In recent months, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) has issued a variety of international tax practice “units” as part of its process to improve tax compliance from identified groups of business taxpayers. The overall process also includes short descriptions of respective “campaigns” and briefly describes the agency’s designated, tailored treatment or treatments for each campaign.
Most recently, it issued a unit on the mutual agreement procedure (MAP), commonly referred to as the Competent Authority Process under bilateral tax treaties (Doc Control No. ISO/P/01_07_03-01). The purpose of the unit is to provide IRS examiners (for the most part, the unit does not address foreign-initiated adjustments) with clear guidance on their responsibility in situations where proposed adjustments will be made in a context in which the taxpayer could potentially face double taxation, consistent with the most recent revenue procedure (Rev. Proc.) 2015-40. The unit also provides a helpful checklist for taxpayers in such situations.
The unit amplifies the guidance in Rev. Proc. 2015-40 with respect to both issues arising in Advance Pricing and Mutual Agreement (APMA) and Treaty Assistance and Interpretation Team (TAIT) (for non-transfer pricing issues). The discussion is consistent with current practice. Critical issues addressed include the following.
- Where double taxation may arise:
- Transfer pricing adjustments
- Potential existence of a permanent establishment (PE) and income attributable to a PE
- Source of income
- Characterization of income (e.g., whether a payment is business profits or a royalty)
- Timing of income
- Protective measures that must be taken by the taxpayer to preserve availability of MAP
- Examples of processes to be followed by examiners to protect the interests of both the fisc and the taxpayer
- Accelerated Competent Authority Procedures to apply results to subsequent years
- Simultaneous appeals procedures
- Coordination with litigation
Practice Point: The unit itself is a practice tip, as it provides a good checklist of reminders as to the various “gotchas” that can befall taxpayers in this area. For example, the unit provides reminders that competent authority requests or treaty notifications must be made within certain time limits that may vary by treaty. Additionally, the unit reiterates that certain agreements with the IRS or a foreign tax authority may preclude or limit access to the competent authority process.
