U.S. Income Tax Treaties — U.S. Competent Authority Functions and Procedures (Portfolio 940)

Tax Management Portfolio, U.S. Income Tax Treaties — U.S. Competent Authority Functions and Procedures, addresses the administrative and Competent Authority procedures available to both taxpayers and the tax agencies of treaty partners under U.S. income tax treaties.

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The Portfolio initially focuses on the Mutual Agreement Procedure that is available to U.S. taxpayers subject to double taxation by the United States and a nation with which the United States has an income tax treaty or taxation that is inconsistent with such a treaty.

This Portfolio discusses these provisions as set forth in the U.S. and OECD model treaties, and in the specific treaties entered into by the United States. The Portfolio describes how a taxpayer makes a request to the U.S. Competent Authority. It also discusses related statute of limitations issues, the small case procedure, and the interaction between the U.S. Competent Authority and IRS Appeals, and the mandatory arbitration provisions.

The Portfolio also addresses the administrative procedures available to the IRS and foreign tax authorities under the treaties. These procedures include consultation regarding the interpretation of treaty terms, exchange of information, and assistance in collection. The discussion of exchange of information reviews the IRS's ability to use its summons power to enforce information requests made by a treaty partner, subject to certain limitations. In addition, the Portfolio reviews tax information exchange agreements entered into by the United States.
The Portfolio Worksheets are designed to assist in making a Competent Authority request, and include copies of the Competent Authority provisions of the U.S. Model Income Tax Treaty, IRS procedures for Competent Authority requests, and relevant portions of the Internal Revenue Manual. They also include a representative tax information exchange agreement and IRS guidelines for information exchanges.


U.S. Income Tax Treaties — U.S. Competent Authority Functions and Procedures was authored by the following experts.
Robert T. Cole

Robert T. Cole (deceased), B.S., Wharton School of Finance, University of Pennsylvania (1953); LL.B., Harvard Law School (1956); Academic Postgraduate Diploma in Law, London School of Economics (1959); former Senior Adviser to the Internal Revenue Service (2012-2013); former Senior Counsel in the Washington, D.C. office of Alston & Bird LLP (1997-2012); Founding Member of Cole Corette & Abrutyn (1973-1996); former International Tax Counsel and Deputy International Tax Counsel of the U.S. Treasury Department (1967-1973); editor and principal author of Practical Guide to U.S. Transfer Pricing.

Akemi Kawano

Akemi Kawano, B.M., The Julliard School (1989), M.M., The Julliard School (1991), D.M.A., Manhattan School of Music (1999), J.D., with Honors, George Washington University Law School (2002); former Associate in the Washington, D.C. office of Alston & Bird LLP; served as General Counsel of the Japan America Society of Washington, D.C.

Kristine K. Schlaman

Kristine K. Schlaman (deceased), B.A., University of Northern Colorado (1977); J.D., Washburn University (1983); M.L.T. with Distinction, Georgetown University (1989); formerly of KPMG, LLP, International Corporate Services Tax Practice; Attorney-Adviser, Office of Associate Chief Counsel (International) (1989–1996); Attorney, Schroeder, Heeney, Groff and Coffman, P.A., Topeka, Kansas (1984–1988).

Table of Contents

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Detailed Analysis

I. Introduction

II. Role and Identification of the Competent Authority

A. Role of the Competent Authority

B. Who Is the Competent Authority?

1. The U.S. Competent Authority

2. Foreign Competent Authorities

III. Mutual Agreement Procedure (MAP) - Taxpayer Cases

A. History of MAP in the United States and the Competent Authority Procedure

B. Treaty Provisions on Mutual Agreement

1. Model Treaties

a. OECD Model

b. U.S. Model

2. Analysis of Article 25 as It Appears in the U.S. Model and U.S. Income Tax Treaties

a. Right to Invoke MAP - Art. 25(1)

b. Responsibilities of the Competent Authorities - Art. 25(2)

c. Consultation Provisions - Art. 25(3) (in part)

d. List of Subjects for MAP Resolution - Art. 25(3) (in part)

e. MAP for Cases Not Provided in the Convention - Art. 25(3) (in part)

