- 4.60.2 Mutual Agreement Procedures and Report Guidelines
- 126.96.36.199 Notification to Taxpayers of Potential Double Taxation
- 188.8.131.52 Role of Examination
- 184.108.40.206 Processing Examination Cases
- 220.127.116.11 MAP Report
- 18.104.22.168 Foreign Initiated Adjustments Affecting a U.S. Tax Return or Claimed on Examination
- 22.214.171.124 U.S. Possessions
- Exhibit 4.60.2-1 Right to Request Competent Authority Consideration Letter 1853(P) (Rev. 01-01-2002)
- Exhibit 4.60.2-2 Right to Request Assistance Under Agreement on the Coordination of Tax Administration with Possessions Pattern Letter 1915(P)(Rev. 01-01-2002)
- Exhibit 4.60.2-3 Double Taxation Issue Schedules 1853(P)/1915(P)
Part 4. Examining Process
Chapter 60. International Procedures
Section 2. Mutual Agreement Procedures and Report Guidelines
If a potential double taxation adjustment is proposed during an examination, the IE must notify the taxpayer of the right to seek Mutual Agreement Procedure (MAP) consideration by using Letter 1853(P) [Exhibit 4.60.2–1] or similar correspondence. lEs also must include with the letter, Schedule 1853(P)/1915(P) [Exhibit 4.60.2–3]. A separate schedule should be prepared for each treaty country entity involved. See IRM 126.96.36.199 for matters involving U.S. possessions.
Pattern Letter 1853(P) should contain a statement advising the taxpayer to comply with all MAP provisions contained in the relevant treaty.
Taxpayers can be notified about proposed adjustments with Letter 1853(P), Form 5701, or other correspondence.
Generally, the IE should not deliver Letter 1853(P) at the onset of the examination, or before adequate development of the double taxation issue. However, where an issue has been developed during a prior examination and the IE can make a reasonable estimate of the proposed adjustment, the IE is encouraged to issue a Letter 1853(P) immediately after determining that there has been no change to the relevant facts in the current audit period.
The IE will issue Letter 1853(P) when an adjustment relating to any tax treaty article is proposed. Letter 1853(P) should be issued when an issue is sufficiently developed and when the adjustment can reasonably be estimated. Specifically, Letter 1853(P) will be issued when an adjustment concerns any of the following relationships with a treaty country entity:
Foreign corporation/U.S. branch (Form 1120F)
U.S. Corporation/Foreign branch, etc.
As a courtesy, the IE may issue Letter 1853(P) to the taxpayer even if the issue involves a nontreaty country.
Letter 1853(P) should be presented to the taxpayer with a receipted copy maintained with the examination workpapers.
IEs should ensure that the following notification language is included in the audit plan for Coordinated Industry Case (CIC) taxpayers: "During the examination, adjustments may be recommended to your income tax liability causing an economic double taxation as a result of your various affiliates operating in foreign countries. Therefore, we suggest you advise your foreign affiliates in these countries to notify the appropriate taxing authorities about postponing the expiration of the statutory period of limitations on refunds or other tax adjustments. This procedure should not be limited to those foreign affiliates listed on page 4 of this portion of the examination plan. In the event these adjustments affect the tax liability of an affiliate operating in a treaty country, you have the right to request competent authority consideration for relief from economic double taxation under Rev. Proc. 96–13."
This notification language does not relieve the IE of the responsibility to issue Letter 1853(P) or a similar letter, and Schedule 1853(P)/1915(P).
Letter 1853(P) or Letter 1915(P), with appropriate changes, may be used for non-allocation issues.
Certain tax treaties provide for a time period for notifying a treaty country in order for the MAP process to be effective. These notification provisions are common in tax treaties negotiated after 1980 and generally make the taxpayer responsible for notifying the treaty country once an issue is raised by the Service.
Depending upon the facts and circumstances, if the taxpayer does not receive timely notice of a proposed adjustment, the Service may be required to recede from a proposed adjustment to the extent the adjustment would give rise to double taxation. Unless the Service ensures that the U.S. taxpayer receives notification of a proposed adjustment prior to the expiration of the specified time period, the Service could lose tax revenue.
The IE must make every effort to notify the taxpayer of a proposed double tax issue at the earliest date possible. If the development of an issue will not permit a timely notification to the taxpayer, the International Territory Manager should contact the Manager, Tax Treaty.
