SECTION 1. PURPOSE
01 The Internal Revenue Service herein provides a procedure whereby a reporting corporation may request that the Service enter into a Section 6038A Agreement under section 1.6038A-3(e) of the Income Tax Regulations.
02 A reporting corporation is either (i) a U.S. corporation that is owned by a 25-percent foreign shareholder or (ii) a foreign corporation that is engaged in a trade or business within the United States at any time during a taxable year. Under sections 6038A and 6038C of the Internal Revenue Code, a reporting corporation is subject to specific record maintenance requirements. These record maintenance requirements, in addition to other matters, may be varied by an Agreement between a reporting corporation and the District Director.
03 The Service provides this procedure to encourage the clarification by mutual agreement of the application of the record maintenance requirements of the section 6038A and section 6038C regulations to the case of a particular reporting corporation.
SEC. 2. BACKGROUND
01 The Omnibus Budget Reconciliation Act of 1989 (the 1989 Act) and the Omnibus Budget Reconciliation Act of 1990 (the 1990 Act) amended section 6038A of the Code in several significant ways. Additionally, the 1990 Act enacted section 6038C to provide greater parity of treatment between the subsidiary and the branch form of business.
02 The 1989 Act added the record maintenance requirement and the authorization of agent requirement, in addition to continuing the annual information filing requirement. The 1990 Act, in addition to enacting section 6038C, applies certain section 6038A and section 6038C requirements to prior open years.
03 The record maintenance requirements are described in section 1.6038A-3 of the regulations. An all-inclusive safe harbor provides detailed guidance for those affected foreign persons not subject to U.S. taxing jurisdiction and who, therefore, may not be familiar with U.S. accounting and tax practices and tax administration procedures.
04 A reporting corporation is required to maintain or cause a foreign person to maintain those documents that are relevant to its business and industry and that are relevant to the U.S. tax treatment of transactions between it and a foreign related party. The regulations permit a District Director to enter into an Agreement with a reporting corporation that determines the specific records that such reporting corporation shall maintain or cause a foreign related party to maintain.
SEC. 3. DISTRICT DIRECTOR
For purposes of section 6038A of the Code and this revenue procedure, the term "District Director" means any District Director, or the Assistant Commissioner (International) when performing duties similar to those of a District Director with respect to any person over which the Assistant Commissioner (International) has appropriate audit jurisdiction.
SEC. 4. GENERAL PROCEDURE
01 A reporting corporation must address the request for an Agreement in writing to the District Director who has the appropriate audit jurisdiction over the reporting corporation.
02 The request should provide the name, address, and taxpayer identification number (if any) of the reporting corporation, of the 25-percent foreign shareholder, and of all the foreign related parties with which the reporting corporation engages in transactions. Further, copies of the most recent Forms 5472 filed with the Service should be attached. If the reporting corporation engages in transactions with more than one foreign related party, the District Director may enter into one Agreement addressing all the transactions.
03 The decision to enter into an Agreement or to revoke an Agreement shall be in the discretion of the District Director. A District Director is not obligated to vary the rules contained in the section 6038A regulations as described in section 7.02.
SEC. 5. WHEN A DISTRICT DIRECTOR WILL ENTER INTO AN AGREEMENT
01 A District Director may enter into an Agreement if the District Director determines that a reporting corporation will maintain and produce the records that are relevant to establish the correctness of the income tax return of the reporting corporation required by the Agreement.
02 The District Director, in determining whether to enter into an Agreement, shall consider prior examination history, if applicable, with respect to timeliness of production of records and adequate record disclosures.
SEC. 6. MODIFICATION AND REVOCATION
01 MODIFICATION. An Agreement may be modified by mutual agreement whenever circumstances warrant. Examples of circumstances that may warrant a modification are a change in the business operations of the reporting corporation, acquisition or disposition of a line of business, or changes in the recordkeeping of the reporting corporation.
02 PROSPECTIVE REVOCATION. The District Director may revoke an Agreement prospectively if the reporting corporation demonstrates disregard for the Agreement or if the reporting corporation unreasonably withholds consent to a modification of an existing Agreement.
