Announcement 2005-47
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Internal Revenue Bulletin:
2005-28
July 11, 2005
Announcement 2005-47
Canadian Memorandum of Understanding on Mutual Agreement Procedure
Contents |
The following is a copy of the News Release issued by the Director,
International (U.S. Competent Authority) on June 15, 2005 (IR-2005-66).
Memorandum of Understanding Between the Competent
Authorities of the United States and Canada Regarding the Mutual Agreement Procedure IR-2005-66, June 15, 2005
WASHINGTON — On June 3, 2005, the Competent Authorities of the United States and Canada entered into a Memorandum of Understanding (MOU) to establish principles and guidelines to improve the performance and efficiency of the mutual agreement procedure (MAP) process in accordance with the terms set forth in the United States — Canada Income Tax Convention (1980), as amended from time to time.
The fundamental purpose of the mutual agreement procedure is to endeavor to resolve double taxation or taxation contrary to a convention. Upon making a MAP request, the taxpayer places responsibility for a principled and timely resolution of the issue in the hands of the respective Competent Authorities and the manner in which the resolution of double taxation is accomplished is at the discretion of the Competent Authorities. It is for this reason the two Competent Authorities have reached the understandings outlined in the MOU.
The text of the Memorandum of Understanding is as follows:
MEMORANDUM OF UNDERSTANDING BETWEEN THE COMPETENT
AUTHORITIES OF CANADA AND THE UNITED STATES REGARDING THE MUTUAL AGREEMENT PROCEDURE The Director General, International Tax Directorate, Canada Customs and Revenue Agency (CCRA), Competent Authority for Canada and the Director-International, Large and Medium Size Business (LMSB), Internal Revenue Service (IRS), Competent Authority for the United States through this Memorandum of Understanding (“MOU”) agree to establish principles and guidelines to improve the performance and efficiency of the mutual agreement procedure (“MAP”) process in accordance with the terms set forth in the Canada-United States Income Tax Convention (1980), as amended from time to time (the “Convention”).
Purpose of the MAP
The fundamental purpose of the MAP is to endeavour to resolve double taxation or taxation contrary to a convention. Upon making a MAP request, the taxpayer places responsibility for a principled and timely resolution of the issue in the hands of the respective Competent Authorities and the manner in which the resolution of double taxation is accomplished is at the discretion of the Competent Authorities. It is for this reason that the two Competent Authorities have reached the following understandings:
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Emphasis on Reaching Agreement. The Competent
Authorities for Canada and the United States are committed to the principle
that the resolution of double taxation or taxation contrary to the Convention
should be possible in all cases. To improve the MAP process between our two
countries, the Competent Authorities agree to adhere to the following principles
and guidelines when seeking to reach a resolution in a particular case:
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Positions shall be Principled, Reasonable and Consistent.
The positions advanced by the Competent Authorities in each case should be
well documented, have merit, and follow the principles of consistency and
reciprocity. Consistency means the Competent Authorities will strive to ensure
that similar cases are resolved in a similar manner. Reciprocity means the
adjusting Competent Authority in a particular case should only advance a position
that it would be prepared to accept if it were the relieving Competent Authority.
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Agreement on the Facts. The Competent Authorities
recognize the importance of reaching agreement on the facts in MAP cases.
Disagreements on the facts as to the nature of a taxpayer’s business
operations can cause, or contribute to, difficulties in resolving a MAP case.
Generally speaking, the Competent Authorities shall accept a transaction
as structured by the taxpayer and only consider disregarding or restructuring
a transaction in exceptional cases.
If the Competent Authorities are unable to obtain agreement on the underlying
facts and circumstances of a particular MAP case after six months of negotiations,
they shall agree to refer the case to a joint panel comprised of tax administration
officials chosen by the Assistant Commissioner of Appeals for the CCRA and
the Chief of Appeals for the IRS. An agreement reached as to the facts of
the case will be binding on the respective MAP organizations. The details
of this procedure will be set forth in a separate MOU between the Competent
Authorities.
