year Method Change. A qualifying same-year method change is a change of method of accounting for recognizing income that is made for the same year as the year the taxpayer adopts the new standards and made as a result of, or directly related to, the adoption of those standards.

This revenue procedure applies to taxpayers that adopt the new standards and that request the Commissioner’s consent, pursuant to § 446(e) of the Code and § 1.446–1(e)(3) of the Income Tax Regulations, to make a qualifying same-year method change.

.01 Qualifying Same-Year Method Change under Existing Automatic Change Guidance.

A method change that is within the scope of section 4 of this revenue procedure that qualifies as an automatic change in the List of Automatic Changes (under Rev. Proc. 2016–29, 2016–21 I.R.B. 880, or any successor) and otherwise satisfies the requirements of paragraphs 5.01(1)(a)–(d) of Rev. Proc. 2015–13 (or any successor), must be implemented by applying the automatic change procedures in Section 6 of Rev. Proc. 2015–13 (or any successor) and the List of Automatic Changes.

.02 Qualifying Same-Year Method Change that Complies with Income Provision of the Code or the Regulations.

(1) A method change that is within the scope of section 4 of this revenue procedure that is not described in section 5.01 of this revenue procedure, which satisfies the requirements of sections 5.01(1)(c) and (d) of Rev. Proc. 2015–13 (or any successor), and which complies with § 451 of the Code or other guidance, must be implemented by applying the automatic change procedures in section 6 of Rev. Proc. 2015–13 (or any successor). A taxpayer making a change under this section 5.02 must file a Form 3115, check the box for line 1(b), and write “Rev. Proc. 2017–XX” followed by the applicable income provision of the Code or Income Tax Regulations or the applicable relevant guidance. In addition, the taxpayer must attach a brief description of the change and why it satisfies the applicable income provision or guidance referenced in line 1(b) of the Form 3115.

(2) A taxpayer with one or more separate and distinct trade(s) or business(es), within the meaning of § 1.446–1(d), that individually have (a) total assets of less than $10 million as of the first day of the taxable year for which a change in method of accounting is requested, or (b) average annual gross receipts of $10 million or less for the three preceding taxable years, as determined under § 1.263(a)–3(h)(3) (substituting “separate and distinct trade or business” for “taxpayer”), may make the change for each such separate and distinct trade or business on a cut-off basis. Accordingly, a § 481(a) adjustment is neither permitted nor required for each such separate and distinct trade or business. See section 2.07 of Rev. Proc. 2015–13.

(3) A § 481(a) adjustment must be computed for the year of change for all separate and distinct trades or businesses other than those for which paragraph 5.02(2) of this revenue procedure provides otherwise and for taxpayers for which paragraph 5.02(2) of this revenue procedure does not apply. See section 7.02 of Rev. Proc. 2015–13.

.03 Multiple Requests. Multiple requests to make qualifying same-year method changes may be made in one request.

This revenue procedure is effective for taxable years ending on or after [INSERT DATE OF PUBLICATION OF FINAL REVENUE PROCEDURE].

The principal author of this revenue procedure is Charles Gorham of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Mr. Gorham at (202) 317-7003 (not toll-free number), or Peter E. Ford, at (202) 317-7011 (not a toll-free number).

March 27, 2017

This Announcement is issued pursuant to § 521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act of 1999, which requires the Secretary of the Treasury to report annually to the public concerning advance pricing agreements (APAs) and the Advance Pricing and Mutual Agreement Program (APMA Program), formerly known as the Advance Pricing Agreement Program (APA Program). The first report covered calendar years 1991 through 1999. Subsequent reports covered each calendar year 2000 through 2015 separately. This eighteenth report describes the experience, structure, and activities of the APMA Program during calendar year 2016. It does not provide guidance regarding the application of the arm’s length standard.

Part I of this report includes information on the structure, composition, and operation of the APMA Program; Part II presents statistical data; and Part III includes general descriptions of various elements of the APAs executed in 2016, including types of transactions covered, transfer pricing methods used, and completion time.

