Competent Authority & Mutual Agreement Procedure Explained

Competent Authority Request & Mutual Agreement Procedure (MAP)

Competent Authority Request & Mutual Agreement Procedure (MAP)

What is Competent Authority & Treaty Mutual Agreement Procedure (MAP): Two common phrases involving international tax and United States Income Tax Treaties are Competent Authority Requests and Mutual Agreement Procedures (MAP). The United states has entered into several different income tax treaties with countries across the globe. Common types of tax treaties include: Income tax treaties; Estate and Gift Tax Treaties; Totalization Agreements and FATCA Agreements. With income tax treaties in particular, the purpose is to help Taxpayers determine the tax “outcome” when a Taxpayer is a citizen/resident of either of the countries (contracting states). But, the treaties are not the final word on all tax issues — and due to disparities between two different in countries general, conflicts will remain. Despite information contained in the tax treaty, either the United States or the other country may have a different position on how certain income should be taxed — and this may result in double taxation. In order to avoid this type of unfair outcome, a taxpayer may request competent authority assistance, as laid out in Revenue Procedure 2015- 40. Let’s review what is a Competent Authority Request and Mutual Agreement Procedures.

Competent Authority Request (CAR)

In a common example, a foreign resident Taxpayer may be residing in the United States and relying on a tax treaty to avoid double taxation. Unfortunately, either the United States and/or the foreign country will not acquiesce to the Taxpayer’s position regarding a particular tax issue — which will then lead to a double taxation or inconsistent taxation. As a result, the Taxpayer may make a Competent Authority Request in accordance with the mutual agreement procedures contained in the tax treaty at issue — 

Rev Proc 2015-40 Section 2 (1) Competent Authority Request

(1) The U.S. Competent Authority

• U.S. tax treaties designate the Secretary of the Treasury or his delegate as the competent authority with respect to the United States. The Secretary of the Treasury has delegated that authority through the Commissioner of the IRS to the Deputy Commissioner (International), LB&I. The authority to act on behalf of the Deputy Commissioner (International), LB&I as the U.S. competent authority has been delegated to the Assistant Deputy Commissioner (International), LB&I.

• See Treasury Order 150- 10 and Delegation Order 4-12 (Rev. 2), IRM 1.2.43 (or successor delegation – 12 – order). Authority to act as the U.S. competent authority with regard to certain competent authority issues has been delegated to the directors of TPO and APMA. The U.S. competent authority has authority to apply the provisions of U.S. tax treaties.

• The U.S. competent authority endeavors to do so in a manner that is consistent with U.S. tax treaty obligations and that secures the appropriate tax bases of the United States and its treaty partners, prevents fiscal evasion, and provides taxpayers broad access to competent authority assistance in accordance with considerations of principled, effective, and efficient tax administration.

• The U.S. competent authority also has authority to interpret the provisions of U.S. tax treaties, but only with the concurrence of the Associate Chief Counsel (International).

What does this Mean?

It means that in accordance with the tax treaty, certain designations are made as to who is considered competent authority. For example, when it comes to the United States — the “Secretary of Treasury or his delegate” is considered to be the competent authority. Further, the Secretary of Treasury has delegated authority through the commissioner of the IRS Deputy Commissioner with authority to act as the competent authority. In general, the competent authority is tasked with operating in conjunction with the spirit of the tax treaty when making any interpretations of law.

As provided in the 2016 Model Tax Treaty as to Competent Authority in various different Articles:

• • • This Convention also shall apply to any identical or substantially similar taxes that are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their taxation laws or other laws that relate to the application of this Convention.

    • Where by reason of the provisions of paragraph 1 of this Article a person other than an individual or a company is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavor to determine the mode of application of this Convention to that person.

    • The competent authority shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation that is not in accordance with this Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. Assessment and collection procedures shall be suspended during the period that any mutual agreement proceeding is pending.

    • The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. They also may consult together for the elimination of double taxation in cases not provided for in this Convention.

Rev Proc 2015-40 Section 2 (2) Mutual Agreement Procedure Articles

(2) Mutual Agreement Procedure Articles

• The mutual agreement procedure articles of U.S. tax treaties grant taxpayers the right to request the assistance of the U.S. competent authority when the taxpayer believes that the actions of the United States or a treaty country result or will result in the taxpayer being subject to taxation not in accordance with the applicable U.S. tax treaty. 

• This situation typically arises as a result of U.S.- or foreign-initiated adjustments resulting from an examination, but can arise from other U.S.- or foreign-initiated actions (such as withholding of tax by a withholding agent) or from a taxpayer initiated position.

