- 4.60.3 Tax Treaty Related Matters
- 18.104.22.168 Competent Authority and the Mutual Agreement Procedure (MAP)/Overview
- 22.214.171.124.1 Domestic Tax Laws and Double Taxation
- 126.96.36.199.2 Tax Treaties and Double Taxation
- 188.8.131.52.3 U.S. Possessions and Double Taxation
- 184.108.40.206.4 Competent Authority
- 220.127.116.11.5 U.S. Competent Authority
- 18.104.22.168.6 Tax Treaty/MAP
- 22.214.171.124.7 MAP/Process
- 126.96.36.199.8 Taxpayers Role/MAP Process
- 188.8.131.52.9 U.S. Competent Authoritys Role/MAP Process
- 184.108.40.206.10 MAP Request/Denial
- 220.127.116.11.11 Field Director's Role/ MAP Process
- 18.104.22.168.12 Accelerated Competent Authority Procedure (ACAP)/Overview
- 22.214.171.124.13 Taxpayers Role/ACAP
- 126.96.36.199.14 Tax Treatys Role/ACAP
- 188.8.131.52.15 Field Directors Role/ACAP
- 184.108.40.206.16 Administrative and Judicial Remedies
- 220.127.116.11.17 Refund or Tax Credit/Map Request
- 18.104.22.168.18 Judicial Consideration/MAP Request
- 22.214.171.124.19 Simultaneous Appeals Competent Authority Procedure (SACAP)/Overview
- 126.96.36.199.20 SACAP/When Filing For Competent Authority Assistance
- 188.8.131.52.21 SACAP/After Filing For Competent Authority Assistance
- 184.108.40.206.22 SACAP/Cases Pending in Court
- 220.127.116.11.23 SACAP/Taxpayers Role
- 18.104.22.168.24 SACAP/Taxpayer Withdrawal
- 22.214.171.124.25 SACAP/Appeals Role
- 126.96.36.199.26 SACAP/U.S. Competent Authoritys Role
- 188.8.131.52.27 SACAP/Services Denial or Termination
- 184.108.40.206.28 SACAP/Returning to Appeals
- 220.127.116.11.29 Advance Pricing Agreement (APA)/Overview
- 18.104.22.168.30 APA/Tax Treatys Role
- 22.214.171.124.31 APA/Chief Counsels Role
- 126.96.36.199.32 APA/Field Directors Role
- 188.8.131.52.33 Limitation on Benefits Article (LOB)/Overview
- 184.108.40.206.34 LOB/Objective Tests
- 220.127.116.11.35 LOB/Subjective Tests
- 18.104.22.168.36 LOB/Taxpayers Role
- 22.214.171.124.37 LOB/Tax Treatys Role
- 126.96.36.199.38 LOB/Field Directors Role
- 188.8.131.52 Rev. Proc. 9932
- 184.108.40.206.1 Background
- 220.127.116.11.2 Purpose
- 18.104.22.168.3 General
- 22.214.171.124.4 Procedures
- 126.96.36.199 Correlative Taxpayers Section 482
- 188.8.131.52.1 Glossary of Terms
- 184.108.40.206.2 Examination Procedures
- Exhibit 4.60.3-1 Income Tax Treaties
- Exhibit 4.60.3-2 APA Invitation Letter
- Exhibit 4.60.3-3 Limitation of Benefits Determinations
Part 4. Examining Process
Chapter 60. International Procedures
Section 3. Tax Treaty Related Matters
The Mutual Agreement Procedure (MAP), performed by the U.S. Competent Authority, provides taxpayers a means to secure relief from economic double taxation. Rev. Proc. 96–13 sets forth the procedures that taxpayers should follow to request assistance from the U.S. Competent Authority.
Note: Rev. Proc. 96–13 is currently being revised.
Foreign tax authorities may use methods of taxation that differ from those used by the U.S. As a result, some taxpayers can be taxed twice on income. Economic double taxation may also occur when two or more countries tax related entities on the same income. Domestic tax laws can eliminate double taxation by:
Allowing a credit against the domestic tax for foreign taxes paid on foreign source income that is also subject to domestic tax (the credit method).
Exempting foreign source income from domestic taxation (the exemption method).
The U.S. may enter into a tax convention, or tax treaty, with another country to avoid double taxation. A treaty can avoid double taxation by:
Defining and allocating taxing rights, which in conjunction with the domestic tax laws of the contracting states can avoid double taxation.
Providing a process, the mutual agreement procedure (MAP), that gives the contracting states a mechanism to resolve double taxation cases and other problems arising from the operation of a tax treaty.
