by Mike Godfrey, Washington

31 August 2020

The US Internal Revenue Service (IRS) has released the text of an arbitration agreement between the US and Switzerland, in Internal Revenue Bulletin 2020-35, published August 24.

The Competent Authority Arrangement sets out how US and Swiss authorities will resolve double tax disputes where discussions under the Mutual Agreement Procedure fail to resolve the dispute in a timely manner.

Paragraph 6 of Article 25 of the US-Switzerland double tax agreement provides for the appointment of an arbitration panel where the two countries cannot resolve a dispute under paragraphs 1 through 5 of Article 25 of the convention (Mutual Agreement Procedure). Paragraph 7, added by a subsequent Protocol to the agreement, provides for mandatory binding arbitration.

The release of the text of the Arrangement follows recommendations from the OECD that countries add provisions to their treaties to enable taxpayers to have an issue heard by an arbitration panel where there has not been a resolution to the dispute for two years to three years. It recommended that governments also release comprehensive guidance.

Most states are adding such provisions by adopting the BEPS Multilateral Instrument. However, the US, which already has provisions for such arbitration with Switzerland, has elected to not sign the BEPS MLI and negotiate with states on a bilateral basis.

The MAP is intended to provide certainty to taxpayers that double tax disputes will be resolved in a timely manner and that double taxation will be eliminated. Enhanced Mutual Agreement Procedure (MAP) arbitration provisions are included in Part IV of the MLI, which countries may choose to adopt on a voluntary basis. Where Part IV applies to a covered tax agreement, provisions in Article 19 of the MLI will provide that a taxpayer will be able to request arbitration with respect to an unresolved MAP case when the competent authorities are unable to reach a resolution within a period of two or three years.

In the case of the US-Switzerland deal, a request for mandatory binding arbitration may be sought when a case remains unresolved after two years.

The new notice from the IRS sets out when taxpayers can request binding arbitration and the rules regarding the appointment of an arbitrator and their conduct. It includes examples of the documentation that should be completed.

The guidance provides that requests for competent authority assistance must comply with the requirements of Revenue Procedure 2015-40 or the US equivalent guidance in “Factsheet on the mutual agreement procedure” of May 2018, or any applicable subsequent guidance.

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