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LB&I Process UnitKnowledge Base – InternationalLibrary LevelNumberShelfTitleBusiness OutboundBook1Income Shifting (Outbound)Chapter1.7Pre-Audit and Post Issue AnalysisSection1.7.3Competent AuthoritySubsectionUnit NameCompetent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)Primary UIL Code9411.07Other transfer pricing issuesDocument Control Number (DCN)ISO/P/01 07 03-01Date of Last Update07/28/17Note: This document is not an official pronouncement of law, and cannot be used, cited or relied upon as such. Further, this document may not contain acomprehensive discussion of all pertinent issues or law or the IRS's interpretation of current law.

DRAFTTable of Contents(View this PowerPoint in “Presentation View” to click on the links below)Process OverviewDetailed Explanation of the ProcessProcess ApplicabilitySummary of Process Steps Step 1 – Double Tax Determination Step 2 – Notification to the Taxpayer Step 3 – Mutual Agreement Process Procedures Step 4 – Accelerated CA Procedures and Ancillary Issues Step 5 – Coordination of CA Process Step 6 – Role of the Taxpayer2

DRAFTTable of Contents (cont’d)(View this PowerPoint in “Presentation View” to click on the links below)Step 7 – Role of the APMA and TAITStep 8 – Role of an ExaminerDefinitionsExamples of the ProcessOther Considerations / Impact to AuditIndex of Referenced ResourcesTraining and Additional ResourcesGlossary of Terms and AcronymsIndex of Related Practice Units3

DRAFTProcess OverviewCompetent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)Multinational companies doing cross-border business in several countries face potential double taxation. Nearly all bilateral income taxtreaties contain a Mutual Agreement Procedures (“MAP”) article, which, among other things, provides the legal framework for resolvinginternational tax disputes between the treaty partners. Taxpayers can request assistance from the U.S. competent authority to reduceor eliminate the effects of double taxation under U.S. tax treaties. The MAP article is generally invoked by taxpayers, but may beinvoked by the U.S. or foreign competent authorities in certain circumstances.During the course of an examination, a Revenue Agent (“examiner”) may determine that an adjustment should be made to the taxableincome of a U.S. or non-U.S. person (as defined under IRC 7701(a)). The adjustment may give rise to double taxation or othertaxation that is inconsistent, or not in accordance, with the provisions of a given U.S. income tax treaty. If this is the case, the affectedtaxpayer may be eligible to invoke its rights under that U.S. tax treaty to seek the assistance of the U.S. competent authority (“U.S.CA”) to alleviate such taxation (or foreign competent authority in some treaties).The U.S. CA is authorized to act on such requests for assistance and to address related issues concerning the application of U.S. taxtreaties. Rev. Proc. 2015-40, 2015-35 IRB 236, provides the procedures for taxpayers to follow in order to seek assistance of the U.S.CA. (If the adjustment involves the U.S. territories of American Samoa, Guam, Commonwealth of the Northern Mariana Islands,United States Virgin Islands, and Puerto Rico, the taxpayer should consult Rev. Proc. 2006-23, 2006-1 C.B. 900. Unless otherwisenoted, this unit will address only requests under Rev. Proc. 2015-40.)Back to Table of Contents4