• The U.S. competent authority will endeavor to resolve competent authority issues arising under the mutual agreement procedure articles of U.S. tax treaties through consultations with the applicable foreign competent authority(ies) but in some cases may resolve such issues unilaterally – 13 – (see, e.g., section 8.02). There is no authority for the U.S. competent authority to provide relief with respect to U.S. tax or to provide other assistance related to taxation arising under the tax laws of a foreign country or the United States unless such authority is granted by a treaty.

• The grant of such authority by the mutual agreement procedure articles of U.S. tax treaties is separate from and in addition to the authority under such articles for the U.S. competent authority to consult generally with foreign competent authorities to resolve difficulties or doubts regarding treaty interpretation or application, irrespective of whether the consultation relates to a current matter involving a specific taxpayer.

What does this Mean?

In general, the Mutual Agreement Procedures provides a mechanism for a Taxpayer to request help and assistance from a “competent authority” in order to ascertain the proper tax treatment of various types of income. The countries may either determine unilaterally or jointly together the outcome, depending on the specific issue at hand.

As provided in the 2016 version of the Model Agreement:

Article 25 MUTUAL AGREEMENT PROCEDURE

1. 1. 1. Where a person considers that the actions of one or both of the Contracting States result or will result for such person in taxation not in accordance with the provisions of this Convention, it may, irrespective of the remedies provided by the domestic law of those Contracting States, and the time limits prescribed in such laws for presenting claims for refund, present its case to the competent authority of one or both of the Contracting States.

      2. The competent authority shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation that is not in accordance with this Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. Assessment and collection procedures shall be suspended during the period that any mutual agreement proceeding is pending.

      3. The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. They also may consult together for the elimination of double taxation in cases not provided for in this Convention. In particular the competent authorities of the Contracting States may agree: a) to the same attribution of income, deductions, credits, or allowances of an enterprise of a Contracting State to its permanent establishment situated in the other Contracting State; b) to the same allocation of income, deductions, credits, or allowances between persons; c) to the settlement of conflicting applications of this Convention, including conflicts regarding: i) the characterization of particular items of income; ii) the characterization of persons; iii) the application of source rules with respect to particular items of income; iv) the meaning of any term used in this Convention; v) the timing of particular items of income; 57 d) to advance pricing arrangements; and e) to the application of the provisions of domestic law regarding penalties, fines, and interest in a manner consistent with the purposes of this Convention.

      4. The competent authorities of the Contracting States may agree to increase any specific monetary amounts referred to in this Convention to reflect economic or monetary developments.

      5. The competent authorities of the Contracting States may communicate with each other directly, including through a joint commission, for the purpose of reaching an agreement in the sense of the preceding paragraphs.

      6. Where a person has presented a case to the competent authority of one or both of the Contracting States either: a) pursuant to paragraph 1 of this Article on the basis that the actions of one or both of the Contracting States resulted or will result for that person in taxation not in accordance with the provisions of this Convention; or b) on a taxpayer-specific case regarding a matter described in paragraph 3 of this Article; and the competent authorities are unable to reach agreement to resolve that case, and the conditions described in paragraph 7 of this Article are met, the case shall be resolved through arbitration conducted in the manner prescribed by paragraphs 7 through 9 of this Article and according to any rules or procedures agreed upon by the competent authorities of the Contracting States pursuant to paragraph 10 of this Article.

      7. A case shall be submitted to arbitration on the earliest date on which all of the following conditions have been satisfied: a) tax returns have been filed with at least one of the Contracting States with respect to the taxable years at issue in the case; b) at least two years have passed since the commencement date of such case, unless the competent authorities of the Contracting States have agreed to a different date and notified the presenter of the case of such agreement; c) the presenter of the case has submitted a written request to the competent authority to which the case was presented for a resolution of the case through arbitration; and d) all concerned persons and their authorized representatives or agents have submitted to the competent authorities of both Contracting States written agreements not to disclose to any other person any information received during the course of the arbitration proceeding from either Contracting State or the arbitration panel, other than the determination of the panel. A case shall not, however, be submitted to arbitration if a decision with respect to such case has already been rendered by a court or administrative tribunal of either Contracting State, or if the competent authorities of the Contracting States have agreed prior to the date on which the arbitration otherwise would be submitted that the particular case is not suitable for resolution through arbitration.

