Guidelines signal step toward more efficient resolution of tax disputes under the Canada-US Treaty

On November 25, 2010, the competent authorities of Canada and the United States released the long-awaited Memorandum of Understanding ("MOU")[1] and a set of operating guidelines[2] regarding the conduct of the new mandatory arbitration proceedings under the Mutual Agreement Procedure ("MAP") of the Canada-United States Income Tax Convention (1980), as amended (the "Treaty").

The Fifth Protocol to the Treaty, which came into force on December 15, 2008, introduced in paragraph 6 of Article XXVI mandatory binding arbitration for residents of Canada and the United States who face potential double taxation that is not resolved by negotiation between the competent authorities. Following the introduction of the arbitration provision, the competent authorities of Canada and the United States were given two years to develop procedures and administrative practices for the implementation of this provision, which were published just a few days shy of the December 15, 2010 deadline.

A review of the MOU reveals an effort by Canadian and U.S. authorities toward a faster and more efficient resolution of MAP cases.

In addition to the general ability of the taxpayer to request that a case proceed to arbitration where a negotiated settlement is not reached within two years, the MOU has imposed various time limits in an effort make the resolution of cross border tax disputes more efficient. For example, the MOU states that the three-member arbitration board must provide its decision (which is to be decided by a majority vote) in writing no later than six months following the date of appointment of the Chair of the board. Furthermore, the MOU provides that taxpayers will have thirty days to accept or reject the board's decision; where a taxpayer has not accepted the decision within thirty days, the decision will be considered rejected.

Finally, as announced at an American Bar Association meeting in Toronto in September 2010, and as confirmed in the MOU, bilateral Advance Pricing Arrangements ("APA") are now eligible for arbitration. In general, an APA is an agreement between the taxpayer and the taxing authority on an appropriate transfer pricing methodology for certain transactions over a period of time. The eligibility of APA cases for arbitration represents a significant benefit for taxpayers, as the arbitration decision will not only resolve disputes involving prior taxation years, but will also apply to future taxation years. This is not the case for all other decisions of the arbitration board which will have no precedential value for years not covered by the arbitration proceeding.

Given the increase in the number of international audits over the past couple of years and the delays that many taxpayers have experienced, the release of the MOU is timely and provides the competent authorities with an additional tool for the resolution of tax disputes that involve the Treaty.