The U.S. has tax treaties with the countries listed in Exhibit 4.60.3–1.
This list includes income tax treaties in force as of August 1, 2001. New treaties and protocols are implemented on a regular basis. Protocols serve to amend or modify a tax treaty. Occasionally, treaties are terminated. Many tax service publications, such as CCH, provide an updated listing.
The IRS has mutual agreement procedures with U.S. possessions that serve to avoid double taxation. These agreements do not allocate taxing rights, but serve to limit the authority of designated tax agencies. The agreements also help to resolve problems that may arise from inconsistent positions taken by the IRS and the possession tax agencies. Rev. Proc. 89–8 provides the IRS and taxpayers with guidelines to follow for resolving issues with the tax authorities of Puerto Rico, Virgin Islands, American Samoa, or Guam.
A tax treaty requires the designation of a competent authority for each country that is a party to the treaty. The respective competent authorities administer the provisions of the treaty. This authority may be delegated to one or more subordinate officials.
The Director, International is the U.S. Competent Authority for all U.S. tax treaties. The Director, International is also responsible for the execution of the Agreements on Coordination of Tax Administration with certain U.S. possessions.
Tax Treaty serves as the staff for the Director, International on tax treaty matters. Tax Treaty administers mutual agreement procedures for U.S. tax treaties and agreements with the U.S. possessions.
The MAP process provides assistance to taxpayers who are subject to double taxation by the U.S. and another country that is a party to a tax treaty with the U.S. The competent authorities of the contracting states shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of a tax treaty. The U.S. Competent Authority, treaty partner, field director (LMSB — Director of Field Operations or SBSE — Area Director), and taxpayer are all part of the MAP process.
The taxpayer initiates the MAP process by making a written request to the U.S. Competent Authority in accordance with the provisions of Rev. Proc. 96–13. After reviewing the request, the U.S. Competent Authority may initiate negotiations with the affected treaty partner to protect U.S. interests. Rev. Procs. 89–8 and 96–13 require the taxpayer to supply the information needed by the U.S. Competent Authority to pursue this process. Failure to provide this information can result in denial of MAP consideration for the taxpayer making the request.
If the taxpayer does not accept an agreement made by the U.S. Competent Authority with a treaty partner, the taxpayer may withdraw the MAP request and pursue other administrative and judicial remedies.
Tax Treaty, serving as the staff of the U.S. Competent Authority:
Acknowledges taxpayer requests within 10 days of receipt.
Notifies the competent authority for the affected treaty country of the MAP request. All original correspondence with the treaty country about the MAP request will be routed through the assigned Tax Attache (TA) when that representative is physically located in the affected treaty country. In all other cases, original correspondence will be sent directly to the treaty country with a copy forwarded to the assigned TA (except for Canada which does not have an assigned representative).
Forwards a copy of the MAP request to the appropriate field director.
Invites the field director to discuss issues.
Informs the field director of any significant differences between Tax Treaty's proposed negotiating position and the field director's position.
Secures a MAP report from the field director for U.S. initiated adjustments. A MAP report is prepared by an International Examiner for all cases with potential double tax issues.
Presents a position paper to the treaty country for U.S. initiated adjustments. A position paper states the U.S. Competent Authority’s recommended course of action for U.S. initiated adjustments.
Requests a position paper from the treaty country for foreign initiated adjustments.
Requests an evaluation from the field director for foreign initiated adjustments, when necessary. An evaluation will give the field director's opinion about adjustments proposed by a foreign tax authority. Evaluations are not usually requested for recurring issues or small adjustments.
Negotiates the case with the foreign competent authority or U.S. possession tax authority.
Prepares a disposition memorandum which is forwarded to the field director for implementation.
Prepares and forwards closing letters to the taxpayer and the treaty partner.
Tax Treaty denies assistance, or ceases to provide assistance to taxpayers if:
The taxpayer is not entitled to the treaty benefit, or the assistance requested.
The taxpayer will only accept a competent authority agreement under conditions that are unreasonable, or prejudicial to the interests of the U.S. Government.
The taxpayer rejected the competent authority resolution for the same or similar issue in a previous case.
The taxpayer does not agree that competent authority negotiations are a government-to-government activity that precludes direct taxpayer participation in the proceedings.
The taxpayer does not furnish sufficient information to determine whether a treaty provision is applicable to the issue raised in the request for assistance.
The taxpayer has acquiesced to a foreign initiated adjustment involving significant legal or factual issues that should have been resolved through the competent authority process and, prior to requesting assistance, has claimed a correlative adjustment or an increased foreign tax credit as a result of the adjustment.
