Canada-U.S. – Competent Authority Memorandum of Understanding
Question
Can the CRA discuss the next steps (implementation) of the Canada-US Competent Authority memorandum of understanding (“MOU”)?
Response
On July 29, 2005, Canada and the United States announced a number of developments designed to implement the MOU that was entered into on June 3, 2005. These developments are as follows:
1. Appointment of Jim Gauvreau, Director, Competent Authority Services Division (“CASD”) and Bruce Messenger, Chief Economist, CASD, to represent the CRA and Tim Dehan, Manager, Tax Treaties, and Clark Armitage, Branch Chief, APA Program, to represent the IRS in bilateral discussions surrounding implementation of the MOU.
2. Setting of agenda priorities for discussion:
- First priority: prepare an MOU that will establish a binding procedure to determine the underlying facts and circumstances of a specific case where factual disagreements persist in a mutual agreement procedure “MAP” case.
- Second priority: create a set of guidelines to resolve cases involving substantive issues that may complicate case resolution. These issues include, but are not limited to, the determination of:
- an arms length compensation for consignment manufacturing operations,
- whether a business is integrated to a point where a profits split method is appropriate, and, if so, the relative value of contributions made by related parties toward the generation of profits,
- the presence of non-routine intangible assets and the determination of an arm’s length value,
- whether a permanent establishment (“PE”) exists and the amount of profit to be attributed to the PE,
- whether a transaction is properly characterized as a service versus a licensed intangible,
- the amount of compensation, if any, upon either the closure or relocation of a business and the allocation of associated closing costs, and
- appropriate relief where the source and residence countries laws are in conflict.
- Third priority: develop guidelines to identify and remove procedural obstacles that impede or delay the process in resolving double taxation cases.
- Fourth priority: create a MOU to address a number of issues surrounding notification.
3. Addressing transitional issues:
Questions have been raised regarding the manner in which existing MAP cases should be managed if issues presented in the case(s) fall within one of the categories of substantive issues identified above. It is important to provide guidance to taxpayers and also their respective organizations regarding the management of such cases during the period while various substantive issues are being addressed in the preparation of issue guidelines. All MAP cases will be considered in an effort to reach agreement and resolve the case(s) in a timely manner. Accordingly, notwithstanding that a particular case may present one or more substantive issues that would otherwise be addressed in a set of guidelines, each case will be considered presently without delay for purposes of discussion and potential agreement. If agreement cannot be reached after a reasonable period of time involving one or more substantive issues, then the case shall be held in abeyance pending the execution of the MOU(s) concerning that issue(s). The case will then be resolved according to the guidelines addressing the substantive issues involved.
4. Execution and release of MOUs.
To provide guidance to taxpayers and their own organizations, each set of guidelines (or MOUs) addressing specific procedural or substantive issues will be publicly released once the document has been agreed to and executed.