oversight

Tax Administration: Opportunities Exist to Improve IRS's Management of International Tax Dispute Resolution

Published by the Government Accountability Office on 2019-04-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office
             Report to the Chairman,
             Committee on Finance, U.S. Senate




             TAX
March 2019




             ADMINISTRATION

             Opportunities Exist
             to Improve IRS's
             Management of
             International Tax
             Dispute Resolution




GAO-19-81
                                            March 2019

                                            TAX ADMINISTRATION
                                            Opportunities Exist to Improve IRS's Management of
                                            International Tax Dispute Resolution
Highlights of GAO-19-81, a report to the
Chairman, Committee on Finance, U.S.
Senate




Why GAO Did This Study                      What GAO Found
With increasing globalization,              A U.S. multinational corporation (MNC) operating in a foreign country is subject
multinational corporations can take         to taxes in that country as well as in the United States. The U.S. MNC’s tax
advantage of differences in                 return may be audited by the United States or the other country. Such audits can
countries’ corporate tax systems to         result in an adjustment to the U.S. MNC’s taxable income that may result in
reduce their overall tax liabilities.       income being subject to tax in both countries. If the U.S. MNC disagrees with the
However, globalization can also lead        adjustment, it can ask the United States Competent Authority (USCA) within the
to disputes about the correct tax           Internal Revenue Service (IRS) to help resolve the dispute through the mutual
liability for U.S. MNCs in different        agreement procedure (MAP). Generally, disputes are resolved by one country
countries. GAO was asked to review          withdrawing some or all of the adjustment and the other country providing other
how the United States administers           relief to the MNC to address double taxation of income. The following figure
the process for resolving                   provides an overview of the dispute resolution process.
international tax disputes when a
U.S. MNC disagrees with a tax               IRS U.S. Competent Authority Mutual Agreement (USCA) Procedure (MAP) Process
determination of another country.
This report (1) describes IRS’s
dispute resolution process, (2)
assesses the information IRS
provides to taxpayers about the
process, and (3) assesses the extent
to which IRS evaluates its
management of dispute resolutions
cases. GAO reviewed IRS guidance
on the MAP process, interviewed
IRS officials and compared IRS
actions to federal standards for
internal control and GAO’s criteria for
a good tax system. GAO analyzed
MAP data for cases closed from
2013 to 2017 as well as a stratified        Dispute resolution assistance is available to U.S.MNCs that need it and USCA
random sample of MAP case files.            provides comprehensive technical information on its website on how to request
                                            assistance. However, because USCA’s website does not provide an overview or
What GAO Recommends                         plain language guidance on the MAP process U.S. MNCs may not have clear
GAO is making a total of eight              information on how to navigate the process.
recommendations, including that IRS         USCA has taken a number of steps to ensure efficient management of MAP
improve the clarity of information on       cases including assigning staff with requisite background and skills to cases
the dispute resolution process, track       according to their complexity and organizing staff into teams that specialize by
and use dispute resolution case data,       countries. However, GAO identified a number of weaknesses that impact
ensure the quality of case data, and        USCA’s management of MAP cases. These include the following
analyze trends in dispute case
characteristics. IRS agreed with GAO’s      •   key data are not tracked and existing data are not used to assess the
recommendations and said it will                effective allocation of resources for the program,
provide detailed corrective action
plans.                                      •   few controls have been established to monitor and ensure the reliability of
                                                the data in the case management database, and
View GAO-19-81. For more information,
contact James R McTigue at (202) 512-9110   •   lack of trend analyses on dispute case characteristics that could help inform
or mctiguej@gao.gov.                            management decision making and the more efficient operation of the
                                                program.
                                                                                      United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                2
               MAP Has Multiple Stages and Potential Resolution Paths                    4
               Available Information about MAP is Limited and Highly Technical           8
               USCA Does Not Track Key Data nor Use Existing Data to Assess
                 Management of MAP Cases                                                12
               Conclusions                                                              28
               Recommendations for Executive Action                                     29
               Agency Comments                                                          30

Appendix I     Objectives Scope and Methodology                                         31



Appendix II    Comments from the Internal Revenue Service                               33



Appendix III   Illustrative Examples of Dispute Resolutions                             35



Appendix IV    Examples of Analysis that Advanced Pricing and Mutual Agreement
               Program Could Do with Current Available Data                             38



Appendix V     GAO Contact and Staff Acknowledgments                                    41



Tables
               Table 1: Advanced Pricing and Mutual Agreement Program
                       (APMA) Staff and Cases by Team                                   13
               Table 2: Estimated Percent of Cases Initiated in United States
                       or Abroad Covering Different Tax Issues                          27
               Table 3: Estimated Percent of Cases with Tax Issues, Given
                       the Outcomes Correlative Relief (CR) and Withdraw
                       (WD) or Other                                                    27
               Table 4: Confidence Intervals at 95% for Total Tax Issue
                       Categories of Sample of MAP Case Files                           32
               Table 5: Confidence Intervals at 95% for Total Tax Issue
                       Categories of Sample of MAP Case Files                           32


               Page i                                           GAO-19-81 Tax Administration
          Table 6: Full Relief Provided When the U.S. Tax Authority
                  Adjusts Transfer Price of Sale from U.S. Parent to
                  its Foreign Subsidiary                                          36
          Table 7: Full Relief Provided when a Foreign Tax Authority
                  Adjusts the Income Share Allocated to U.S.-Owned
                  Foreign Subsidiary                                              37

Figures
          Figure 1: IRS United States Competent Authority (USCA)
                   Mutual Agreement Procedure (MAP) Process                        6
          Figure 2: Number of Resolved MAP Cases by Selected
                   Country that Made an Adjustment, 2013-2017                     18
          Figure 3: Average Time in Months to Complete MAP Cases by
                   Selected Country, 2013-2017                                    19
          Figure 4: Share of MAP Cases Partially Resolved by the
                   United States, 2014-2017                                       21
          Figure 5: Share of MAP Cases Resolved Entirely by the
                   United States, 2014-2017                                       22
          Figure 6: Estimated Percentage of Types of Tax Issues for All
                   Cases Based on Our Sample of MAP Cases Resolved
                   between 2015 and 2017.                                         25
          Figure 7: Percentage of Types of Transactions Covered by
                   Advanced Pricing Agreements in 2014                            26
          Figure 8: Share of MAP Cases Assigned an Economist by
                   Country, 2013-2017                                             39
          Figure 9: Share of MAP Cases with an Economist and Average
                   Processing Time, 2013 - 2017                                   40




          Page ii                                         GAO-19-81 Tax Administration
Abbreviations

APA               Advance Pricing Agreement
AMPA              Advance Pricing and Mutual Agreement Program
IRS               Internal Revenue Service
MA                mutual agreement procedure
MNC               multinational corporations
OECD              Organisation for Economic Co-operation
                  and Development
TJCA              The Tax Cuts and Jobs Act of 2017
USCA              United States Competent Authority




This is a work of the U.S. government and is not subject to copyright protection in the
United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.




Page iii                                                     GAO-19-81 Tax Administration
                       Letter




441 G St. N.W.
Washington, DC 20548




                       March 13, 2019

                       The Honorable Charles E. Grassley
                       Chairman
                       Committee on Finance
                       United States Senate


                       Dear Mr. Chairman:

                       As countries have become more globally interconnected, multinational
                       corporations (MNC) are relying more on tax planning strategies that take
                       advantage of differences among countries’ corporate tax systems to
                       reduce their overall tax liabilities. These strategies have led to concerns
                       about the erosion of countries’ corporate tax bases through the shifting of
                       profits from one jurisdiction to another. In addition, globalization can
                       complicate tax administration by resulting in disputes about the correct
                       tax liability in different countries. U.S. MNC activity can result in audits
                       conducted by the countries in which they are operating where U.S. MNCs
                       disagree with the adjustment made to their taxable income.

                       In 2015, the Organisation for Economic Co-operation and Development
                       (OECD) released a report with 15 action items addressing a variety of
                       issues related to tax base erosion and profit shifting. In 2017, we reported
                       on two of these actions: (1) revisions of the transfer pricing guidelines and
                       new transfer pricing documentation; and (2) country-by-country
                       reporting. 1 The OECD report also included an action item addressing
                       ways to improve mechanisms for resolving international tax disputes.

                       These disputed adjustments can potentially lead to double taxation of a
                       U.S. MNC’s income. These disputes can be resolved through the mutual
                       agreement procedure (MAP). MAP is administered through the Advance
                       Pricing and Mutual Agreement Program (APMA) in the office of the U.S.
                       Competent Authority (USCA) within the Internal Revenue Service (IRS).
                       The designated USCA is the Deputy Commissioner of the Large Business
                       and International Division of IRS.


