Tax Treaties and Competent Authority Procedures

Countries enter into bilateral income tax treaties to govern the allocation of respective taxing rights to avoid double taxation of their residents with respect to income arising in their respective territories.

A bilateral income tax treaty typically limits the source country’s power to tax income earned by a resident of the other contracting state from sources within its own territory, provides for relief from double taxation and provides for a procedure before the competent authorities of the contracting states as a way to settle international tax disputes arising under the treaty.

Tax treaty benefits essentially reduce withholding taxes at source on investment income and limit taxation of business profits at source unless attributable to a permanent establishment in the source country. The large Italian and U.S. tax treaty network makes it likely that you are entitled to benefits under one or more of the 70-plus Italian and U.S. tax treaties. Understanding and working with tax treaties require specific practice, because notwithstanding efforts to conform to a model (either the OECD or the U.S. model), Italian and U.S. treaties differ from each other in important and often subtle respects. Seemingly simple questions common to all treaties, such as who is entitled to treaty benefits, can give rise to contentious and potentially costly disputes.

Certain issues, such as what constitutes a permanent establishment and how profits attributable to a permanent establishment are computed (which seemed reasonably settled at a certain point in time) are still subject to debate and at the root of complex tax disputes. You are probably aware that since 1998 the OECD has been engaged in a project to re-examine the attribution of profits to a PE under article 7 of the OECD Model, and in August 2004 it issued a discussion draft on this issue, setting forth the methodology to attribute profits to a permanent establishment and addressing a series of related issues, which are receiving high attention among the OECD member states.

“Our international tax practice covers both substantive legal issues and administrative and procedural aspects of securing treaty benefits by filing appropriate forms and working with Italian, U.S. and foreign tax authorities”.

Our services in this area include:

  • interpeting tax treaty provisions and advising clients as to eligibility to treaty benefits;
  • structuring clients’ operations to maximize the value of treaty benefits;
  • advising clients on treaty interpretation and applicability of a treaty to their transactions;
  • assisting clients so that they satisfy any filing information or reporting requirements necessary to take advantage of treaty benefits;
  • invoking the Competent Authority procedure under a treaty.