      8. For the purposes of this Article, the following definitions shall apply: a) the term “presenter” means the person that has presented a case to the competent authority of one or both of the Contracting States either: i) pursuant to paragraph 1 of this Article on the basis that the actions of one or both of the Contracting States result or will result for that person in taxation not in accordance with the provisions of this Convention; or ii) on a taxpayer-specific case regarding a matter described in paragraph 3 of this Article; b) the term “concerned person” means the presenter and all other persons, if any, whose tax liability to either Contracting State may be directly affected by a mutual agreement to resolve a case submitted to arbitration pursuant to paragraph 7 of this Article; and c) the “commencement date” for a case means the earliest date on which the information necessary to undertake substantive consideration for a mutual agreement has been received by both competent authorities.

      9. For the purposes of arbitrations under this Article, the following rules shall apply:

• • • • a) The arbitration panel shall consist of three individual members. The competent authority of each Contracting State shall select one member of the arbitration panel. In the event that the competent authority of a Contracting State fails to select a member for the arbitration panel in the manner and within the time periods agreed by the competent authorities of the Contracting States pursuant to paragraph 10 of this Article, the competent authority of the other Contracting State shall select a second member. The two members of the arbitration panel who have been selected shall select the third member, who shall serve as Chair of the arbitration panel. If the two initial members of the arbitration panel fail to select the Chair in the manner and within the time periods agreed by the competent authorities of the Contracting States pursuant to paragraph 10 of this Article, these members shall be dismissed, and each competent authority of the Contracting States shall select a new member of the arbitration panel. The Chair shall not be a national or lawful permanent resident of either Contracting State. The members appointed shall not be employees, nor have been employees within the twelve-month period prior to the date on which a case is submitted to arbitration, of the tax administration or the treasury department of the Contracting State that identified them. Furthermore, the members appointed shall not have any prior involvement with the specific matters at issue in the arbitration proceeding for which they are being considered as arbitrators.

      • b) The members of the arbitration panel and their staff shall be considered to be “persons or authorities” to whom information may be disclosed under Article 26 (Exchange of Information and Administrative Assistance) of this Convention.

      • c) All material received by a competent authority of a Contracting State in the course of, or relating to, an arbitration proceeding (including the arbitration panel’s determination) shall be considered to be information exchanged between the Contracting States. Accordingly, no such information relating to an arbitration proceeding may be disclosed by the competent authorities of the Contracting States, except as permitted under Article 26 (Exchange of Information and Administrative Assistance). The competent authorities of the Contracting States shall ensure that members of the arbitration panel and their staff agree in writing to treat any information relating to the arbitration proceeding consistent with the confidentiality and nondisclosure provisions of Article 26 (Exchange of Information and Administrative Assistance) of this Convention and the applicable domestic laws of the Contracting States.

      • d) If at any time before the arbitration panel delivers a determination to the competent authorities of the Contracting States: i) the competent authorities of the Contracting States reach a mutual agreement to resolve the case pursuant to this Article; ii) the presenter of the case withdraws the request for arbitration; iii) a decision concerning the case is rendered by a court or administrative tribunal of one of the Contracting States during the arbitration proceeding; or iv) if any concerned person or their authorized representatives or agents violates the written nondisclosure statement required by subparagraph (d) of paragraph 7 of this Article, and the competent authorities of both Contracting States agree that such violation should result in the termination of the arbitration proceeding; the mutual agreement procedure, including the arbitration proceeding, with respect to the case shall terminate.

      • e) After a case is submitted to arbitration, the presenter shall be permitted to submit to the competent authorities of both Contracting States for submission to the arbitration panel a paper setting forth the presenter’s analysis and views of the case for consideration by the arbitration panel. Such submission must be submitted before the date on which the competent authorities of the Contracting States are required to submit their position papers to the arbitration panel, and shall not include any information not previously provided to the competent authorities before the case was submitted to arbitration.

      • f) After a case is submitted to arbitration, the competent authority of each of the Contracting States shall be permitted to submit to the arbitration panel a position paper with a proposed resolution addressing each adjustment or similar issue raised in the case, and shall simultaneously provide a copy of such position paper to the other competent authority. Such proposed resolution shall be a resolution of the entire case and shall reflect all agreements previously reached between the competent authorities of the Contracting States with respect to any adjustment or similar issue raised in the case. Such proposed resolution shall be limited to a disposition of specific monetary amounts (for example, of income, profit, gain or expense) or, where specified, the maximum rate of tax charged pursuant to the Convention for each adjustment or similar issue in the case. The competent authority of each of the Contracting States shall also be permitted to submit additional supporting papers for consideration by the arbitration panel, and shall simultaneously provide a copy of such supporting papers to the other competent authority.

