U.S. tax treaties allow a taxpayer to request a Mutual Agreement Procedure (MAP) if the taxpayer believes that it is, or will be, subject to taxation inconsistent with the treaty1. This situation typically arises as a result of a U.S.- or foreign-initiated adjustment, which normally would cause double taxation (taxation of the same income twice)2. The taxpayer may file a MAP request with the U.S. competent authority. That request asks the U.S. and foreign competent authorities to agree to “relieve” (remove) taxation inconsistent with the treaty, which normally would mean to relieve double taxation. In particular, the adjusting jurisdiction might agree to fully or partially withdraw its adjustment, or the other jurisdiction might agree to provide “correlative” relief, which is a downward adjustment of taxable income.
On receiving a MAP request, the U.S. competent authority normally will accept the request for consideration. The U.S. competent authority may however decline to accept the request if the request is defective (for example, lacking required information) and the defect is not corrected, the taxpayer is clearly not eligible for assistance under the terms of the relevant tax treaty (such as by failing to be a resident of either contracting state), or the taxpayer has engaged in certain prejudicial conduct (such as impeding the IRS examination function or failing to comply with provisions regarding coordination of MAP with IRS Appeals).3 After accepting a case for consideration, the U.S. competent authority will first consider whether, based on its own analysis of the case, it is able to unilaterally provide full relief, which would be either a full withdrawal of the adjustment in the case of a U.S.-initiated adjustment, or correlative relief in the full amount of a foreign-initiated adjustment.4
If the U.S. competent authority cannot unilaterally provide full relief, it will negotiate with the foreign competent authority. Four outcomes are possible that would grant full or partial relief: (1) the adjusting jurisdiction fully withdraws the adjustment, (2) the non-adjusting jurisdiction provides full correlative relief (correlative relief in the full amount of the adjustment), (3) the adjusting jurisdiction partially withdraws the adjustment and the non-adjusting jurisdiction provides partial correlative relief, with the correlative relief in an amount equal to the remaining adjustment, so that no double taxation remains, (4) there is some partial withdrawal of adjustment, some partial correlative relief, or both, but the withdrawal (if any) plus the correlative relief (if any) total to less than the original adjustment, so that some double taxation remains.5 After the competent authorities tentatively agree on one of these outcomes, the U.S. competent authority presents that outcome to the taxpayer. If the taxpayer accepts the outcome, the U.S. competent authority normally will then formalize that outcome, direct the relevant offices within the IRS to implement its terms, and close the case. If the taxpayer does not accept an outcome tentatively agreed by the competent authorities, the case is closed and jurisdiction over the relevant issue(s) is returned to the relevant offices within the IRS.6 7
1 Rev. Proc. 2015-40, sec. 2.01(2).
2 Generally, a taxpayer that is subject to tax in more than one jurisdiction (for example, because it is based in one jurisdiction but has a permanent establishment is another jurisdiction) files tax returns showing incomes in the different jurisdictions that add up to the taxpayer’s total income. Similarly, a group of related taxpayers with operations in more than one jurisdiction generally files tax returns showing incomes in the different jurisdictions that add up to the group’s total income. In both cases, one jurisdiction’s upward adjustment of taxable income would then cause the total incomes subject to taxation to exceed the entity’s or group’s total income.
5 As an example of the third possibility, suppose that a U.S. company USCo sells an item to a Country X affiliate ForCo for $100, believing that that price comports with the arm’s length standard under IRC section 482, and that USCo and ForCo file tax returns, in the United States and Country X respectively, on that basis. Suppose further that IRS examiners consider that under the arm’s length standard the price should have been $150, and accordingly adjust USCo’s income upward by $50. At that point USCo and ForCo collectively would be subject to $50 of double taxation, since the total income taxed to USCo and ForCo would be $50 more than their actual combined income. During MAP, the competent authorities might agree on a sales price of $130 as comporting with Article 9 of the tax treaty between the United States and Country X. (Article 9 of U.S. tax treaties expresses the arm’s length standard.) The U.S. competent authority would then withdraw $20 of its adjustment, leaving only a $30 adjustment remaining, while the Country X competent authority would provide correlative relief (a downward income adjustment) of $30. As a result, no double taxation would remain.
6 Rev. Proc. 2015-40, sec. 9.
7 Under some treaties, if the competent authorities cannot agree on an outcome within a certain time (typically two years), the taxpayer normally may request arbitration; the arbitrators’ decision, if accepted by the taxpayer, is binding on the IRS and the other jurisdiction’s tax authority. Rev. Proc. 2015-40, sec. 10.