The field director, acting in a support and advisory role:
Forwards the MAP report to Tax Treaty when requested.
Supplies any additional information necessary for negotiations with the treaty partner.
Provides an evaluation of a foreign initiated adjusment when requested by Tax Treaty.
Processes the disposition memorandum prepared by Tax Treaty.
The Accelerated Competent Authority Procedure (ACAP) is used by taxpayers for resolving issues already under competent authority consideration that recur in subsequent years. This procedure is available only when an identical issue occurs in the subsequent years and the issue is raised by the Service. Refer to Rev. Proc. 96–13, section 7.06. However, ACAP is not subject to accelerated issue resolution (AIR) process limitations provided in Rev. Proc. 94–67, 1994–2 C.B. 800.
The taxpayer may request the procedure at the time of filing, or any time thereafter, but before the conclusion of the mutual agreement process. In filing the request, the taxpayer sends the request in accordance with Rev. Proc. 96–13 to the Director, International. The request must contain a written statement that the taxpayer agrees:
That an inspection of books or records under the ACAP will not preclude or impede, under IRC Section 7605(b) or any other administrative provision adopted by the Service, a later examination of a return or inspection of books and records for any taxable period covered by the ACAP.
To furnish all relevant information requested by Tax Treaty and the field director.
After reviewing the taxpayer's request, Tax Treaty will:
Contact the appropriate field director to recommend whether the issue should be resolved in a comparable manner for subsequent taxable periods.
Request any additional information from the field director or taxpayer needed to negotiate the case.
Prepare and present a position paper to the treaty country.
Negotiate the case with the foreign competent authority.
Prepare a disposition memorandum which is forwarded to the field director for implementation.
Prepare and forward closing letters to the taxpayer and the treaty partner.
The field director, after consulting with Tax Treaty about the ACAP request, will:
Prepare and forward written approval or disapproval of the ACAP within 60 days.
Provide necessary information for the subsequent year(s) adjustments.
Taxpayers are afforded administrative and/or judicial remedies regardless of whether an issue is U.S. or foreign initiated.
For foreign initiated issues, the U.S. competent authority’s decision about a refund or tax credit is final and not subject to administrative review. For U.S. initiated issues, taxpayers should exhaust available MAP remedies because judicial determinations are generally final. If the U.S. Competent Authority accepts a MAP request after a court decision, MAP activity will be limited to persuading the treaty partner to grant a correlative adjustment.
The U.S. Competent Authority will not accept, or continue to consider a taxpayer’s request for assistance if it includes an issue pending in a U.S. Court, or designated for litigation unless permission is granted by Associate Chief Counsel (International).
IF a case is pending in Then The U.S. Tax Court Chief Counsel generally will ask the court to postpone its action until MAP consideration is closed. Any other court The Department of Justice, after consulting with Chief Counsel, will ask the court to postpone its consideration.
The final decision on severing issues or delaying trial rests with the U.S. court. The filing of a competent authority request does not relieve the taxpayer from taking any action that may be necessary or required with respect to litigation. For a case not pending in a court, and except to prevent prejudice to the Government’s interest (such as the expiration of the limitation period for assessment), the Service will postpone processing MAP issues until the U.S. competent authority has made a determination.
The Simultaneous Appeals Competent Authority Procedure (SACAP) is a process that allows taxpayers to request the services of Appeals and the U.S. Competent Authority simultaneously. The procedure serves to expedite settlement of U.S. initiated double tax issues. Refer to Rev. Proc. 96–13, section 8.
This procedure may be used when:
The taxpayer applies for competent authority assistance after a field director has proposed an adjustment and before a protest is filed;
The taxpayer has filed a protest for proposed adjustments, but decides to seek competent authority assistance for one issue while the other isssues are referred to Appeals; or
The taxpayer decides to request competent authority assistance with respect to an issue after the case has been assigned to Appeals.
This procedure may be used at any time after requesting competent authority assistance, but before the U.S. position paper is communicated to the foreign competent authority.
This procedure may be granted after the U.S. position paper is forwarded to the foreign competent authority if:
It would facilitate an early resolution of the competent authority issue; or
It is in the best interest of the Service.
A request for the SACAP is granted only with the consent of Chief Counsel when:
The matter is pending before a U.S. court; or
The matter has been designated for litigation and jusrisdiction has been released to the U.S. Competent Authority.