John C. C. Hughes

Acting Director, Advance Pricing and Mutual Agreement Program

[Pub. L. 106–170 § 521(b)(2)(A)]

In February of 2012, the former APA Program was moved from the Office of Chief Counsel to the Office of Transfer Pricing Operations within the Large Business and International Division of the IRS and combined with the U.S. Competent Authority staff responsible for transfer pricing cases, thereby forming the APMA Program.

After the formation of the APMA Program, the team that developed the IRS position in a bilateral or multilateral case and finalized the APA with the taxpayer also became responsible for discussing the case and obtaining an agreement with the treaty partner. This compression of functions into a single APA team has helped to eliminate inefficiencies and has decreased the amount of time it takes to reach resolution once a case is set for discussion with the treaty partner.

As of December 30, 2016, the APMA Program was comprised of 62 team leaders, 20 economists, and 10 senior managers organized into 10 groups (7 team leader groups and 3 economist groups). Each team leader group has responsibility for cases involving certain countries with one of the economist groups also taking responsibility of a country. Because of the large volume of cases with certain treaty partners, some countries are the responsibility of more than one group. The APMA Program’s main office is located in Washington, DC, and it also has a significant presence in San Francisco and the Los Angeles area.

On August 31, 2015, new revenue procedures governing MAP and APA applications were published in 2015–35 I.R.B. on pages 236 and 263, respectively. Revenue Procedure (Rev. Proc.) 2015–41 provides guidance and instructions on filing APA requests as well as guidance and information on the administration of APAs. Rev. Proc. 2015–41 updates and supersedes Rev. Proc. 2006–9, 2006–1 C.B. 278, as modified by Rev. Proc. 2008–31, 2008–1 C.B. 1133, which is also superseded. Rev. Proc. 2015–40 provides procedures and guidance on requesting assistance from the U.S. Competent Authority where the taxpayer believes that the actions of the United States or a treaty country result or will result in the taxpayer being subject to taxation not in accordance with the applicable U.S. tax treaty. Rev. Proc. 2015–40 updates and supersedes Rev. Proc. 2006–54, 2006–2 C.B. 1035.

The model APA agreement, which was last significantly revised in 2009, is currently under review for future changes. The 2009 model appears in this report as Appendix 1. A list of primary APMA contacts is available at https://www.irs.gov/businesses/corporations/apma-contacts.

[Pub. L. 106–170 § 521(b)(2)(C)(i–viii)]

Table 1: APA Applications Filed

§ 521(b)(2)(C)(i)

	Unilateral	Bilateral	Multilateral	Total
Filed 1991–1999[a]				401
Filed 2000–2015	542	1194	10	1746
Filed in 2016	14	84	0	98
Total Filed 1991–2016				2245
[a] The first APA Statutory Report, which compiled APA data from 1991–1999, did not report the cumulative number of applications for those years by submission type, so the cumulative totals cannot be reported in that manner.

 

The table above illustrates the number of complete applications filed per year. As of December 31, 2016, APMA had also received 17 user fee filings that were not yet accompanied by substantially complete APA applications, in addition to the 98 complete APA applications.

 

Table 2: Executed and Pending APAs

§ 521(b)(2)(C)(ii–vi)

	Unilateral	Bilateral	Multilateral	Total
Total Executed 1991–2015	539	958	14	1511
Total Executed in 2016	21	65	0	86
Total Executed 1991–2016	560	1023	14	1597
Total Pending	67	322	9	398
Renewals Executed in 2016	17	32	0	49
Renewals Pending	33	131	2	166

 

Of the 86 agreements executed in 2016, 41 percent were new APAs (i.e., not a renewal of a prior APA). This was a slight increase from the 40 percent executed in 2015.

 

As the chart above illustrates, nearly three quarters of the total number of bilateral APAs executed in 2016 involved the United States entering into mutual agreements with either Japan or Canada.

 

The number of pending APAs dropped slightly from 2015 to 2016 with Japan and Canada continuing to account for almost half of all pending bilateral APAs.

