Press Room: Tax Release

December 05, 2011

Competent Authority Process May Relieve Double Tax & Produce Cash Refunds

As foreign governments scramble to raise revenue, foreign tax authorities have become much more aggressive in making tax assessments on U.S. taxpayers doing business in their jurisdictions. In many cases, taxpayers have already paid U.S. tax on income that a foreign tax authority seeks to tax. Payment of additional foreign tax could lead to an unacceptably high effective tax rate. While it may be possible to amend prior year tax returns to claim a credit for newly assessed foreign taxes, in many cases prior years may be closed. 

Taxpayers who are faced with a foreign tax assessment from a jurisdiction with whom the U.S. has negotiated a U.S. Tax Treaty should consider making a request for Competent Authority relief. There are many potential advantages that taxpayers may obtain from the process. First, IRS may open closed years in many cases and can make adjustments to previously calculated U.S. tax liability. This could result in refunds of taxes paid in prior years. Second, resolution of issues in prior years may, in some cases, form the basis for treatment of the same issue in subsequent years, providing taxpayers with enhanced certainty on issues inherently subject to debate such as transfer pricing.

The Competent Authority process may also be invoked to clarify uncertainty in the interpretation of an income tax treaty. For example, a taxpayer that does not otherwise qualify for benefits under an existing treaty may be able to petition the Competent Authority for a ruling that the taxpayer is nevertheless eligible to claim treaty benefits. Obviously, favorable results obtained through the Competent Authority may result not only in positive cash tax refunds but could also produce favorable financial statement benefits. 

Generally speaking, the process involves submitting a written request for relief to the office of the Competent Authority in Washington, D.C. The submission is typically followed by one or more face-to-face meetings with Competent Authority personnel and the entire process may take a few months in simple cases but could take over a year in complex multilateral cases.

WTAS’ National Tax Office (NTO) personnel have successfully represented taxpayers before the U.S. Competent Authority and have advised on all aspects of the Competent Authority process including pre-file conferences, negotiations and filing amended tax returns to obtain cash refunds. Please contact your WTAS advisor to determine whether the competent authority process may produce benefits in your situation.