Lawyers' Letter Requesting Protection of APAs

                                   March 25, 1999

[1] We are writing to you on behalf of a number of clients that have entered into advance pricing agreements (APAs) with the Internal Revenue Service. These clients are US taxpayers that own foreign subsidiaries or US taxpayers that are owned by foreign parent corporations.

[2] We have a simple two-part message:

o Our clients feel betrayed by the IRS's decision to depart from

The information received or generated by the Service during the

[5] We also note that the resources of the APA staff are being diverted to disclosure issues to the detriment of the APA program. This diversion of APA staff resources to disclosure and redaction of APAs is making it impossible for the APA staff to comply with the mandated timing for processing of APA requests. Lengthening the time it takes to obtain an APA is likely to further discourage participation in the APA program. The combination of unwanted disclosure and delays in processing APAs could seriously damage, if not largely destroy, the APA program.

[6] The fact that most APAs are bilateral, involving treaty countries, makes the application of section 6110 particularly pernicious. Tax treaties generally require that information exchanged pursuant to the provisions of the treaty be kept secret except in limited circumstances. Disclosure of APAs therefore also represents a breach of faith with our treaty partners, and our treaty partners are clearly upset by this unilateral action by the IRS, While it is too early to predict the effect of section 6110 disclosure on bilateral APAs, the reaction so far indicates a considerable risk to the ability of the IRS to secure satisfactory bilateral APAs. An inability to obtain bilateral APAs would for many taxpayers reduce the APA program to one of marginal utility and of little interest.

[7] The distinguishing feature of an APA is that it involves the choice and application of a transfer pricing methodology to a specific set of transactions, typically including brand name products and other intangible property. The factual circumstances of each APA are therefore unique. The background files, moreover, contain principally confidential information of the taxpayer, such as pricing, financial, and commercial data. APAs therefore differ from private letter rulings, which were the principal focus in enacting section 6110. Rulings involve the application of principles of law to factual circumstances that in most cases can be disclosed and replicated without knowledge of confidential information. Indeed, APAs are much like closing agreements, which for good reason are not subject to section 6110.

[8] We urge the IRS to rectify this serious problem as expeditiously as possible. If possible, the Service should admit to the court it made a mistake when it conceded the applicability of section 6110, especially in light of the decision in Tax Analysts v. IRS. At the very least, we urge that the Service not oppose the views of the taxpayers that have sought to participate in the BNA litigation as amici. In addition, we urge the Service, Treasury, and the Congress to support legislative initiatives that would exempt APAs and APA background files from section 6110 (and other disclosure). We also note that we have no objection to the IRS publishing general information on APA methodologies and other APA information on a periodic basis, as long as the published information does not summarize individual APAs. Indeed such an approach could provide more useful information to the public than properly redacted APAs under section 6110 as well as avoiding the risk of improper disclosure.

[9] To summarize, our clients that have participated in the APA program have asked us respectfully to request the IRS, Treasury, and Congress to work together to rectify the current situation through legislation that confirms that APAs are confidential taxpayer information, the disclosure of which is governed by section 6103 of the Internal Revenue Code. The Service is to be congratulated for developing the APA program. We urge the Service now to defend it. We shall be pleased to expand upon their concerns and our views at your convenience.

Sincerely,