 

Table 4: APAs Finalized or Renewed^[4] by Industry

§ 521(b)(2)(C)(viii)

Industry
Manufacturing	40
Wholesale/Retail Trade	33
Services	6
All Other Industries	7

 

Table 4a: Manufacturing APAs Finalized or Renewed 2016

Manufacturing
Computer and Electronic Products	7
Chemical	6
Transportation Equipment	6
Miscellaneous Manufacturing[a]	9
All Other Types of Manufacturing	12
[a] Miscellaneous Manufacturing is NAICS code 339.

 

[Pub. L. 106–170 § 521(b)(2)(D) and (E)]

Nature of the Relationships

§ 521(b)(2)(D)(i)

 

As in prior years, more than half of the APAs executed in 2016 involved transactions between non-U.S. parents and U.S. subsidiaries.

Covered Transactions, Functions and Risks, and Tested Parties

§ 521(b)(2)(D)(ii–iii)

 

Although the majority of transactions^[5] covered in APAs executed in 2016 involve the sale of tangible goods and the provision of services, the IRS also has successfully completed numerous APAs involving the use of intangible property. While transactions involving intangibles may be more challenging and represent a smaller percentage of the covered transactions in 2016 (20 percent), the IRS continues to seek opportunities to work with taxpayers and treaty partners to provide prospective certainty for such transactions wherever appropriate.

In the majority of APAs, the covered transactions involve numerous business functions and risks. For instance, with respect to functions, APAs involving manufactured products typically involve a controlled group that conducts research and development (R&D), engages in product design and engineering, manufactures the product, markets and distributes the product, and performs support functions such as legal, finance, and human resources services. Regarding risks, the controlled group may assume a variety of risks including market risks, R&D risks, financial risks, credit and collection risks, product liability risks, and general business risks. In the APA evaluation process, a significant amount of time and effort is devoted to understanding how the functions and risks are allocated amongst the controlled group of companies that are party to the covered transactions. Generally, for methods requiring selection of a tested party, the tested party that is chosen will be the least complex of the controlled taxpayers.

 

75 percent of the tested parties in 2016^[6] were U.S. distributors, U.S. manufacturers, or U.S. service providers.

Table 6: Term Lengths of APAs Executed in 2016

Term Length (years)	Number of APAs
2	2
3	2
4	1
5	52
6	8
7	15
8	7
9	2
10	2
11	4
12	0
13	0
14	1
Average	6

 

As described in § 3.03(1) of Rev. Proc. 2015–41, taxpayers should request an APA term that would cover at least 5 prospective years and may also request that the APA be “rolled back” to cover one or more earlier taxable years, although the appropriate APA term is decided on a case-by-case basis. Of the APAs executed in 2016, only 20 percent included rollback years. A substantial number of those APAs with terms of greater than 5 years were submitted as a request for a 5-year term, and the additional years were agreed to between the taxpayer and the IRS (or, in the case of a bilateral APA, between the IRS and the foreign government upon the taxpayer’s request) to ensure a reasonable amount of prospectivity in the APA term.

 

The median time required to complete an APA in 2016 increased slightly from 31.9 months in 2015 to 32.8 months in 2016.

[§ 521(b)(2)(B)]

between

[Insert Taxpayer’s Name]

and

THE INTERNAL REVENUE SERVICE

The Parties to this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Insert Taxpayer’s Name], EIN ________.

[Insert Taxpayer Name] is the common parent of an affiliated group filing consolidated U.S. tax returns (collectively referred to as “Taxpayer”), and is entering into this APA on behalf of itself and other members of its consolidated group.

Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties].

This APA contains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Transactions under I.R.C. section 482, the Treasury Regulations thereunder, and any applicable tax treaties.

{If renewal, add} [Taxpayer and IRS previously entered into an APA covering taxable years ending _____ to ______, executed on ________.]

The Parties agree as follows:

The Parties have executed this APA on the dates below.

