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Deadlines important for taxpayers challenging double taxation under US treaties

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US taxpayers need to understand how they can obtain double taxation relief via competent authority requests as TP continues to be a top enforcement priority of tax authorities around the world, and one of the major risks for many multinationals.

With foreign tax authorities actively asserting TP deficiencies, many taxpayers are receiving proposed adjustments regarding intercompany transactions. For this reason, it is imperative that taxpayers understand the actions required to preserve the right to request competent authority assistance to relieve double taxation. Failure to do so will likely result in double taxation and impact the affected taxpayer’s ASC740 calculations.

Taxpayers should be aware that tax authorities sometimes propose tax adjustments to intercompany transactions under domestic tax rules rather than under the applicable transfer pricing rules (e.g. general tax provisions that increase revenue or deny deductions). Any adjustment related to an intercompany transaction may qualify for competent authority assistance, even if the adjustment is not made pursuant to the transfer pricing rules, and the procedures in this alert should be followed to preserve taxpayers’ rights to request competent authority assistance.

Competent authority assistance for double taxation is provided under the mutual agreement procedure (MAP) article of the relevant tax treaty. To obtain relief from double taxation, the US and other countries’ competent authorities must be notified of the proposed TP adjustments, or a request for MAP assistance must be filed, within specified deadlines under many US tax treaties. For example, in the case of an IRS-initiated adjustment, the foreign tax authority may require notification and, in the case of a foreign-initiated adjustment, the IRS may need to be notified. Failure to make the appropriate filings can result in the IRS or foreign tax authority denying the taxpayer’s request for competent authority relief to eliminate double taxation. In addition, taxpayers generally should not sign closing or similar agreements with the tax authorities if they intend to request competent authority assistance, because doing so may limit their ability to obtain relief from double taxation.

In 2017, the IRS received 299 new US competent authority requests, 195 relating to transfer pricing or attribution cases and 104 relating to non-transfer pricing cases according to the OECD’s 2017 MAP statistics for the US. Beginning with reporting year 2016, the US is reporting its MAP statistics pursuant to the MAP Statistics Reporting Framework in BEPS Action 14. The reporting framework does not provide for reporting a breakdown of US-initiated adjustments versus foreign-initiated adjustments in relation to competent authority requests received. Therefore, the US has not reported this information for 2017.

Taxpayers must be vigilant regarding the tax treaty deadlines to protect their right to request competent authority assistance. These tax treaty deadlines can and do differ from domestic statutes of limitations, and taxpayers must take protective actions to keep recourse to competent authority open. The fact that the domestic statute of limitations may still be open for transfer pricing assessments in one or both of the affected countries is not determinative of the availability of competent authority assistance.

Taxpayers who are either subject to a foreign or IRS-initiated tax audit or who have a reasonable expectation that they may be subject to a foreign or IRS-initiated tax audit should review the relevant tax treaty timelines and consider taking all necessary protective measures. Taxpayers do not need to wait until the conclusion of a TP audit to take such measures.

Failure to notify the IRS (or foreign tax authority) within the specified time frames will likely preclude the taxpayer from seeking competent authority relief from double taxation, and may also give rise to issues regarding the creditability of foreign taxes, see Procter & Gamble Co. v. U.S. (S.D. Ohio, Case No. 1:08-cv-00608, defendant’s motion for summary judgment granted July 6 2010).

The table below summarises the notification/filing requirements and applicable time limitations for requesting competent authority assistance between the US and all of its tax treaty partners as of November 2018. Some US tax treaties (those with Canada, Finland, Jamaica, Mexico, Netherlands, and Turkey) require notification to the tax authority that did not propose the adjustment within a certain number of years of the taxpayer’s tax year-end or the filing of a tax return.

For example, the US-Mexico tax treaty requires notification to the tax authority that did not propose the adjustment within four and a half years from the due date or the date of filing of the taxpayer’s tax return in the country whose tax authority did not propose the adjustment, whichever is later. The standard statute of limitations for a tax adjustment in Mexico is five years, which extends past the deadline for notification under the US-Mexico tax treaty. This could potentially lead to situations whereby the taxpayer is not aware of a tax adjustment until after the notification deadline under the US-Mexico tax treaty has passed, which could preclude the taxpayer from seeking competent authority relief from double taxation. To avoid this, taxpayers should consider filing notifications with the IRS advance pricing and mutual agreement (APMA) programme at the onset of any Mexican tax examination, even if they are not certain that the examination will result in a transfer pricing adjustment.