03 RETROACTIVE REVOCATION. Except in rare or unusual circumstances, the revocation of an Agreement shall not be effective with respect to any prior taxable year to which the Agreement applies provided that--
(1) There has been no misstatement or omission of material facts;
(2) The facts at the time the Agreement was executed are not materially different from the facts applicable to such taxable year; and
(3) The reporting corporation acted in good faith in relying upon the Agreement and revoking the Agreement retroactively would be to the detriment of the reporting corporation.
SEC. 7. TERMS OF AGREEMENT
01 IN GENERAL. The Agreement shall identify the records that the reporting corporation must maintain or cause a foreign related party to maintain, how such records must be maintained, where and by whom such records must be maintained, and the period of retention of such records. A District Director generally will require a reporting corporation to maintain or cause a foreign related party to maintain those records specified under the safe harbor provisions of section 1.6038A-3 of the regulations and the regulations under section 6038C of the Code that are relevant in establishing the correctness of the income tax return of the reporting corporation. In most instances, required record maintenance for a particular reporting corporation under an Agreement will be less than the range of records described under the safe harbor provisions. Finally, the District Director may determine the effective date and the expiration date of the Agreement.
02 VARIANCE. An Agreement may include provisions relating to the record maintenance requirement and the authorization of agent requirement that vary the rules contained in the regulations under sections 6038A and 6038C of the Code. The District Director may exempt transactions from the section 6038A record maintenance requirements where the value of related party transactions is low with respect to particular foreign related parties (or specific groups of foreign related parties), even if transactions of similar value with other persons related to the reporting corporation remain subject to the section 6038A record maintenance requirements. Based upon a showing of reasonable cause by the reporting corporation, the production and translation time periods with respect to records that must be maintained under the Agreement may be varied from the rules contained in the regulations.
03 SIGNIFICANT INDUSTRY SEGMENT TEST. A District Director may determine which industry segments are material for purposes of requiring the maintenance of records (under either section 1.6038A-3(a)(1) or (a)(2) of the regulations). The industry segments that the District Director determines are material need not be the industry segments that meet the significant industry segment test under section 1.6038A-3(c)(5) of the regulations or the high profit test under section 1.6038A-3(c)(6) of the regulations. For this purpose, a reporting corporation will be required to maintain only records from which profit and loss statements for the related party group may be constructed with respect to industry segments identified by the District Director. To the extent that existing profit and loss statements are similar in scope and level of detail to profit and loss statements for industry segments that would otherwise be required under section 1.6038A-3(c)(5) and (c)(6) of the regulations, the Agreement generally will permit the existing profit and loss statements to be maintained instead of the profit and loss statements that would otherwise be required under the regulations.
SEC. 8. MODEL AGREEMENTS
01 A District Director may develop a model agreement for a particular business or industry (or rely upon a model agreement developed by another District Director or an Industry Specialization Program) that provides a guide to reporting corporations as to what terms generally would be applicable to that particular business or industry.
02 The District Director shall modify a model agreement in accordance with the particular facts and circumstances of the reporting corporation.
SEC. 9. COORDINATION WITH REV. PROC. 86-19 and REV. PROC. 91-22
01 A District Director may enter into an Agreement that includes not only provisions relating to the requirements under sections 6038A and 6038C of the Code, but also provisions with respect to machine- sensible records as described in Rev. Proc. 86-19, 1986-1 C.B. 558 and with respect to Advance Pricing Agreements described in Rev. Proc. 91-22, 1991-11 I.R.B. 11.
02 If any of the records to be maintained under this revenue procedure are machine-sensible records as described in Rev. Proc. 86-19, all of the provisions of Rev. Proc. 86-19 shall apply to such records.
SEC. 10. EFFECTIVE DATE
This revenue procedure is effective July 29, 1991.
DRAFTING INFORMATION
The principal author of this revenue procedure is Carol P. Tello, Office of the Associate Chief Counsel (International). For further information on the procedure, please call Ms. Tello on (202) 377-9493.
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