                       1
                        GAO, International Taxation: Information on the Potential Impact on IRS and U.S.
                       Multinationals of Revised International Guidance on Transfer Pricing, GAO-17-103
                       (Washington, D.C.: Jan. 27, 2017).




                       Page 1                                                     GAO-19-81 Tax Administration
             You asked us to review how the United States is administering the
             process for resolving international tax disputes. In this report, we (1)
             describe the MAP dispute resolution process for U.S. MNCs, (2) assess
             the information IRS provides to taxpayers about the MAP process, and
             (3) assess to what extent IRS evaluates management of dispute
             resolution cases.

             To describe the dispute resolution process, we reviewed documents and
             interviewed officials in IRS’s USCA, the office responsible for
             administering the MAP process. To assess the information IRS provides
             taxpayers, we reviewed USCA guidance on how the process works and
             interviewed USCA officials on how they communicate with taxpayers. To
             assess how IRS evaluates its administration of dispute resolution cases,
             we compared USCA’s processes with standards for internal controls and
             characteristics of a good tax system: efficiency, equity, and
             administrability. 2 Specifically, we interviewed USCA officials on their
             process for ensuring efficient management. We also reviewed MAP case
             data, including analyzing both the full inventory management database of
             tracked dispute cases as well as a generalizable random sample of
             dispute resolution case files. For more information on our methodology,
             see appendix I.

             We conducted this performance audit from April 2017 to March 2019 in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             U.S. taxpayers who earn income abroad may be subject to U.S. taxes on
Background   that income. Firms incorporated in the United States can earn income
             from their own foreign activities or through their ownership of foreign
             subsidiaries. In such cases, income is subject to tax in both the country




             2
              GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
             (Washington, D.C.: Sept. 10, 2014); and Understanding the Tax Reform Debate:
             Background, Criteria, and Questions, GAO-05-1009SP (Washington, D.C.: Sept. 1, 2005).




             Page 2                                                   GAO-19-81 Tax Administration
where it was earned and in the United States. In this report, we focus on
U.S. corporations with operations in foreign countries. 3

Countries have generally adopted one of two alternative approaches to
taxing corporations’ foreign income. Prior to the enactment of Public Law
115-97—commonly referred to by the President and many administrative
documents as the Tax Cuts and Jobs Act of 2017 (TCJA)—the U.S.
government taxed U.S. corporations largely on a worldwide basis,
meaning that the United States taxed both the domestic and foreign
earned income of corporations. 4 Most other countries, including most
OECD member countries, use a largely territorial approach that taxes
income earned within their borders, and exempts certain foreign-earned
income of their resident corporations from taxation.

However, under both a worldwide and a territorial system, income earned
by foreign entities from operations within a country is taxed by that
country. As such, the corporation or its subsidiary must file a tax return in
that country, and the country’s tax authority can audit the tax return and
adjust taxable income and taxes due.

Countries have adopted measures to limit the potential for double
taxation, which occurs when two or more countries levy taxes on the
same income due to differences in the tax jurisdictions and tax systems.
To avoid double taxation, countries—including the United States—that tax
on a worldwide basis provide a credit for foreign taxes paid that reduces
the MNC’s domestic tax liability. In addition, countries maintain tax
treaties with each other that cover a wide range of tax issues but have
two primary purposes: (1) avoiding double taxation, and (2) preventing tax
evasion.

Despite these efforts to limit disputes, a U.S. MNC may disagree with an
adjustment made to its taxable income. In such cases, an MNC can go
directly to the country’s tax authority to try to resolve the dispute.
According to tax experts we spoke with, if, however, a U.S. MNC views

3
 Individual taxpayers with income earned abroad may also be subject to taxes in the
country where the income was earned and the United States. See, GAO, Tax Policy:
Economic Benefits of Income Exclusion for U.S. Citizens Working Abroad Are Uncertain,
GAO-14-387 (May 20, 2014).
4
 To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the
budget for fiscal year 2018, Pub. L. No. 115-97, 131 Stat. 2054 (Dec. 22, 2017) (hereafter
the Tax Cuts and Jobs Act).




Page 3                                                         GAO-19-81 Tax Administration
                       this process as unlikely to be successful or if it was unsuccessful and
                       believes the adjustment would result in double taxation, the corporation
                       can ask USCA for assistance in resolving the dispute.

                       In the United States, the designated USCA is the commissioner of the
                       Large Business and International Division of the IRS. The USCA office is
                       made up of two groups: the Advance Pricing and Mutual Agreement
                       Program (APMA) and the Treaty Assistance and Interpretation Team.
                       According to USCA officials, most disputes involving U.S. MNCs—the
                       focus of this report—are resolved through APMA.

                       TJCA significantly changed the way in which the United States taxes
                       MNC’s income but some experts have pointed out that the law is unlikely
                       to end profit shifting. The Congressional Budget Office estimated in April
                       2018 that TCJA would reduce profit shifting by about $65 billion per year
                       out of an estimated $300 billion of profit shifting per year prior to the act.
                       For U.S. corporations earning income directly through foreign
                       subsidiaries, the act moved the United States from a system that
                       generally taxed worldwide income and provided a credit for taxes paid
                       abroad to a system that generally does not tax foreign-sourced income.
                       However, the new ‘territorial’ system created by the act included a
                       number of provisions designed to protect the United States’ corporate tax
                       base by taxing some foreign income. It included (1) a lower worldwide tax
                       on global intangible low-taxed income, and (2) a corresponding tax on
                       intangible income earned abroad based on assets in the United States
                       (foreign-derived intangible income). The act also added a corporate tax
                       base erosion and antiabuse tax. It is not clear how these provisions will
                       affect corporations’ allocation of profits and business activity.


                       The process of resolving a dispute through MAP usually begins when a
MAP Has Multiple       U.S. MNC requests assistance from USCA to resolve disputes over an
Stages and Potential   adjustment in either its foreign-filed or its U.S. tax return. According to
                       IRS, the number of active MAP cases, as of October 2017, was 686 and
Resolution Paths       covered $26 billion of income subject to potential double taxation. 5 It
                       should be noted that a single U.S. taxpayer can be involved in multiple
                       MAP cases because disputes are resolved bi-laterally. For example, if a
                       U.S. MNC had a dispute involving the allocation of overhead costs across

                       5
                        These data from IRS’s APMA office represent the office’s inventory as of October, 25,
                       2017. This snapshot differs from OECD’s MAP statistics which provide statistics over the
                       entire year.




                       Page 4                                                      GAO-19-81 Tax Administration
multiple subsidiaries in different countries, then there would be separate
dispute cases for each country involved. According to IRS data, the
number of MAP cases filed each year has been growing, more than
doubling in 5 years from 100 in 2010 to 286 in 2014.

As noted earlier, when a U.S. MNC disputes a foreign tax authority’s
adjustment to a tax return, the U.S. MNC can try to resolve the issue
through the appeals process within the taxing jurisdiction. However,
according to tax experts we spoke with, if the U.S. MNC is unsuccessful
or if the U.S. MNC believes the local appeal will be less successful than
the MAP process, it can request assistance from USCA.

Once a taxpayer has requested assistance through MAP, USCA conducts
an initial review to determine if it will accept the request. For example,
USCA analysts would ensure that the request involves potential double
taxation and that the foreign country was a treaty partner.

If USCA accepts the MAP request for assistance, it reviews the technical
facts of the dispute and prepares its position prior to negotiating on a
resolution with the foreign competent authority. When IRS, rather than the
foreign tax authority, initiates the adjustment, USCA will discuss the facts
of the case with the IRS examiner who proposed the adjustment, but
determines on its own how much of the adjustment is justified. In the case
of foreign-initiated adjustments, USCA will contact the foreign competent
authority while developing its position to provide updates and obtain any
needed information. According to USCA officials, based on its review, the
USCA determines whether it considers the adjustment valid and the
amount of the adjustment that should be withdrawn by the initiating tax
authority, and what amount of relief USCA may provide. USCA can also
unilaterally decide to fully withdraw the IRS adjustment or provide full
correlative relief for a foreign-initiated adjustment that USCA considers
valid.

USCA resolves disputes brought to it by MNCs according to MAP
specified in the tax treaties. Under the treaties, international tax disputes
that may result in double taxation can be resolved in the following five
ways:

•   The country that initiated the adjustment to taxable income can fully
    withdraw the adjustment, leaving the taxpayer’s reportable taxable
    income unchanged.




