On March 21, 2019, the U.S. Internal Revenue Service (IRS) created an International Practice Unit (IPU) on foreign-initiated transfer pricing adjustments under Rev. Proc. 2015-40. This IPU focuses on procedures for foreign-initiated adjustments (i.e., adjustments made by foreign tax authorities) and taxpayer-initiated adjustments or positions concerning the taxable income of U.S. multinationals or their foreign affiliates.
During an examination, an IRS Revenue Agent (examiner) may determine that an adjustment should be made to the taxable income of a U.S. or foreign person. The adjustment may give rise to double taxation, or taxation otherwise not in accordance with the provisions of an applicable U.S. income tax treaty. Adjustments and potential tax treaty considerations may also occur during examinations conducted by foreign jurisdictions that are U.S. treaty partners. In each of these cases, the affected taxpayer may be eligible to invoke its rights under the relevant U.S. tax treaty to seek the assistance of the competent authorities to alleviate taxation.
Most U.S. bilateral income tax treaties contain a Mutual Agreement Procedure (MAP) article, which provides the legal framework for resolving international tax disputes between treaty partners. Taxpayers can request assistance from the U.S. competent authority and, when an applicable treaty’s MAP article allows a taxpayer to submit a competent authority request to either Contracting State, the foreign competent authority, to reduce or eliminate the effects of double taxation under U.S. tax treaties. Taxpayers may also request assistance when they have incurred taxation that is otherwise not in accordance with the provisions of an applicable U.S. tax treaty. The MAP article is generally invoked by taxpayers, but may be invoked by the U.S. or foreign competent authorities in certain circumstances.
Certain foreign-initiated adjustments may give rise to a taxpayer pursuing assistance of the U.S. competent authority under Rev. Proc. 2015-40. Some of these include the following:
- Transfer pricing adjustments (e.g., increases/decreases to prices of tangible goods; to royalty or other payments for intangible property; to fees or other remuneration for intercompany services transactions).
- Potential existence of a permanent establishment (“PE”) and income attributable to a PE.
- Characterization of accrued income or deductions, and payments received or made.
- Timing of income and deductions (differences in taxable year in which a certain item of income or deduction is recognized).
- Source of income and deductions (differences in the source country to which a certain item of income or deduction is attributed).
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