Federal District Court Allows the IRS to Collect Danish Income Tax
A recent decision of the Federal District Court for the Northern District of Georgia offers an example of how the Internal Revenue Service may collect income tax from a citizen of another country residing in the United States pursuant to the terms of an income tax treaty. In Dileng v. Commissioner of Internal Revenue Service a Federal District Court refused to block the IRS from collecting Danish income tax as requested by the Skatteminsteriet (the “SKAT”) Denmark’s Ministry of Taxation. The SKAT requested the IRS to collect the tax pursuant to the terms of Article 27 (Administrative Assistance), of the 1999 Denmark-USA Income Tax Convention (the “Danish Treaty”).
Tax Court Denies Treaty Benefits to Pakistani Medical Resident
A recent decision of the Tax Court considers the scope of Article XII of the 1959 Pakistan-U.S. Income Tax Convention (the “1959 Pakistan Treaty”), which exempts from taxation, by the source state, certain income earned by professors and teachers. The Tax Court concluded that Article XII did not apply to income earned by a citizen of Pakistan who was present in the United States in connection with a training program for medical residents at a U.S. university.
D.C. District Court Finds Denial of Treaty Benefits by IRS is Subject to Judicial Review
On September 18, 2015, the United States District Court for the District of Columbia issued a memorandum opinion in Starr International Company v. United States holding that a decision by the U.S. competent authority to deny the benefits of the 1996 Switzerland-USA Income Tax Convention (the 1996 Treaty”) to the plaintiff, Starr International Company (“Starr”), was reviewable by the court. The decision overturns the position of the IRS announced last month in Rev. Proc. 2015-40 that the U.S. competent authority determines whether a taxpayer qualifies for such discretionary benefits in its “sole discretion.” If this decision is upheld by the Court of Appeals for the District of Columbia, non-U.S. taxpayers who are denied treaty benefits by the U.S. competent authority under the discretionary relief provision found in the limitation on benefits article of most U.S. income tax treaties will be able to look to the courts for relief. Thus, in many cases, the courts would become the ultimate arbiter as to whether relief is available to a resident of another country under a U.S. income tax treaty.
IRS Issues Guidance on Discretionary Grant of Benefits under Income Tax Treaties
In Rev. Proc. 2015-40, issued August 13, 2015, the IRS provides guidance to taxpayer, including residents of other countries, requesting competent authority assistance under U.S. income tax treaties. The revenue procedure includes guidance on the circumstances in which the U.S. competent authority will consider granting discretionary relief under the limitation on benefits article of a U.S. income tax treaty. The guidance, is consistent with recently announced proposed amendments to the 2006 U.S. Model Income Tax Treaty. Significantly, the guidance also introduces a “purpose test” which is a new, and relatively undefined, concept for U.S. income tax treaties.
Treasury Releases Proposed Amendments to its U.S. Model Income Tax Treaty
On May 20, 2015, the U.S. Treasury released a group of proposed changes to the 2006 U.S. Model Income Tax Convention of November 15, 2006 (the “Model Treaty”). The Model Treaty usually is the opening position of the United States in income tax treaty negotiations with other countries. In general, the Treasury’s proposed changes, if implemented, would significantly restrict the circumstances in which the U.S. is willing to grant treaty benefits to residents of another country. However, the news for U.S. treaty partners is not all bad; the Treasury now, as a general matter, is willing to offer “derivative benefits” to all potential treaty partners.
United States Held Liable for Making False Statements to Foreign Tax Authority
In a recent case, Aloe Vera of America Incorporated, et al. v. United States of America, the United States was found liable for making false statements to the Japanese tax authority during a joint audit of a group of taxpayers. The opinion also reports that, in connection with the joint audit, the Japanese National Tax Administration (“NTA”) leaked information concerning the audit to Japanese media, which caused the taxpayer’s Japanese subsidiary to experience a decline in sales. This case is notable, not only because it sheds light on the simultaneous examination program authorized by U.S. income tax treaties, but because it shows the potential hazards, to the IRS and U.S. taxpayers, of exchanging taxpayer information with treaty partners.
Senator Paul Continues to Block Senate Hearings to Approve New Tax Treaties
Senator Rand Paul (Republican, Kentucky), in a letter dated May 7, 2014, to Senate Majority Leader Harry Reid (Democrat, Nevada), stated his opposition to five treaties or protocols approved by the Senate Foreign Relations Committee last year. His letter states that he will object to any unanimous consent request, motion or waiver of any rule in relation to these treaties or any related measure. Senator Paul’s opposition to the treaties makes it difficult for these treaties to be approved by the full Senate, because most Senate business is conducted by unanimous consent of the members.
IRS Proposes Revisions to Procedures for Requesting Assistance of U.S. Competent Authority
On 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.
Update on Discussions on Improving the India-USA Tax Relationship
Speaking at a luncheon in Washington on November 22, 2013, Mr. Mike Danilack of the IRS updated practitioners on the current state of the relationship between the U.S. competent authority and his counterpart in India, Mr. Akhilesh Ranjan.
IRS Concludes That Dividends Paid by Cypriot Corporation Qualify under Section 1 (h) (11)
In a Chief Counsel Advice memorandum, CCA 201343019, issued September 10, 2013, the Office of Associate Chief Counsel (International) considered whether a dividend paid by a Cypriot corporation to a U.S. shareholder was “qualified dividend income” (QDI) for purposes of section 1(h)(11). The CCA is significant because Cypriot corporations are common in many private equity (as well as other investment) structures, and the government previously had not addressed how to apply section 1(h)(11) to dividend paid by a foreign corporation that has no U.S. source income.
Tenth Circuit Refuses to Quash IRS Subpoena for Bank Account Data Requested Under Mexican Treaty
A recent order and judgment by the Tenth Circuit issued in the case of Solomon Juan Marcos Villareal v. United States of America illustrates how the IRS can use a summons to obtain U.S. financial data beneficial to a non-U.S. tax authority’s investigation of a non-U.S. taxpayer and then share that information with the tax authority pursuant to the terms of an income tax treaty or TIEA.
Tax Court Considers Taxation of the Golfer Sergio Garcia
Nearly two years ago, in our July 2011 column, we discussed Goosen v. Commissioner, a case concerning the taxation of endorsement fees paid to professional golfer Retief Goosen, a U.K. tax resident and non-domiciliary. On March 14, 2013 the Tax Court issued an opinion in in a similar case involving another professional golfer, Sergio Garcia, a citizen of the Spain and a Swiss tax resident. The Garcia case is significant because it includes an interpretation of the artistes and sportsmen article (Article 17) of the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (the “Swiss Income Tax Treaty”).
Differences between India and the United States on Significant Treaty Issues Continue
The U.S. tax press reports that the U.S. competent authority, Mike Danilack, while speaking at a tax conference in California in early February 2013, announced that, after consultations with his counterparts in India, he was pessimistic that India and the United States could conclude bilateral APA's given their current positions on some significant transfer pricing issues. Danilack said that India and the United States disagree on some fundamental points, including choice of transfer pricing method (cost-plus v. profit split) and the appropriate treatment of risk in a transfer pricing analysis.