The taxpayer may address the SACAP request to the U.S. competent authority as:
Part of the initial competent authority assistance request; or
A separate letter to the U.S. competent authority after the initial competent authority assistance request has been submitted.
The taxpayer must state whether the periods included in the request were previously protested to Appeals. SACAP does not give taxpayers the right to further review of an issue previously considered by Appeals.
The taxpayer may withdraw the request for SACAP at any time. This procedure does not affect the taxpayer’s right to Appeals consideration of other unresolved issues. The other issues may be pursued without waiting for resolution of the issue under competent authority consideration.
The Chief, Appeals forwards a copy of the request to the appropriate Director, Appeals who assigns an Appeals Officer to the case. The assigned Appeals Officer will:
Consult with the taxpayer and the U.S. Competent Authority, using established Appeals procedures, in order to resolve the unagreed issue.
Coordinate the Appeals process with competent authority procedures.
The U.S. Competent Authority has jurisdiction for the issue when SACAP is involved and is responsible for:
Sending a copy of the request to the Chief, Appeals.
Requesting Appeals consideration of the issue.
Developing a U.S. position paper on the issue.
Negotiating the case with the foreign competent authority.
Preparing the disposition memorandum for the field director.
Preparing and forwarding closing letters to the taxpayer and the treaty partner.
The U.S. competent authority, the Chief, Appeals, or the appropriate Director, Appeals may terminate or deny the SACAP if it is determined to be prejudicial to the mutual agreement procedure or the administrative appeals process.
A taxpayer that received Appeals consideration, but was unable to reach a settlement in Appeals, may be denied the SACAP.
A taxpayer may request a conference with the U.S. competent authority and/or the Chief, Appeals to discuss the denial or termination.
The taxpayer may refer the issue to Appeals for further consideration if:
The competent authorities fail to agree; or
The taxpayer does not accept the mutual agreement reached by the competent authorities.
An advance pricing agreement (APA) is an agreement between the Service and a taxpayer on a transfer pricing method (TPM). This methodology may be applied to any apportionment or allocation of income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlled, directly or indirectly by the same interests.
The APA process is designed to be a flexible problem-solving process, based on cooperative and principled negotiations between taxpayers and the Service. The taxpayer initiates the request in accordance with Rev. Proc. 96–53. The APA Program is a component of the Office of the Associate Chief Counsel (International). Refer to CCDM 42.10 for the procedures for negotiating and entering into APA's and otherwise conducting the APA Program.
Rev. Proc. 96–53 was modified by Rev Proc. 97–1. The first Rev. Proc. issued each year, e.g. Rev. Proc. 97–1, Rev. Proc. 98–1, etc., explains the kinds of guidance (letter rulings, determination letters, information letters, etc.) and the manner in which guidance is requested by taxpayers and provided by the IRS.
If an APA involves transactions with a related entity in a treaty country, the taxpayer may request competent authority consideration to give effect to an APA on a bilateral basis. If this occurs, coordination is required between the APA staff within Chief Counsel and Tax Treaty.
Section 7.05 of Rev. Proc. 96–13 provides that any written agreement entered into by a taxpayer at Counsel is treated as a binding agreement in any subsequent competent authority negotiations. This does not include unilateral APA's.
Tax Treaty is responsible for coordinating the following:
Attend and participate in bilateral APA pre-filing meeting(s).
Notify the foreign competent authority in writing of the taxpayer’s request for a bilateral APA. Refer to Exhibit 4.60.3–2 which is a sample letter for this purpose.
Participate in the evaluation of the TPM and the development of the U.S. negotiating position.
When appropriate, prepare a U.S. negotiating position paper in accordance with the APA/Competent Authority section described in CCDM 42.10.8.
Conduct negotiations with the foreign competent authority for resolution of the bilateral APA.
Prepare closing documents for disposition of the case to the appropriate offices.
The APA Staff’s responsibilities include:
Accept or deny requests for APA's submitted by a taxpayer.
Evaluate the APA request and determine the scope of the APA.
Coordinate and evaluate the TPM proposed by the taxpayer.
Establish an IRS position for an appropriate TPM which is recommended as the U.S. position in subsequent competent authority negotiations.
The position established by the APA staff must be in writing and approved by the appropriate official within Chief Counsel.
The position established by the APA staff must provide an analysis of the taxpayer's proposal and reasons for acceptance or modifications to the TPM proposed by the taxpayer.
Field director personnel will attend and participate in bilateral APA pre-filing meeting(s).
Field director personnel will participate in the evaluation of the TPM and the development of the U.S. negotiating position.
