Rev. Proc. 91-23: competent authority.

• Author: Weiland, Ralph J.

On December 14, 1993, Tax Executives Institute filed the following comments with the Internal Revenue Service concerning the competent authority process. The comments took the form of a letter from TEI President Ralph Weiland to Assistant Commissioner (International) Regina Deanehan. The letter was prepared under the aegis of TEI's International Tax Committee, whose chair of the committee is Lisa Norton of Ingersoll-Rand Company.

On March 18, 1991, the Internal Revenue Service issued Rev. Proc. 9123, 1991-1 C.B. 534, setting forth the procedures concerning requests for assistance of the U.S. Competent Authority in resolving instances of taxation in contravention of an income, estate, or gift tax treaty to which the United States is a party.(1) We understand that the IRS is undertaking to revise Rev. Proc. 91-23 to address issues such as the use of foreign statutes of limitations and the effect of an Appeals settlement on the resolution of a Competent Authority dispute. Tax Executives Institute is pleased to submit the following comments in conjunction with the IRS's Competent Authority initiative.

1. Overview

   Rev. Proc. 91-23 was generally a welcome development for taxpayers because it reaffirmed the government's commitment to implementing treaty protections against double taxation. In addition, the revenue procedure broke new ground with respect to Advance Pricing Agreements (APAs), which were themselves introduced in 1991. As more and more corporations enter into cross-border transactions and as U.S. treaty partners devote more attention to double taxation issues (particularly in the transfer pricing and permanent establishment areas), the Competent Authority process has become increasingly important.

   One of the most persistent problems plaguing the Competent Authority process is the length of time it takes to conclude a settlement. TEI applauds the IRS for its recent improvements in this area, and we encourage the government to continue its efforts to expedite the process. We believe that the key elements to longterm improvement of the process are taxpayer involvement, accessibility, and taxpayer knowledge of the steps necessary to preserve access to Competent Authority. Through the adoption of the following recommendations, TEI believes that the efficiency and effectiveness of the process in eliminating double taxation can be increased.

   First, taxpayers should be authorized to request Competent Authority assistance before pursuing a case with Appeals in order to mitigate problems associated with "hazards of litigation" settlements in Appeals and with foreign statutes of limitations.

   Second, taxpayers should be encouraged to become more involved in the process. For example, taxpayers should be permitted to reply directly to inquiries from treaty partners regarding the nature and operation of their business.

   Third, the revised revenue procedure should specifically address issues of deficiency interest or exchange gain or loss resulting from the settlement and provide that such issues (consistent with the underlying treaty) should be addressed in the Competent Authority negotiation.

   Fourth, in light of the increasingly multijurisdictional nature of tax issues, the IRS should adopt procedures to coordinate Competent Authority cases among multiple treaty partners and should work with our treaty partners to develop such procedures. In addition, the IRS should share with taxpayers its vast knowledge of foreign procedures and statutes of limitation.

   Finally, certain areas merit discussion between the U.S. Competent Authority and our treaty partners outside the context of a specific case. We urge the U.S. Competent Authority to work toward reaching understandings with our major treaty partners regarding the threshold for creating a permanent establishment (particularly in the service industry) and the acceptability of taxpayer-initiated "compensating adjustments" pursuant to the temporary regulations under section 482 of the Internal Revenue Code.

2. Expediting the Competent Authority Process

   1. Coordination with Appeals Procedures. Section 5.04 of Rev. Proc. 91-23 provides that taxpayers "must generally pursue their right of administrative review with Appeals before requesting Competent Authority assistance." Certain narrow exceptions are permitted, for example, where the disagreement is limited to the amount of the adjustment or the method used by the IRS to compute the amount of the proposed adjustment. 1991-1 C.B. at 537. According to press reports, the IRS is considering modification of this provision because foreign competent authorities sometimes balk at Appeals settlements on the ground they are based on the hazards of litigation rather than resolution of the legal or factual issues involved in the Competent Authority dispute. In addition, the IRS has issued Announcement 93144, 1993-39 I.R.B. 12 (Dec. 6, 1993), which contemplates the issuance of a revenue procedure permitting taxpayers to go directly from examination to Competent Authority.(2)

      The major impediment to taxpayers seeking Competent Authority assistance is the time-consuming nature of the process. Long delays may cause the amount of interest to exceed the tax eventually found to be owing. Foreign law may not provide for extensions of the statute of limitations a prerequisite to seeking U.S. Competent Authority assistance. In addition, even where a taxpayer acts diligently to extend a foreign statute of limitations, it is not always possible to toll the statute long enough for the competent authorities to come to agreement. Requiring taxpayers to seek review of an issue at Appeals in some cases may serve only to exacerbate the timeliness issue. Moreover, an Appeals settlement based on resolution of issues other than those involving transfer pricing may cause the Appeals process to be perceived as a negotiation rather than a legal determination, thereby prompting some treaty partners to resist resolution of the...