Rev. Proc. 70-18

Section 1. Purpose and Scope

The purpose of this Revenue Procedure is to prescribe the procedures of the Internal Revenue Service with regard to the handling of issues by the United States competent authority involving the allocation of income and deductions between a person subject to the income tax jurisdiction of the United States (hereinafter referred to as the United States taxpayer) and a related person subject to the income tax jurisdiction of a foreign country with which the United States has an income tax treaty (hereinafter referred to as the treaty country).

Sec. 2. Background

.01 General Information

1. The United States has tax treaties in force with various countries which provide for consultation between the competent authority of the United States and the competent authority of the treaty country in certain cases.

The Statement of Organization and Functions of the Internal Revenue Service, presently published in 35 F.R. 2417, and in C.B. 1970-1, 442, identifies the competent authority functions performed by the Internal Revenue Service. That document designated the Director of International Operations as the United States competent authority in administering the operating provisions of tax treaties, and the Assistant Commissioner (Technical) as the United States competent authority in matters involving interpretation or application of tax treaties. These designations are revised as indicated in the following paragraph.

2. Effective with the issuance of this Revenue Procedure, the Assistant Commissioner (Compliance) will act as the United States competent authority in administering the operating provisions of tax treaties. The Assistant Commissioner (Technical) will continue to act as the United States competent authority in matters involving interpretation or application of tax treaties. Accordingly, United States taxpayers who desire advance rulings which involve interpretation or application of tax treaties should submit their requests directly to the Assistant Commissioner (Technical) Internal Revenue Service, Washington, D.C. 20224, in accordance with the established rules and procedures applicable to advance rulings generally. Correspondence with respect to the operating provisions of tax treaties to the competent authority of the United States and requests for information regarding the interpretation and application of tax treaties by treaty countries should be addressed to the Assistant Commissioner (Compliance), Internal Revenue Service, P.O. Box 7799, Washington, D.C. 20044.

.02 Allocation Issues

1. The income tax treaties to which the United States is a party generally expressly provide for the allocation of income between related persons. An example of such a provision is as follows:

RELATED PERIODS

(1) Where a resident of a Contracting State and a resident of the other Contracting State are related and where such related persons make arrangements or impose conditions between themselves which are different from those which would be made between independent persons, then any income which would, but for those arrangements or conditions, have accrued to the resident of the first Contracting State but, by reason of those arrangements or conditions, has not so accrued, may be included in the income of the resident of the first Contracting State for purposes of the present Convention and taxed accordingly. (2) (a) A person other than a corporation is related to a corporation if such person participates directly or indirectly in the management, control, or capital of the corporation.

(b) A corporation is related to another corporation if either participates directly or indirectly in the management, control, or capital of the other, or if any person or persons participate directly or indirectly in the management, control, or capital of both corporations.

2. The Assistant Commissioner (Compliance) acts as the competent authority of the United States in the settlement of issues as to allocations of income and deductions in specific cases, involving double taxation arising for consideration under the mutual agreement procedures of the income tax treaties. An example of a treaty provision establishing a mutual agreement procedure is as follows:

MUTUAL AGREEMENT PROCEDURE

(1) Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the Contracting State of which he is a resident.

(2) The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the application of the Convention. In particular, the competent authorities of the Contracting States may consult together to endeavor to agree:

(a) To the same attribution of industrial or commercial profits to a resident of one of the Contracting States and its permanent establishment situated in the other Contracting State;

(b) To the same allocation of income between a resident of one of the Contracting States and any related person, provided for in Article; or

(c) To the same determination of the source of particular items of income.

(3) The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. When it seems advisable for the purpose of reaching agreement, the competent authorities may meet together for an oral exchange of opinions.

(4) In the event that the competent authorities reach such an agreement, taxes shall be imposed on such income, and refund or credit of taxes shall be allowed, by the Contracting States in accordance with such agreement.

Sec. 3. General Conditions Under Which Procedure is Applicable

.01 The procedures described in sections 3 through 9 of this Revenue Procedure shall apply where it is shown that either the United States or the treaty country, in applying its own internal rules, has made (or proposes to make) an adjustment in income taxes on the basis of an allocation of income or deductions with respect to transactions between a United States taxpayer and a person related to the United States taxpayer.

