Double taxation is a common issue that arises in cross-border transactions. The United States has entered into over 65 comprehensive double tax treaties with other countries to prevent double taxation and promote international trade. These treaties require the US to offer foreign tax credits to offset double taxation, and the US has included corresponding provisions in its treaties that follow the language of Art. 9 of the OECD Model Tax Convention.
Under these treaties, taxpayers may claim a foreign tax credit or a deduction for taxes paid to a foreign country. The foreign tax credit is generally more favorable because it reduces US tax liability dollar-for-dollar, whereas a deduction only reduces taxable income. Additionally, US treaties usually include an article on the mutual agreement procedure, requiring the competent authorities of the contracting states to consult and eliminate double taxation.
In cases where the competent authorities are unable to reach an agreement, some US treaties include a provision for arbitration. The arbitration process involves the resolution of the issues proposed by each competent authority by a panel of arbitrators.
The IRS issues an updated list of issues on which it will not accept applications for private letter rulings or determination letters. This list includes issues that are the subject of a pending request for the competent authority procedure under a double tax treaty. In addition, the attribution of profits to a US permanent establishment and the issue of whether a foreign taxpayer has a permanent establishment in the US are also on this list.
Rev. Proc. 2015-40 provides guidance on requesting and obtaining assistance from the US Competent Authority under US tax treaties. The guidance includes pre-filing procedures in mutual agreement procedure cases and a requirement for a pre-filing memorandum on the nature of the issues or the adjustment required.
The IRS has also revised the Internal Revenue Manual (IRM) section 4.61.3 concerning examinations involving transfer pricing issues. The revision requires collaboration between transfer pricing teams and the Advance Pricing and Mutual Agreement (APMA) Program on examinations with the potential to generate transfer pricing adjustments involving a country with which the United States has a double tax treaty.
The IRS has also released a Practice Unit on foreign-initiated adjustments under Rev. Proc. 2015-40. The Practice Unit provides guidance on the procedures for foreign-initiated actions, such as transfer-pricing adjustments, that are initiated by the taxpayer or made by the tax authorities following a tax audit.
In conclusion, US double tax treaties play a crucial role in promoting international trade and preventing double taxation. The US has entered into comprehensive treaties with over 65 countries, and these treaties generally include provisions for mutual agreement procedures and arbitration. The IRS has also provided guidance on requesting assistance under these treaties and on examinations involving transfer pricing issues. As international trade continues to grow, US double tax treaties will become increasingly important in facilitating cross-border transactions and reducing the incidence of double taxation.