If a taxpayer either executes a closing agreement, or reaches a settlement with Appeals or Counsel pursuant to a closing agreement or other written agreement with respect to a potential competent authority issue, the U.S. Competent Authority will endeavor only to obtain a correlative adjustment from the treaty country and will not undertake any actions that would otherwise change such agreements. See IRM 4.60.3, Tax Treaty Related Matters, for additional information. Any such agreement should specify that the taxpayer acknowledges that its rights for MAP consideration on the issue will be restricted in this manner.
Field personnel should be familiar with the revenue procedures, rulings, and regulations that apply to MAP requests.
An allocation of income or deductions between a U.S. corporation and a related foreign corporation under IRC section 482 or any other IRC section, may affect the computation of the deemed paid credit under IRC section 902.
The effect of an IRC section 482 allocation in computing the deemed paid credit is explained in Rev. Rul. 92–75, which states that unless efforts are pursued to obtain refunds from a foreign country, no credit will be allowed for foreign taxes paid with respect to the IRC section 482 allocation or any other IRC section.
Rev. Rul. 92–75 also modified Rev. Rul. 80–231; both rulings presume that an IRC section 482 allocation creates an excess of foreign taxes paid and that the excess will be presumed to have been refunded by the foreign country. The taxpayer may rebut this presumption only if the Service is satisfied that the U.S. taxpayer and the foreign entity have exhausted all effective and practical remedies, and the foreign country does not refund the overpayment. Treas. Reg. 1.901–2(e)(5) incorporates and expands the position in these revenue rulings.
If the United States has a treaty with a country having tax jurisdiction over the foreign entity, all effective and practical remedies include requesting MAP.
Any determination by the Service that a taxpayer has exhausted the competent authority remedy must be made in consultation with the U.S. Competent Authority. Therefore, taxpayers should be encouraged to use MAP.
As the program manager for the field director (LMSB — Director of Field Operations or SBSE — Area Director) on MAP matters, the International Territory Manager monitors MAP requests to ensure expeditious handling and keeps the field director informed about the status of pending MAP requests.
The field office or appeals office to which the return is charged must protect the statute of limitations in cases under competent authority consideration. Original copies of tax returns should not be sent to the U.S. Competent Authority. Tax Treaty should be notified promptly if a taxpayer will not extend the statute of limitations.
U.S. Initiated Cases. A taxpayer may file a MAP request with respect to adjustments proposed during the U.S. examination process. Upon receipt of the MAP request, Tax Treaty will send the field director a copy of the acknowledgment letter issued to the taxpayer and a copy of the MAP request. Tax Treaty will also request a copy of the MAP report from the field director at this time.
If a taxpayer requests MAP consideration during the course of an examination, the normal processing of a case should proceed except for MAP issues.
If a taxpayer agrees to all issues (including potential MAP issues), the IE should secure an agreement on all issues (including potential MAP issues), and prepare an IE report and a MAP report. If the taxpayer wishes to pay that part of the deficiency attributable to the MAP issues prior to final resolution, such payment will be treated as an advance payment. If the taxpayer wishes to exclude the MAP issues from the agreement, the IE will secure a partial agreement on issues other than MAP and prepare both an IE and MAP report.
If a taxpayer conditionally agrees with the MAP issues and disagrees with other issues, the IE will prepare an unagreed IE report and a MAP report. If the taxpayer wishes to pay that part of the deficiency attributable to the MAP issues prior to final resolution, the payment will be treated as an advance payment.
For MAP issues, the IE should include a statement with the report informing the taxpayer that any protest filed should include language which will alert the Appeals Officer that agreement on the MAP issues is tentative pending the taxpayer’s acceptance of the competent authority determination. This allows the taxpayer to protect its right to protest the MAP issue at a later time.
If a taxpayer wishes to appeal unagreed issues (including MAP issues), the IE will prepare an unagreed IE report that explains the adjustment amount and tax effect for all issues. After approval of the unagreed IE report and MAP report, a 30-day letter will be issued. Afterwards, the regular procedures for reviewing the protest and forwarding the case to Appeals will be followed.
The imposition of IRC section 6621(c) interest on proposed adjustments will be automatic if the proposed tax remains unpaid 30 days after the issuance of a 30-day or 90-day letter.
The IRC section 6621(c) rate is to be applied on the 30th day after the date that the first letter of proposed deficiency allowing the taxpayer an opportunity for administrative review in Appeals is sent.