3. U.S. Tax Treaties Compared to the U.S. Model

C. Revenue Procedure 2006-54 and Other Sources of MAP

1. Sources That Should Be Consulted by Taxpayers Considering Assistance Under MAP

2. Treaty Country Sources

3. OECD Guidance

D. Powers of Competent Authority in MAP

1. Power to Agree

2. Power to Initiate Cases

3. Power to Communicate Outside of Diplomatic Channels

4. Application to U.S. Possessions

E. Types of MAP Cases

1. Transfer Pricing Allocation Cases and Attribution Cases

2. APA Cases

3. Non-Allocation Cases (Including Limitation on Benefits Cases)

4. Taxpayer Initiated Cases

5. Self-Help Alternative

F. Which Taxes, Which Taxpayers, Which Years

1. Which Taxes

2. Which Taxpayers

3. Which Years - ACAP

G. Domestic Statutes of Limitations, Treaty Time Limits, Protective Measures, and When to Apply

1. Domestic Law Statute of Limitations and Treaty Waiver

2. Treaty Time Limits

3. Protective Measures to Avoid Being Barred

4. When to File a Competent Authority Request

a. In General

b. Competent Authority Revenue Procedure Guidance for U.S. Adjustment

c. Competent Authority Revenue Procedure Guidance for Treaty Country Adjustments

H. Effect on Domestic Proceedings

1. IRS Audits

2. Judicial Proceedings

3. Other Dispute Resolution Proceedings

a. Advance Pricing Agreements (APA)

b. Pre-Filing Agreements (PFA)

c. Fast Track Settlement Program (FTS)

d. Accelerated Issue Resolution (AIR)

e. Limited Issue Focused Examination (LIFE)

f. Appeals Arbitration Program (AAP)

I. Bad Adjustments and the Role of IRS Appeals

1. The Bad Adjustment Problem

2. Internal Revenue Manual Procedures Applicable to Appeals

3. Simultaneous Appeals Procedure (SAP): Appeals Assistance to the Competent Authority

J. Denial of Competent Authority Requests and De Minimis Amounts

1. Basis for Denial

2. No Appeal of a Decision of the U.S. Competent Authority to Deny MAP

3. De Minimis Amounts Leading to Unilateral Relief

K. The MAP Process

1. Applicability to U.S.-Initiated Adjustment and to Foreign-Initiated Adjustments

2. Conferences with the U.S. Competent Authority

3. The Competent Authority Request

a. For Normal Cases (Not Small Cases)

b. Small Case Requests

4. Processing the Competent Authority Proceeding

a. Development

b. Position Paper and Rebuttal Paper

c. Negotiations

d. Closing the Competent Authority Case

L. Arbitration

1. The Time Has Come


3. U.S. Income Tax Treaties

a. Voluntary Arbitration

b. Mandatory Arbitration

M. Rejected Outcomes and Failed Proceedings

N. Interest on Deficiencies and Refunds; Penalties

1. Interest

2. Penalties

O. Confidentiality of Competent Authority Proceedings

1. The Confidentiality Problem

2. Section 6105 Protects MAP Confidentiality

3. Communication of Taxpayer Information Between Competent Authorities

P. Repatriation of Funds to Reflect a Reallocation: Rev. Proc. 99-32

Q. Mandatory Use of MAP to Protect Availability of the U.S. Foreign Tax Credit

1. Background

a. Rulings

b. Schering Corp. v. Comr.

2. Current Law

R. Statistical Snapshot of MAP

IV. Consultation Between Competent Authorities Regarding Interpretation or Application of a Treaty

A. In General

B. Scope of Consultation Provisions

C. Use of Consultation Procedure

D. Legal Effect of Consultations

V. Exchange of Information

A. In General

1. Exchange of Information Outside of International Agreements

a. Summonses and the "Competing Interests" Test

b. Summonses versus Exchange of Information Requests

2. Tax Treaty Provisions for the Exchange of Information

a. In General

b. Discussion - Paragraph 1 of Article 26

(1) Overriding Principles

(2) Assessment or Collection of Taxes and Administration of Taxes

(3) Incorporation of an "As May Be Relevant" Standard

(4) Taxpayers Covered

(5) Taxes Covered

(6) Obligation by Requested Contracting State to Provide Information to Requesting Contracting State

c. Discussion - Paragraph 2 of Article 26

d. Discussion - Paragraph 3 of Article 26

e. Discussion - Paragraph 4 of Article 26

f. Discussion - Paragraph 5 of Article 26

g. Discussion - Paragraph 6 of Article 26

h. Discussion - Paragraph 7 of Article 26

i. Discussion - Paragraph 8 of Article 26

j. Discussion - Paragraph 9 of Article 26

k. Effective Date of "Exchange of Information" Article

B. Exchange of Information Under Tax Treaties

1. Types of Exchanges

a. In General

b. Competent Authority

c. Exchanges Regarding Changes in Tax Laws

d. Routine Exchanges of Information

e. Spontaneous Exchange of Information

f. Specific Exchange of Information Program (Exchange of Information upon Request)