Page 5                                              GAO-19-81 Tax Administration
•   USCA can provide correlative relief to the MNC. This relief usually
    takes the form of a corresponding adjustment, which relieves double
    taxation caused by the other country’s adjustment.
•   USCA and the foreign country can agree to a combination of
    withdrawing some of the adjustment to taxable income and providing
    relief for the remaining adjustment to provide full relief of double
    taxation to the taxpayer.
•   USCA and the foreign country can agree on some combination of
    withdrawal and relief that results in partial relief to the taxpayer.
•   No relief from adjustment. 6

Figure 1 provides an overview of the basic process of a MAP request for
assistance. Appendix III provides illustrative examples of dispute
resolution cases and resolutions.

Figure 1: IRS United States Competent Authority (USCA) Mutual Agreement
Procedure (MAP) Process




Once USCA has determined its position, it begins negotiating with the
foreign competent authority to resolve the dispute. These cases can take
several years to resolve with some taking much longer than the average,
particularly if there is a fundamental disagreement. For example, USCA’s

6
 In addition to the five ways USCA resolves a MAP case; at any point the taxpayer can
also withdraw its request for USCA assistance, which ends the case without a resolution
through USCA.




Page 6                                                     GAO-19-81 Tax Administration
APMA inventory data from 2013 to 2017 indicate the average processing
time was around 2 years, but cases ranged from as little as a few months
to 5 years to resolve, with a few cases taking even longer. In addition, the
inventory data show that disputes are generally over taxable income from
prior years. For example, a MAP case resolved in 2017 could have been
filed in 2008 for a dispute over 2005 taxable income. However, cases
may be shorter when the tax treaties include provisions for binding
arbitration. The United States has treaties with four counties that include
provisions for binding arbitration. If the two countries are unable to
resolve the dispute within 2 years, the taxpayer can request that the case
go to arbitration for a decision. 7

Throughout the entire process, the taxpayer has a right to withdraw the
request and accept the tax authority’s adjustment which may entail
double taxation. According to tax experts that we interviewed, if the
adjustment is small, a taxpayer may prefer to accept the double taxation
rather than incur the cost of going through the MAP process. These costs
can include direct costs of retaining tax advisors as well as the indirect
costs of listing the amount of funds that are in dispute on their financial
statement as an unresolved tax issue. The taxpayer can also refuse the
negotiated or arbitrated resolution and appeal the case to the IRS office
of appeals or foreign tax authority.




7
 The four countries with binding arbitration provisions in treaties with the United States are
Belgium, Canada, Germany, and France.




Page 7                                                         GAO-19-81 Tax Administration
Available Information
about MAP is Limited
and Highly Technical
USCA Provides             USCA provides information about the MAP process through an IRS web
Information Needed for    page on competent authority assistance. 8 The webpage includes contact
Requesting MAP            information for USCA offices and a link to a document that describes the
                          process for requesting assistance. The document is in the form of a
Assistance, but the       Revenue Procedure—an official statement of a procedure based on the
Information has Limited   Internal Revenue Code, related statutes, tax treaties, and regulations.
Accessibility             Our analysis of the information on the website found a number of issues
                          that limit its accessibility:

                          •   The website does not include an overview or high-level description of
                              the MAP process.
                          •   The website lacked elements such as frequently asked questions or
                              fact sheets that IRS has developed for similar processes that help
                              promote understanding of complex tax issues. 9
                          •   The website does not explain in clear language what constitutes a tax
                              dispute eligible for the MAP resolution process. Other IRS websites
                              provide more detailed information for other issues relevant to U.S.
                              MNCs. For example, the IRS website for country-by-country reporting
                              provides a detailed page explaining the new reporting guidance with
                              multiple links for additional guidance. 10
                          •   In addition, USCA’s guidance for requesting MAP assistance is an 87-
                              page revenue procedure. While this document is complete, it is highly
                              technical and may not be easily understood by taxpayers seeking
                              relief from double taxation.

                          8
                           Internal Revenue Service, Competent Authority Assistance, International Taxpayers,
                          accessed on November 8, 2018, https://www.irs.gov/individuals/international-
                          taxpayers/competent-authority-assistance.
                          9
                           See, for example, Internal Revenue Service, Appeals is an Independent Organization,
                          Compliance, accessed on November 7, 2018,
                          https://www.irs.gov/compliance/appeals/appeals-an-independent-organization.
                          10
                            Internal Revenue Service, Country-by-Country Reporting, International Businesses,
                          accessed on November 6, 2018, https://www.irs.gov/businesses/international-
                          businesses/country-by-country-reporting.




                          Page 8                                                     GAO-19-81 Tax Administration
IRS requires information for taxpayers to be clear and accessible. IRS’s
Taxpayer Bill of Rights states that taxpayers have the right to clear
explanations of tax laws and IRS procedures. 11 In addition, the federal
internal control standards, the Plain Writing Act of 2010, and Office of
Management and Budget plain writing guidance state that agencies
should, for example, communicate the necessary quality information
externally. 12 Moreover, accessibility is consistent with the criteria we have
previously identified for a good tax system. 13 IRS’s Strategic Plan for
Fiscal Years 2018-2022 notes that the agency faces a business
environment that is becoming more global, dynamic, and digital, further
underscoring the importance of taxpayers having accessible, plain
language guidance on MAP. 14

The Organisation for Economic Co-operation and Development (OECD)
also assessed the accessibility of USCA’s guidance and found that it met
OECD’s minimum standards. As part of its base erosion and profit-shifting
project, the OECD has been reviewing countries’ administrations of the
mutual agreement processes. In its review of the United States’ process,
the OECD concluded that while U.S. MAP guidance is comprehensive
and available, and fully met the OECD’s minimum standards, some
further clarity could be provided.

The OECD review offered examples of how other countries provide
taxpayers with overview information they can use before accessing more
detailed technical guidance. For example, Canada publishes an annual
MAP Program Report on its website that includes background information
on its process, as well as general information on the steps in the process
and high-level information on timeframes. Singapore’s MAP web page
includes basic information on the MAP process, an example of a case
that would be suitable for MAP, and a link for users to provide feedback
on the usefulness of the information.

11
  Internal Revenue Service. Publication 1, Your Rights As A Taxpayer, (Washington, D.C.:
September 2017).
12
  GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: Sept. 10, 2014); Pub. L. No. 111-274, 124 Stat. 2861 (2010); and
Office of Management and Budget. Final Guidance on Implementing the Plain Writing Act
of 2010, M-11-15, (Washington, D.C: April 13, 2011).
13
  GAO, Understanding the Tax Reform Debate: Background, Criteria, and Questions,
GAO-05-1009SP (Washington, D.C.: Sept. 1, 2005).
14
 Internal Revenue Service, Strategic Plan, FY2018-2022 (Washington, D.C.: April 2018).




Page 9                                                     GAO-19-81 Tax Administration
                         USCA officials said that they have not improved the information provided
                         on their website because they believe the current guidance to be
                         sufficient. However, USCA officials told us that they are engaged in some
                         efforts that may improve the information they provide to taxpayers. USCA
                         officials stated that USCA is close to finalizing a “practice unit” explaining
                         the competent authority process. According to USCA officials, this unit
                         uses plain language to walk taxpayers step by step through MAP and the
                         competent authority process. The unit also highlights the roles and
                         responsibilities of all the stakeholders in the process, including the
                         taxpayers. USCA officials said they intend to make the practice unit
                         available on USCA’s public website and the United States’ OECD MAP
                         Profile. 15

                         APMA officials also said they expect that the additional information on the
                         requirements of MAP and Revenue Procedure 2015-40 will be useful to
                         those unfamiliar with the processes. USCA officials did not provide a date
                         for when this practice unit would be completed.

                         Providing taxpayers with a clear overview and accessible guidance on the
                         MAP process would help ensure that taxpayers who might benefit from
                         entering the MAP process are aware of the process, know how to
                         navigate it, and understand the general time frames for relief. Providing
                         information that helps facilitate this process could help reduce taxpayer
                         burden.


USCA Does Not            USCA may contact taxpayers about their cases for various reasons.
Document Contacts with   Officials in the APMA office stated that they send acknowledgement
                         letters when the MAP request is accepted, and routinely gather additional
Taxpayers
                         information from taxpayers to fully develop a MAP case. They said that an
                         analyst generally will communicate with a taxpayer before and after
                         APMA has substantive discussions with its foreign counterparts regarding
                         the taxpayer’s case. While officials stated they provide regular contact,
                         they do not have a process to systematically record or track these
                         contacts, other than in the case file.