DRAFTProcess Overview (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)The U.S. CA has two different offices that resolves disputes deriving under U.S. tax treaties: Advance Pricing and Mutual Agreement Program (“APMA”) – this office provides assistance primarily for cases involving transferpricing adjustments made under IRC 482 (or under equivalent transfer pricing provisions of treaty countries); this business unit alsonegotiates unilateral, bilateral, and multilateral Advance Pricing Agreements (“APAs”). Treaty Assistance and Interpretation Team (“TAIT”) – this office provides assistance for cases arising under tax treaties other thantransfer pricing cases (e.g., treaty residence determinations, cases involving fiscally transparent entities, and discretionarydeterminations under a limitation on benefits article) and most other interpretative matters that arise under such treaties, such asthose arising under the MAP article. TAIT also has primary responsibility for cases arising under U.S. tax treaties with respect toestate and gift taxes.APMA and TAIT can each consider cases arising under the permanent establishment articles of U.S. tax treaties, and both willcoordinate and collaborate on such cases, and on any other cases, as appropriate.The obligations of the examiner in relation to the CA process are set forth in the Internal Revenue Manual (“IRM”). See e.g., IRMsection 4.60.2. In general, the examiner's first step after determining an adjustment should be made to ensure that the affectedtaxpayer has been informed of its right to seek assistance of the U.S. CA (or in some circumstances the competent authority of theother Contracting State) on a timely basis.Once the taxpayer has been notified by the examiner of the potential double taxation, the onus is then on the taxpayer to follow theinstructions and guidance provided in Rev. Proc. 2015-40 and the governing U.S. tax treaty to request the assistance of the U.S. orforeign CA. After submitting its request for assistance, the taxpayer will work primarily with the CA to which the request was made toaddress the issue. However, the examiner continues to be involved in the process and remains an important source of information forthe U.S. CA. Eligibility to file a request for CA assistance is determined by reference to the applicable U.S. tax treaty and therequirements of Rev. Proc. 2015-40.Back to Table of Contents5

DRAFTProcess Overview (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)This unit focuses on procedures for U.S.-initiated adjustments, i.e., adjustments made by the examiner concerning the taxable incomereported by a U.S. company (or by a foreign company that, e.g., has income effectively connected to a U.S. trade or business or,under a U.S. tax treaty, has a permanent establishment to which profits are, or should be, attributed).Circumstances under which this process applies:Various U.S.-initiated adjustments can give rise to a taxpayer pursuing assistance of the U.S. CA under Rev. Proc. 2015-40. Listedbelow are examples of adjustments that may require CA consideration (this listing is not all inclusive): Transfer pricing adjustments (Increases/decreases to prices of tangible goods; to royalty or other payments for intangible property; tofees or other remuneration for intercompany services transactions). Potential existence of a permanent establishment (“PE”) and income attributable to a PE. Characterization of income (changes to the character of income received or of payments made, e.g., whether a payment is for aroyalty or for a service; whether a royalty payment is for the use of a patent or some other type of intangible property) (for example,payments deemed to occur as a result of U.S.-initiated adjustments). Timing of income (differences in taxable year in which a certain item of income is recognized). Source of income (differences in the source to which a certain item of income is attributed).Back to Table of Contents6

DRAFTProcess Overview (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)MAP articles are intended to assist taxpayers facing double taxation (or taxation not in accordance with a treaty). The MAP articlesprovide the mechanism for the U.S. competent authority and the competent authority of the treaty partner to endeavor to reach amutual agreement alleviating the double taxation. In many cases, the competent authorities will reach an agreement (a “mutualagreement”, or a “competent authority resolution”, under Rev. Proc. 2015-40) that alleviates the double taxation in its entirety.However, in some cases, the agreement does not alleviate all double taxation, and in other cases, no agreement is reached at all. Inthose situations where an agreement is not reached, some treaties (such as the treaty between the United States and Canada) allowsa taxpayer to have its case resolved through mandatory, binding arbitration if the competent authorities do not reach a mutualagreement within a prescribed time period.TTREATY IMPLICATION: Taxpayers, the IRS, and foreign tax authorities may use competent authority resolutions as aframework for managing similar or recurring competent authority issues. When the taxpayer has filed a bilateral or multilateralAPA request pursuant to Rev. Proc. 2015-41 that proposes to cover one or more issues covered by the competent authorityrequest and/or if it included a rollback request years in its APA request, such APA request will be coordinated between APMAand other offices within IRS, for example field exam.Back to Table of Contents7

