Rev. Rul. 72-437

Rev. Rul. 72-437

Advice has been requested whether a credit or refund of Federal income tax is allowable to carry out the agreement reached under Article XVII of the United States-Federal Republic of Germany Income Tax Convention, relating to mutual agreement procedure, when the credit or refund is otherwise barred by the statute of limitations. Advice has also been requested whether an executed closing agreement can be reopened where the competent authorities reach agreement under such Article XVII for the avoidance of double taxation.

Article XVII of the United States-Federal Republic of Germany Income Tax Convention, C.B. 1966-1, 360, at 372, provides as follows:

(1) Where a taxpayer shows proof that the action of the authorities of the contracting States has resulted or will result in double taxation contrary to the provisions of the present Convention, he shall be entitled to present his case to the State of which he is a citizen or a resident, or, if the taxpayer is a company or a corporation of one of the contracting States, to that State. Should the taxpayer's claim be deemed worthy of consideration, the competent authority of the State to which the claim is made shall endeavor to come to an agreement with the competent authority of the other State with a view to avoidance of double taxation.

(2) The competent authorities of the contracting States may communicate with each other directly to implement the provisions of the present Convention. Should any difficulty or doubt arise as to the interpretation or application of the present Convention, or its relationship to conventions between one of the contracting States and any other State, the competent authorities shall endeavor to settle the question as quickly as possible by mutual agreement. (3) In particular, the competent authorities of the contracting States may consult together to endeavor to agree.

(a) to the same attribution of industrial or commercial profits to an enterprise of one of the contracting States and to its permanent establishment situated in the other State,

(b) to the same allocation of profits between related enterprises as provided for in Article IV, or

(c) to the same determination of the source of particular items of income. In the event that the competent authorities reach such an agreement taxes shall be imposed on such income, and refund or credit of taxes shall be allowed, by the contracting States in accordance with such agreement.

Section 6511 of the Internal Revenue Code of 1954 provides, in general, that no credit or refund of any tax shall be allowed or made after the expiration of the period of limitation unless a claim for credit or refund is filed by the taxpayer, if a return is filed, within 3 years from the time the return was filed or within 2 years from the time the tax was paid, whichever period expires the later, or within 2 years from the time the tax is paid if no return is filed.

Section 7121 of the Code, in general, authorizes the Secretary or his delegate to enter into a closing agreement with any person relating to the Federal tax liability of such person and if approved, such agreement shall be final and conclusive, and, except upon showing of fraud, malfeasance, or misrepresentation of a material fact the case shall not be reopened as to matters agreed upon, and in any suit, action, or proceeding such agreement shall not be annulled or disregarded.

Senate Executive Report No. 7, Eighty-ninth Congress, C.B. 1966-1, 543, at 544, relating to the Tax Protocol with the Federal Republic of Germany, states, in part, as follows:

* * * Moreover, the protocol contains a new provision empowering the competent authorities of the two countries to make adjustments in tax liability, including refunds, and determinations as to the source of particular items of income, in order to avoid double taxation in appropriate cases.

The Memorandum from the staff of the Joint Committee on Internal Revenue Taxation, C.B. 1966-1, 547, at 548 and 553, in connection with the Protocol amending the Income Tax Convention between the United States and the Federal Republic of Germany, states, in part, as follows:

* * * In addition, the protocol contains a new provision granting the Governments of the two countries the authority to make adjustments in tax liabilities, including refunds, in order to avoid double taxation in appropriate cases notwithstanding impediments, such as the statute of limitations which might exist under internal law. * * *

* * * In addition, this provision [Article XVII] provides that in the event the competent authorities reach an agreement, the taxes of each country are to be imposed on the income as reattributed, reallocated, or differently sourced and an appropriate refund of taxes shall be allowed by the country to carry out the agreement, even if such refund would otherwise be barred by the statute of limitations. None of the existing income tax conventions to which the United States is a party contains procedures permitting the countries to make the resulting appropriate accommodation of tax liability resulting from such a reallocation. This provision will apply in the case of any discussions conducted by the competent authorities of the two cases after the treaty goes into effect even if such discussions concern taxable years prior thereto.

In view of the above, if the competent authorities of the United States and Germany reach agreement under Article XVII of the United States-Federal Republic of Germany Income Tax Convention, including agreements dealing with attribution of profits between an enterprise of one country and its permanent establishment in the other country, allocation of profits between related enterprises, or the source of items of income, each of the contracting States must implement the agreement in the determination of tax liability. Thus, if the United States competent authority agreed to an adjustment by the German competent authority, the United States would reflect the adjustment in its own determination of tax liability and allow an appropriate credit or refund, whether or not such credit or refund is otherwise barred by the statute of limitations under section 6511 of the Code or where a closing agreement had been executed under section 7121 of the Code. Article XVII of the German Treaty permits refunds pursuant to any agreement reached after January 1, 1965, the effective date of the German Protocol, with respect to taxable years beginning before or after January 1, 1965.

Accordingly, a credit or refund of Federal income tax is allowable to carry out the agreement between the competent authorities reached under Article XVII of the United States-Federal Republic of Germany Income Tax Convention, even if the credit or refund is otherwise barred by the statute of limitations. In addition, a closing agreement can be reopened where the competent authorities under such Article XVII reach an agreement for the avoidance of double taxation.

Prior to the Protocol in 1965 amending the Income Tax Convention between the United States and the Federal Republic of Germany, none of the income tax conventions to which the United States was a party contained a mutual agreement procedure permitting the countries to make appropriate accommodation of tax liability resulting from a reallocation or reattribution of income or from differently sourced income. Since the following income tax conventions to which the United States is a party have included a mutual agreement procedure similar to Article XVII of the German Income Tax Convention as follows:

Article XXA of the United States-United Kingdom of Great Britain and Northern Ireland Income Tax Convention, C.B. 1966-2, 567.

Article 25 of the United States-French Republic Income Tax Convention, C.B. 1968-2, 691.

Article XXIV of the United States-Kingdom of the Netherlands Income Tax Convention, C.B. 1967-2, 472.

Article 28 of the United States-Republic of Finland Income Tax Convention, C.B. 1971-1, 513.

Article 23 of the United States-Trinidad and Tobago Income Tax Convention, C.B. 1971-2, 479.

Article 25 of the United States-Japan Income Tax Convention, entered into force on July 9, 1972, and printed in the Department of State Treaties and Other International Acts Series (TIAS) No. 7365.

Other tax conventions in process of negotiation and ratification may contain similar provisions.