                         Regular contact with taxpayers may help make the process more
                         transparent and help ensure that they are informed about their cases.

                         15
                           Internal Revenue Service, Practice Units, accessed on November 6, 2018,
                         http://www.irs.gov/businesses/corporations/practice-units.




                         Page 10                                                   GAO-19-81 Tax Administration
One of the criteria we have previously identified for a good tax system is
transparency. 16 A transparent tax system reduces uncertainty for
taxpayers, allowing them to better plan their decisions about employment
and investment.

According to IRS officials, APMA provides general guidance on when a
taxpayer should be notified of developments in the case or its status. 17
APMA officials stated that contact will vary depending on the facts and
circumstances of the case such as its complexity and frequency of
communications with the foreign competent authority. However, the
guidance is focused on taxpayer expectations and does not address any
requirements of officials to track or record contacts.

Contacts with taxpayers could affect perceptions of the transparency and
fairness of the MAP process. Tracking and recording contact with
taxpayers would help provide APMA with assurance that taxpayers are
being kept aware of the status of their MAP case in a timely manner.
Monitoring such information would help APMA to evaluate the
transparency and fairness of its MAP administration. It would also help
assure APMA there is consistency in contacting taxpayers.




16
  GAO, Understanding the Tax Reform Debate: Background, Criteria, and Questions,
GAO-05-1009SP (Washington, D.C.: Sept. 1, 2005)
17
 This guidance is contained in Rev. Proc. 2015-40.




Page 11                                                 GAO-19-81 Tax Administration
USCA Does Not
Track Key Data nor
Use Existing Data to
Assess Management
of MAP Cases
USCA Does Not Track        APMA maintains an inventory database that tracks some information on
Hours Worked or Key        MAP cases. These data include how many months it took to resolve the
                           case, the analyst assigned to the case, and whether an economist was
Milestones for MAP Cases
                           assigned. According to APMA officials, each MAP case is assigned an
                           analyst and, for complex cases, an economist. APMA groups analysts
                           into teams that work on MAP cases from different geographic regions.
                           Three teams consist of economists that are assigned to cases managed
                           by other teams. APMA data on how staff are deployed are shown in table
                           1. 18




                           18
                             APMA reorganized in the fall of 2018 and is now organized into three groups that
                           contain two teams each with each team containing both economists and analysts.
                           According to IRS, those groups still focus on different geographic regions. The
                           reorganization was designed to facilitate staffing across cases, teams and regions.




                           Page 12                                                     GAO-19-81 Tax Administration
                          Table 1: Advanced Pricing and Mutual Agreement Program (APMA) Staff and Cases
                          by Team

                              APMA
                              Team                  2014                        2015                   2016                2017
                                               Staff        Cases          Staff        Cases      Staff      Cases    Staff      Cases
                              Team 2               6           n.a.            8           n.a.       7         n.a.      5         n.a.
                              Team 3               7             33           10             82      10          93       8         116
                              Team 4               7             18            9             43       7          12       8           7
                              Team 5a              7             63            9             79      10          87       9          63
                              Team 7a             10           355             9           280        9         272       7         210
                              Team 8              10             72            9             73       9          63       7          52
                                      a
                              Team 9               8           127             9             89       6         143       7         201
                              Team 10              9             14            9             29       8          17       9          13
                              Team 11              7           n.a.            7           n.a.       9         n.a.      6         n.a.
                              Team 12              9           n.a.            7           n.a.       7         n.a.      6         n.a.
                              Total               80           682            86           675       82         687      72         662
                          Source: GAO presentation of Internal Revenue Service data.| GAO-19-81.

                          Notes: Data are as of December 31 each year. Staff counts do not include managers. APMA does not
                          have an analyst “Team 1” or “Team 6.”
                          n.a.=not applicable. Teams 2, 11, and 12, include only economists. Number of cases is not reported
                          to avoid double counting because economists are assigned as needed to cases in other teams.
                          a
                           Teams 5, 7, and 9 cover cases involving India that counts tax issues covering multiple years as
                          separate cases in each year which leads to a greater number of cases for these teams.




Lack of Data on Complex   While these data provide some information on workload, they do not
Cases                     provide information on how many hours or staff days are associated with
                          a particular case. This information would be useful to know because it
                          could provide insight about the resources needed for different cases
                          based on differences in complexity and other factors. Standards for
                          internal control state that management should establish and operate
                          monitoring activities that can be used to evaluate results and ensure that
                          objectives are met with minimum wasted resources. However, according
                          to APMA officials, their tracking system is not set up to track hours or staff
                          days spent on each case.

                          Instead, according to APMA officials, their staffing process accounts for
                          differences in complexity in other ways. Officials explained that when
                          APMA receives a MAP request, it ranks the request according to
                          complexity using a scale that runs from 1 to 5. The more complex cases,



                          Page 13                                                                          GAO-19-81 Tax Administration
                             those ranked 3 or higher, are assigned an economist which can increase
                             the cost of working the more complex cases.

Lack of Data on Resources    USCA’s existing inventory data are insufficient to accurately measure the
Expended                     resources spent across MAP cases because APMA’s inventory
                             management system does not allow for recording hours or staff days
                             spent on each case. Specifically, while a case may take several years to
                             resolve, an analyst may not be actively working the case. For example,
                             two MAP cases could take the same number of months to process, but in
                             one case, the analyst may have spent many hours reviewing the case,
                             while in the other case, the analyst was waiting for a response from the
                             foreign competent authority and not actively working on the case. The
                             actual time spent on the cases by these two analysts would therefore be
                             different though the processing time would be the same. Measuring hours
                             spent on each case could help APMA know if it needs to adjust its staffing
                             to increase the efficiency of its resource allocation process. However,
                             without collecting and analyzing trends and variations in hours spent per
                             case, APMA is unable to assess whether it is resolving MAP cases and
                             using staff resources efficiently.

Lack of Information on Key   APMA tracks some data on the status of cases in progress such as the
Milestones and Progress      date when the case was submitted, the time to date it has been in
                             inventory, and the current status of the case. 19 The current status of
                             cases in progress is identified in the inventory database as being in
                             development, a position paper written, in negotiation, reached a tentative
                             agreement, and reached mutual agreement (formal exchange of
                             resolution papers). However, APMA does not track progress toward these
                             key milestones that could help it manage cases, such as the time a case
                             spends in each status or the date the case moved from one status to the
                             next.

                             APMA also lacks data on certain milestones that may help it better
                             manage the MAP process. It does not have a system for tracking whether
                             a prefiling meeting was held for a case. USCA offers prefiling meetings
                             for taxpayers considering requesting assistance, which provide
                             information on what the taxpayer can expect in a MAP case. Taxpayers
                             may seek prefiling meetings to (1) learn more about the working
                             relationship with the foreign competent authority, and (2) learn what
                             information may be helpful to include in the request. According to USCA,

                             19
                              Other information includes taxpayer identifiers, and who is working on the case.




                             Page 14                                                     GAO-19-81 Tax Administration
                                it has found that these meetings facilitate the process and considers them
                                helpful. However, USCA would have increased assurance that the
                                meetings are effective if it collected data and analyzed cases with and
                                without prefiling meetings.

                                In addition, APMA does not retain any case-in-progress data when the
                                case is resolved, nor does it collect and maintain information in its
                                inventory database on how agreements are implemented. In its review of
                                MAP processes across countries, OECD recommended that USCA
                                expand its guidance by including information on how MAP agreements
                                are implemented. This guidance would be in the form of steps to be taken
                                and the timing of the steps. APMA does not record these steps in its
                                inventory database. APMA would be better able to track a case through
                                completion and assess its effectiveness if it collected and maintained this
                                information.

                                Standards for internal control state that management should establish
                                and operate monitoring activities to evaluate program results. However,
                                APMA does not have adequate systems in place to monitor its activities,
                                such as a system to record time spent in each status (or stage) of the
                                process. Tracking key stages in the MAP process would better position
                                APMA to evaluate its management of MAP cases. For example, if APMA
                                observes that some cases are taking longer to resolve, it could use
                                information on time spent in different stages of the process to identify the
                                source of the slow down and take corrective action.

