Competent Authority: Rev. Proc. 2006-54 Basics

Companies must pay tax on the income they earn, but each dollar of revenue should be taxed by only one country. Our tax laws and our network of tax treaties help assure that companies do not suffer this double taxation. Yet when companies operate internationally, governments sometimes disagree on which gets to tax the worldwide revenues of a company. Tax treaties attempt to both prevent double taxation and also to provide a mechanism to correct double taxation if it occurs. Click here for the IRS’s tax treaty website: Tax Treaties.

That mechanism, the Mutual Agreement Article of our treaties, sets out the process by which the governments “mutually agree” to resolve a particular case of double taxation via the negotiations between the “competent authorities,” of the two governments. The IRS’s competent authority office, employing forty analysts, is located in Washington DC (with a small satellite office in California).

According to the Organization for Economic Cooperation and Development (OECD), as of 2007 the countries with the largest numbers of cases are Germany, the United States, France, Canada, Austria and the Netherlands (OECD Survey of Country Mutual Agreement Procedure Statistics, released 9/29/09).

Though surprising, the US competent authority handles mostly cases resulting from the actions of a foreign government, such as Canada or Japan. Such foreign-initiated adjustments make up over 80 percent of the U.S. competent authority’s caseload. The good news is that in approximately 90 percent of all competent authority cases, the governments eliminate double taxation entirely.

Applying for Competent Authority Assistance

Revenue Procedure 2006-54 provides all the details on filing a request for competent authority assistance. With some narrow exceptions, requesting competent authority assistance is free. Section 4.01 of the revenue procedure covers when to file a competent authority request. If you receive an adjustment for another country’s taxing authority that you believe will cause double taxation or is in any way contrary to the treaty, you may request assistance. Or, if the IRS takes an action that you believe will cause double taxation you may request competent authority assistance as soon as the amount of the proposed adjustment is communicated in writing to you.