A limitation on benefits article (LOB) is included in all new bilateral U.S. tax treaties to prevent residents of third countries from obtaining unintended benefits through "treaty shopping." The third country residents may seek unintended benefits because the third country does not have a tax treaty with the U.S., or to circumvent a less favorable tax treaty that the U.S. has with the third country. International Examiners may direct questions about these procedures to Tax Treaty at tel. (202) 874–1550.
The LOB article in most U.S. treaties sets forth a series of objective tests, or safe harbors. The presumption underlying each test is that a taxpayer satisfying the requirements of any of these tests does not have a treaty shopping purpose for locating in a treaty partner country. Taxpayers must meet a residency test and one of the LOB article’s safe harbor tests in order to qualify for treaty benefits. Other requirements may apply in particular situations. In the case of hybrid entity structures, the requirements of IRC section 894(c) and the regulations thereunder must also be satisfied.
The LOB treaty article also contains a subjective test. The subjective test provides that a resident of one of the States not otherwise entitled to the benefits of the convention under the objective tests may be granted treaty benefits if the competent authority of the State from which benefits are sought consents to this determination .
A resident of Japan establishes a corporation in the Netherlands to receive treaty benefits under the provisions of the U.S.-Netherlands Income Tax Treaty. However, the corporation would fail the objective tests of that treaty's LOB article. If the corporation receives a favorable determination from the competent authority, it would be entitled to benefits under that treaty. A detailed explanation of the LOB article is contained in the Technical Explanation of the U.S. Model Convention issued September 20, 1996.
Before making a request for an LOB determination from the U.S. Competent Authority, the taxpayer must first determine if it meets any of the objective tests, or safe harbors, contained in the existing tax treaty. If it does not pass any of these tests, the taxpayer should send a written request for an LOB determination to the Director, International. Refer to Section 3.08 of Rev. Proc. 96–13.
Most taxpayers will not request a competent authority determination because they will meet one of the LOB article’s safe harbors.
The taxpayer may withdraw the request at any time during the process.
Tax Treaty will:
Review the application for a competent authority determination. Refer to Exhibit 4.60.3–3 for applicant information that should be considered during this review and submitted with the application.
Request additional information and representations from the applicant, if necessary.
Notify the field director of the application and request input before a determination is made.
Prepare a disposition memorandum after making a determination.
If necessary, send the disposition memorandum to the Office of Associate Chief Counsel (International) for its concurrence.
Send a disposition memorandum to the appropriate field director, a determination letter to the applicant, and a notification letter to each affected treaty country's competent authority if it concludes that a favorable determination for treaty benefits should be granted.
In the absence of any determination by the U.S. Competent Authority, the International Examiner will:
Determine if, pursuant to the applicable treaty, the foreign recipient of the income is a resident of the Contracting State and meets at least one of the safe harbors of the LOB article in order to qualify for treaty benefits.
If the foreign recipient does qualify for treaty benefits, verify that treaty rates are used for the applicable withholding taxes.
If the foreign recipient does not qualify for treaty benefits, verify that withholding taxes are imposed in accordance with the Internal Revenue Code.
A spontaneous exchange of information should be made with the competent authority of the treaty partner if the taxpayer is not eligible for treaty benefits.
If there has been a determination by the U.S. Competent Authority, the International Examiner will:
If benefits have been granted, review the facts relied on by the U.S. Competent Authority to verify that there are no contradictions with information already learned during the audit. If contradictions exist, adjust the tax withheld at the treaty rate to reflect the tax due at the IRC statutory rate. If no contradictions exist, verify that the treaty rate was used to compute the applicable withholding tax.
International Examiners may direct any questions about these procedures to Tax Treaty at tel. (202) 874–1550.
Rev. Proc. 99–32, which superseded Rev. Proc. 65–17, addresses situations where an adjustment is made under IRC section 482 ( "primary adjustment" ) that requires a secondary adjustment to conform the taxpayer’s accounts to reflect the primary adjustment. This Rev. Proc. allows U.S. taxpayers to avoid the Federal income tax consequences of a secondary adjustment that would otherwise result from a primary adjustment.
Rev. Proc. 99–32 accomplishes the following:
Outlines the technical policy and procedure governing the adjustment of accounts.
Allows taxpayers to elect treatment under this Rev. Proc. regarding an adjustment under IRC section 482 without adverse tax consequences.
