U.S. tax treaties generally permit taxpayers to request assistance from the U.S. government to alleviate double taxation or taxation otherwise inconsistent with tax treaties. The component of a government that handles these requests is typically known as the “competent authority”. Competent authority provisions are usually contained in a particular treaties’ Mutual Agreement Procedure (“MAP”) article.
The IRS, on November 22, 2013, released Notice 2013-78, proposing a revenue procedure (to supersede Rev. Proc. 2006-54) and providing updated guidance related to requesting U.S. Competent Authority (“Competent Authority”) assistance. The proposed revenue procedure is also intended to “improve clarity, readability, and organization” and reflect IRS structural changes that have occurred since 2006. The changes contained within the notice are, in some cases, substantial.
One of the key changes is that, in certain situations, a taxpayer seeking Competent Authority assistance must file a “pre-filing memorandum”. These situations include, but are not limited to, certain issues relating to a foreign-initiated adjustment of more than $10 million, a taxpayer-initiated position (e.g., a request for refund), the taxation of intangibles, and requests for discretionary limitations of benefits relief. The pre-filing memorandum must, in the case of a foreign-initiated adjustment, explain the factual and legal basis of the action and describe the steps undertaken in the foreign country and any communications with the foreign competent authority regarding the matter. Additionally, the pre-filing memorandum must state whether the taxpayer wishes to have a pre-filing conference with the Competent Authority and propose at least three possible dates for such a conference, whether or not the taxpayer wishes to have a conference.
That is, the Competent Authority could require a pre-filing conference–something not provided for in current guidance. Pre-filing conferences could, however, prove helpful to taxpayers, because the Competent Authority can provide preliminary advice, although such advice is advisory only.
The proposed guidance also greatly expands the Competent Authority’s ability to expand the scope a matter. Under current guidance, a taxpayer may use a procedure known as the Accelerated Competent Authority Procedure (“ACAP”) to request the expansion of a matter to subsequent taxable periods, if the same issues exist in those periods. Current guidance also requires the consent of the IRS field office with jurisdiction over the matter. Under the proposed guidance, however, the Competent Authority is not required to obtain IRS field office consent or even wait for a taxpayer’s request for an expanded scope. Instead, the proposed guidance permits the Competent Authority to seek to include other years where it is “feasible, practicable, and in the interest of sound tax administration to do so.” The proposed guidance further provides that the Competent Authority may expand the scope of issues because of its “strong interest in resolving all potential .. . issues in a timely manner”.
Under the proposed guidance, taxpayers must think far in advance whether they wish to seek Competent Authority assistance. If the IRS memorializes in writing an examination resolution (e.g., a resolution with IRS Examination that is memorialized in a Fast Track Settlement Session Report, a Form 870 waiver, a Form 870-AD offer, a closing agreement, or any other similar agreement) relating to a U.S.-initiated adjustment, it may be too late. The Competent Authority will accept a request for its assistance relating to U.S.-initiated adjustment memorialized in a such a resolution only if the terms of the resolution are agreed to by the Competent Authority, in writing, prior to its execution. If the Competent Authority disagrees with the resolution, the Competent Authority will request that the examination team and the taxpayer amend the terms accordingly. With respect to Fast Track Settlement proceedings, the Competent Authority will accept a MAP request relating to a U.S.-initiated adjustment only if the Competent Authority was named as a participant, and given a reasonable opportunity to participate, in the proceeding (and related IRS meetings).
The proposed guidance also shrinks the time in which a taxpayer may request IRS Appeals assistance through the Simultaneous Appeals Procedure (“SAP”). Through SAP, as the procedure’s name suggests, IRS Appeals considers the same issues simultaneously with the Competent Authority. Current guidance provides that a taxpayer may request IRS Appeals assistance, at any time, after filing for Competent Authority assistance. Under the proposed guidance, a taxpayer has only 60 days after the Competent Authority accepts the taxpayer’s request for assistance.
On the whole, the proposed guidance is intended to make the Competent Authority process more efficient. If the guidance is issued in its current form, seeking Competent Authority assistance will be more difficult for taxpayers as they will have to decide earlier to request Competent Authority assistance. Lastly, the Competent Authority would be granted substantially greater powers such as requiring pre-filing conferences and expanding the scope of its assistance to other years or issues.