IRS Proposes Revisions to Procedures for Requesting Assistance of U.S. Competent Authority
November 2013On November 22, 2013, the IRS released Notice 2013-78 (the “Notice”) which, if finalized, would replace Rev. Proc. 2006-54, the revenue procedure that currently governs requests for the assistance of the U.S. competent authority in resolving tax treaty issues. The Notice formalizes some previously informal policies and announces some new ones. Overall, the Notice is positive for U.S. taxpayers in a number of ways. We discuss some of the highlights below.
Section 2.02 (Background and Scope) of the Notice announces that MAP issues also arise as a consequence of taxpayer-initiated positions. For a number of years the U.S. competent authority refused to consider such cases, i.e., an adjustment would be considered by the U.S. competent authority only if the adjustment resulted from an action by the United States or the other contracting State. This position was criticized by commentators, including the author, as putting taxpayers seeking to correct transfer pricing errors that they discovered in order to avoid interest and penalties in an untenable position.
Coordination with APAs
On the same day that the Notice was released, the IRS released Notice 2013-79, which would replace Rev. Proc. 2006-9, the revenue procedure providing guidance and information on the IRS’s advanced pricing agreement (“APA”) program. The Notice references Notice 2013-79 and notes the interconnectedness of APAs and MAPs. The Notice states “the U.S. competent authority seeks MAP resolutions and APAs that achieve substantive and procedural consistency and coordination in their coverage and application. In particular, the U.S. competent authority may seek to roll forward a MAP resolution to years where it is feasible, practicable, and in the interest of sound tax administration to do so. Further, in appropriate cases, the U.S. competent authority will encourage taxpayers to extend MAP resolutions to future years that could be covered by an APA.
The U.S. competent authority now may treat interest on tax deficiencies and penalties on U.S.-initiated adjustments as MAP issues. Although many income tax treaties permitted these issues to be considered, U.S. competent authority typically would not consider them in the past. This is a welcome expansion of the MAP program, although whether such matters will in fact be addressed appears to remain at the discretion of the U.S. competent authority.
Taxpayers generally have had difficulty soliciting the official view of the U.S. government on interpretive tax treaty matters. The Office of the Chief Counsel of the IRS will not consider issuing a private letter rulings on questions arising under a tax treaty that are specific to a particular taxpayer. Chief Counsel will rule on more general questions concerning the interpretation of tax treaties. However, in practice, the Chief Counsel’s Office rarely issues such rulings.
Section 2.05 (Informal Advice Generally) states that APMA and TAIT “will provide oral, informal advice to taxpayers, whether or not in the course of the MAP process, on general matters concerning MAP issues, including whether a MAP issue may exist.” The Notice states that this advice is “advisory and not binding on the IRS.” Although this advice is not binding, and the scope is limited to MAP issues, the author has found that U.S. competent authority generally is more open discussion of tax treaty issues than the Office of Chief Counsel. Formalizing this process in the Notice should be beneficial to taxpayers.
Pre-filing conferences, in which the taxpayer has a preliminary discussion with the U.S. competent authority to describe the taxpayer’s issue allows both parties to form a judgment as to whether a MAP request would be fruitful and is typically a standard part of the MAP process. Section 3.02 (Pre-Filing Procedures) requires a memorandum to be prepared by the taxpayer as part of such a pre-filing conference in certain situations. Topics for which a pre-filing memorandum are required include foreign-initiated adjustments exceeding $10 million for all years combined, taxpayer-initiated positions, intangible transfers and development and requests for discretionary LOB (limitation on benefits) relief. The Notice also describes the required content of such a pre-filing memorandum.
Denial of assistance
The Notice specifies situations in which the U.S. competent authority may refuse to consider a MAP request. The Notice lists 12 circumstances in which assistance may be denied. The circumstances include: (i) the taxpayer agreed to a foreign-initiated adjustment involving significant legal or factual issues without first consulting with the U.S. competent authority, (ii) the taxpayer rejected a request to extend the period of limitations for assessment of tax for the taxable periods covered by the MAP request, and (iii) the case involves a taxpayer-initiated position that evinces “after-the-facts tax planning or fiscal evasion or is otherwise inconsistent with sound tax administration.”
Simultaneous appeals procedure
Taxpayers or the IRS may find it beneficial for an issue involving a U.S. treaty partner to be considered simultaneously by the U.S. competent authority and IRS Appeals (rather than consideration by Appeals before the issue is taken to U.S. competent authority). Generally, SAP review must be requested no later than 60 days after the date of the determination letter notifying the taxpayer that the U.S. competent authority has accepted the MAP request. The taxpayer may requested a meeting with Appeals and the U.S. competent authority prior to requesting SAP review.
Whether to permit SAP review is decided by U.S. competent authority after a meeting with IRS Appeals. As part of the SAP review process Appeals will meet with the taxpayer and recommend a position to the U.S. competent authority. The SAP review process may be terminated by any of the parties at any time.
In general, Rev. Proc. 99-32 provide rules for taxpayers wishing to repatriate cash as the payment of an account receivable instead of accepting the consequences of a secondary adjustment (e.g., a deemed dividend) following from a primary transfer pricing adjustment. Section 11 (MAP Repatriation) provide special rules for repatriation following a primary adjustment. In particular, the Notice provides that the U.S. competent authority may determine it is appropriate to eliminate or modify the requirement that interest be paid on the account receivable set up to enable the repatriation of funds.
Over the last several years the IRS has invested heavily in the office of the Deputy Commissioner (International) under the leadership of Mike Danilack. The staff of the office of the U.S. competent authority has been expanded considerably, the APA program has been brought under the auspices of the Deputy Commissioner, and considerable investment has been made in developing a strategic vision for U.S. international tax administration and the training of existing and new personnel. The Notice is but one example of the fruits of this effort.
 2006-2 C.B. 1035. An issue that can be resolved by the U.S. competent authority, principally under the mutual agreement procedure article of the U.S. tax treaty. See Cope and Foley, Self-Initiated Transfer Pricing Adjustments Or Virtue Unrewarded, Tax Notes Today (November 18, 2010). 2006-1 C.B. 278. Section 1.01 (Definitions). Rev. Proc. 2013-1, 2013-1 I.R.B. 1. APMA is The Advanced Pricing and Mutual Agreement Program and TAIT is the Treaty Assistance and Interpretation Team. Both are offices under the auspices of the U.S. competent authority. APMA deals with cases arising under the business profits or associated enterprises articles of income tax treaties. TAIT is responsible for cases arising under all other articles. Notice, Section 6.02. Notice, Section 8 (Simultaneous Appeals Procedure). Simultaneous Appeals Procedure review. 1999-2 C.B. 296.KEYWORD: Income Tax Treaties
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