Eaton1 memorandum opinion - reassurance on the IRS' ability to cancel APAs
A recent U.S. Tax Court memorandum reviewed an important question: If the IRS no longer agrees with the position taken in an Advance Pricing Agreement (APA), can its administrative privileges be used to cancel the APA?
Ordinarily, an APA provides the taxpayer with certainty in the transfer pricing treatment of the specified cross-border transaction for a set period of time. An APA is attractive in certain circumstances, as it provides shelter from rigorous audit activity and reduces compliance costs. However, the taxpayer does have to provide extensive business information, which can then be used to provide the basis of the material assumptions. The material assumptions are key to the APA, and can include parameters in respect of the type of business, related and third party transactions, industry or general economic conditions. When a material assumption has been breached, the APA can then be cancelled by the tax authority.
Eaton, a large multinational company, had entered into two APAs with the IRS: for the 2001-2005 tax years and the 2006-2010 tax years. At the time of negotiating each APA, a profit split method was accepted. The IRS had discussed using a different profit split method; however, this was not included in the APAs. Later, the IRS cancelled the APAs based on the preference for a different profit split method, and increased the company's taxable income by US$368 million.
In Eaton's case, the company argued that it had not omitted or misrepresented material facts during the negotiation process, and the material assumptions were not breached. However, the IRS used its administrative privileges to cancel the APAs in 2011. In this unusual memorandum opinion, the Court reaffirmed the established precedent that once an APA is in place, the IRS can cancel based on the revenue procedures or a breach of the material assumptions. A change of opinion on a technical matter is not sufficient to cause a cancellation.
This is good news for taxpayers looking to enter into the IRS' APA program, and achieve certainty on their transfer pricing positions going forward. This Tax Court memorandum reaffirms the position that it is difficult to for the IRS to cancel an APA, unless the company breaches a material assumption in the APA.
1 Eaton Corp. v Commissioner, T.C. Memo. 2017-147, T.C., No.5576-12, 7/26/17
The Apotex Case2 – using transfer pricing tools to settle drug infringement cases
Apotex manufactured a patent-protected drug in Canada, then sold it in Canada, Australia and the UK. It has been established that in 2008 Apotex infringed Servier's patent, and damages are to be paid.
This case looks at how to calculate the settlement based on Apotex's sale of the patent-infringing drug to the off-shore affiliates. Fundamentally, the Federal Court of Appeal answered two key questions.