(1) "Incoming" Requests

(2) "Outgoing" Requests

(3) IRS Chief Counsel Advice

(4) Court Cases

g. Industry-wide Exchanges of Information

h. Simultaneous Examination and Simultaneous Criminal Investigation Programs

(1) General Purpose

(2) Specific Objectives

(a) Background

(b) Current Case Selection

(3) Examination Procedures

(4) Disclosure of Information


2. U.S. Response to Specific Requests for Information Under Tax Treaties

a. Specificity of Request

b. Use of IRS Summons Power

(1) IRS Summons Power

(2) No Requirement of Requested State's Tax Interest

(3) No Requirement of Reciprocity of Obligations

(4) Enforcement of IRS Summons Power for Documents Located Abroad

(5) Breadth of IRS Summons Power for Treaty Purposes

3. Limitations Under the Laws of the Requesting State: The Mutuality Clause

4. Business Secrets

5. Limitations Arising from Interpretation of Treaty Obligations - The Swiss Practice

a. Treaty v. Swiss Banking Statutes Under the 1951 Treaty

b. Form of Information Exchanges (1951 Swiss Treaty)

c. Effect of 1996 Treaty with Switzerland on Obligations Under Exchange of Information Article

6. Restrictions on Disclosure and Use of Exchanged Information

a. Use for Tax Purposes Only

b. Restrictions on Disclosure

c. Disclosure to Congress

d. Nondisclosure to Third Countries

C. Tax Information Exchange Agreements

1. Background

2. Tax Information Exchange Agreements in General

3. Existing Agreements

4. Terms of Agreements

5. Authority for the Agreements

6. Process of Negotiation

7. Entrance into Force

8. Scope of Required Information and Taxpayer Rights

9. Agreement Provisions

10. Exchange of Information Programs

11. Limitations of the Agreement

12. Comparison of Selected Provisions in Current Agreements

a. General CBI-Tax Information Exchange Agreements

b. Comprehensive CBI Tax Information Exchange Agreements

c. Non-CBI Tax Information Exchange Agreements

VI. Assistance in Collection

A. General

B. Limited Enforcement Provisions

1. Scope

2. Relation to MAP

3. Obligation versus Authority

4. Persons Covered

5. Implementation Efforts

a. U.S. Implementation Efforts

b. Swiss Withholding Procedures

C. General Enforcement Provisions

1. Taxes Covered

2. Conditions for Assistance

a. Status of Tax Liability

b. Procedural Requirements

3. Persons Covered

4. Method of Enforcement

5. Conservancy

6. Section 7602(c) Notice

D. Limitations of General Nature

E. Judicial Precedents

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 2006 U.S. Model Income Tax Treaty, Articles 25 and 26, with Technical Explanation

Worksheet 2 Status of U.S. Tax Treaties and International Tax Agreements

Worksheet 3 Time Limits Under the U.S. Income Tax Treaties to Qualify for Competent Authority Relief

Worksheet 4 Tax Information Exchange Agreement - Netherlands Antilles

Worksheet 5 Rev. Proc. 2006-54 (Requests for Assistance of U.S. Competent Authority after December 4, 2006)

Worksheet 6 Rev. Proc. 98-21 (requests to U.S. Competent Authority under U.S. â€" Canada treaty)

Worksheet 7 Announcement 82-90 (Competent Authority requests under U.S. - Canada treaty regarding "thin capitalization")

Worksheet 8 Technical Information Release 1294 (Competent Authority requests under U.S.â€"Canada treaty regarding necessary documentation for Canada to allow an interest deduction)

Worksheet 9 Memorandum of Understanding Regarding Deferment of Assessment and/or Suspension of Collection of Taxes During Mutual Agreement Procedure

Worksheet 10 Joint Mexico-U.S. Statement on Maquiladoras; Addendum of August 3, 2000 [Issued by the Mexican Ministry of Finance and the U.S. Internal Revenue Service 10/29/99]

Worksheet 11 IR-2003-116 (Administrative Arrangements for the Implementation of MAP with the Netherlands)

Worksheet 12 U.S.-U.K. Develop New Administrative Arrangements for Mutual Agreement Procedure

Worksheet 13 Ann. 2007-107 (U.S.-U.K. Agreement Defining "First Notification" under Treaty Article 26(1))

Worksheet 14 MAP Operational Guidance for Member Countries of PATA as Updated February 6, 2004

Worksheet 15 IRS Competent Authority Statistics

Worksheet 16 IRS Standards for Exchange of Information Between National Tax Authorities

Worksheet 17 IRM 4.30.3, Overseas Posts

Worksheet 18 IRM 4.60.2, MAPs and Report Guidelines

Worksheet 19 IRM 4.60.3, Tax Treaty Related Matters

Worksheet 20 IRM 4.60.1, Exchange of Information

Worksheet 21 IRM, Appeals - International Issues, Competent Authority Cases




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