The provisions of Rev. Proc. 99–32 apply to U.S. taxpayers in the following situations:
Where the primary adjustment was initiated by either the taxpayer or the service;
Where there is a secondary adjustment under IRC section 482;
Where the Service initiated a primary adjustment under IRC sections 61 or 162, but the adjustment also could have been made under IRC section 482; or
Where the adjustment relates to a domestic corporation or a foreign corporation engaged in a trade or business within the U.S, or to controlled transactions between a controlled foreign corporation of a domestic corporation and a related foreign corporation.
The field director or appeals office with jurisdiction over the case is responsible for determining:
The amount of the adjustment allowable under Rev. Proc. 99–32.
Whether the taxpayer qualifies under Section 3 of Rev. Proc. 99–32.
A U.S. taxpayer seeking the benefits of Rev. Proc. 99–32 must file a written request with the field director before closing action is taken on the primary adjustment.
In applying the provisions of Section 5.01 of Rev. Proc. 99–32, the term "closing action" includes the first occurrence of any of the following:
Execution and acceptance of Form 870–AD (Offer of Waiver Restriction on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment).
Execution of a closing agreement relative to the allocation under IRC section 482, or section 61 or 162, as appropriate .
Stipulation of an IRC section 482 allocation in the United States Tax Court.
Expiration of the statute of limitations for the taxable year of the allocation.
Final determination of tax liability for the year to which the allocation relates by an offer in compromise, a closing agreement, or a court action.
When an IE proposes an IRC section 61, 162, or 482 adjustment, the taxpayer will be advised of the following:
The taxpayer may be eligible for benefits allowed by Rev. Proc. 99–32.
If the taxpayer agrees tentatively to the IRC section 482 allocations, it may submit a request to the field director for Rev. Proc. 99–32 benefits.
To the extent applicable in the case, the taxpayer must submit to the field director the data listed in Sections 5.01(4) (a) through (c) of Rev. Proc. 99–32. The field director is responsible for verifying the information submitted.
If the IE concludes: Then the IE will: The taxpayer qualifies for Rev. Proc. 99–32 treatment. a. Prepare a closing agreement. b. Secure concurrence of the Director, International by fowarding: 1. The taxpayer’s written request for Rev. Proc. 99–32 relief; and 2. The closing agreement proposed to the taxpayer. Note Tax Treaty will provide concurrence within 30 days. c. Process the case under established procedures. The taxpayer qualifies for treatment but the proposed adjustments are erroneous. a. Discuss the matter with the taxpayer. b. If the IE and taxpayer are not able to reach an agreement, the taxpayer is entitled to the normal appeal rights.
The Joint Committee Case procedures will be implemented for cases involving a refund or credit greater than $1,000,000.
The IE will process the case to the point of having the necessary closing agreement executed by the taxpayer.
The IE will forward the case to field director for review and tentative approval.
The field director will forward the case to the Joint Committee for review.
After the Joint Committee approves the case, it will be returned to the field director for closing.
If an IE determines that the taxpayer does not qualify for Rev. Proc. 99–32 benefits due to the application of the penalty provisions of IRC sections 6662(e)(1)(B) and 6662(h), the IE will submit a memorandum explaining this determination to the International Territory Manager for review.
The International Territory Manager will consider the IE’s recommendation and indicate concurrence or disagreement. The IE will adopt the International Territory Manager's position.
If Then The taxpayer qualifies for treatment under Rev. Proc. 99–32. The IE follows Rev. Proc. 99–32 procedures, Section (4) or (5). The taxpayer does not qualify for the benefits of Rev. Proc. 99–32, The taxpayer may: due to the application of the penalty provided by IRC 6662(e)(1)(B) or IRC 6662(h). 1. Withdraw the tentative agreement to the IRC section 482 allocation and exercise its appeal rights for the issue; or 2. Tentatively agree to the IRC section 482 allocation and appeal the issue regarding its qualification for the Rev. Proc. 99–32 benefits.
The benefits provided by Rev. Proc. 99–32 are subject to administrative discretion. Accordingly, the decision whether a particular taxpayer qualifies for relief is a matter within the discretion of the Service.
The IE will close the case using established procedures.
Determinations about the issues listed below are made during the examination, even when the case is unagreed. This eliminates the need to reopen the examination at a later date.
The tax avoidance purpose test
The dividends excludable under Section 4.01(4) of the Rev. Proc. 99–32, and the foreign tax credit attributable to such dividends
Treas. Reg. 1.482–1(a)(2) provides for making primary adjustments to the income of one member of a controlled group of taxpayers. lEs also make the appropriate correlative adjustments to the income of any other member of the controlled group affected by the primary adjustment.
Reports for the primary and correlative taxpayers, whether agreed or not, are prepared concurrently, and remain together after the case is closed and transmitted to the review staff, appeals office, or service center.
