IRS Concludes First ADA to Sanction Separate Branch Treatment and Provide a Specific Methodology for Testing Interbranch Foreign Exchange Spot and Forward Contracts

On February 9, 1998, Dai-Ichi Kangyo Bank Ltd, (the ABank), represented by Mayer, Brown & Platt, announced that it had concluded with the Internal Revenue Service (AIRS) the first advance pricing agreement (AAPA) that contains a transfer pricing methodology (ATPM or Amethod) addressing foreign exchange spot and forward contracts conducted between branches.

The agreement is notable because it not only sets forth a new, statistically-based testing method to assess these transactions, but also recognizes the proper allocation of income from interbranch transactions as if the branches were separate taxable entities. Both of these approaches were subsequently incorporated into the IRS Proposed Regulations released on March 2, 1998. This agreement signals the willingness of the IRS to settle previously unresolved issues and can serve as a model for future taxpayer APAs with the IRS.