International Tax Monthly – September Issue

Advance Pricing Agreements: IRS Issues Updated Procedures

The IRS recently issued guidance on the process for requesting and obtaining advance pricing agreements (APAs). In Revenue Procedure 2015-41, the IRS also provides guidance on the administration of executed APAs.

The IRS guidance is being issued concurrently with procedures and guidance on the process for requesting assistance from the U.S. competent authority under the provisions of U.S. tax treaties.


APAs are agreements between the IRS and a taxpayer on the transfer pricing methodology to be used in allocating income, deductions, credits or allowances between two or more organizations or businesses controlled by the same interests. The APA program is designed as an alternative dispute resolution process that supplements the traditional administrative, judicial and treaty mechanisms for resolving transfer pricing issues.

APAs come from the IRS Advance Pricing and Mutual Agreement (APMA) program.

New Guidance

The new guidance sets out the procedures, rules and guidelines relevant to filing an APA request. It also addresses a taxpayer’s obligations before and after filing the request.

There are differences between Rev. Proc. 2015-41 and the proposed version (IRS Notice 2013-79). For example, the new guidance clarifies that, if the APMA requires — as a condition of continuing with the advance pricing agreement process — the taxpayer to expand the proposed scope of its request to cover interrelated matters, the APMA will do so with due regard to considerations of principled, effective and efficient tax administration.

This will occur only after considering the views of the taxpayer and the applicable foreign competent authority. (Interrelated matters are issues in the same years, covered issues or interrelated issues in other years, and covered issues or interrelated issues in the same or other years as applied to other countries.)

User Fees Increased

User fees for APA requests are increased under the new guidance, but total user fees may be reduced for multiple APA requests filed by the same controlled group within a 60-day period.

The new guidance also addresses rollback years — generally, a year covered by an APA ending before the first tax year covered by an agreement for which the taxpayer has filed a complete request. It provides that rollback years may be formally covered within an APA.

A rollback (the application of the covered methods to the specific back years) will be included in an APA when it is either 1) requested by the taxpayer and approved after coordination and collaboration between the APMA and other offices within the IRS, or 2) required by the APMA, after coordination and collaboration with other offices.

Effective Date and Transition Rule

Rev. Proc. 2015-41 applies to all APA requests filed under its procedure. However, there is a transition rule. An APA request filed after August 31, 2015, may instead be filed under earlier guidance (IRS Rev. Proc. 2006-9) if a substantially complete APA request is filed under that Revenue Procedure no later than December 29, 2015.

For this purpose, the 120-day allowance of Rev. Proc. 2006-9 won’t apply in determining the date on which a substantially complete APA request is considered filed. APA requests filed on or before December 29, 2015, should clearly state under which Revenue Procedure they are filed.

IRS Issues Interim Guidance for Expatriate Health Plans
Regarding the ACA

The IRS recently issued interim guidance in Notice 2015-43 related to how the Affordable Care Act (ACA) applies to expatriate health plans. Previous guidance exempted certain expatriate health plans from some ACA provisions. Then, a law enacted in December 2014 codified the exemption of qualifying expatriate plans issued or renewed on or after July 1, 2015, from most ACA requirements — provided they met specified standards.

Now that the July 1 effective date has passed without interpretive guidance, the recent IRS notice generally allows application of a “reasonable good faith interpretation” of the standards until further guidance is issued. The U.S. Department of the Treasury, U.S. Department of Labor and U.S. Department of Health and Human Services indicated that they agree with the guidance and plan to jointly issue proposed regulations on the requirements for expatriate plans.

Forms 1094 and 1095

Notice 2015-43 also confirms that coverage under an expatriate health plan does count as minimum essential coverage. Providers of minimum essential coverage (for example, insurers and self-insured employers) and applicable large employers must file IRS Forms 1094 and 1095 regardless of whether the coverage is provided through an expatriate health plan. These filings, which are first due in early 2016, report health coverage for employees.

The clarification recognizes that insurers and plan sponsors may need additional time to modify their expatriate health plan arrangements and thus provides relief by allowing application of a reasonable good-faith interpretation of the standards. Compliance with previous IRS FAQ guidance generally is considered good-faith interpretation.

Look for Future Guidance

Be aware that Notice 2015-43’s good-faith rules don’t apply to Patient-Centered Outcomes Research Institute (PCORI) fees paid by insurers and sponsors of self-insured plans or certain other fees paid by insurers.

More guidance is expected on the application of ACA provisions to expatriate health plans. In the meantime, those who sponsor or advise expatriate health plans should continue to bring their arrangements into compliance with required standards and may wish to submit comments while waiting for additional guidance. IRS Notice 2015-43 explains how to submit comments, which are due by October 19, 2015.

New Zealand: Proposal to Apply GST to Cross-Border
Services and Intangibles

The New Zealand government has issued a discussion document about imposing a goods and services tax (GST) on the cross-border supply of services and intangibles. This would include e-books, music, videos and software purchased from offshore websites.

The proposed rules would require offshore suppliers to register and return the GST when they supply services and intangibles to consumers who are residents of New Zealand.

The Destination Principle

New Zealand’s GST is a “consumption tax” — a tax on consumer spending on goods and services. Under the so-called “destination principle,” generally the country that has the right to tax consumer spending is the country in which the good or service is consumed.

Goods and services that are exported (presumably consumed offshore) are generally untaxed. Therefore, double taxation is expected to be largely averted if countries apply the destination principle and recognize that the GST is a tax on consumers (rather than businesses).

Existing GST System

In general, the existing GST system in New Zealand doesn’t apply to cross-border services and intangibles that are “consumed” in New Zealand. The Goods and Services Tax Act of 1985 generally applies only to services that are:

    • Performed by New Zealand tax residents, or
  • Supplied by a nonresident, but physically performed in New Zealand.

When New Zealand introduced the GST in 1986, few consumers purchased services from offshore, and online digital products weren’t yet available. Since the introduction of the GST, steps have been taken to apply it to some cross-border services consumed in New Zealand.

First, since 2003, offshore suppliers of telecommunications services have been required to return GST on telecommunications services initiated by consumers in New Zealand. However, the definition of “telecommunications services” excluded the content of the telecommunication and, thus, excluded services such as Internet downloads that are delivered electronically.

In addition, since 2005, the GST reverse charge has been made applicable to imported services by businesses making exempt supplies and other nontaxable supplies. A reverse charge treats the purchaser as having made the supply and thus liable for the GST. The reverse charge also applies to certain unregistered persons who acquire imported services.

The Discussion Draft

The discussion draft notes that the Organisation for Economic Co-operation and Development (OECD) is developing guidelines that establish international best practices for determining taxing rights in regard to cross-border business-to-consumer supplies of services and intangibles. The OECD’s business-to-consumer guidelines for value-added tax and GST broadly divide cross-border services into “on-the-spot” services and “remote” services.

In relation to remote services, the draft suggests the consumer’s usual place of residence as the predominant test for determining where consumption occurs. It also suggests requiring offshore suppliers of services to register in the country of consumption as a suitable method of taxing these supplies.

Outside New Zealand

The offshore supplier registration model has already been adopted for cross-border services and intangibles by the European Union and a number of countries, including Norway, Switzerland and South Africa, and it will be followed by Japan. Australia has also recently announced measures to apply the GST to cross-border services and intangibles beginning July 1, 2017.

What’s Next

The deadline for comment submissions is September 25, 2015. If adopted, the proposed rules would be included in New Zealand’s next omnibus tax bill.