[Taxpayer Name in all caps]

By: ___________________________ Date: ___________________, 201___

Jane Doe

Sr. Vice President (Taxes)

By: ___________________________ Date: ___________________, 201___

John C. C. Hughes

Acting Director, Advance Pricing and Mutual Agreement Program

1. Covered Transactions.

[Define the Covered Transactions.]

2. APA Term.

This APA applies to Taxpayer’s taxable years ending __________ through ________ (APA Term).

3. TPM.

{Note: If appropriate, adapt language from the following examples.}

[The Tested Party is __________.]

• CUP Method

The TPM is the comparable uncontrolled price (CUP) method. The Arm’s Length Range of the price charged for _________ is between _______ and ___________ per unit.

• CUT Method

The TPM is the CUT Method. The Arm’s Length Range of the royalty charged for the license of ______is between ____% and ___ % of [Taxpayer’s, Foreign Participants’, or other specified party’s] Net Sales Revenue. [Insert definition of net sales revenue or other royalty base.]

• Resale Price Method (RPM)

The TPM is the resale price method (RPM). The Tested Party’s Gross Margin for any APA Year is defined as follows: the Tested Party’s gross profit divided by its sales revenue (as those terms are defined in Treasury Regulations sections 1.482–5(d)(1) and (2)) for that APA Year. The Arm’s Length Range is between ____% and ___ %, and the Median of the Arm’s Length Range is ___%.

• Cost Plus Method

The TPM is the cost plus method. The Tested Party’s Cost Plus Markup is defined as follows for any APA Year: the Tested Party’s ratio of gross profit to production costs (as those terms are defined in Treasury Regulations sections 1.482–3(d)(1) and (2)) for that APA Year. The Arm’s Length Range is between ___% and ___%, and the Median of the Arm’s Length Range is ___%.

• CPM with Berry Ratio PLI

The TPM is the comparable profits method (CPM). The profit level indicator is a Berry Ratio. The Tested Party’s Berry Ratio is defined as follows for any APA Year: the Tested Party’s gross profit divided by its operating expenses (as those terms are defined in Treasury Regulations sections 1.482–5(d)(2) and (3)) for that APA Year. The Arm’s Length Range is between ____ and ___, and the Median of the Arm’s Length Range is ___.

• CPM using an Operating Margin PLI

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s Operating Margin is defined as follows for any APA Year: the Tested Party’s operating profit divided by its sales revenue (as those terms are defined in Treasury Regulations section 1.482–5(d)(1) and (4)) for that APA Year. The Arm’s Length Range is between ____% and ___ %, and the Median of the Arm’s Length Range is ___%.

• CPM using a Three-year Rolling Average Operating Margin PLI

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s Three-Year Rolling Average operating margin is defined as follows for any APA Year: the sum of the Tested Party’s operating profit (within the meaning of Treasury Regulation section 1.482–5(d)(4) for that APA Year and the two preceding years, divided by the sum of its sales revenue (within the meaning of Treasury Regulation section 1.482–5(d)(1)) for that APA Year and the two preceding years. The Arm’s Length Range is between ____% and ____%, and the Median of the Arm’s Length Range is ___%.

• Residual Profit Split Method

The TPM is the residual profit split method. [Insert description of routine profit level determinations and residual profit-split mechanism].

[Insert additional provisions as needed.]

4. Application of TPM.

For any APA Year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate for the Covered Transactions] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the Tested Party] within the Arm’s Length Range, then the amounts reported on Taxpayer’s U.S. Return must clearly reflect such results.

For any APA year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the Tested Party] outside the Arm’s Length Range, then amounts reported on Taxpayer’s U.S. Return must clearly reflect an adjustment that brings the [price per unit, royalty rate] [or] [Tested Party’s Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin] to the Median.