In addition to the original notification, the IRS requires annual notification updates until a complete competent authority request has been filed. Under Rev. Proc. 2015-40, the annual notification must be submitted following the close of each taxable year ending after the taxable year in which the taxpayer submitted the treaty notification, but no later than the date on which the taxpayer timely files a tax return for such taxable year.

US treaty partner

Notification/Action deadline per tax treaty

Australia

The case must be presented within three years from the first notification of the tax authority action giving rise to taxation not in accordance with the provisions of the treaty.

Austria

No deadline.

Bangladesh

No deadline.

Barbados

No deadline.

Belgium

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Bulgaria

No deadline.

Canada

The competent authority of the country that did not propose the adjustment must receive notification that such a case exists within six years from the end of the taxable year to which the case relates.

China

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Cyprus

No deadline.

Czech Republic

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Denmark

No deadline.

Egypt

No deadline.

Estonia

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Finland

The competent authority of the country that has been requested to provide a refund must have received notification within six years from the end of the taxable year to which the case relates.

France

The case must be presented within three years of the notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Germany

The case must be presented within four years from the notification of the assessment giving rise to double taxation or to taxation not in accordance with the provisions of the treaty.

Greece

No deadline.

Hungary

No deadline.

Iceland

No deadline.

India

The case must be presented within three years of the date of receipt of notice of the action that gives rise to taxation not in accordance with the treaty.

Indonesia

The case must be presented within three years of the first notification of the action giving rise to taxation not in accordance with the provisions of the treaty. Where a combination of decisions or actions taken in both countries results in taxation not in accordance with the provisions of the treaty, the three-year period begins to run only from the first notification of the most recent action or decision.

Ireland

No deadline.

Israel

No deadline.

Italy

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Jamaica

The taxpayer or the competent authority of the US must give notice within the time limits established by the domestic law of Jamaica to the competent authority of Jamaica that there may be a claim for tax adjustments.

Japan

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Kazakhstan

No deadline.

Korea

No deadline.

Latvia

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Lithuania

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Luxembourg

No deadline.

Malta

No deadline.

Mexico

When a resident of one country presents his case to the competent authority of that country, the competent authority of the other country must have been notified of the case within four and a half years from the due date or the date of filing of the return in that other country, whichever is later. In any case arising under any article other than Article 9 (transfer pricing) of the treaty, it may be prudent to notify each country within four and a half years from the due date or the date of filing of the return in that other country, whichever is later. As discussed previously, the statute of limitations for a tax adjustment may extend past the due date for notification under the US-Mexico tax treaty. Taxpayers should consider filing notifications with the IRS APMA programme at the onset of any Mexican tax examination.

Morocco

No deadline.

Netherlands

The competent authority of the country that did not propose the adjustment must receive notification that such a case exists within six years from the end of the taxable year to which the case relates.

New Zealand

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Norway

No deadline.

Pakistan

No deadline.

Philippines

No general notification deadline, but there is a filing deadline with respect to the Philippines. The claim for refund or credit must be filed in the Philippines no later than two years from the close of the taxable year in which the US-imposed tax is paid, and such claim for refund or credit must be filed within five years from the close of the taxable year in issue.

Poland

No deadline.

Portugal

The case must be presented within five years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Romania

No deadline.

Russia

No deadline.

Slovakia

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Slovenia

The case must be presented within five years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

South Africa

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty (or in the case of tax collected at source, within three years from the date of collection).

Spain

The case must be presented within five years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Sri Lanka

No deadline.

Sweden

No deadline.

Switzerland

No notification deadline in treaty. However, a formal request for competent authority assistance must be made within 10 years after the final assessment of Swiss or US taxes, as applicable.

Thailand

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Trinidad and Tobago

No deadline.

Tunisia

No deadline.

Turkey

The competent authority of the country that did not propose the adjustment must receive notification that such a case exists within five years from the end of the taxable year to which the case relates.

Ukraine

No deadline.

United Kingdom

The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty or, if later, within six years from the end of the taxable year or chargeable period in respect of which that taxation is imposed or proposed.

Venezuela

No deadline. However, the statute of limitations must be “interrupted in accordance with the steps designated by domestic law” to implement the mutual agreement.


This article was written by Kerwin Chung, Dave Varley, Kirsti Longley, Darrin Litsky, and Jamie Hawes of Deloitte US.



Kirsti Longley

Kirsti Longley
Managing director
kilongley
@deloitte.com


 

DVarley

Dave Varley
Principal
dvarley
@deloitte.com

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