Lack of Information on Dollar   APMA also tracks the type of outcome resulting from resolution of a MAP
Amounts                         case in its inventory database, but does not record the dollar amount
                                involved in the resolution of the case in the database. Such information
                                could be valuable in identifying systemic issues in program operations or
                                potential policy issues. As discussed earlier, MAP cases are resolved by
                                either the initiating country withdrawing the adjustment, the relevant treaty
                                partner providing relief to the taxpayer to offset the double taxation, or a
                                combination of the two.

                                APMA stopped recording actual dollar amounts in 2014 when it changed
                                to recording case outcome categories rather than amounts withdrawn and
                                relieved.

                                Standards for internal control state that management should use quality
                                information to achieve the entity’s objectives. According to the standard,
                                management should design a process that uses the entity’s objectives
                                and related risks to identify the information requirements needed to


                                Page 15                                            GAO-19-81 Tax Administration
                           achieve the objectives and address risks. Recording the actual amount of
                           the outcome and pairing it with an accurate and consistent adjustment
                           would allow APMA to conduct analyses to determine if certain
                           characteristics of cases affect the relative contribution to the resolution
                           between the United States and the relevant treaty partner.


APMA Does Not Have         In our review of a generalizable sample of MAP case files we found a
Controls to Ensure the     number of inconsistencies between the amount of adjustment recorded in
                           APMA’s inventory database, the amount recorded in the original MAP
Quality of its Case Data
                           request, and the amount recorded in the resolution letter provided to
                           taxpayers and the foreign competent authority. We also found
                           inconsistencies between the request letter and the resolution letter
                           amounts. On the basis of our sample, we estimate that about 30 percent
                           of the entries in the inventory database had these types of discrepancies.

                           The cause of some of these discrepancies was relatively easy to identify
                           and correct, such as transcription errors, which could have been detected
                           if APMA had a more robust inventory management system in place. Other
                           inconsistencies in the data were more difficult to resolve. According to
                           IRS officials, some discrepancies could be explained by changes in
                           exchange rates over time. However other inconsistencies could be not be
                           as easily explained.

                           These inconsistencies exist because APMA does not have controls in
                           place to systematically and routinely evaluate the quality of the data in its
                           inventory of cases. As a result, the accuracy of program measures that
                           USCA might develop based on these data may be uncertain.

                           Having controls in place to ensure the accuracy of data in the inventory
                           database would also help APMA meet OECD’s minimum standards. The
                           OECD has called for countries to provide MAP case statistics by country
                           and published these statistics for the first time in 2018. 20 According to
                           APMA officials, APMA is currently working on implementing an upgraded
                           inventory management system that should help APMA meet this goal.
                           Development and full implementation of this project has been underway
                           for 4 years.



                           20
                             These OECD published statistics are now the platform through which USCA provides
                           public statistics on its MAP process.




                           Page 16                                                  GAO-19-81 Tax Administration
APMA Does Not Analyze         APMA’s inventory data-base includes data on both pending and resolved
Currently Available Data to   MAP cases that can help management monitor program operations and
                              potentially identify areas to improve the management of MAP cases.
Inform Its Operations and
                              However, APMA does not systematically analyze data to identify areas for
Management Decisions          improvement. For example, analysis of trends and comparisons of certain
                              case characteristics—such as the country initiating the adjustment, the
                              elapsed time on the case, whether an economist was assigned to the
                              case, and the negotiated outcome—can help to identify how these
                              characteristics may be related. According to APMA officials they do not
                              undertake this kind of data analysis because they use the data as needed
                              to manage current resources and to achieve their primary goal of
                              satisfying the OECD’s minimum standards. These minimum standards
                              include such goals as countries ensuring that adequate resources are
                              provided to the MAP function and ensuring that both competent
                              authorities should be made aware of MAP requests and given an
                              opportunity to share their views on whether the request should be
                              accepted.

                              According to federal internal control standards, management should
                              design information systems to provide information to meet the entity’s
                              objectives and respond to risks. Information and analysis that helps
                              APMA understand changes in international environment and complexity
                              of U.S. MNCs would better enable it to identify future resource needs by
                              evaluating trends in case characteristics.

                              In the absence of quantifiable analysis conducted by APMA, we used
                              information from its existing inventory data to illustrate the types of
                              analysis that may be possible. For example, figure 2 shows that the
                              volume of cases can vary greatly by country over time. The figure shows
                              that the number of cases resulting from an adjustment by IRS ranged
                              from a low of 22 in 2015 to high of 85 in 2017. Conducting similar analysis
                              of trends in volume may help APMA better plan for allocating its limited
                              resources to different teams in anticipation of increased case volume. In
                              addition, because APMA allocates staff across teams that focus on
                              particular countries, tracking trends in case load by country could help
                              USCA prepare to anticipate spikes in cases and allocate resources more
                              effectively across country teams. By conducting regular trend analyses,
                              APMA could also identify areas for further analysis to determine what
                              may be driving variations in case load by country.




                              Page 17                                           GAO-19-81 Tax Administration
Figure 2: Number of Resolved MAP Cases by Selected Country that Made an
Adjustment, 2013-2017




Similarly, figure 3 shows our analysis of the average time to resolve a
case. Average case time ranged between 15 and 40 months, with the
average case time exceeding the OECD-recommended 24-month period
for a number of countries and years. By conducting similar analysis of the
trends and differences in processing time across MAP cases, APMA




Page 18                                             GAO-19-81 Tax Administration
would be better able to identify areas meriting additional review for ways
to improve timeliness.

Figure 3: Average Time in Months to Complete MAP Cases by Selected Country,
2013-2017




Page 19                                             GAO-19-81 Tax Administration
We also used inventory data to analyze outcomes in terms of the
determinations reached through MAP negotiations. One analysis included
an examination of the share of cases in which the United States provided
some relief to the taxpayer. As can be seen in figure 4, most foreign
cases in most years resulted in relief being shared between the two
countries involved in a dispute. As shown in figure 4, in 2017,
approximately two-thirds of all foreign cases were resolved with both
countries providing some relief compared to less than 10 percent of U.S.
cases. 21




21
  These percentages track cases where both countries share relief and do not account for
cases where the foreign country resolved the case entirely by fully withdrawing their
adjustment or providing all the relief for a U.S.-initiated adjustment.




Page 20                                                    GAO-19-81 Tax Administration
Figure 4: Share of MAP Cases Partially Resolved by the United States, 2014-2017




However, as shown in figure 5, USCA in most years fully withdrew a large
percentage of adjustments made by IRS. In 2017, 74 percent of IRS
adjustments were withdrawn. The data show that U.S.-initiated cases
were more often resolved entirely by the United States than with the
foreign country providing some of the relief.




Page 21                                                GAO-19-81 Tax Administration
Figure 5: Share of MAP Cases Resolved Entirely by the United States, 2014-2017




However, these data on case resolutions need to be interpreted with
caution. For example, as pointed out by IRS officials, a measure like the
percent withdrawn may be misinterpreted if it concerns a small number of
large MNCs with operations in many countries, and the adjustments are
small unless this information is provided as context. Nonetheless, the
case resolution data can be useful for guiding further analysis by helping
to identify areas that would merit further analysis of the reasons for
withdrawing cases or the reasons IRS examiners are making adjustments
that are not upheld by USCA. Analyzing trends in outcomes would help to
ensure that APMA is not missing opportunities to protect the U.S.
corporate tax base and that IRS examiners are cognizant of tax treaty



Page 22                                               GAO-19-81 Tax Administration
                             treatment of foreign source income of U.S. MNCs. Additional examples of
                             MAP case data analysis are provided in appendix IV.

                             While APMA must work all MAP cases, developing quality data on MAP
                             cases would help to ensure effective management of the program.
                             Analyzing trends in case data could help identify and manage evolving
                             demands and priorities—such as the challenges present in a changing
                             global tax environment. According to federal internal control standards, as
                             a part of management controls, management should design information
                             systems to obtain and process information to meet operational needs.

                             Because APMA cannot alter its workload, it is all the more important to
                             effectively manage staff and time. Reliable information systems are
                             essential for effective management. Without assessing APMAs’ current
                             and past performance, APMA may be less able to identify areas for
                             improvement. Conducting analysis and improving the quality of data could
                             help inform APMA’s allocation of resources and inform other parts of the
                             agency concerning international tax issues. For example, IRS exams may
                             be better able to judge the appropriateness of its tax adjustments when it
                             is informed about how USCA has viewed similar adjustments governed
                             by tax treaties.


