The new revenue procedure issued by the Internal Revenue Service on requests for competent authority assistance is good news for taxpayers.
It should assist taxpayers by providing more detailed information on when it is appropriate to apply for assistance, and how. The Internal Revenue Service and the U.S. Treasury Department have considered public comments when finalizing the revenue procedure. Of note is that the powers of the U.S. Competent Authority are reduced. An example of this is that the scope of the review of an application cannot be forcibly extended, such as when the competent authority identifies inter-related issues.
All tax treaties to which the United States is a party contain provisions enabling cases of dispute involving tax treaties to be taken the competent authority of a contracting country.
Article 24 of the tax treaty between New Zealand and the U.S. provides for competent authority assistance in cases where there is a treaty-related issue involving the two countries:
Mutual Agreement Procedure
1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or citizen. This case must be presented within 3 years from the first notification of that action.
2. The competent authority shall endeavour, if the objection appears to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States.
3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.
4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.
Accordingly, the competent authorities are required under the tax treaty to resolve any issues that arise which result in an outcome which the treaty did not intend.
We have experienced this in the area of the pensions arising out of past employment, and the application of Article 18(1)(a) of the NZ/US treaty. We are currently dealing with the U.S. Competent Authority on this issue.