.02 The provisions of the income tax treaties, an example of which is quoted in section 2.021, express mutual recognition of the principle of allocation of income and deductions among related persons when their dealings have not been at arm's length and the right of each Contracting State to continue to propose and make allocations in accordance with its domestic law. Thus, where appropriate, allocations of income and deductions will, for Federal income tax purposes, be made by revenue agents in conformity with section 482 of the Internal Revenue Code and the regulations thereunder. However, where a case in which an allocation has been proposed or made by the United States or by the treaty country is accepted by the competent authority of the United States for discussion with the competent authority of the treaty country, the United States competent authority will seek to arrive at an agreement with the treaty country on an allocation of income which is acceptable to the United States, the treaty country and the taxpayers. In seeking to arrive at such an agreement the United States competent authority will adhere to the standard of arm's length dealing (referred to in the United States regulations under section 482) and the equivalent standard of arrangements or conditions which would have been made between independent persons (referred to in a number of treaties). He will also take into account all of the facts and circumstances and the purpose of the treaty to avoid double taxation by agreements on the allocation of income.

Sec. 4. Procedures to be Followed Where Treaty Country Proposes Allocations

.01 If a United States taxpayer desires competent authority action in a case where a treaty country proposes adjustments in the treatment of income or deductions of the related person resulting from arrangements or transactions between the United States taxpayer and such related person and modification of the United States taxpayer's tax liability for the taxable year or years involved is not prevented by the operation, apart from the treaty, of any law or rule of law, the United States taxpayer should file a written request for competent authority consideration with the Assistant Commissioner (Compliance), Internal Revenue Service, P.O. Box 7799, Washington, D.C. 20044.

.02 In order to assure consideration while the facts are more easily obtainable, to assure adequate time for the competent authorities to consult and attempt to arrive at an agreement prior to the imposition of any procedural barrier under foreign law, and to avoid inordinate delay in the final determination of tax liability, the United States taxpayer should file his request as soon as the position of the treaty country on the adjustments has been sufficiently developed to permit competent authority consideration, whether or not the adjustments have been formally proposed by the treaty country. In any event, the written request for competent authority consideration should ordinarily be filed not later than 90 days after the adjustments by the treaty country are first formally proposed and communicated to the related person.

.03 The written request for competent authority consideration shall contain a statement by the United States taxpayer that he is requesting competent authority consideration and shall indicate the income tax treaty under which the request is being made. In addition to the written request for competent authority consideration, the United States taxpayer simultaneously should file on Form 843 a claim for credit or refund of any overpayment of tax that may be attributable to the proposed allocation in accordance with the regulations under section 6402. The filing of a timely Form 843 under this Revenue Procedure permits only the making of such credit or refund as may be provided by the mutual agreement reached by the United States competent authority with the treaty country or as the United States competent authority may otherwise determine to be warranted. The United States taxpayer shall indicate on the Form 843 that a request for competent authority consideration is being filed pursuant to this Revenue Procedure. The United States taxpayer shall attach a copy of the claim for credit or refund to the written request for competent authority consideration being filed with the Assistant Commissioner (Compliance) and shall indicate where the claim for credit or refund is being filed.

.04 The Form 843 to be filed pursuant to paragraph .03 of this section, in addition to the information otherwise required, shall include:

(a) the income tax treaty and the particular provisions under which the request is being made,

(b) a statement whether the Federal income tax returns of the United States taxpayer for the years in question were audited, or are in the process of being audited,

(c) the name, address, and taxpayer identification number (Social Security number) or employer identification number (if any) of the related person,

(d) the office with which the related person filed Federal income tax returns (if any) for the years in question,

(e) a statement as to whether the Federal income tax returns (if any) of the related person for the years in question were audited, or are in the process of being audited,

(f) a description of the control and business relationship between the United States taxpayer and the related person,

(g) a statement of the status of the tax liability of the related person in the treaty country for the year or years for which the adjustment is proposed, including whether or not the competent authority of the treaty country has been asked to take action under the mutual agreement procedure article and his response thereto,

(h) a description of the transactions involved in the issues raised by the treaty country, the position taken by the treaty country, including copies of any official correspondence from the treaty country describing the issues and its position, and the United States taxpayer's position on those issues, including copies of any brief, protests, etc., submitted by the United States taxpayer or the related person in response to the action proposed by the treaty country (English translations being required of any of the above documents that are in a foreign language),

(i) copies of pertinent foreign income tax returns (with English translations), schedules (in dollars) showing changes proposed under the allocation by the treaty country, and computation of the resulting foreign tax adjustment,

(j) the amount of any correlative adjustment which would have to be made to the income of the United States taxpayer if the United States competent authority were to accede to the position of the treaty country, and

(k) any other material the United States taxpayer desires to submit.

