By Anthony Diosdi
The competent authority process is a dispute resolution mechanism available to taxpayers involved in a cross-border tax dispute involving a tax treaty. The taxpayer may invoke this procedure to require the tax administration’s competent authority function to “endeavor” to resolve the dispute by “mutual agreement” with a treaty partner. A taxpayer (or taxpayer’s representative) normally initiates a competent authority proceeding with a written request for assistance under the tax treaty. Tax treaties typically do not specify requirements for the competent authority request.
The related procedures for requesting competent authority relief is described in IRS Rev. Proc. 2015-40, 2015-35 I.R.B. 236.
On August 31, 2015, the Internal Revenue Service or IRS released updated competent authority procedures in Revenue Procedure 2015-40, 2015-35 IRB 236. The updated revenue procedure provided guidance on requesting assistance from U.S. competent authority, acting through the Advance Pricing and Mutual Agreement program and Treaty Assistance and Interpretation Team, under provisions of U.S. tax treaties. These procedures significantly modify the prior guidance provided in Rev. Proc. 2006-54 and represent the finalization of procedures that were initially proposed in Notice 2013-78, 2013–50 IRB 633.
Several substantive additions and changes are included in Rev. Proc. 2015-40, including clarification that the competent authority assistance may be provided with respect to taxpayer initiated positions, that U.S. competent authority offices are available for informal consultation on ancillary issues (regardless of whether such issues are part of the competent authority request), and providing clarification on the coordination between the competent authority proceeding and IRS administrative and judicial proceedings, among others. As a change to the procedures proposed in Notice 2013-78, the competent authority will decline to provide assistance on an issue that is first under the jurisdiction of the IRS Appeals Office unless the taxpayer severs the issue from the pending Appeals protest. Revenue Procedure 2015-40, 2015-35 IRB 236 also substantially modified the standards for obtaining discretionary relief under the limitation on benefits provisions of U.S. treaties. The competent authority will not accept a discretionary limitation of benefits or “LOB” for a tax treaty unless the taxpayer represents and explains why it does not qualify for the requested benefits under the objective tests of the treaty’s LOB provision. User fees for discretionary LOB relief was increased to $37,000.
According to Rev. Proc. 2015-40, a competent authority request consists of a letter and attachments. The contents of the request letter vary by the type of competent authority request, but generally consists of information about the taxpayer and about the competent authority issues involved in the request. The request letter must contain an introductory statement that the taxpayer seeks assistance of the U.S. competent authority. The letter should also 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 of the letter should be appropriate to the stage, size, and complexity of the competent authority issues underlying the proposed competent authority request. The letter 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.
Anyone making a competent authority submission should understand that they will have no direct right to participate in the proceedings. This is because the vast majority of governments view the proceeding primarily as a division of taxing jurisdiction between tax administrators. It should also be noted that tax and estate tax treaties do not require the competent authorities to reach a mutual agreement, nor do they set a deadline for the conclusion of such agreements. As a result, there is no guarantee a competent authority request will resolve a treaty dispute and in cases where a resolution is reached, it may take two years or more from the date of request to conclude the matter. If an agreement is reached between the competent authorities, the competent authorities will implement the refund of any overpayment of tax, adjustments to intercompany accounts, and address any currency exchange matters.
Conclusion
Whenever there is dispute involving a tax or estate tax treaty, a U.S. taxpayer may utilize the competent authority procedures to obtain relief from double taxation or taxation that is otherwise not in accordance with the treaty. Although the competent authority procedures may take time to resolve, the time it takes to resolve a cross-border tax dispute involving a treaty utilizing the competent authority process is comparable to litigating a tax dispute. Unlike tax litigation, the competent authority process may provide bilateral relief, with the taxpayer’s income, earnings and profits, and other relevant tax attributes in both countries. Finally, although a competent authority agreement is binding only for the taxable periods requested, a resolution through a competent authority request typically has the practical effect of avoiding disputes in future years.
We have substantial experience advising clients ranging from small entrepreneurs to major multinational corporations in cross-border tax planning and compliance. We have also provided assistance to many accounting and law firms (both large and small) in all areas of international taxation.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.
He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.