DRAFTProcess Overview (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)This unit primarily addresses only adjustments proposed by examiners. For the most part, it does not address foreign-initiatedadjustments, i.e., adjustments made by tax examiners in other countries. In most instances, a U.S. taxpayer can present a request forassistance relating to a foreign-initiated adjustment to the U.S. competent authority under Rev. Proc. 2015-40. Questions aboutwhether a taxpayer is eligible to present a request for assistance in relation to a foreign-initiated adjustment should be directed to theU.S. competent authority.Taxpayers can consult with the U.S. CA informally on any issues relating to tax treaties, whether or not the issue clearly involves arequest for assistance under a treaty. The consultation can be anonymous and is non-binding on the IRS. For example, the taxpayermay consult the U.S. competent authority regarding exhaustion of competent authority and administrative remedies relating to foreigntax credit determinations.In the case of U.S.-initiated adjustment, the examiner will issue the appropriate letter (a Letter 1853(P)/1915(P)) along with Form 5701,or at the earliest time, the examiner believes when an adjustment could give rise to double taxation or might otherwise not be inaccordance with the treaty involved. It is the policy of the U.S. competent authority to provide broad access to taxpayers with potentialtreaty-related disputes, so the examiner should consult with the U.S. CA if he or she has any questions about whether the appropriateletter should be issued with Form 5701.A taxpayer requests assistance by following the instructions and guidance on submissions found in Rev. Proc. 2015-40 and therelevant provisions in the applicable income tax treaty (e.g., the provisions of the MAP article). The requirements on submissions areaddressed in Section 3 of the Revenue Procedure and its Appendices.Back to Table of Contents8

DRAFTProcess Overview (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)Depending on the facts and circumstances of the particular issue, to reach a principled resolution, and for effective and efficient taxadministration, either of the CAs may identify and request information on any interrelated issues. See section 3.05(3) of Rev. Proc.2015-40. The request may be amended to include additional facts, and the CAs will consider such additional information in reaching asettlement.Most U.S. tax treaties provide that agreements reached by the competent authorities are to be implemented by the United States andthe treaty country notwithstanding any time limits or other procedural limitations under the domestic law of either country. A minority ofU.S. tax treaties may not allow the U.S. competent authority to waive such limitations. Further, in any particular case, domesticbarriers may be waived only if a competent authority request is accepted and a competent authority resolution is reached. For thesereasons, and because circumstances not under the control of the taxpayer or the U.S. or foreign competent authority may impede theimplementation of a competent authority resolution, Section 11 of Rev. Proc. 2015-40 advises, as a general matter, that the taxpayerand members of its controlled group take protective measures under applicable domestic law to increase the likelihood that acompetent authority resolution in its competent authority case can be implemented in both treaty countries and to protect any rights ofaccess to alternative remedies outside of the competent authority process from being barred by administrative, legal, or proceduralbarriers.Back to Table of Contents9

DRAFTProcess Overview (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)The following general example provides an overview of the actions an examiner would take after raising a U.S.-initiated adjustmentinvolving a transfer pricing issue (and thus handled by APMA): Foreign Parent (“FP”) owns 100% of U.S. Subsidiary (“USS”). FP is located in Japan, FP manufactures tangible goods and sellsthese to USS, which, in turn, sells the goods to third-party customers in North America. For a given taxable year, the examiner determines that the prices paid by USS to FP for the tangible personal property were too highunder IRC 482 and increases (adjusts) the income of USS accordingly. FP would face double taxation as a result of the examiner'saction if the treaty country does not allow a corresponding adjustment under its domestic law. The adjustment would result in areduction to FP’s income, but the amount of this additional income would have already been included in the income of FP and taxedby the treaty country. The examiner should issue Form 5701 together with Letter 1853(P) to inform USS of its rights to seek assistance of the U.S.competent authority to alleviate this double taxation under the U.S. tax treaty. The assistance the U.S. competent authority canprovide is to review the U.S.-initiated adjustment and, if it is justified under the U.S. tax treaty (i.e., presents a clear, principledapplication of the Code and application regulations), present the case to the treaty partner. (If the U.S.-initiated adjustment is notjustified, the U.S. competent authority may withdraw the adjustment without presenting it to the treaty partner.) After consultationswith the treaty partner, an agreement may be reached whereby the treaty partner provides “correlative relief” for some or all of theadjustment. The U.S. competent authority will instruct the examiner (through a disposition memorandum to the Internal ReferralRecipient) as to how to implement the competent authority agreement regarding USS.FPTangibleGoods(Japan)PaymentUSSBack to Table of Contents10