The above provisions refer to several terms, defined below:
Primary Adjustment. The initial adjustment, which generally increases the taxable income of a member of a group of controlled taxpayers, and creates a corresponding decrease in the taxable income of one or more members of the same group.
Primary Taxpayer. Taxpayer whose taxable income is affected by the primary adjustment.
Correlative Adjustment. Adjustment that creates a corresponding decrease in the income of another member of the group of controlled taxpayers.
Correlative Taxpayer. Taxpayer whose taxable income is affected by a correlative adjustment.
Controlled Group. The actions of two or more taxpayers with a common goal or purpose owned directly or indirectly by the same interest.
If the examination of the primary taxpayer results in adjustments under IRC section 482, the examination of the correlative U.S. taxpayer is conducted concurrently by the IE.
The correlative U.S. taxpayer should be notified in writing as early as possible that proposed adjustments may affect the tax liability of the correlative taxpayer.
The correlative U.S. taxpayer should be advised of the period of limitations under IRC section 6511.
If the period for filing a claim for refund expires in less than 180 days, a Form 1040X or Form 1120X should be solicited from the correlative U.S. taxpayer.
If the correlative adjustment affects the U.S. tax liability of the correlative taxpayer for any pending tax year, a separate report covering those years should be prepared by the IE. The report should be prepared concurrently with the primary report, with the understanding that it may be sent to the correlative taxpayer.
A completed Form 1308 (Recommendation to Delay Allowance of Overpayment) should be attached to the return of the correlative taxpayer and a completed Form 3198 (Special Handling Notice) indicating this action should be attached to the case file. This will ensure that overpayments resulting from the correlative adjustments are not refunded to the taxpayer prematurely.
Rules regarding the unauthorized disclosure of information apply to IRC section 482 adjustments, despite the relationship between primary and correlative taxpayers. The correlative report should not disclose tax return information of the primary taxpayer except to the extent necessary to explain the correlative adjustment.
The report to the primary taxpayer will include one of the following statements:
A separate examination report reflects correlative adjustments to the taxable income of the correlative taxpayers.
A correlative adjustment is deemed to have been made since it does not affect the U.S. income tax liability of the correlative taxpayer for any pending tax year.
Taxpayers who seek correlative relief for foreign initiated adjustments should make a request to the U.S. Competent Authority for assistance. However, if the adjustment involves years under the jurisdiction of a field director or Appeals, taxpayers should seek to obtain relief from these offices. If the adjustment involves a reallocation of income or deductions involving a related person in a country that has a tax treaty with the U.S., the taxpayer should be advised to contact Tax Treaty. Failure to request assistance from the U.S. Competent Authority may result in denial of correlative relief with respect to the issue, including any otherwise available foreign tax credits.
After review and approval of the examination reports for the primary and correlative taxpayers, the reviewer issues a special preliminary (30-day) letter to the correlative taxpayer. The letter advises the correlative taxpayer of the following:
Nature of the adjustment(s)
Reason the overpayment cannot be processed at this time
Possible need to protect the statute of limitations from expiring
The case is then processed according to established procedures.
If the correlative adjustment is the only adjustment affecting the correlative taxpayer, the taxpayer receives the examination report with the appropriate 30-day letter. An agreement will not be solicited from the correlative taxpayer until the primary adjustments are agreed.
If there are adjustments in addition to the correlative adjustment, the taxpayer will receive the appropriate 30-day letter and a report reflecting all of the adjustments. The taxpayer will have the option to agree to the non-correlative adjustments only. If this occurs, the Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment) must specifically state that the correlative adjustment is not reflected in the computation of the deficiency or overassessment.
If a statutory notice of deficiency is issued to the correlative taxpayer (for non-correlative adjustments), the correlative adjustments that decrease income will not be included in the deficiency computation. However, the statutory notice of deficiency must include an explanation of any correlative adjustments.
If the primary taxpayer’s case goes to Appeals, Examination Support and Processing will also send the correlative taxpayer’s case to Appeals.