APMA Does Not Record         The APMA inventory database contains select characteristics of resolved
the Disputed Tax Issues in   cases, such as the time it took to resolve the case and the country that
                             initiated the adjustment in dispute. However, it does not contain
Its Inventory Database,
                             information on the tax issue that was in dispute. Without tracking the tax
Which Limits the             issue in dispute, APMA is unable to analyze trends in tax issues which
Usefulness of Data           could be used to determine if there are systemic issues that could be
                             solved through means such as changes in IRS regulations, treaty, or
                             statute.

                             USCA officials told us that there are additional costs to tracking tax issues
                             and that defining the type of tax issue involved in complex international
                             tax cases could be difficult. However, IRS tracks issues in other similar
                             areas. For example, IRS’s Office of Appeals, which handles a wide range
                             of tax controversies covering both international and domestic issues,
                             tracks the tax issue in dispute.

                             Furthermore, APMA includes categories of tax transactions in its annual
                             statutory reports. The categories are used in Advanced Pricing
                             Agreements (APA) to distinguish between a U.S. entity and non-U.S.
                             entity, and to determine whether a transaction covered by an agreement


                             Page 23                                            GAO-19-81 Tax Administration
involved the sale of tangible property, use of intangible property or the
provision of services. APAs are agreements between IRS and MNCs on
how transactions among related entities of the MNC should be priced.
APAs can prevent potential disputes by having agreement on the
transaction prior to filing a tax return with IRS. These categories or
alternative categories that APMA has already developed could be added
to the inventory database to provide additional information on the tax
issue in dispute.

To illustrate how the additional information on tax issues can help inform
management decisions, we categorized the tax issues in our sample of
MAP cases using APA categories. 22 As shown in figures 6 and 7, we
compared the estimated percentage of certain tax issues in all MAP
cases between 2015 and 2017 with those in APA cases in 2014. We also
compared tax issues with other characteristics of the MAP cases. As
figure 6 shows, an estimated 37 percent of MAP cases involved disputes
over a tax adjustment related to services provided by a non-US entity
such as a foreign corporation. 23 Figure 6 also shows that disputes
concerning the provision of services (both U.S. and non-U.S.) are
estimated to account for 61 percent of cases, which far exceeded
disputes over the use of intangible property, at 17 percent or the sale of
tangible property at 15 percent. 24 Conducting similar reviews of this type
of information could help APMA better match its resources in terms of
experience with different types of tax issues. 25




22
  We used the narrative describing the tax issue in the taxpayer’s request letter as the
basis of the categorization.
23
  This estimate has a 95 percent confidence interval within +/- 10 percentage points. See
appendix I for full list of confidence intervals.
24
  This estimate has a 95 percent confidence interval within +/- 10 percentage points.
25
  For further examples of how this type of frequency analysis could be is useful for
administering the dispute resolution process, see appendix IV.




Page 24                                                       GAO-19-81 Tax Administration
Figure 6: Estimated Percentage of Types of Tax Issues for All Cases Based on Our
Sample of MAP Cases Resolved between 2015 and 2017.




Note: All estimates have 95% margins of error within +/- 11 percentage points.


We also compared tax issues identified in MAP cases with the
transactions covered in APAs. The results illustrate how tracking tax
issues could be useful for improving the administration of both programs.
For example, as shown in figure 7, 23 percent of APA transactions
covered sales of tangible property into the United States in 2014. 26 Our
categorization of MAP cases reported in figure 6 shows sales of tangible
property into the United States as a disputed issue in only an estimated 8
percent of those cases. 27 This difference in relative frequencies may
suggest a connection between the programs, as tax practitioners have

26
  For figures 6 and 7, we used 2015 through 2017 data for tax issue categories and 2014
data for the APA categories respectively. We chose to use the 2014 APA data to better
align the APA-covered transactions with our resolved MAP case data, which included
disputes covering 2014 taxable income.
27
  This estimate has a 95 percent confidence internal within +/- 9 percentage points. Sales
of tangible property from the United States were an issue exhibiting a similar percentage
of cases in APA and MAP cases.




Page 25                                                             GAO-19-81 Tax Administration
suggested increasing the use of APAs as a way of reducing international
tax disputes. However, some of the differences in percentages between
figure 6 and 7 could arise from differences in years covered and in
categorization of tax issues.

Figure 7: Percentage of Types of Transactions Covered by Advanced Pricing
Agreements in 2014




We also categorized the information to illustrate how tracking tax issues
and other characteristics, such as location and the outcomes of the
dispute resolution process could help with administration. 28 For example,
as shown in table 2, the tax issue with the largest estimated share of
foreign MAP cases (67 percent) involved the provision of services. 29 U.S.
MAP cases, in contrast, were spread more evenly across tax issues, with
no single tax category having an estimated share greater than 50 percent.
Conducting a similar review of this type of information could help APMA



28
  Our sample was not designed to provide precise estimates for all subgroups. Therefore
we were unable to distinguish statistically between finer tax categories and all outcomes.
29
 This estimate has a 95 percent confidence interval within +/- 15 percentage points.




Page 26                                                      GAO-19-81 Tax Administration
match its resource allocations in terms of staff experience with different
types of tax issues within its country-focused teams.

Table 2: Estimated Percent of Cases Initiated in United States or Abroad Covering
Different Tax Issues

                                                                               Location
 Tax Issue                                                              U.S.               Foreign
 Sale of Intangible Property                                              20                     14
 Use of Intangible Property                                               36                     10
 Provision of Service                                                     44                     67
 All other Types of Covered Transaction                                    0                     10
Source: GAO analysis of Internal Revenue Service data.| GAO-19-81.

Note: All estimates have 95% margin of errors less than +/- 19 percent.



Additionally, table 3 shows when we tracked outcomes of the dispute
resolution process, we found that an estimated 69 percent of cases
resolved by a combination of withdrawal and correlative relief involved the
provision of services. 30 For other outcomes, this tax issue of provision of
services is estimated to occur 49 percent of the time. 31 Further research
on how outcomes and tax issues may be related could also inform how
APMA trains and assigns staff.

Table 3: Estimated Percent of Cases with Tax Issues, Given the Outcomes
Correlative Relief (CR) and Withdraw (WD) or Other

                                                                          Outcome
 Tax Issue                                                           CR & WD      Other Outcomes
 Sale of Intangible Property                                              14                     16
 Use of Intangible Property                                               11                     24
 Provision of Service                                                     69                     49
 All other Types of Covered Transaction                                    5                     10
Source: GAO analysis of Internal Revenue Service data.| GAO-19-81.

Note: All estimates have 95% margin of errors less than +/- 17 percentage points.




30
  This estimate has a 95 percent confidence interval within +/- 16 percentage points.
31
  This estimate has a 95 percent confidence interval within +/- 16 percentage points.




Page 27                                                                 GAO-19-81 Tax Administration
              Other analyses could examine the tax issue and whether an economist
              was assigned or the average processing time. These statistics may help
              identify insights into complex cases. Undertaking similar reviews across
              tax issues may help identify areas for increased scrutiny to ensure
              effective administration.

              Federal internal controls standards state that as part of an effective
              internal control system, management should establish activities to monitor
              program performance. Reliable information on program operations
              requires the collection of quality data. Collecting key characteristics and
              conducting relevant analyses would help ensure effective internal control
              and could help improve USCA’s management of MAP cases.


              In a world with a growing number of international transactions, the United
Conclusions   States needs an efficient and effective dispute resolution process to
              ensure that it is protecting the U.S. taxpayer and the U.S. corporate tax
              base. The MAP processes adopted by countries—including the United
              States—in their tax treaties are in place to prevent double taxation and
              ensure the accurate application of treaty provisions.

              USCA plays a key role in resolving disputes over double taxation but the
              agency has weaknesses in its processes that hamper its efforts. First,
              USCA has not provided clear guidance to taxpayers on how the MAP
              process works. As a result, taxpayers may be unaware of the process
              and not fully understand what to expect when they undergo it.
              Furthermore, USCA does not record when and for what reason there is
              contact between the taxpayer and USCA, therefore making it difficult for
              USCA to ensure that taxpayers are informed about the progress of their
              case.

              Second, USCA does not track the hours that analysts spend on cases
              and the milestones of cases. As a result, USCA does not have a full
              understanding of the efficiency of the MAP process, including ways to
              improve it. It also does not have processes to ensure the quality of the
              data it collects, therefore cannot ensure accurate performance
              measurement. While APMA aims to meet the minimum standards of the
              OECD, it does not analyze the data to identify areas for improvement.

              Analyses of USCA’s data could more fully inform its management
              decisions. A number of potential analyses are available of how cases are
              resolved. By forgoing these types of analyses, USCA may be unaware of



              Page 28                                           GAO-19-81 Tax Administration
                      certain trends, possible explanations for them, or any need to adjust
                      guidance or resources to address these issues.

