IRS Announces Development of Procedures for Implementing
Arbitration under the Protocol with Germany
By David R. Tillinghast,
Esq.
Baker & McKenzie, New York, NY
As I noted in a previous commentary, the Note of Agreement
accompanying the protocol which adopted the provision for mandatory
arbitration of certain disputes arising under the income tax treaty
between the United States and Germany has, tucked away in the back, a
paragraph (q) which grants to the two countries' Competent Authorities
the authority to “modify or supplement” the procedures set
forth in the Note “as necessary to more effectively implement
the intent of [the arbitration provision] to eliminate double
taxation.” In Announcement 2008-39, 2008-18 I.R.B. 867 (May 5,
2008) (the “Announcement”), the IRS announced the first
exercise of that authority and the apparent intention of the Competent
Authorities to jointly develop further “procedures for
implementing the arbitration process, which will be incorporated into
a mutual agreement at a future date.”
Apart from announcing the intention of the Competent Authorities to
enter into a mutual agreement on procedures in the future, the actual
modification or supplementation provided in the Announcement is rather
modest, relating to the determination of the “commencement
date” of a Mutual Agreement Procedure. This is of central
significance because arbitration can commence only two years after
that date (unless the Competent Authorities agree to a different
date).
Basically, the “commencement date” is defined as the
date on which “the information necessary to undertake
substantive consideration for a mutual agreement has been received by
both competent authorities.” (Protocol, Paragraph 6(b)). For
purposes of a Competent Authority request submitted in the United
States (which does not involve an Advance Pricing Agreement), this
means the information required to be submitted under §4.05 of
Rev. Proc. 2006-54.
In the Announcement, the IRS states that the U.S. and German
Competent Authorities have agreed that, 45 days after receipt of a
request for Competent Authority assistance, each Competent Authority
will determine whether the taxpayer's request provides the necessary
information. If so, the Competent Authority will so notify the
taxpayer and the other Competent Authority. If necessary information
is not provided, the notification will indicate what further
information is needed. In the end, the Competent Authorities will
inform the taxpayer in writing of the commencement date.
This is a kind of “good news, bad news” item for
taxpayers. The intention of the Competent Authorities to act promptly
is, of course, the good news. But one wonders how strictly that
deadline will be enforced. In a complex transfer pricing case, say, 45
days may not be really sufficient to permit a thoughtful review of
whether all of the needed information is really there. The tendency
may, therefore, be for a Competent Authority to respond that it needs
further information. Note that here, as in all aspects of the proposed
arbitration procedure, the taxpayer has no voice in the matter. If a
Competent Authority says that it needs more information, there is no
effective way to dispute this. The potential for a Competent Authority
to drag its heels in a case which it wants to go away is obvious.
The Announcement makes two statements with respect to cases
initially submitted to the Competent Authorities as a request for an
APA. The first is that such a case will be eligible for arbitration
“only to the extent that returns have been filed with respect to
all taxable years at issue.” This could make the arbitration of
APA disputes moot, since the IRS's current practice is to require an
APA to be primarily prospective as of the date of the request for the
APA and generally to have a five-year term (not counting roll-back
years). If arbitration must await the filing of returns for all of
those years, substantial delays will be involved. Possibly the
statement is intended to mean that any arbitration award will cover
only the years for which returns have been filed, but this certainly
is not clear.
The second modification relates to when the “commencement
date” occurs in an APA case. The Note of Agreement provides that
in such a case the date is the date on which the information necessary
to undertake substantive consideration for a mutual agreement, namely,
the information required to be submitted under §4 of Rev. Proc.
2006-9, is submitted. This mirrors the rule stated for non-APA cases.
The Announcement states, however, that the Competent Authorities will
modify this rule to take into account the procedures related to
processing of APA requests. This contemplates that the
“commencement date” will be two years after the
“earlier” of the date on which the Competent Authorities
“exchange position papers” or the date the taxpayer
submits all of the information required by Rev. Proc. 2006-9.
While it appears designed to speed up the arbitration process, this
part of the Announcement is unclear in some respects. First, it
suggests that the Competent Authorities exchange position papers
before they have received all of the information called for by Rev.
Proc. 2006-9. If so, and if further information is later developed, it
is not clear what happens. In addition, it is not clear whether the
earlier statement in the Announcement, to the effect that the
Competent Authorities will notify the taxpayer within 45 days after
the receipt of a request for Competent Authority assistance whether
the necessary information has been submitted, applies in an APA case.
However, the APA discussion does make it clear that the Competent
Authorities will inform the taxpayer in writing of the commencement
date.
The Announcement notes that, under the Note of Agreement, the
commencement date for a case that was already under consideration by
the Competent Authorities on December 28, 2007 (the date of
ratification of the Protocol), is that date. No reference is made to
whether or not the taxpayer involved had or had not submitted all of
the information required by the applicable Rev. Proc. or whether, in
an APA case, the Competent Authorities had exchanged position papers;
and the Announcement gives no indication that the basic rule will be
modified. Perhaps the Competent Authorities are aware that in all
cases pending on that date the conditions applicable to other cases
had been satisfied, but this is not clear from the Announcement
itself.
This commentary also will appear in the July 11, 2008, issue of
the Tax Management International Journal. For more information,
in the Tax Management Portfolios, see Cole, Venuti, Gordon and
Croker, 940 T.M., Income Tax Treaties -- Administrative and
Competent Authority Aspects, and in Tax Practice Series, see
¶7140, U.S. Income Tax Treaties.
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