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14 October 2012

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Treaty between US and Canada – IRS releases competent authority agreement regarding application of Authorized OECD Approach (AOA)

The US Internal Revenue Service (IRS) has released IRS Announcement 2012-31 with the official text of the recent competent authority agreement between the United States and Canada. The announcement is dated 20 August 2012.

The competent authority agreement was entered into under article XXVI(3) (Mutual Agreement Procedure) of the 1980 US-Canada Income Tax Treaty.

The agreement addresses the application of the principles set forth in the Organization for Economic Cooperation and Development (OECD) Report on the Attribution of Profits to Permanent Establishments (the "authorized OECD approach" or "full AOA") in the interpretation of article VII (Business Profits) of the Treaty (the OECD Report).

The agreement references the Second Exchange of Notes to the Fifth Protocol to the Treaty, which states that the OECD Transfer Pricing Guidelines apply, by analogy, in determining the business profits attributable to a permanent establishment.

According to the competent authority agreement, the following understandings have been reached:

-   the Exchange of Notes indicated that the full AOA would apply without waiting for the OECD Report to be finalized;
-   article VII of the Treaty must be interpreted in a manner entirely consistent with the full AOA;
-   all other provisions of the Treaty that require a determination of whether an asset or amount is effectively connected or attributable to a permanent establishment must be interpreted in a manner entirely consistent with the full AOA; and
-   relief of double taxation continues to be subject to the provisions and limitations of each country's domestic law, as provided in article XXIV (Elimination of Double Taxation) of the Treaty.

The agreement states that it applies to taxable years beginning after 1 January 2012, but that taxpayers may elect to apply the agreement in its entirely to both Contracting States for all taxable years beginning after 31 December 2008.

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