For purposes of this Appendix A, the “results of Taxpayer’s actual transactions” means the results reflected in Taxpayer’s and Tested Party’s books and records as computed under U.S. GAAP [insert another relevant accounting standard if applicable], with the following adjustments:

5. APA Revenue Procedure Treatment

If Taxpayer makes an adjustment under paragraph 4 of this Appendix A (a “primary adjustment”), Taxpayer and its related foreign entity may elect APA Revenue Procedure Treatment in accordance with section 11.02(3) of Revenue Procedure 2006–9 and avoid the possible adverse tax consequences of a secondary adjustment that would otherwise follow the primary adjustment.

[Insert additional provisions as needed.]

This APA’s critical assumptions are:

1. The business activities, functions performed, risks assumed, assets employed, and financial and tax accounting methods and classifications [and methods of estimation] of Taxpayer in relation to the Covered Transactions will remain materially the same as described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.

[Insert additional provisions as needed.]

The APA Records will consist of all documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records, or other writings that support the information provided in such documents.

The Annual Report (and each of the four copies required by paragraph 5(e) of this APA) will include:

1. Two copies of a properly completed APA Annual Report Summary in the form of Appendix E to this APA, one copy of the form bound with, and one copy provided separately from, the rest of the Annual Report.

2. A table of contents, organized as follows:

3. Statements that fully identify, describe, analyze, and explain:

a. All material differences between the U.S. Group’s business operations (including functions, risks assumed, markets, contractual terms, economic conditions, property, services, and assets employed) during the APA Year from the business operations described in the APA Request. If there have been no material differences, the Annual Report will include a statement to that effect.

b. All material differences between the U.S. Group’s accounting methods and classifications, and methods of estimation used during the APA Year, from those described or used in the APA Request. If any change was made to conform to changes in U.S. GAAP (or other relevant accounting standards) Taxpayer will specifically identify the change. If there has been no material change in accounting methods and classifications or methods of estimation, the Annual Report will include a statement to that effect.

c. Any change to the Taxpayer notice information in paragraph 14 of this APA.

d. Any failure to meet any critical assumption. If there has been no failure, the Annual Report will include a statement to that effect.

e. Whether or not material information submitted while the APA Request was pending is discovered to be false, incorrect, or incomplete.

f. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered Transactions or is otherwise relevant to the TPM.

g. The amount, reason for, and financial analysis of (1) any primary adjustments made under Appendix A for the APA Year; and (2) any (a) secondary adjustments that follow such primary adjustments or (b) accounts receivable that Taxpayer establishes, in lieu of secondary adjustments, by electing APA Revenue Procedure Treatment pursuant to paragraph 5 of Appendix A and Revenue Procedure 2006–9, section 11.02(3), for the APA Year, including but not limited to:

h. The amounts, description, reason for, and financial analysis of any book-tax difference relevant to the TPM for the APA Year, as reflected on Schedule M-1 or Schedule M-3 of the U.S. Return for the APA Year.

i. Whether Taxpayer contemplates requesting, or has requested, to renew, modify, or cancel the APA.

4. The Financial Statements, and any necessary account detail to show compliance with the TPM, including consolidating financial statements, segmented financial data, records from the general ledger, or similar information if the assets, liabilities, income, or expenses relevant to showing compliance with the TPM are a subset of the assets, liabilities, income, or expenses presented in the Financial Statements.

5. {Use the following or the alternative prescribed by paragraph 5(f) of this APA:} A copy of the independent certified public accountant’s opinion required by paragraph 5(f) of this APA.

6. A financial analysis that reflects Taxpayer’s TPM calculations for the APA Year. The calculations must reconcile with and reference the information required under item 4 above in sufficient account detail to allow the IRS to determine whether Taxpayer has complied with the TPM.

7. An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities that are parties to the Covered Transactions or are otherwise relevant to the TPM.

8. A copy of the APA and any amendment.

9. A penalty of perjury statement, executed in accordance with Revenue Procedure 2006–9, section 11.01(6) and (7).

The following definitions control for all purposes of this APA. The definitions appear alphabetically below:

The APA Annual Report Summary on the next page is a required APA Record. The APA Team Leader supplies some of the information requested on the form. Taxpayer is to supply the remaining information requested by the form and submit the form as part of its Annual Report.