If possible, the field director having jurisdiction over the primary taxpayer should manage the examination of the correlative taxpayer. If this is not possible, the field director with jurisdiction over the correlative taxpayer will manage the examination related to the proposed allocation.
|U.S. Income Tax Treaties in Force — August 1, 2001|
|Peoples Republic of China||Norway|
|Ireland||Trinidad and Tobago|
The treaty with the Union of Soviet Socialist Republics covers the following countries: Armenia, Azerbaijan, Belarus, Georgia, Kyrgystan, Moldova, Tajikstan, Turkmenistan, and Ubekistan. Limited tax treaties are in force with Bermuda and the Netherlands Antilles. The treaty with Bermuda relates only to taxation of insurance enterprises and mutual assistance matters. The treaty with the Netherlands Antilles relates only to interest payments.
|The (name of case) has submitted an application for an Advance Pricing Agreement ( "APA" ) to the Office of the Associate Chief Counsel (International). If agreed to, the proposed APA would apply to (short explanation of APA). In its application, (name of case) indicated that it would like the United States to enter into a mutual agreement with (treaty partner). Therefore, we would appreciate your cooperation in this matter.|
|The Office of the Associate Chief Counsel (International) and (name of case) are currently discussing the APA. After these preliminary discussions, we would like you to participate in the negotiation of a mutually agreeable APA for (name of case). Accordingly, we invite any comments from your staff on the best way to proceed in this matter.|
|The competent authority analyst assigned to this case is (name of analyst). Please have your staff direct all communications with the IRS concerning this APA to him/her. His/her telephone number is (telephone number).|
|This information is provided under our mutual income tax convention, which limits its use and disclosure.|
All Limitation of Benefits (LOB) determination requests must be made in accordance with the provisions of Rev. Proc. 96–13.
Documents signed by an officer of the applicant should be legible and include the officer's name and title.
The applicant must provide the following information for identification and preliminary request review:
Name, address, and taxpayer identification number (U.S. and foreign) of applicant.
Properly executed power of attorney (POA), if necessary.
Reference to the LOB article in the specific treaty under which discretionary benefits are sought.
Statement about the type(s) of benefits requested (e.g., dividends, interest, royalties, branch profits, etc.) and the relevant treaty provision(s).
Date on which the applicant requests that the determination become effective.
Statement as to whether the applicant made a previous request and the ultimate disposition of that request.
Penalties of perjury statements for each set of documents submitted with the request.
Applicant organization information:
Narrative description of the business activities of the applicant's U.S., foreign, and group holdings with appropriate organizational charts that describe the chain of ownership from the applicant to its ultimate owner.
Name, address, and U.S. taxpayer identification number of the applicant's U.S. entities from whom income covered by the request was, or will be received.
Name of every entity or person, along with its ownership interest, in the ownership chain of the applicant, concluding with the owner that is a regularly traded entity under the standards set forth in the applicable treaty.
Description of the control and business relationships between the applicant and relevant related persons for the years in issue, including any changes in such relationships prior to the date of the request.
Description of the relevant transactions, activities, or other circumstances involved in the matter covered by the request.
Applicant financial statement information:
Financial statements for the years in issue, if available, of the applicant and each entity that paid or will pay income to the applicant during the period covered by the request.
Annual reports of the publicly held entity for the years in issue, if applicable.
Statement from the applicant explaining why it does not meet each of the safe harbor tests listed in the LOB treaty article.
Statement from the applicant detailing its business activities in the treaty partner country. This statement should include a description of its business, employees, real estate holdings, intangible assets, and the reasons why it was organized in the treaty partner country.
Statement from the applicant as to whether any organization in the ownership chain between the applicant and the publicly held entity (including the publicly held entity) is a conduit company. If a conduit company is present, a representation must be provided that it meets the conduit base erosion test.
Copies of all tax rulings or tax concessions issued to the applicant by the country in which it is organized.
If the applicant has requested a certification from its country of residence regarding entitlement to the benefits of the treaty, where applicable, it should provide a copy of all correspondence from the treaty country.
Statement from the applicant whether an examination by any tax authority has been or is currently in process which is related to the relief request.
Whether a request for an advance pricing agreement has been or is anticipated to be made with respect to the income that is covered by the request.
Confirmation that each entity between the applicant and the publicly held entity meets the base erosion test of the treaty.
A statement discussing each factor that is relevant to a decision to grant treaty benefits, either under the treaty, an accompanying memorandum of understanding, or other relevant positions.
If the requested treaty benefits relate to dividends, a description of the capital structure of the applicant and of the U.S. entity paying the dividends. This description should include details about each class of shares and associated rights (e.g., voting, conversion, dividend rate, etc.).
If the requested treaty benefits relate to interest, the applicant should provide a general description of the terms of indebtedness, the method used to calculate interest, and the existence of embedded options or other derivative structures.
If the requested treaty benefits relate to royalties, the applicant should provide a description of the intangible property generating the royalty payments, when the applicant gained the rights to this property, and the terms of the royalty agreement.