      • g) Notwithstanding the provisions of subparagraph (e) of this paragraph, it is understood that, in the case of an arbitration proceeding concerning: i) the tax liability of an individual for which the competent authorities have been unable to reach agreement with respect to the individual’s Contracting State of residence; ii) the taxation of the business profits of an enterprise with respect to which the competent authorities have been unable to reach an agreement on whether a permanent establishment exists; or iii) such other issues the determination of which are contingent on resolution of similar threshold questions; the position paper may include positions regarding clause (i), (ii) or (iii) of this subparagraph, in addition to proposed resolutions limited to specific monetary amounts 61 (for example, of income, profit, gain or expense) or, where specified, the maximum rate of tax charged pursuant to this Convention due as a consequence of the arbitration panel’s determination regarding residency, the existence of a permanent establishment or other threshold questions.

      • h) Where an arbitration proceeding concerns a case comprising multiple adjustments or issues each requiring a disposition of specific monetary amounts of income, profit, gain or expense or, where specified, the maximum rate of tax charged pursuant to this Convention, the position paper may propose a separate disposition for each adjustment or similar issue.

      • i) Each competent authority shall be permitted to submit a reply to any position paper submitted to the arbitration panel, and shall simultaneously provide the other competent authority with a copy of any such reply submitted to the arbitration panel.

      • j) The arbitration panel shall deliver a determination in writing to the competent authorities of the Contracting States. The determination reached by the arbitration panel in the arbitration proceeding shall be limited to one of the proposed resolutions for the case submitted by one of the competent authorities of the Contracting States for each adjustment or similar issue and any threshold questions, and shall not include a rationale or any other explanation of the determination. The determination of the arbitration panel shall have no precedential value with respect to the application of this Convention in any other case.

      • k) The determination of the arbitration panel with respect to a case submitted to arbitration shall constitute a resolution by mutual agreement under this Article and shall be binding on the Contracting States if it is accepted by all of the concerned persons. Unless the competent authorities of both Contracting States agree to a longer time period, the concerned persons shall have 45 days from the date they receive the determination of the arbitration panel to notify, in writing, the competent authority of the Contracting State to whom the case was presented of their acceptance of determination. In the event the case is pending in litigation, each concerned person that is a party to such litigation must also advise, within the same time frame, the relevant court of its acceptance of the determination of the arbitration panel and its intention to withdraw from the consideration of the court the issues resolved through the proceeding. If any concerned person fails to so advise the relevant competent authority and relevant court within this time frame, the determination of the arbitration panel shall be considered not to have been accepted by the concerned persons. Where the determination of the arbitration panel is not accepted, the case shall not be eligible for any subsequent further consideration by the competent authorities.

      • l) The fees and expenses of the members of the arbitration panel, as well as any costs incurred in connection with the proceeding by the Contracting States, shall be borne 62 equitably by the competent authorities of the Contracting States.

1. 10. The competent authorities of the Contracting States shall agree in writing, before the first case is submitted to arbitration, on time periods and procedures that are consistent with paragraphs 6 through 9 of this Article for:

• • • a) establishing when information necessary to undertake substantive consideration for a mutual agreement has been received by both competent authorities for purposes of determining the commencement date, and for notifying each other when such requirement has been satisfied;

    • b) notifying the presenter of any agreements that a case is not suitable for resolution through arbitration, or to change the date on which a case shall be submitted to arbitration;

    • c) the appropriate application of arbitration in the context of a request for an advanced pricing agreement, including rules concerning the date on which a case may be submitted to arbitration;

    • d) obtaining the agreements of all concerned persons and their authorized representatives or agents not to disclose any information received during the course of the arbitration proceeding from the competent authority of either Contracting State or the arbitration panel, other than the determination of such panel pursuant to subparagraph (d) of paragraph 7 of this Article, and the agreements of the members of the arbitration panel and their staff to treat any information relating to the arbitration proceeding consistent with the confidentiality and nondisclosure provisions of Article 26 (Exchange of Information and Administrative Assistance), as required by subparagraph (c) of paragraph 9 of this Article;

    • e) the appointment of the members of the arbitration panel;

    • f) the submission of position papers, supporting papers and reply submissions by the competent authorities of the Contracting States to the arbitration panel;

    • g) the submission to the competent authorities of both Contracting States by the presenter of a paper setting forth the presenter’s views and analysis of the case for consideration by the arbitration panel;

    • h) the delivery by the arbitration panel of its determination to the competent authorities of the Contracting States;

    • i) the acceptance or rejection by the concerned persons of the determination of the arbitration panel; and

    • j) the adoption by the arbitration panel of any additional procedures necessary for the conduct of its business. The competent authorities of the Contracting States may mutually agree in writing to modify their agreement concerning these time periods and procedures, as needed, and may further agree in writing on such other rules, time periods and procedures as may be necessary for the effective and timely implementation of an arbitration proceeding

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