The Competent Authorities agree to consider conducting joint site visits
with taxpayers in specific cases in an effort to reach agreement regarding
the underlying facts and circumstances of a taxpayer's business; however,
it is recognized that the use of joint site visits must be prudent and judicious,
due to resource limitations in each of the respective tax administrations.
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Means of Resolving Cases. Despite the best efforts
of Competent Authority officers, it is recognized that substantive differences
on issues may complicate the ability to reach a resolution on a specific case
even when there is an agreement on the underlying facts and circumstances
of the case.
In these situations, Competent Authority officers shall look for appropriate
opportunities to compromise. Compromise is often required when diverging
views otherwise make resolution difficult to achieve.
If resolution is still not possible, the appropriate first level managers
in the Competent Authority organizations will jointly undertake a detailed
review of the case to ensure that all appropriate action has been taken to
facilitate a resolution. If a MAP request has not been resolved within two
years from the date of acceptance, the Director General, International Tax
Directorate, CCRA and the Director-International, LMSB, IRS agree to meet,
or, if more appropriate, agree to have their subordinates meet, in order to
resolve the case.
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Procedural Issues. Procedural issues may delay
or impede the resolution of MAP cases. These issues could result from administrative
policies, practices and procedures of the respective Competent Authority organizations.
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Removal of Barriers. It is hereby agreed that
administrative policies, procedures and practices that impede or delay the
process of resolving a MAP case will be identified and removed to the extent
possible under the delegated powers of the Competent Authorities in their
respective tax administrations.
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Notification. The Competent Authorities also agree
to interpret “notification” broadly under the Convention so as
to reflect the intention to be as inclusive as possible when considering requests
for MAP assistance. A separate MOU to be executed by the Competent Authorities
will address a number of issues surrounding notification.
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Substantive Issues in MAP Cases. The Competent
Authorities will follow the OECD’s Transfer Pricing Guidelines
for Multinational Enterprises and Tax Administrations to resolve
substantive issues in cases involving transactions between related parties.
Notwithstanding, the Competent Authorities have identified a number of issues
that have resulted, or could result, in a failure to resolve double taxation
or taxation contrary to the Convention. These issues include, but are not
limited to, the determination of:
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an arm’s length compensation for consignment manufacturing operations;
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whether a business is integrated to the point where a profit split method
is appropriate and, if so, the relative value of contributions made by related
parties toward the generation of profit;
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the presence of non-routine intangible assets and the determination
of an arm’s length value;
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whether a permanent establishment (PE) exists and the amount of profit
to be attributable to the PE;
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whether a transaction is properly characterized as a service versus
a license of intangibles;
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the amount of compensation, if any, upon either the closure or relocation
of a business and the allocation of associated closing costs; and
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appropriate relief where source and residence country’s laws are
in conflict.
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Conclusion
Through the execution of this MOU, our respective Competent Authority organizations will initiate discussions as soon as possible to: (1) create a MOU to establish a binding procedure to determine the underlying facts and circumstances of a specific case; (2) create a set of guidelines to be used in resolving cases involving the above substantive issues that complicate case resolution; (3) identify and remove procedural obstacles that impede or delay the process of resolving double taxation cases; and (4) create a MOU to address a number of issues surrounding notification.
Other Provisions
The Competent Authorities for Canada and the United States agree to publish this MOU to demonstrate our mutual commitment to improving the MAP process.
This is a MOU between the Competent Authorities of Canada and the United States addressing procedural matters under the Convention. This MOU is not to be interpreted as creating any cause of action, rights or benefits in favor of third parties or taxpayers.
This MOU may be modified at any time by agreement between the Competent Authorities. The Competent Authorities agree to implement this MOU as soon as possible after signing this agreement. Either Competent Authority may terminate the MOU at any time by giving written notice to the other Competent Authority.
| Competent Authority for Canada | Competent Authority for the United States | |
| Frederick R. O’Riordan Director General International Tax Directorate
Canada Customs and Revenue Agency | Robert H. Green Director-International Large and Medium Size Business
Internal Revenue Service | |
| Date: | Date: |