                      Finally, many of APMA’s tasks depend on factors beyond its control (for
                      example, the volume of taxpayer requests), but management of the
                      processes could benefit from the collection and analysis of well-defined
                      measures and quality data.


                      We are making the following eight recommendations to the IRS.
Recommendations for
Executive Action      The Commissioner of Internal Revenue should direct USCA to provide an
                      overview of the MAP process that is more accessible and transparent
                      than the Revenue Procedure. (Recommendation 1)

                      The Commissioner of Internal Revenue should direct USCA to ensure
                      that APMA staff record and track contact with taxpayers.
                      (Recommendation 2)

                      The Commissioner of Internal Revenue should direct USCA to ensure
                      that APMA staff record and track the hours they spend on MAP cases.
                      (Recommendation 3)

                      The Commissioner of Internal Revenue should direct USCA to ensure
                      that APMA identify and record the dates of key milestones throughout
                      MAP case resolutions. (Recommendation 4)

                      The Commissioner of Internal Revenue should direct USCA to ensure
                      that APMA puts procedures in place to review the quality of inventory
                      data. (Recommendation 5)

                      The Commissioner of Internal Revenue should direct USCA to ensure
                      that APMA records the dollar amounts of MAP case outcomes in its
                      database. (Recommendation 6)

                      The Commissioner of Internal Revenue should direct USCA to ensure
                      that APMA analyzes trends in case characteristics as part of routine
                      program management activities. (Recommendation 7)

                      The Commissioner of Internal Revenue should direct USCA to ensure
                      that APMA identify and record categories of the tax issue relevant in the
                      dispute. (Recommendation 8)



                      Page 29                                           GAO-19-81 Tax Administration
                  We provided a draft of this report to the Commissioner of Internal
Agency Comments   Revenue for review and comment. In its written comments, reprinted in
                  appendix II, IRS agreed with our eight recommendations and will provide
                  detailed corrective action plans in its 60-day letter response to Congress.
                  IRS also provided technical comments, which we incorporated where
                  appropriate.


                  As agreed with your office, unless you publicly announce the contents of
                  this report earlier, we plan no further distribution until 30 days from the
                  report date. At that time, we will send copies to the Secretary of the
                  Treasury, the Commissioner of Internal Revenue, and other interested
                  parties. In addition, the report will be available at no charge on the GAO
                  website at http://www.gao.gov.

                  If you or your staff have any questions about this report, please contact
                  me at (202) 512-9110 or mctiguej@gao.gov. Contact points for our
                  Offices of Congressional Relations and Public Affairs may be found on
                  the last page of this report. GAO staff who made key contributions to this
                  report are listed in appendix V.




                  Sincerely yours,
                  James R. McTigue, Jr.
                  Director
                  Strategic Issues




                  Page 30                                            GAO-19-81 Tax Administration
Appendix I: Objectives Scope and
              Appendix I: Objectives Scope and
              Methodology



Methodology

              As noted earlier, to assess the extent to which the Internal Revenue
              Service (IRS) evaluates management of dispute resolution cases, we
              interview IRS officials. Having determined that the Advanced Pricing
              Mutual Agreement Program (APMA) does not conduct analysis of mutual
              agreement procedure (MAP) case data, we used information from its
              existing inventory data to illustrate the types of analysis that may be
              possible. The inventory database APMA provided us contained all MAP
              cases that were closed from 2013 to 2017, as well as the current stock of
              open MAP cases. Because of a change in the method of recording the
              outcome variable between 2013 and 2014, we restricted our analysis of
              outcomes to 2014 to 2017.

              The inventory database did not include a variable for the tax issue in
              dispute. To illustrate the type of analysis that could be conducted if the
              tax issue were recorded we collected a sample of MAP case files. To
              estimate features such as tax issue and outcome for the inventory
              database, we selected a generalizable random sample of 84 cases that
              was proportionally allocated across four strata described in table 4. 1 The
              strata included wither the initiating country was U.S. or Non-U.S. and
              whether an Economist was involved. This sample was selected from the
              population frame that consists of all files from APMA 2013-2017 Resolved
              and 2017 Pending inventory for cases resolved in years 2015 to 2017.
              Overall, this sample was designed to produce 95 percent confidence
              intervals for percentage estimates that are within approximately +/- 10
              percentage points. The sample is not designed to provide estimates for
              other reporting groups at the same level of precision, and all margins of
              error are reported along with estimates.




              1
               Although 84 cases were randomly sampled from the population, two cases in strata 1 are
              not included in our data analysis as they were inadvertently left out of our data request
              due to a processing error unrelated to the attributes of the cases themselves. We
              therefore consider these two cases to be missing at random and treat the remaining 82
              cases as our random sample.




              Page 31                                                     GAO-19-81 Tax Administration
Appendix I: Objectives Scope and
Methodology




Table 4: Confidence Intervals at 95% for Total Tax Issue Categories of Sample of
MAP Case Files

 Strata                  Country                 Economist            Population Counts     Sample Size
 1                       U.S.                    Economist                           31              10
 2                       U.S.                    Economist                          108              20
 3                       Non-U.S.                No Economist                        42              10
 4                       Non-U.S.                No Economist                       324              44
 Total                                                                              505              84
Source: GAO analysis of Internal Revenue Service data.| GAO-19-81.




To create a tax issue variable, we reviewed the summary of competent
authority issues required by Rev.Proc. 2015-40 to be included in the MAP
request letter. 2 We then allocated the tax issue described in the narrative
to APMA’s advanced pricing agreement transaction categories. Some
case files included multiple tax issues, but these cases accounted for less
than 18 percent of the sample. The illustrations provided rely on the first
tax issue noted in the narrative. Table 5 provides the estimates and
margins of error for the categories.

Table 5: Confidence Intervals at 95% for Total Tax Issue Categories of Sample of
MAP Case Files

                                                                     Percent of     Lower        Upper
 Tax Issue                                                               Cases      Bound        Bound
 Sale of Tangible Property from the U.S.                                    7.1           2.6       15.0
 Sale of Tangible Property into the U.S.                                    7.7           2.9       15.7
 Use of Intangible Property by a U.S. Entity                                0.9           0.0        6.6
 Use of Intangible Property by a Non-U.S. Entity                           15.2           8.3       24.9
 Provision of Services by a U.S. Entity                                    23.9        15.2         34.6
 Provision of Services by a Non-U.S. Entity                                37.8        28.5         47.1
Source: GAO analysis of Internal Revenue Service data.| GAO-19-81.




2
 Earlier versions of United States Competent Authority revenue procedures had a similar
narrative requirement.




Page 32                                                                     GAO-19-81 Tax Administration
Appendix II: Comments from the Internal
              Appendix II: Comments from the Internal
              Revenue Service



Revenue Service




              Page 33                                   GAO-19-81 Tax Administration
Appendix II: Comments from the Internal
Revenue Service




Page 34                                   GAO-19-81 Tax Administration
Appendix III: Illustrative Examples of Dispute
               Appendix III: Illustrative Examples of Dispute
               Resolutions



Resolutions

               The following tables illustrate how a resolution can be reached in different
               types of disputes. Table 6 provides a hypothetical example of U.S.-
               initiated adjustment to a transfer price and a resolution that provides full
               relief from double taxation through a combination of partial withdrawal
               and correlative relief. In this example, the U.S. multinational corporation
               (MNC) parent sells a product to its subsidiary incorporated in a foreign
               country for $1,000. The U.S. parent is taxed on the income of $1,000 from
               the sale and the subsidiary is able to deduct that payment.

               The U.S. tax authority audits the parent’s return and determines that the
               price the parent sold the product for was too low and adjusts to price up
               from $1,000 to $2,000, resulting in an increase in taxable income. The
               U.S. MNC parent disputes the adjustment and requests assistance from
               the U.S. Competent Authority (USCA). The new adjusted transfer price
               results in $1,000 that is subject to double taxation because the foreign
               subsidiary has not deducted the additional $1,000 as the price paid to the
               U.S. parent, while the U.S. tax authority is now considering that income
               taxable.

               USCA negotiates with the foreign competent authority and the two parties
               agree on a revised transfer price of $1,600. The negotiated resolution
               results in USCA agreeing to withdraw $400 of the original adjusted
               amount of the transfer price. In turn, the foreign competent authority
               agrees to correlative relief in the form of an increased deduction of $600
               of the additional price that the foreign subsidiary will pay the U.S. parent.
               The taxpayer receives full relief from double taxation since the total of the
               withdrawal and the correlative relief erases the $1,000 of double-taxed
               income that resulted from the increased adjustment.




