One of the primary purposes of a tax treaty is to reduce or eliminate double taxation on income from sources within one of the countries paid to a resident of the other country that is a party to the treaty. The Mutual Agreement Procedure (“MAP”) article of U.S. income tax treaties is designed to facilitate the “competent authority” process. Competent authority process refers to all steps in the process of initiating and resolving a competent authority case.
A Competent Authority Arrangement is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions. Competent Authority Arrangements also exist between the United States Internal Revenue Service and each United States Territory and Commonwealth tax agency to address issues of interest to the respective jurisdictions.
Note that every U.S. income tax treaty is different. Almost all U.S. income tax treaties have a MAP article, but the specific provisions of individual MAP articles will vary with each treaty.
Conceptually, the competent authority process can be separated into two phases, which roughly correspond to paragraphs 1 and 2 of the MAP article in most U.S. income tax treaties. Paragraph 1 covers the process of requesting competent authority assistance, while paragraph 2 covers the process to reach a competent authority resolution of such request. The process to reach a resolution under paragraph 2 may itself have two phases, the unilateral and bilateral phases.
Who Can Request Competent Authority Assistance?
Under most U.S. income tax treaties, a taxpayer must be a resident for treaty purposes (“treaty resident”), a national (as defined in the treaty), or a citizen of one of the Contracting States to the treaty to request competent authority assistance under that treaty. E.g., see U.S.- Canada Income Tax Treaty, Art. XXVI(1).
Notes that a person’s status as a “treaty resident” is separate from that person’s ! status as a resident under domestic tax law principles. A resident of a country for treaty purposes is a person who satisfies the requirements of the relevant treaty’s Resident article. E.g., see U.S. Model Treaty (2006), Art. 4.
From Whom Can a Taxpayer Request Competent Authority Assistance?
Under most U.S. income tax treaties, a taxpayer may request assistance from the competent authority of the country of which it is a treaty resident, national, or citizen. E.g., see U.S. Canada Income Tax Treaty, Art. XXVI(1). The U.S. Model Treaty (2006) and some U.S. income tax treaties allow for a taxpayer to request assistance from the competent authority of either Contracting State.
For What Can a Taxpayer Request Competent Authority Assistance?
A taxpayer can request competent authority assistance for any action of either Contracting State (i.e., U.S.-initiated action or foreign-initiated action) that results or will likely result in taxation not in accordance with the treaty. “Foreign-initiated action” and “U.S.-initiated action” refer to a foreign- or U.S.-initiated adjustment, or another action by or on behalf of the tax authority of a treaty country or IRS (such as withholding), that gives rise to a competent authority issue or makes it likely that a competent authority issue will arise.
The issue(s) covered in a taxpayer’s competent authority request is referred to as a “competent authority issue(s).” A “competent authority issue” is an issue that can be resolved by the U.S. competent authority, typically under the MAP article of a U.S. income tax treaty. Typically, a competent authority issue will be an action of a Contracting State which results or is likely to result in taxation not in accordance with an income tax treaty.
What is the Effect of Closed U.S. Statute of Limitation?
Under most U.S. income tax treaties, the taxpayer may request, and the U.S. competent authority may accept a request for, competent authority assistance even if the U.S. statute of limitations for claiming a refund (or other applicable time limit under U.S. law or the law of the other Contracting State) is closed. E.g., see U.S. Model Treaty (2006), Art. 25(1)). These domestic law procedural limitations may only be waived if a competent authority request is accepted and a competent authority resolution is reached. As a result, a taxpayer may want to take protective measures to ensure treaty notification is timely met.
Note that a U.S. income tax treaty may not increase the tax burden beyond the burden determined under domestic law. As a result, competent authority resolutions cannot be used to override U.S. statutes of limitation to impose additional tax, unless the taxpayer expressly agrees to this. See, e.g., Technical Explanation (TE) to U.S. Model Treaty (2006), Art. 1(2). Also see, e.g., TE to the U.S. Model Treaty (2006), Art. 25(2).
How Does a Taxpayer Request Competent Authority Assistance?
Taxpayers who are eligible to request assistance from the U.S. competent authority must do so in accordance with the governing U.S. income tax treaty, Rev. Proc. 2015-40 (or any successor), and any other applicable U.S. guidance. Requests for some types of competent authority assistance may have special filing requirements.
Note that on must distinguish U.S. income tax treaties (U.S. agreements with foreign countries) from U.S. tax coordination agreements (U.S. agreements with U.S. Territories – i.e., American Samoa, Guam, the Commonwealth of the Northern Marianas Islands, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands). For guidance on the competent authority process under U.S. tax coordination agreements, refer to Rev. Proc. 2006-23.
A taxpayer can request competent authority assistance when it considers that the actions of one or both of the Contracting States to a U.S. income tax treaty result or will likely result for the taxpayer in double taxation or other taxation not in accordance with the governing treaty. E.g., see U.S. Model Treaty (2006), Art. 25(1).
Taxpayers should request competent authority assistance promptly after a competent authority issue(s) arises or is likely to arise, as many U.S. income tax treaties require that a competent authority request be filed, or require notification to the competent authority that such request will be filed, within a certain time limit (referred to as a treaty notification period).
The Competent Authority Arrangements for purposes of Country-by-Country exchange can be found separately below: