Competent Authority Procedure to Settle Tax Treaty Disputes
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Competent Authority Procedure to Settle Tax Treaty Disputes
In general, tax treaties are complicated. With a tax treaty, two different countries with robust and complex tax laws try to come to certain agreements about how certain income and other issues should be treated. Especially when the United States is involved, it can get very complicated due to the fact that, unlike almost every other country across the globe, the US follows a citizenship-based taxation worldwide income model. This is much different than other countries that follow a residence-based taxation model. As a result, the way that the treaty impacts US persons especially can be ambiguous at best. In order to clarify how certain aspects of a tax treaty should be handled, countries with tax treaties may also enter into Competent Authority Arrangements based on certain trees. For example, one recent Competent Authority Arrangement that received a lot of press involved the United States and Malta tax Treaty — and specifically how certain Malta retirement schemes are treated — since the US was taking the position that US persons were exploiting certain aspects of the treaty in order to fund Malta retirements schemes similar to Roth IRAs but without the same limitations and restrictions. Still, even with Tax Treaties and CAAs, tax disputes happen. When there is a dispute as to a tax treaty, Taxpayers may request Competent Authority Assistance in accordance with revenue procedure 2015–40. Let’s take a brief look at how that works:
Competent Authority Procedures
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Generally, if you are a U.S. resident for purposes of a U.S. income tax treaty, you can request assistance from the U.S. competent authority if you think that the actions of the United States, a treaty country, or both, cause or will cause double taxation or taxation otherwise inconsistent with the treaty. For instructions, see Revenue Procedure 2015-40 Before requesting assistance, you should read any specific treaty articles, including the Mutual Agreement Procedure (MAP) article, that apply in your situation (the filers of Competent Authority claims involving Article XIII(8) of the United States’ treaty with Canada also should consult Revenue Procedure 98-21,PDF 1998-9 I.R.B. 27).
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Note on number of copies to be submitted: Beginning June 20, 2019, all applicants need submit only two copies of the competent authority request, except as otherwise permitted for small case competent authority requests (see section 5 of Revenue Procedure 2015-40). One copy must be an original printed submission containing signed originals of the request letter and attachments. One copy must be an electronic copy of the contents of the original printed submission on CD or flash drive or similar acceptable electronic storage medium. The requirement to provide additional photocopies for certain competent authority requests, as set forth in section 2.03(1) of the revenue procedure’s appendix, no longer applies.
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Similarly, advance pricing agreement (APA) applicants need submit only the original printed APA request containing signed originals of the request letter and attachments and one electronic copy of the contents of the original printed request on an acceptable electronic storage medium. The requirement to provide additional copies set forth in section 2.01 of the appendix to Revenue Procedure 2015-41, no longer applies.
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It is important that you make your request for competent authority consideration as soon as you have been denied treaty benefits or it is likely that the actions of the United States or the foreign country have resulted (or will result) in double taxation or taxation otherwise inconsistent with the treaty. Except where otherwise provided in an applicable treaty, taxpayers have discretion over the time for filing a request; however, delays in filing may preclude effective relief. In addition to a timely request for assistance, you should take the following measures to protect your right to the review of your case by the competent authorities:
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File a timely protective claim for credit or refund of U.S. taxes in accordance with Section 11 of Revenue Procedure 2015-40 .
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Take appropriate action under the procedures of the foreign country to avoid the lapse or termination of your right of appeal or competent authority consideration under the foreign country’s income tax law. Many countries’ MAP procedures are summarized at the OECD page MAP Profiles.
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The U.S. competent authority cannot consider requests involving countries with which the United States does not have an applicable tax treaty.
The office of the U.S. competent authority lies within the Large Business and International Division. Two primary offices within the U.S. competent authority conduct the MAP process. Those offices are the Advance Pricing and Mutual Agreement Program (“APMA”) and the Treaty Assistance and Interpretation Team (“TAIT”).
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APMA has primary responsibility for cases arising under the business profits and associated enterprises articles of U.S. tax treaties. An example of a competent authority issue handled by APMA is the economic double tax that could be incurred as a result of an allocation made by the IRS under section 482 of the Code or by a foreign tax authority under an equivalent provision in its domestic law.
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TAIT has primary responsibility for competent authority issues arising under all other articles of U.S. tax treaties. TAIT also has primary responsibility for competent authority issues arising under U.S. tax treaties with respect to estate and gift taxes.
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APMA and TAIT each can consider competent authority issues arising under the permanent establishment articles of U.S. tax treaties, and both offices will coordinate and collaborate on such cases and on any other cases as appropriate.
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