The issuance of Form 5701 for an Early Referral Issue(s) will not be treated as a letter of proposed deficiency for purposes of the computation of the increased interest under IRC section 6621(c).
In situations where the IE issued a notice of proposed adjustment, Form 5701, to the taxpayer and the taxpayer requests MAP under Rev. Proc. 96–13, the IRC section 6621(c) rate will not apply to that issue since a 30-day letter has not been issued.
If a 30-day letter is issued because of other unagreed issues, or after the field director's office has completed its examination, the IRC section 6621(c) rate will apply to the issue under MAP consideration because the MAP issue is included in the 30-day letter. The filing of a MAP request by the taxpayer should not delay the issuance of a 30-day letter.
Foreign Initiated Cases. A taxpayer requesting MAP assistance with regard to foreign initiated adjustments is not required to file a copy of the request with a field director. Tax Treaty will forward a copy of the MAP request and a copy of the acknowledgment letter to the appropriate field director.
If the U.S. taxpayer’s return is Then Under examination The field director will continue the examination of the domestic entity. Not under examination The field director will secure the return and determine whether any issues, other than the foreign initiated adjustments, should be examined.
The field director should request the participation of an IE and indicate that the taxpayer has requested MAP consideration.
Foreign initiated issues accepted for MAP consideration, should not be examined until directed by the U.S. Competent Authority.
The procedures used to resolve foreign initiated adjustments affecting a U.S. tax return or claimed during an examination by a U.S. taxpayer are explained in IRM 188.8.131.52.
Requests for Evaluation of Positions and/or Additional Information:
The U.S. Competent Authority may need additional information about U.S. initiated adjustments and will ask the field director for more detailed information about the MAP report previously submitted. Cases accepted for MAP consideration in which the Service’s position is not well developed will be returned to the appropriate field director/IE for further development.
The U.S. Competent Authority usually will request justification from the foreign competent authority for the foreign adjustments, and upon receipt of such justification, will forward a translated copy to the field director, generally with a request for an evaluation of the foreign initiated issue.
Requests for evaluation of positions and/or additional information will be directed to the field director having jurisdiction at the time that the request is made. Field directors will handle these requests as priority action items, with a target date for submission of the completed response not more than 60 days from the time of receipt. The field director will follow locally prescribed measures to record and control incoming correspondence, and enter a response due date of 60 days from the date of receipt. A memorandum to the Director, International, Attn: LM:IN:T, should indicate the action office to whom the request was forwarded, the name and telephone number of the individual within that office who may be contacted, and the response due date given to the action office.
The acknowledgment memorandum will be routed through appropriate field office channels.
When a request is assigned to an international group for completion, the group will control it in the same manner as an assigned income tax return.
If an evaluation cannot be completed within the requested 60-day period, personnel performing the evaluation will consult with Tax Treaty about the anticipated completion date.
If the action office finds that it will be unable to meet the response due date, a status report will be prepared in the form of a memorandum to the Director, International, Attn: LM:IN:T, and forwarded through the appropriate field office channels. The memorandum will describe the actions taken to complete the request, the reason the evaluation cannot be completed by the response due date, and the projected completion date.
Status reports reflecting revised due dates will be submitted at the end of every month until the evaluation is completed.
Tax Treaty will prepare quarterly status reports for each case under negotiation and forward them within 15 days after the close of a quarter to the appropriate operating division (LMSB, SB/SE). Copies of quarterly status reports involving cases under appeals jurisdiction will be sent to the Chief, Appeals and the appropriate Director, Appeals (LMSB, SB/SE, W&I).
The U.S. Competent Authority relies on a well-developed IE report to explain the MAP issue to the treaty partner, and to develop a negotiating position for the issue. lEs must insure that the U.S. position contained in the report is factually and technically correct. If problems arise during the preparation or review of a report about a MAP issue, the IE should consult with the International Team Manager, who may contact Tax Treaty for assistance.
A MAP report must be prepared for all cases that contain potential double tax issues regardless of whether a MAP request has been initiated. After a taxpayer submits a MAP request, Tax Treaty will secure from the field director pertinent portions of the IE report and MAP issue papers (MAP report). A copy of the IE report (Form 3963) will be the first page of the MAP report. The MAP report should include:
An explanation of the U.S. and foreign initiated adjustments.
A copy of the Letter 1853(P) or Letter 1915(P).
A brief description of the taxpayer’s U.S. business operations and the operations of all foreign entities involved in the MAP request, including the control and ownership of the entities involved.