DRAFTDetailed Explanation of the ProcessCompetent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)Analysis All examiners should have “global awareness” of the adjustments they may make or consider to a taxpayer’s income. That is, anyadjustment may result in differences in amount, character, and other tax attributes from what was reported to other taxadministrations. These differences raise the possibility of double taxation or taxation not in accordance with a given treaty.Taxpayers have rights under treaties to pursue CA assistance to address such issues. The basic steps that an examiner should take in these circumstances are set forth in IRM 4.60.2.1, 4.60.2.3, and 4.60.3. As noted inthe example, most importantly, the examiner must notify the taxpayer of its right to seek competent authority assistance under MAP.The examiner would notify USS by using Letter 1853(P) or similar correspondence. If the examiner’s adjustment will result inpotential double taxation in more than one country, then a separate schedule should be prepared for each treaty country entityinvolved. See IRM 4.60.2.6 for matters involving U.S. territories. To resolve the double taxation (or taxation otherwise inconsistent with the applicable income tax treaty) issue, and if the taxpayerdecides to seek assistance from the U.S. CA, it will follow certain procedures as set forth in the Rev. Proc. 2015-40 to request suchassistance. If the taxpayer rejects the tentative resolution reached by the competent authorities, and if either country’s CA is unwilling tonegotiate further, or the competent authorities are unable to reach an agreement, then the U.S. competent authority will formallyclose the case. The taxpayer may then pursue all the other domestically available remedies to resolve the issue. In the event a resolution is reached, the taxpayer may be able to claim additional credits or refunds, consistent with the MAPsettlement. (or in some cases in which there is no tax settlement, a taxpayer may be able to claim a U.S. foreign tax credit if theyadequately exhaust their administrative and judicial remedies.). In order to protect its rights to claim additional credits or refunds,and to retain its rights to alternative remedies under the Code, the taxpayer is advised to file a written protective claim as specifiedunder IRC 6402 and the regulations thereunder. This claim may be filed before, or in conjunction with, a request for CA assistance.Instructions regarding such a claim are set forth in Rev. Prov. 2015-40.Back to Table of Contents11

DRAFTDetailed Explanation of the Process (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)Analysis In general, per IRM 4.60.2, the examiner has the following obligations after determining an issue is sufficiently developed and thatthe adjustment can be reasonably estimated: Issue a MAP letter – Letter 1853(P) (U.S. tax treaties) or Letter 1915(P) (U.S. territories), with relevant Schedule 1815(P) or1915(P) – to the taxpayer Contact the taxpayer’s representative (or the taxpayer him or herself, if self-represented) regarding the letter Work with the audit team and communicate with the team regarding the process and the dates of meetings Provide audit work papers, for example, a copy of the Notice Of Proposed Adjustment (“NOPA”), economists report, etc., to theassigned analyst (e.g., APMA team leader) on the caseBack to Table of Contents12

DRAFTDetailed Explanation of the Process (cont’d)Competent Authority Revenue Procedure 2015-40 Guidance: U.S.-Initiated Adjustment(s)AnalysisLegal GuidanceRev. Proc. 2015-40 provides procedures and guidance on the process of requesting assistance from the U.S. CA under the provisionsof U.S. tax treaties. The revenue procedure was published on August 31, 2015, and updates and supersedes Rev. Proc. 2006-54. Aproposed version of Rev. Proc. 2015-40 was released for public comment in Notice 2013-78. Rev. Proc. 2015-40 substantiallyrestructured the proposed guidance in Notice 2013-78 to improve clarity, readability, and organization. Rev. Proc. 2015-40 affirms thatthe U.S. competent authority is committed to providing broad access to competent authority assistance under U.S. tax treaties. Theeffective date of the Rev. Proc. 2015-40 is generally for requests filed on or after October 30, 2015. Special effective date rules applywith respect to discretionary limitation on benefits (“LOB”) determinations and also with respect to the new triennial statement requiredby Section 3.06 of Rev. Proc. 2015-40, which generally applies to discretionary LOB determinations issued after October 30, 2015.Rev. Proc. 2015-40 was issued concurrently with Rev. Proc. 2015-41 (2015-35 IRB 263), the successor to Rev. Proc. 2006-9, asmodified by Rev. Proc. 2008-31, which provides guidance on the process of requesting and obtaining APAs, as well as guidance onthe administration of executed APAs.Both Rev. Proc