Competent Authority As A Dispute Resolution Tool

• Author: Sandra Goldberg/Gary L. Zed
• Profession: Senior Manager/Partner
• Pages: 470-547

Chapter Nineteen

Competent Authority as a

Dispute Resolution Tool

Sandra M. Goldberg and Gary L. Zed

A. INTRODUCTION

This chapter will examine the Competent Authority legal framework and

administrative procedures in Canada as they relate to tax dispute resolution.

The Canadian tax treaty network is impressive, and Canada remains a

leading country in both the number of its tax treaties and the maturity of its

administrative procedures for resolving treaty disputes. Canada’s first com-

prehensive tax treaty was signed with the United States in 1942. As of the

end of June, 2004, Canada had 83 tax treaties in force, 6 treaties pending

ratification, and 19 treaties under negotiation or renegotiation. The majori-

ty of treaties negotiated by Canada are structured following the OECD

model tax convention. The model treaty, as amended, sets the standard and

serves as the foundation for treaty negotiations by Canadian officials.

The pressure continues for industrial countries to adopt pro-growth tax

policies that will attract foreign investments. Advancements in technology

and reduction in communication and transportation costs have boosted

international investment flows and increased economic integration. At the

same time, the tax administrations of many countries have historically ben-

efited, or more correctly, profited, from cooperative endeavours made pos-

sible by the mutual agreement procedures (“MAP”) and exchange of

information articles that are common to all tax treaties. This is particularly

true between two or more countries that derive additional benefits from

mature treaty relationships and membership in various multilateral tax

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administration alignments, such as the Pacific Area Tax Administrators

(“PATA”), the Group of Four (“G-4”), the OECD, as well as other less famil-

iar forums. PATA is made up of Australia, Canada, Japan, and the United

States, and by and large limits the scope of its activities to administration

issues only. The G-4 (France, Germany, the United Kingdom, and the Unit-

ed States) and the OECD, on the other hand, engage in a broad range of

cooperative efforts that include both tax policy and administration.

The cooperation of countries linked by tax treaties is complicated by

various abiding circumstances: political and domestic pressures facing rev-

enue administrations to raise additional dollars to combat deficits1; global

companies trying to stick handle their way through tax regimes lacking in

transparency and predictability; and worst, the lack of effective dispute res-

olution mechanisms by some members of the global treaty community.

B. COMPETENT AUTHORITY

1) General

“Competent Authority” as part of a discussion on “tax advocacy” may, at first

glance, seem somewhat unnatural; however, in the context of international

dispute resolution, competent authority as a tool of first resort is more and

more commonplace and quickly becoming top of mind in developing and

managing tax disputes with revenue administrations around the world.

The Competent Authority function in Canada is split between the Inter-

national Tax Directorate (“ITD”) and the Policy and Legislation Directorate

of the Canada Revenue Agency (“CRA”).2In ITD, the Director of the Com-

petent Authority Services Division serves as Competent Authority to resolve

specific dispute cases of double taxation or taxation not in accordance with

a tax treaty. The Director of the Legislative Policy Division of the Policy and

Planning Branch is the Competent Authority for issues involving interpre-

Competent Authority as a Dispute Resolution Tool 471

1 See, for example, recent reports of the Auditor General, such as the 2002 Report of the

Auditor General of Canada – December – Chapter 4 – “Canada Customs and Revenue

Agency Taxing International Transactions of Canadian Residents,” c. 4, December

2002; 2001 Report of the Auditor General of Canada “Canada Customs and Revenue

Agency – International Tax Administration: Non-Residents Subject to Canadian Income

Tax,” c. 7, December 2001. As well, in the United States, the U.S. Senate Finance Com-

mittee leaders in a letter of December 23, 2003 asked Internal Revenue Service Com-

missioner Mark Everson to determine whether multinational corporations that secure

special advance pricing agreements are paying their fair share of U.S. taxes.

2 A December 12, 2003 announcement stated that the Canada Customs and Revenue Agency

(CCRA) be split into two agencies, the Customs Branch would join a new Border Services

Agency and the remainder of the CCRA would be renamed the Canada Revenue Agency.

tation, nondiscrimination, treaty shopping, double non-taxation issues, and

general issues concerning the application of tax treaties where specific tax-

payers are not involved. It is noted that the divide between the two functions

is increasingly blurred given the significant cooperation between these two

functions and utilization of specialist resources.

The day-to-day operations of key Competent Authority programs are

carried out by the ITD of the CRA. The Competent Authority program as

administered by the ITD plays a critical role in fostering international com-

pliance with tax laws as well as dispute resolution. Over the years, the CRA

has sought to increase cooperation with many foreign tax authorities in

improving the mechanisms for resolving disputes under tax treaties. For

Canada, cooperation and reciprocity have been the cornerstones to build-

ing fruitful relationships with its treaty partners. Traditionally, the Compe-

tent Authority activities carried out by the ITD, more commonly known as

the “Competent Authority” function, have been those tied to the double tax-

ation program. However, the full range of key Competent Authority activi-

ties under the responsibility of the ITD includes:

• double taxation program;

• exchange of information program; and

• Advance Pricing Arrangement (“APA”) program.

The Canadian Competent Authority process is a well-established pro-

gram that will be subject to both challenges and opportunities in the coming

years. For example, transfer pricing and other international transactions in

Canada continue to be at the forefront of the audit issues facing taxpayers,

and it is these very issues that are making their way at an unprecedented pace

before the Competent Authority for resolution. These issues result from an

array of sometimes inconsistent and evolving domestic rules and interpreta-

tions. Thus, multinational enterprises (“MNEs”) are forced to operate in an

environment that creates numerous pitfalls and risks of (economic) double

taxation but can also create beneficial anomalies that the astute can exploit.

2) Legislative Framework

The legal basis for the above-noted programs is contained in articles 9, 25,

and 26 of the OECD model treaty, along with their counterparts in Cana-

da’s tax treaty network.3Model provisions 9 and 25 are key to the world of

ADVOCACY AND TAXATION IN CANADA472

3 The OECD is currently undertaking a study of the effectiveness of the Mutual Agree-

ment Procedures and will make recommendations for improvements to be included

in the model treaty and commentaries.