Copies of the IE report and workpapers pertinent to the MAP issue(s).
A narrative explaining each double tax issue.
A statement detailing the taxpayer’s degree of cooperation (Note: A taxpayer's failure to cooperate during the examination may result in denial of MAP assistance.).
If the MAP request is available before the MAP report is completed, a statement indicating the IE’s agreement or disagreement with the facts in the MAP request and the reason for any disagreement.
Status of the statute of limitations for each year included in the MAP report.
Unless provided elsewhere, an evaluation of the MAP issue in view of the taxpayer’s business operations, and if relevant, the arm’s-length standard.
Comments about any requests for economist assistance or technical advice and the results of those requests.
Identification of MAP issues as recurring items and the status of the prior adjustments.
A copy of any Letter 1853(P) and/or Letter 1915(P) issued for prior period adjustments.
A comment about whether the issue is expected to occur in subsequent cycles.
The MAP report should include the following information for imputed interest issues:
The capital and debt structure of the U.S. and foreign entities.
A breakdown of the accounts on which interest is imputed with details of the adjustment computation.
A reconciled schedule of the U.S. entity's accounts with its foreign affiliates.
The MAP report should include the following information for royalty issues:
Copies of any pertinent royalty agreements between U.S. and foreign entities.
Copies of any royalty agreements used for comparable purposes.
Description of patents or other intangibles.
The MAP report should include the following information for transfer pricing issues:
A functional analysis, if necessary.
Documentation used for selection of the comparables.
Economist report, if applicable.
The MAP report should include information about the basis for assertion or non-assertion of the IRC section 6662(e) penalty where potentially applicable.
Reviewing MAP Reports:
A MAP report must accompany the examination report and is subject to review by an International Team Manager or designated reviewer.
After the review, the MAP report is held by the International Team Manager until it is requested by Tax Treaty.
lEs should look for foreign initiated adjustments that U.S. taxpayers may have used to reduce their U.S. tax liability. IEs may find these adjustments by scrutinizing:
Foreign tax credits
Changes to transfer prices, management fees, license fees, or any intercompany charged expenses
During the examination, the taxpayer should be asked to provide a written response about any foreign initiated adjustment, regardless of whether the adjustment has been reported to the Service.
With the concurrence of Tax Treaty, the field director may be allowed to provide relief for foreign initiated adjustments in small dollar cases where the facts and the amounts are not in dispute.
When non-treaty country adjustments are encountered, lEs must follow the Internal Revenue Code to determine any U.S. tax liability.
IEs must identify foreign initiated adjustments early in the examination cycle and may contact Tax Treaty to determine the best means for resolving the issue.
If the adjustments deal with income and expense allocations, or are made contrary to treaty provisions, the information listed in paragraph 7 below should be forwarded by the IE through the International Territory Manager to Tax Treaty for evaluation.
The IE should provide Tax Treaty with the following information about foreign initiated adjustments:
Treaty country initiating the adjustment.
Name, taxpayer identification number, and address of the U.S. and affiliated foreign taxpayers.
U.S. tax years affected.
Adjustment amounts in U.S. dollars.
An explanation of the foreign issue that includes a description of the U.S. tax impact .
A description of the method used by the U.S. taxpayer to absorb the foreign adjustment.
Whether funds were repatriated or accounts were offset by the U.S. or foreign entities.
A statement of the IE's preliminary evaluation regarding the economic substance of the issue and a recommendation about the need for an economic evaluation.
Any other relevant information.
Within 30 days after receipt of the information listed in paragraph 7, Tax Treaty will advise the International Territory Manager whether jurisdiction for the adjustment will be released by the U.S. Competent Authority to the field director.
If the U.S. Competent Authority releases jurisdiction, the field director may allow a correlative adjustment.
If the U.S. Competent Authority does not release jurisdiction, the field director will issue Letter 1853(P) . The U.S. Competent Authority will take no further action unless the taxpayer submits a MAP request for the issue. MAP negotiations may be initiated after the taxpayer's request for assistance is received.
In order to resolve tax disputes arising from inconsistent positions taken by the Service and U.S. possession tax agencies, the Service executed agreements ( "Agreements" ) with Puerto Rico, American Samoa, Virgin Islands, and Guam.
The Agreements designate the Director, International as the official responsible for resolving, by mutual agreement, any differences that may arise from the application of U.S. tax laws and those of its possessions.