.05 In a case where a treaty country is considering adjustments described in paragraph .01 of this section, but the position of the treaty country has not been sufficiently developed to permit competent authority consideration and the statutory period for filing by the United States taxpayer of a claim for credit or refund of any tax for the taxable year in which the correlative adjustment may be made is about to expire, the United States taxpayer should, to protect himself, file a claim for credit or refund on Form 843 including, to the extent available, the information required by paragraph .04 of this section. The United States taxpayer shall indicate on the Form 843 that the claim is being filed under the circumstances described in section 4.05 of this Revenue Procedure. A copy of the claim for credit or refund shall be transmitted by the United States taxpayer to the Assistant Commissioner (Compliance). The claim for credit or refund will be held by the Internal Revenue Service pending the filing of a written request for competent authority consideration in accordance with paragraph .01 of this section. However, the United States taxpayer must keep the competent authority of the United States informed as to the proceedings of the treaty country and the adjustments being considered by filing semi-annually a statement with the Assistant Commissioner (Compliance), signed by a person having authority to sign the United States taxpayer's Federal income tax returns, that the treaty country is still considering adjustments in the treatment of income and deductions of the related person. The statement shall include the information required by paragraph .04 of this section not previously submitted and any necessary modification of previously submitted information. Failure by the United States taxpayer to file the required statement within 9 months of the filing of the Form 843 or the last filed required statement, as the case may be, will be grounds for denying competent authority consideration. If the United States taxpayer should decide not to file a request for competent authority consideration he should so advise the Assistant Commissioner (Compliance).

.06 The filing of a timely Form 843 under this Revenue Procedure permits only the making of such credit or refund as may be provided by the mutual agreement reached by the United States competent authority with the treaty country or as the United States competent authority may otherwise determine to be warranted. However, nothing in this Revenue Procedure shall be considered to grant a United States taxpayer any right to invoke section 482 in his favor or to compel the Internal Revenue Service to make an allocation of income or deductions or grant a refund or credit of tax. The decision of the United States competent authority as to the amount, if any, of a refund or credit of tax to be allowed under the mutual agreement procedure shall be final and shall not be subject to judicial review.

.07 Where a treaty country proposes adjustments described in paragraph .01 of this section and the United States taxpayer requests competent authority consideration or assistance pursuant to this section but the United States taxpayer's case has been closed after examination in an office of a district director, the Internal Revenue Service will not reopen the case to make an adjustment unfavorable to the United States taxpayer, except under the circumstances described in the rules governing reopening of cases closed after examination in an office of a district director, presently published in Revenue Procedure 68-28, C.B. 1968-2, 912.

.08 Where a treaty country proposes adjustments described in paragraph .01 of this section and modification of the United States taxpayer's tax liability for the taxable year or years involved is, apart from the treaty, prevented by the operation of any law or rule of law, but the United States taxpayer nevertheless desires the intercession of the United States competent authority, he should file a written request for competent authority consideration or assistance with the Assistant Commissioner (Compliance) containing the information listed in paragraph .04 of this section, to the extent available and applicable, and reasons warranting intercession by the United States competent authority. See paragraph .02 of this section on the time for filing. In such a case, the United States competent authority, if he agrees to accept the case, will limit his intervention to assistance, which entails consulting with the competent authority of the treaty country on the adjustments proposed by the treaty country, unless the treaty permits otherwise and the taxpayer has shown due diligence.

Sec. 5. Procedures To Be Followed Where the Internal Revenue Service Proposes Allocations

.01 If a United States taxpayer desires competent authority action in a case where the Internal Revenue Service has made (or proposes to make) an allocation of income and deductions between a United States taxpayer and a related person subject to the jurisdiction of a treaty country, the United States taxpayer should file a written request for competent authority consideration.

.02 The written request for competent authority consideration should be submitted at such time as the case is sufficiently developed for competent authority consideration and the United States taxpayer reasonably feels that satisfactory settlement is not possible without competent authority action. If the case needs further development the competent authority will forward the case to the district director for attention. Since a request for competent authority consideration contemplates detailed consideration of the facts and possible negotiation and settlement in the particular case, agreement between the competent authorities will ordinarily be more easily effected and the case more likely to be accepted for competent authority action where the request is submitted while the case is under administrative control.

