Managing the Competent Authority Process for U.S.-Based Multinational Enterprises

by Barry Shott, Richard Barrett and Elizabeth Sweigart *

Under pressure to close revenue gaps and to address perceived aggressive tax positions related to the pricing of cross-border transactions, both the U.S. and foreign tax authorities are imposing very large tax adjustments upon multinational enterprises. When this situation arises, a company potentially could be required to pay tax twice on the same income for the same period - in the local country proposing the adjustment and in the other country where the counterparty to the transaction has already reported the income on its tax return and paid tax on that income. In these instances, it is important for companies to understand and to take advantage of the various forms of assistance available to them under the applicable tax treaties including seeking relief under the mutual agreement procedures (MAP) provided by the Office of the Competent Authority within the tax administration. Requesting MAP assistance in a timely manner and fully engaging in the process are critical success factors for managing the risk of double taxation by multinational enterprises.

The Role of Treaties. Income tax treaties, also known as income tax conventions, are comprehensive agreements between countries intended to establish a set of rules for the taxation of income as a result of taxpayers conducting cross-border transactions with a related party in another taxing jurisdiction. The great majority of income tax treaties are bilateral, although certain non-U.S. jurisdictions have entered into multilateral agreements. Primarily, these tax treaties serve to facilitate international commerce and investment by mitigating the threat of double taxation and providing greater certainty to companies engaging in cross-border trade. Tax treaties are also seen by governments as a tool to combat fiscal evasion related to income tax and capital gains.

Some countries, including the United States, have also entered into Tax Information Exchange Agreements (TIEAs) with other countries...

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Currently the United States has over 60 bilateral treaties with countries around the world covering various aspects of taxation including income tax, withholding tax, value added tax, and other taxes. In addition, the United States has approximately a dozen TIEAs in place.

Model Tax Conventions. There are several models available for countries to consider when negotiating income tax treaties.

In the United States, the U.S. Model Income Tax Convention (U.S. Model), last updated by the U.S. Treasury Department on November 15, 2006, serves as the starting point for treaty negotiations between the United States and other jurisdictions. A key - and often controversial - feature of the U.S. Model is the inclusion of the Limitation on Benefits (LOB) provision in Article 22...

Most recently updated in 2008, the Organisation for Economic Co-operation and Development (OECD) developed its original Model Tax Convention on Income and on Capital (OECD Model) in 1963. The OECD Model has been widely adopted by the OECD member states - as well as more developed non-member countries...

Developing countries tend to prefer the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model), most recently updated in 2011. First issued in 1980, the UN Model explicitly states that an intention of the convention is to promote tax treaties that "contribute to the furtherance of the development aims of developing countries."...

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"Competent Authority" Defined. Often erroneously seen by smaller taxpayers as only the domain of large enterprises, MAP is an important tool for taxpayers - both individuals and corporations - to manage situations in which the actions of one or both of the treaty participants result in taxation in contravention of treaty provisions. The term "Competent Authority" is used in income tax treaties to identify the designee or representative in each of the jurisdictions who will be responsible for implementing the treaty and its provisions...

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The MAP Process. In the United States, a request for MAP assistance can be filed once a taxpayer identifies a situation in which a tax is or may be levied by a foreign tax authority in contravention of an existing tax treaty.

In instances in which the IRS is initiating the adjustment, MAP relief may be requested following receipt of written notice of the proposed adjustment (e.g., Form 5701) by the taxpayer. Generally, the U.S. Competent Authority will deny requests for assistance as premature when the taxpayer has not been informed in writing of a proposed adjustment.

The specific procedures for seeking relief from the U.S. Competent Authority are set forth in
 Rev. Proc. 2006-54, 2006-2 CB 1035. In light of the recent IRS restructuring, which moved the Advance Pricing Agreement (APA) function out of the Office of Chief Counsel and combined it with the MAP teams under the LB&I Division, IRS officials have remarked publicly that a new revenue procedure reflecting the IRS realignment is forthcoming. Although changes to the existing procedure are expected, the overarching leading practices for taxpayers to manage the MAP process likely will remain consistent with current procedures...

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Leading Practices. ... [T]reaty partners have different procedures for addressing MAP requests some of which mirror the U.S. process and some of which have their own local approach and nuances...

Treaty Awareness. MAP assistance is only available when there is a treaty between the taxpayer's host country and the country from which the foreign income is sourced...

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Act Promptly, Understand the Options. ... [A]lternative approaches include commencing a Simultaneous Appeals Procedure (SAP) together with a MAP request. Although not widely used, this approach provides for the assigned IRS Appeals officer to work in concert with the U.S. Competent Authority to resolve the issue before the foreign tax authority is contacted...

Overall, MAP is an important tool for taxpayers doing business internationally. A thorough understanding of the relevant tax treaties and the administrative procedures for each operating jurisdiction should be considered essential due diligence in managing cross-border transactions...

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Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

* Barry Shott, Richard Barrett, and Elizabeth Sweigart are with PricewaterhouseCoopers LLP. Barry, a Senior Managing Director, joined PwC after a 35-year career with the IRS in a wide range of field and executive level positions. Most recently, he was the Deputy Commissioner (International), LMSB (now LB&I) for the IRS and U.S. Competent Authority. He can be reached at barry.shott@us.pwc.com. Richard, a Principal at PwC, has over 30 years of experience in tax consulting and tax administration. Prior to joining PwC, Richard worked in the Office of the Associate Chief Counsel (International) of the IRS as the Director of the Advance Pricing Agreement (APA) Program. He can be reached at richard.f.barrett @us.pwc.com. Liz, a Director at PwC, has over a decade of transfer pricing, financial reporting, and project management experience. She can be reached at elizabeth.a.sweigart@us.pwc.com. Learn more about PwC at http://www.pwc.com.

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