               Page 35                                             GAO-19-81 Tax Administration
Appendix III: Illustrative Examples of Dispute
Resolutions




Table 6: Full Relief Provided When the U.S. Tax Authority Adjusts Transfer Price of
Sale from U.S. Parent to its Foreign Subsidiary

                                                      U.S. Taxable    Double taxed
 Actions                                                   Income          income
 U.S. MNC sets original transfer price                       1,000                0
 U.S tax authority adjusts price upward                      2,000            1,000
 U.S. and Foreign Competent Authorities negotiate            1600                n.a
 resolution:
 U.S. competent authority withdraws $400 of its                n.a             (400)
 adjustment
 Foreign competent authority concedes $600 and                 n.a             (600)
 provides correlative relief

Legend: n.a. = not applicable
Source: GAO. | GAO-19-81.



Alternatively, foreign tax authorities can make adjustments that affect a
U.S. taxpayer. Table 7 provides a hypothetical example of a foreign
initiated adjustment to a cost-sharing arrangement, and a resolution that
provides full relief from double taxation, again, through a combination of
partial withdrawal and correlative relief.

In this scenario, the U.S. parent and its foreign subsidiary agree to share
the costs of developing a product that will yield income of $10,000. As
part of the agreement, the subsidiary will receive 10 percent of the
income yield while the parent will receive 90 percent.

The foreign tax authority audits the subsidiary’s tax return and determines
that the amount of income assigned to the subsidiary is too low. It then
adjusts the percentage to 50 percent, increasing the income allocated to
the subsidiary from $1,000 to $5,000. This adjustment results in a
potential $4,000 of income that is now subject to double taxation. The
subsidiary decides that resolving this dispute locally is unlikely and
through the U.S. parent requests assistance from USCA.

USCA and the foreign competent authority negotiate a new allocation of
35 percent resulting in new income allocated to the subsidiary of $3,500.
This resolution results in a combination of withdrawal and correlative
relief. The competent authority agrees to withdraw $1,500 of the
adjustment as income to the subsidiary, and the U.S. competent authority
agrees to reduce the amount taxable to the parent by $2,500. The
taxpayer receives full relief from double taxation since the total of the



Page 36                                                 GAO-19-81 Tax Administration
Appendix III: Illustrative Examples of Dispute
Resolutions




withdrawal and the correlative relief erases the $4,000 of double-taxed
income that resulted from the increased adjustment.

Table 7: Full Relief Provided when a Foreign Tax Authority Adjusts the Income
Share Allocated to U.S.-Owned Foreign Subsidiary

                                                                Foreign       Double-
                                                 Income         Taxable         Taxed
 Actions                                           Share        Income        Income
 U.S. MNC sets original income share               10%             1,000             0
 Foreign tax authority adjusts share upward        50%             5,000         4,000
 U.S. and Foreign Competent Authorities            35%             3,500           n.a
 negotiate resolution:
 Foreign competent authority withdraws               n.a             n.a       (1,500)
 $1,500 of its adjustment
 U.S. competent authority concedes $2,500            n.a             n.a       (2,500)
 and provides correlative relief

Legend: n.a. = not applicable
Source: GAO. | GAO-19-81.




Page 37                                                    GAO-19-81 Tax Administration
Appendix IV: Examples of Analysis that
              Appendix IV: Examples of Analysis that
              Advanced Pricing and Mutual Agreement
              Program Could Do with Current Available Data


Advanced Pricing and Mutual Agreement
Program Could Do with Current Available Data
              All mutual agreement procedure (MAP) cases are not the same in terms
              of complexity. One possible indicator of complexity is whether an
              economist was assigned to a case. United States Competent Authority
              (USCA) ranks the cases in order of complexity and assigns economists to
              the more complex cases. Our analysis of Advanced Pricing and Mutual
              Agreement Program (APMA) data in figure 8 shows how the use of
              economists varies by source of MAP cases. For most years, APMA
              assigned economists to a higher percentage of cases that involved U.S.
              than Canadian initiated adjustments. For most years, the share of
              economists assigned to foreign initiated cases was similar to U.S. initiated
              cases. However, in 2015 and 2016 the share of U.S. cases receiving an
              economist was more than double that of all foreign initiated cases. For
              most years, an economist was assigned to less than a quarter of foreign
              and U.S. MAP cases.




              Page 38                                            GAO-19-81 Tax Administration
Appendix IV: Examples of Analysis that
Advanced Pricing and Mutual Agreement
Program Could Do with Current Available Data




Figure 8: Share of MAP Cases Assigned an Economist by Country, 2013-2017




We also analyzed USCA inventory data to compare the percentage of
cases that were assigned an economist and the average time it took to
resolve cases. As figure 9 shows, the average time a case was in
processing tends to decrease when the percentage of cases that are
assigned an economist increases. This relationship suggests that
assigning economists to a case may reduce the time it takes to resolve it



Page 39                                             GAO-19-81 Tax Administration
Appendix IV: Examples of Analysis that
Advanced Pricing and Mutual Agreement
Program Could Do with Current Available Data




despite the greater complexity of the case. However, there may be many
other factors that could influence processing time. APMA officials noted
that many these factors include the readiness of the foreign competent
authority to discuss the case in a timely fashion. Further analysis would
be necessary to isolate the effects of specific resource allocation changes
on process efficiency.

Figure 9: Share of MAP Cases with an Economist and Average Processing Time,
2013 - 2017




Page 40                                             GAO-19-81 Tax Administration
Appendix V: GAO Contact and Staff
                   Appendix V: GAO Contact and Staff
                   Acknowledgments



Acknowledgments


                   James R. McTigue, Jr., (202) 512-9110, mctiguej@gao.gov
GAO Contact
                   In addition to the contact named above, Kevin Daly (Assistant Director),
Staff              Jennifer G. Stratton (Analyst-in-Charge), Bertha Dong, Dawn Bidne,
Acknowledgements   Michael Bechetti, Sonya Vartivarian, Ed Nannenhorn, David Dornisch,
                   and A.J. Stephens made significant contributions to this report.




(102038)
                   Page 41                                           GAO-19-81 Tax Administration
                         The Government Accountability Office, the audit, evaluation, and investigative
GAO’s Mission            arm of Congress, exists to support Congress in meeting its constitutional
                         responsibilities and to help improve the performance and accountability of the
                         federal government for the American people. GAO examines the use of public
                         funds; evaluates federal programs and policies; and provides analyses,
                         recommendations, and other assistance to help Congress make informed
                         oversight, policy, and funding decisions. GAO’s commitment to good government
                         is reflected in its core values of accountability, integrity, and reliability.

                         The fastest and easiest way to obtain copies of GAO documents at no cost is
Obtaining Copies of      through GAO’s website (https://www.gao.gov). Each weekday afternoon, GAO
GAO Reports and          posts on its website newly released reports, testimony, and correspondence. To
                         have GAO e-mail you a list of newly posted products, go to https://www.gao.gov
Testimony                and select “E-mail Updates.”

Order by Phone           The price of each GAO publication reflects GAO’s actual cost of production and
                         distribution and depends on the number of pages in the publication and whether
                         the publication is printed in color or black and white. Pricing and ordering
                         information is posted on GAO’s website, https://www.gao.gov/ordering.htm.
                         Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
                         TDD (202) 512-2537.
                         Orders may be paid for using American Express, Discover Card, MasterCard,
                         Visa, check, or money order. Call for additional information.

                         Connect with GAO on Facebook, Flickr, Twitter, and YouTube.
Connect with GAO         Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts.
                         Visit GAO on the web at https://www.gao.gov.

                         Contact FraudNet:
To Report Fraud,
                         Website: https://www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in
                         Automated answering system: (800) 424-5454 or (202) 512-7700
Federal Programs
                         Orice Williams Brown, Managing Director, WilliamsO@gao.gov, (202) 512-4400,
Congressional            U.S. Government Accountability Office, 441 G Street NW, Room 7125,
Relations                Washington, DC 20548

                         Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
Public Affairs           U.S. Government Accountability Office, 441 G Street NW, Room 7149
                         Washington, DC 20548

                         James-Christian Blockwood, Managing Director, spel@gao.gov, (202) 512-4707
Strategic Planning and   U.S. Government Accountability Office, 441 G Street NW, Room 7814,
External Liaison         Washington, DC 20548




                            Please Print on Recycled Paper.