.03 The United States taxpayer shall file his written request for competent authority consideration with the appropriate office of the Internal Revenue Service (district director, regional appellate division, or regional counsel) in which his case is pending and shall forward a copy to the Assistant Commissioner (Compliance), Internal Revenue Service, P.O. Box 7799, Washington, D.C. 20044. Where a case contesting the tax liability of the United States taxpayer for the taxable year or years involved is pending in any court other than the United States Tax Court, the written request for competent authority consideration shall be filed with the Chief Counsel, Attention: Associate Chief Counsel (Litigation), Internal Revenue Service, Washington, D.C. 20224, and a copy shall be forwarded to the Assistant Commissioner (Compliance), Internal Revenue Service, P.O. Box 7799, Washington, D.C. 20044.

.04 The Internal Revenue Service office receiving the written request for competent authority consideration will forward the request and pertinent files to the Assistant Commissioner (Compliance) with appropriate comments and recommendations, including whether the case should be accepted for competent authority consideration.

.05 In any case not pending in a court, and except where necessary to prevent prejudice to the Government's interests, the Internal Revenue Service will otherwise postpone its processing of issues under consideration by the competent authority pursuant to this Revenue Procedure. However, the filing of a written request for competent authority consideration does not relieve the taxpayer from taking any action which may become necessary with respect to the processing of his case. .06 A request for competent authority consideration submitted during the pendency of litigation contesting the taxpayer's tax liability for the taxable year or years involved in the request will not be accepted by the competent authority except with the consent of the Chief Counsel. Where the litigation is pending in the United States Tax Court, the Chief Counsel will in appropriate cases ask the court to delay the trial of the case pending competent authority action. Where the litigation is pending in any other court, the Chief Counsel will consult with the Department of Justice as to the action to be taken on the taxpayer's request. The final decision on whether to delay the processing of a case rests with the court. However, the filing of a written request for competent authority consideration does not relieve the taxpayer from taking any action which may become necessary with respect to any litigation.

.07 The written request for competent authority consideration or assistance required to be filed under this section shall be signed by a person having the authority to sign the United States taxpayer's Federal income tax returns, and shall include:

(a) the income tax treaty and the particular provisions under which the request is being made,

(b) the name, address, and taxpayer identification number (Social Security number) or employer identification number of the United States taxpayer and the taxable year or years to which the request relates.

(c) the location of the district director's office which has made or proposes to make adjustments,

(d) the name, address, and taxpayer identification number (Social Security number) or employer identification number (if any) of the related person concerned in the adjustment,

(e) a description of the control and business relationship between the United States taxpayer and the related person,

(f) a statement of the status of the tax liability of the related person in the treaty country for the year or years for which the adjustment is proposed,

(g) a description of the issues involved,

(h) a statement describing the action by the related person to induce the treaty country to make an appropriate correlative adjustment, including whether or not the competent authority of the treaty country has been asked to take action under the mutual agreement procedure article and his response thereto,

(i) where the treaty country has taken any position with regard to the issues involved, full information with respect thereto, including copies of any official correspondence from the treaty country, the related entity's position on the issues, briefs, protests, and any other pertinent data (English translations are required of any of the above documents that are in a foreign language),

(j) a statement describing the effect of the adjustment on the tax liability of the related person, if the treaty country were to accept the adjustment,

(k) a statement describing the extent (and amounts of allocation) that the United States taxpayer is willing to agree to be bound by any agreement reached by the competent authorities of the United States and the treaty country and stating that he is willing to enter into a closing agreement under section 7121 of the Code (and appropriate stipulation) consistent with such conditions.

(1) any other material which the United States taxpayer wishes to submit.

Any statement submitted by the taxpayer pursuant to subparagraph (k) of this paragraph as to the competent authority agreement to which he is willing to be bound shall not be considered to be evidence of the proper amount of the allocation.

.08 A written request for competent authority consideration with respect to closed cases, in which modification of the United States taxpayer's tax liability for the taxable year or years involved is not prevented by the operation, apart from the treaty, of any law or rule of law, shall be filed with the appropriate district director who initially had jurisdiction of the taxpayer's case. The United States taxpayer at the same time shall forward a copy of the written request to the Assistant Commissioner (Compliance), Internal Revenue Service, P.O. Box 7799, Washington, D.C. 20044. Where the Internal Revenue Service has rejected a claim for refund of taxes (whether or not the claim involved adjustments described in paragraph .01 of this section) and the United States taxpayer desires competent authority consideration but has not yet instituted suit in the United States district court or the United States Court of Claims, the United States taxpayer should consider securing such extension of the 2-year period of limitations for bringing suit as may be agreed upon in a properly executed Form 907. See section 6532(a)(2) of the Internal Revenue Code and regulations section 301.6532-1(b). An extension of the period of limitations for bringing suit for refund in an appropriate case can afford sufficient time for competent authority consideration and possible agreement and settlement of the case without litigation.

