International tax law treaties can be very difficult to navigate. Even though there is a model tax treaty that most tax treaties are “ modeled after” each individual tax treaty is different; as such, each individual tax treaty requires its own analysis in order to ensure compliance.
In order to try to bring some clarity to specific issues and ambiguities within the various different tax treaties, the United States has entered into competent authority agreements with various different treaty countries. The purpose of the competent authority agreements is to “clarify or interpret treaty provisions”
- 1 Competent Authority Request
- 2 Purpose of Revenue Procedure 2015-40
- 3 Foreign Tax Laws
- 4 Informal Consultations
- 5 Taxpayer Role in the Competent Authority Process
- 6 Procedures for Filing Competent Authority Requests
- 7 Mandatory Pre-Filing Procedures – Taxpayer Initiated Positions
- 8 Time for Filing a Competent Authority Request
- 9 Content and Form of Competency Request
Competent Authority Request
Internal Revenue Service has provided procedures for requesting competent authority assistance under tax treaties as well. The following is a summary of these procedures as set forth in “IRS Rev. Proc. 2015-40”
Purpose of Revenue Procedure 2015-40
This revenue procedure provides guidance on the process of requesting and obtaining assistance under U.S. tax treaties from the U.S. competent authority, acting through the Advance Pricing and Mutual Agreement Program and the Treaty Assistance and Interpretation Team of the Deputy Commissioner (International), Large Business & International Division of the Internal Revenue Service. This revenue procedure updates and supersedes Rev. Proc. 2006-54, 2006-2 C.B. 1035, and is being issued concurrently with Rev. Proc. 2015-41, 2015-35 I.R.B., which provides guidance with respect to advance pricing agreements.
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.
Foreign Tax Laws
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.
Informal Consultations with Taxpayers. The U.S. competent authority is available for informal consultations with taxpayers (including consultations in which the taxpayer chooses to be anonymous) regarding any competent authority issue. Any informal advice provided by the U.S. competent authority through such consultations is advisory only and is not binding on the IRS. The U.S. competent authority also is available for informal consultations on issues that arise in connection with competent authority issues, even where such issues are not themselves competent authority issues.
For example, a taxpayer may consult the U.S. competent authority on FTC issues, which may cover, when appropriate, considerations surrounding administrative or other steps that may be available to the taxpayer in the foreign jurisdiction. See Treas. Reg. §1.901- 2(e)(5) and Rev. Rul. 92-75.
Taxpayer Role in the Competent Authority Process
The taxpayer can facilitate the competent authority process by ensuring that both competent authorities receive complete, accurate, and timely information on the factual and legal issues underlying the competent authority request. The taxpayer also may assist the competent authorities by offering constructive, principled proposals for the terms of a competent authority resolution at appropriate points in the competent authority process. Nevertheless, the taxpayer must recognize the fundamental principle that the competent authority process is conducted between two or more governments. Thus, the taxpayer must recognize that it will not be directly involved in the negotiations between the competent authorities.
Subject to the arbitration provisions of U.S. tax treaties, the U.S. competent authority will allow a taxpayer a reasonable opportunity to present and supplement its views of the relevant facts and arguments, both in writing and orally, before and after discussions with the foreign competent authority have commenced. The competent authorities may invite or request the taxpayer to make a presentation to both competent authorities jointly, particularly where the competent authorities seek clarification of the issues or facts in fact-intensive, unusual, or complex cases. Taxpayers also may request the opportunity to make such a joint presentation during the competent authority process. However, the U.S. competent authority will consult with the foreign competent authority on whether to accept the request, and if so, on appropriate content for the presentation.
Procedures for Filing Competent Authority Requests
For a competent authority request that involves a taxpayer initiated position, the taxpayer must follow the mandatory pre-filing procedures described in section 3.02(2). For a competent authority request that does not involve a taxpayer-initiated position, there is no mandatory pre-filing procedure, and taxpayers are not required to contact the U.S. competent authority before filing a competent authority request. However, even when the mandatory prefiling procedures are not applicable, taxpayers may benefit from attending a prefiling conference under the optional pre-filing procedure of section 3.02(3).
The U.S. competent authority has found that a pre-filing conference can facilitate the competent authority process when the competent authority issues presented by – 22 – the taxpayer are complex, large in amount, novel, or likely to involve interrelated issues. Common types of cases for which the U.S. competent authority generally recommends that a pre-filing conference be held are listed in section 3.02(4). Even in such cases, however, the U.S. competent authority may advise the taxpayer that a pre-filing conference is unnecessary.
Mandatory Pre-Filing Procedures – Taxpayer Initiated Positions
A taxpayer must submit a pre-filing memorandum prior to filing a competent authority request if the proposed competent authority issues will involve a taxpayer-initiated position. The pre-filing memorandum must identify the taxpayer, explain the factual and legal basis of the taxpayer-initiated position, and describe any administrative, legal, or other procedural steps undertaken in the applicable treaty country (including whether the foreign tax authority has accepted an income tax return reflecting the taxpayer-initiated position for which the taxpayer seeks competent authority assistance) and any communications with the foreign competent authority regarding the position.
The degree of detail and content of the pre-filing memorandum must be appropriate to the stage, size, and complexity of the competent authority issues underlying the proposed competent authority request. The pre-filing memorandum must propose at least three possible dates for a pre-filing conference, each at least two weeks after the date that the pre-filing memorandum is submitted. The U.S. competent authority will decide whether to hold a pre-filing conference with the taxpayer, taking into account any views expressed by the taxpayer in the pre-filing memorandum as to the advisability of such a conference.
Time for Filing a Competent Authority Request
Subject to the provisions of section 3.04(3), taxpayers are encouraged to file a competent authority request promptly after a competent authority issue arises or is likely to arise. Certain U.S. tax treaties may require that a competent authority request or a treaty notification be filed within a certain time limit (see generally sections 11 and 12).
Content and Form of Competency Request
The U.S. competent authority will provide assistance only after the taxpayer has filed a complete competent authority request. The Appendix sets forth the required contents of a complete competent authority request, prescribes the order in which the contents must be presented, and provides information and instructions on other administrative matters relevant to filing the request. With regard to requests for assistance from APMA, see section 2 of the Appendix. With regard to requests for assistance from TAIT, see section 3 of the Appendix.
A competent authority request filed with the U.S. competent authority must include a description or discussion of any related requests for assistance submitted to the foreign competent authority, together with a thorough, informative explanation of any material differences between the competent authority request filed under this revenue procedure and the request filed with the foreign competent authority. The U.S. competent authority may request that the taxpayer provide a full or partial copy of the corresponding request submitted to the foreign competent authority. See generally the Appendix.
Evaluating and analyzing international tax treaties can be a daunting task, even for experienced lawyers. No two tax treaties are the same and depending on the specific issue at hand, the analysis may be very comprehensive. This is only part one of a multiple part summary of the process ex-pats another individuals working overseas should consider if they are confronted with issues involving tax liability for their overseas employment.