Mechanisms for Addressing Double Taxation
Where an additional tax adjustment may result in double taxation, U.S. taxpayers may challenge the adjustment through domestic litigation or through the Mutual Agreement Procedure (MAP) under an applicable tax treaty, with the latter being more common. If the taxpayer challenges the adjustment through domestic litigation and obtains a final judicial decision, the U.S. competent authority will seek corresponding relief only from the foreign competent authority. Compared with directly seeking relief through the treaty mechanism, this approach clearly increases the risk of double taxation. If the tax authorities of the two countries are unable to reach a satisfactory agreement through the traditional mutual agreement procedure, the taxpayer will generally have the right to litigate the matter domestically and potentially in a foreign jurisdiction as well.
The United States has not joined the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, commonly referred to as the Multilateral Instrument (MLI), and specific EU directives do not apply to the United States. Amendments to tax treaties must be approved by the U.S. Senate, and over the past ten years, the number of newly concluded or revised tax treaties approved by the United States has been relatively limited.
Application of General Anti-Avoidance Rules / Specific Anti-Avoidance Rules in Cross-Border Contexts
The United States does not have a comprehensive general anti-avoidance rule or regime, but it does have certain statutory provisions that may apply both in cross-border and purely domestic situations, such as Section 269 of the Internal Revenue Code, under which the IRS may disallow tax benefits if the principal purpose of acquiring control of a corporation is to evade or avoid federal income tax; judicial doctrines such as the economic substance doctrine; and anti-abuse regulations such as Treasury Regulation Section 1.701-2, namely the Subchapter K anti-abuse rule, which is used to limit potential abuse of partnership rules or structures. The closest U.S. equivalents to general or specific anti-avoidance rules are various judicially created anti-abuse doctrines that emphasize substance over form, including the economic substance doctrine, which has since been codified. Recently, courts have seen multiple challenges relating to the scope of application of the economic substance doctrine, including in the areas of transfer pricing and other cross-border transactions.
Challenges to International Transfer Pricing Adjustments
In the United States, taxpayers frequently challenge transfer pricing adjustments through domestic courts as well as through the mutual agreement procedures provided under tax treaties. In some cases, litigation arises because bilateral procedures fail to produce a satisfactory outcome, or because the taxpayer is denied treaty assistance.
Unilateral / Bilateral Advance Pricing Arrangements
Unilateral and bilateral Advance Pricing Arrangements (APAs) are widely used in the United States to secure certainty in transfer pricing matters. In 2024, the U.S. Advance Pricing and Mutual Agreement Program (APMA) received 169 APA requests and executed 142 APAs. As of the end of 2024, 560 APA requests were still pending before the program.
Once a taxpayer decides to apply for an APA, the process generally proceeds as follows: first, the taxpayer submits an application to the Advance Pricing and Mutual Agreement Program and pays the user fee; next, the program informs the taxpayer whether the application has been accepted or requests additional information; the program then usually holds a kickoff meeting to discuss the application; if it is a bilateral APA, the taxpayer may be invited to make a joint presentation to both competent authorities; the program then evaluates the APA and, in the case of a bilateral request, conducts negotiations with the foreign counterpart authority; if agreement is reached, the APA is executed; once effective, the IRS monitors compliance throughout the entire term; if no agreement is reached, the taxpayer’s case will usually be returned to the examination process.
Cross-Border-Related Litigation
In the United States, litigation arising from transfer pricing represents the largest share of litigation involving cross-border transactions. Recently, the IRS has focused on intercompany financing transactions, cost sharing arrangements, and the licensing or transfer of intangible assets, especially in the technology and pharmaceutical sectors. Among these, disputes involving intangible assets are the primary source of challenges. As for legal controversies, reducing future litigation may require legislative or regulatory amendments as well as judicial decisions; otherwise, continuing to promote early resolution mechanisms and resolving disputes through tax treaty channels may be the best means of alleviating litigation.
Disclaimer
Laws and procedures may change. This article provides general information only and does not constitute legal advice. If you encounter a legal dispute overseas, please contact us immediately to consult a professional foreign-related lawyer.