Rev. Proc. 89–8 prescribes the procedures to be used for resolving issues arising when a taxpayer is subject to inconsistent tax treatment by the Service and possession tax agencies.
The procedures set forth in IRM 4.60.3 also apply to U.S. possession cases except that pattern Letter 1915P [Exhibit 4.60.2–2] with Schedule 1853(P)/1915(P) [Exhibit 4.60.2–3] should be substituted for pattern Letter 1853(P). A separate schedule should be prepared for each U.S. possession involved with the issue.
Rev. Proc. 89–8 directs the taxpayer to file a written request for assistance when there is an indication of inconsistent tax treatment by the Service and the U.S. possession tax agency. The Director, International will forward a copy of the request to the field director having jurisdiction of the taxpayer’s return.
The provisions of this Section and IRM 4.60.3 also apply to cases involving inconsistent treatment by the Service and the U.S. possession tax agency. Call the Tax Treaty division for further assistance. Address communications as follows:
Manager, Tax Treaty
950 L’Enfant Plaza South, S.W.
Washington, DC 20024
[Type on Appropriate Letterhead]
Tax Year(s) Ended:
We recently advised you that we propose to recommend adjustments to your income tax liability for the above tax year(s). These adjustments may result in double taxation under the mutual agreement procedure(s) governed by a U.S. treaty(ies) with [Name(s) of Country(ies)].
You may request competent authority consideration for relief from double taxation under Revenue Procedure 96–13, 1996–1 C.B. 616.
To help us process your case promptly, please let us know within 30 days whether you intend to seek competent authority consideration. If you do not wish to request consideration now, you may do so later.
You should not execute the closing agreement required by Revenue Procedure 99–32, 1999–2 C.B. 297, if you intend to request competent authority consideration.
You are responsible for advising your foreign affiliate(s) [Name(s)] to notify the appropriate taxing authority(ies) about postponing the expiration of the statutory period of limitations on refunds or other tax adjustments where necessary in their country(ies) of residence.
We have enclosed pertinent information, Double Taxation Issue Schedule 1853, to help you notify the appropriate taxing authority(ies) about the adjustment(s). Estimates will be shown when the adjustment amount(s) has not been finalized by the date of this letter. After the adjustment(s) is finalized, a revised schedule will be issued.
Thank you for your cooperation.
[Manual or Strip-in signature]
Schedule(s) of Double Taxation Issues (Give number of schedules being sent)
[Type on appropriate letterhead]
Tax Year(s) Ended:
We have recently advised you that we propose to recommend adjustments to your income tax liability for the above year(s). These adjustments may result in double taxation under the mutual agreement procedure governed by the Agreement on the Coordination of Tax Administration with (the name of a U.S. possession).
In the case of the Agreement on the Coordination of Tax Administration, you have the right to request relief from double taxation under Rev. Proc. 89–8, 1989–1 C.B. 778.
To help us process your case promptly, please let us know within 30 days from the date of this letter whether you intend to seek relief from double taxation. If you do not wish to request assistance now, you may do so later.
You should not execute the closing agreement required by Rev. Proc. 99–32, 1999–2 C.B. 297, if you intend to request the Director, International to implement the mutual agreement procedure with (name of U.S. possession).
You are responsible for advising your affiliate(s) to notify the appropriate taxing authorities about postponing the expiration of the statutory period of limitations on refunds or other tax adjustments.
We have enclosed pertinent information, Double Taxation Issue Schedule 1915, to help you notify the appropriate taxing authority(ies) about the adjustment(s). Estimates will be shown when the adjustment amount(s) has not been finalized by the date of this letter. After the adjustment(s) is finalized, a revised schedule will be issued.
Thank you for your cooperation.
Schedule(s) of Double Taxation Issues
|DATE||TYPE OF RETURN|
|U.S. Entity:||Treaty Country Entity:|
|TIN:||Relationship to U.S. entity:|
|(Parent, Subsidiary, Branch, etc.)|
|Instructions to Examiners:|
|1.||This schedule is attached and issued with Letter 1853(P)/1915(P).|
|2.||Separate schedules must be prepared for each treaty country entity/U.S. Possession.|
|3.||Issues should be clearly identified (for example: transfer pricing, royalty, etc. with appropriate IRC section/uniform issue code).|
|4.||If amounts are not finalized and the examiner believes the statute of limitations of the foreign entity is imminent, an estimate amount may be used (state estimate). When the amounts are finalized, a revised schedule should be issued.|