.09 Where modification of the United States taxpayer's tax liability for the taxable year or years involved is, apart from the treaty, prevented by operation of any law or rule of law, but the United States taxpayer nevertheless desires the intercession of the United States competent authority, he should file a written request for competent authority consideration or assistance with the Assistant Commissioner (Compliance) containing the information listed in paragraph .07 of this section to the extent available and applicable and the reasons warranting intercession by the United States competent authority. In such a case, the United States competent authority, if he agrees to accept the case, will ordinarily limit his intervention to assistance, which entails consulting with the competent authority of the treaty country in an effort to secure an appropriate correlative adjustment.

Sec. 6. Notification to Related Entity

In any case covered by sections 4 or 5 of this Revenue Procedure, the United States taxpayer should advise his related person to take such timely protective action as may be necessary with foreign taxing authorities, including the staying of the expiration of the period of limitations on the making of a refund or other tax adjustment, complying with any applicable procedures of the treaty country for invoking competent authority consideration, and attempting to resist an adjustment or obtain an appropriate correlative adjustment.

Sec. 7. Cases Initiated By Foreign Competent Authority

Where a case is referred to the United States competent authority, by the competent authority of a treaty country, the United States competent authority will request that the United States taxpayer follow the procedures outlined in this Revenue Procedure to the extent appropriate.

Sec. 8. Revenue Procedure 65-17

Revenue Procedure 65-17, C.B. 1965-1, 833, and Amendment I, C.B. 1966-2, 1211, as amplified, Revenue Procedure 65-31, C.B. 1965-2, 1024, provides that the United States taxpayer must file a request for the treatment provided by the Revenue Procedure in writing with the district director before closing action is taken on the section 482 issue. Section 4.03 of Revenue Procedure 65-31 lists the actions which will constitute closing action on the section 482 issue and foreclose availability of Revenue Procedure 65-17. Accordingly, if a United States taxpayer desires competent authority action and the benefits provided by Revenue Procedure 65-17, he must file his request under Revenue Procedure 65-17 before entering into any closing agreement or before any other closing action as defined in section 4.03 of Revenue Procedure 65-31 is taken on the section 482 issue.

Sec. 9. Action By Competent Authority

.01 The United States taxpayer will be notified whether the competent authority considers his case suitable for consideration or assistance. If the request for competent authority consideration or assistance is accepted, the cooperation of the United States taxpayer is essential in any consultation or negotiation with the competent authority of the treaty country. Accordingly, the United States taxpayer shall supply to the United States competent authority any additional information that is necessary. Whether the United States taxpayer will be asked to execute a consent extending the period of limitations on assessment of tax for the taxable year or years concerned will depend on the circumstances of each case. Failure to cooperate with the United States competent authority, or supply the material, or take the actions required by this Revenue Procedure, will be grounds for rejection of further competent authority consideration or assistance.

.02 If the competent authority determines at any time that a case is unsuitable for consideration or assistance, the United States taxpayer may submit a request to the Commissioner of Internal Revenue for a review of the declination by a panel designated by the Commissioner. The decision of the review panel will be final.

.03 The United States competent authority will notify the United States taxpayer in writing of the decision reached. If the competent authorities arrive at an agreement (or partial agreement), the United States competent authority will notify the United States taxpayer of the terms of the agreement (or partial agreement). Where appropriate, in any case covered by section 4 or section 5 of this Revenue Procedure, a closing agreement reflecting the terms of the agreement will be sent to the taxpayer for signature. The taxpayer will return the copies of the closing agreement, executed by the persons and accompanied by any documents required by sections 6.07 and 6.17 of Revenue Procedure 68-16, C.B. 1968-1, 770 to the competent authority for processing in accordance with established procedures, including the report, if necessary, to the Joint Committee on Internal Revenue Taxation required under section 6405 of the Internal Revenue Code.

.04 If relief acceptable to the taxpayer is not provided by mutual agreement or otherwise, or if the competent authority of the United States rejects the request for competent authority consideration in a case in which the Internal Revenue Service proposes to make or has made an allocation under section 482, the taxpayer may pursue the section 482 allocation through otherwise available channels of administrative review and in the courts.

Sec. 10. Effective Date

This Revenue Procedure shall be applicable with respect to requests for competent authority consideration or assistance made on or after June 26, 1970.

¹ Also released as Technical Information Release 1037, dated June 26, 1970.