Line 3 on Schedule OI asks:
Are you claiming treaty benefits pursuant to a Competent Authority determination? Y/N
If “Yes”, attach a copy of the Competent Authority determination letter to your return.
“No” is most likely going to be your answer. But a Competent Authority Agreement (CAA), which sounds similar, just might have been a factor. If so, it could be helpful to attach a statement explaining the facts and circumstances. See China example, below.
If “Yes” is your answer, attach the determination letter. This will have been provided in answer to a request for competent authority assistance, perhaps a ruling, by a taxpayer resident in a country covered by a bilateral income tax treaty. The determination took many months and much effort to obtain. The taxpayer will have the letter.
A U.S. taxpayer would request assistance from the U.S. Competent Authority or the Competent Authority of a treaty country, if they thought that the actions of the U.S., a treaty country, or both, cause or will cause a tax situation (such as harm to the taxpayer) not intended by the treaty between the two countries. The U.S. Competent Authority representative is the Deputy Commissioner (International) of the IRS’ Large Business and International Division. The Deputy Commissioner may delegate action to another official. For how a taxpayer requests assistance, see IRS Rev. Proc. 2015-40, dated August 31, 2015.
A list of tax authorities with CAA with the U.S., and hyperlinks to the text of each CAA is posted on the IRS website under Competent Authority Agreements. See list of countries below. Each tax authority designates an office or individual to whom questions may be addressed, and from whom specific determinations or rulings may be sought.
A Competent Authority Agreement (CAA) might be negotiated to:
– set a general framework for addressing tax treaty issues, including the interaction with treaty articles on Mutual Agreement Procedures (MAP) and arbitration,
– specify how an Intergovernmental Agreement (IGA) on information exchanges that meet the provisions of FATCA (Foreign Account Tax Compliance Act) will be implemented,
– give a general answer on an issue that comes up repeatedly about an article in a bilateral tax treaty, as some issues on fellowships, scholarships, pensions, and exempt/exclusion periods. These situations might benefit from a statement attached to the income tax return that explains how the general explanation in the CAA applies to the taxpayer’s situation.
Examples of situations where a statement linking the CAA to the taxpayer’s situation could be helpful:
The U.S.-China CAA concerns Professors and Teachers covered by Article 19. If they meet the conditions, their remuneration for teaching, lectures, and research is exempt from taxation for three years from their date of arrival in the host country. The CAA specifies that the three-year exemption period may be interrupted by a suspension if the individual discontinues the activity and departs the host state; if the individual then returns and again meets the conditions, the suspension ends and the three-year exemption period continues to run.
An attached statement might cite the CAA and the Article (19) it clarifies, and then present the dates: The date the exemption period started and the date it would have ended three years later. The dates between which the three-year period was suspended because the individual had departed the U.S. and ceased the activity. The new scheduled end date for the exemption period, that is, the date reached when the suspended days are added to the original end date.
The U.S.- Belgium CAA on fellowship payments seeks to clarify which treaty article applies to tax treatment of the payments.
The U.S. – Austria CAA on scholarships seeks to clarify what rules apply to determining if a treaty exemption applies.
Some CAA on pensions are of interest mainly to the pension plans, rather than individuals. The U.S. – U.K. CAA discusses U.K. plans where certain dividends received by the plan qualify for tax exemption. A U.S. – Belgium CAA names certain types of Belgian retirement plans which correspond to certain U.S. plan types, and thus would have the same tax treatment in the U.S. on contributions to the plan, or distributions from the plan. Specific non-U.S. pension plans may have applied for and received a letter of determination. If they have one, they might so inform members of their retirement plan.
Countries/Entities which have a CAA with the U.S. in January 2016
Note: There are many fewer CAA than bilateral income tax treaties. The number of CAA will grow as more countries and entities negotiate a CAA on the operations of a FATCA-related IGA.
Australia, Austria, Belgium, Canada, Cayman Islands, China, Czech Republic, Denmark, Finland, Germany, Gibraltar, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Jamaica, Japan, Latvia, Liechtenstein, Luxembourg, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Republic of Estonia, Slovenia, Spain, South Africa, Sweden, Switzerland, United Kingdom.