By Knight, Ray A; Knight, Lee G
The CPA Journal , Vol. 67, No. 3
To whom do U.S. taxpayers turn when interpreting international tax treaty issues? The U.S. competent authority, of course.
International tax issues are resolved according to tax treaties administered by competent authorities of the cour tries that are parties to the treaties. The U.S. competent authority is the IRS Assistant Commissioner (International), who is responsible for assisting taxpayers with respect to matters covered in the mutual agreement articles included in U.S. tax treaties.
Most U.S. tax treaties permit taxpayers to request competent authority assistance when they believe that actions of the U.S. or the other treaty country result, or will result, in taxation contrary to the provisions of the treaty. For example, most tax treaties allow taxpayers to request assistance to relieve economic double taxation arising from an allocation of income between related U.S. and foreign countries under IRC section 482, or an equivalent provision under the laws of a treaty country.
Requests for U.S. competent authority assistance must comply with the procedures specified in the treaty under which relief is sought, as well as numerous requirements detailed in Revenue Procedures 96-13 and 96-14, released in early 1996 to replace three 1991 revenue procedures. The new revenue procedures not only expand the procedures for seeking competent authority relief, but also expedite the competent authority relief procedure. Revenue Procedure 96-13, issued to replace Revenue Procedures 91-23 and 9126, provides general guidance for requesting the assistance of the U.S. competent authority. Revenue Procedure 96-14, issued to replace Revenue Procedure 91-24, amends the circumstances under which relief provided under Revenue Procedure 65-17 must be coordinated with the competent authority. Revenue Procedure 65-17 sets forth procedures to obtain an adjustment when a taxpayer's taxable income is increased by an allocation between related U.S. and foreign corporations under IRC section 482.
Interpreting Tax Treaties
The IRC provides that, in determining the relationship between a treaty provision and any U.S. law affecting revenue, neither the treaty provision nor the law is entitled to preferential status by reason of it being a treaty provision or a law. With respect to interpreting treaties, the clear import of the language controls "unless application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectation of its signatories." Thus, the apparent intent of the parties is the guideline in interpreting a treaty. The words of the treaty are interpreted according to their ordinary meaning. The good faith in which tax treaties are entered into requires that their obligations be liberally construed to effect the desired relief of the quality and reciprocity between the nationals of the contracting parties. When a treaty reasonably can be construed in more than one way, the more liberal interpretation is preferred-that is, a treaty should be construed liberally. The practice of treaty signatories counts as evidence of the treaty's proper interpretation because their conduct generally indicates their understanding of the agreement. The meaning attributed to a treaty provision by government agencies charged with their negotiation and enforcement is entitled to great weight. Courts traditionally have been reluctant to impinge on the judgment of "competent authorities" charged by the treaty states with the responsibility of interpretation and implementation. The Supreme Court has stated "our role is limited to giving effect to the intent of the treaty parties. When the parties to a treaty both agree as to the meaning of a treaty provision, and that interpretation follows from the clear treaty language, we must, absent strong contrary evidence, defer to that interpretation."
The interpretation of a treaty is not equivalent to the interpretation of a code provision. …