ARTICLE 25 — U.S. Income Tax Treaty

Mutual Agreement Procedure

This Article provides for cooperation between the competent authorities of the Contracting States to resolve disputes which may arise under the Convention and to resolve cases of double taxation not provided for in the Convention. The Article also provides for the possibility of the use of arbitration to resolve disputes which cannot be settled by the competent authorities. The competent authorities of the two Contracting States are identified in subparagraph 1i) of Article 3 (General Definitions).

Paragraph 1 provides that where a resident of a Contracting State considers that the actions of one or both Contracting States will result for him in taxation which is not in accordance with the Convention he may present his case to the competent authority of his State of residence. A citizen of a Contracting State may bring a case under paragraph 1 of Article 24 (Nondiscrimination) to the competent authority of his State of citizenship. It is not necessary for a person first to have exhausted the remedies provided under the national laws of the Contracting States before presenting a case to the competent authorities. The paragraph provides that a case must be presented to the competent authorities no later than four years from the notification of the assessment which gives rise to the double taxation or taxation not in accordance with the provisions of the Convention. The four year period begins to run when the last formal notification of the assessment is issued. Thus, if the Internal Revenue Service makes a section 482 adjustment on a taxpayer's 1990 return, and, in 1994, sends the statutory notice of deficiency which results in double taxation, the taxpayer has until 1998 to present his case to the competent authority. When the case results from the combined action of the tax authorities in the two Contracting States, the four year time period begins to run when the formal notification of the second action is given. Although it is preferred U.S. policy to provide no time limit for the

presentation of a case to the competent authorities, the limit in paragraph 1 of the Convention should not result in any unreasonable denial of protection or assistance to taxpayers.

Paragraph 2 provides that if the competent authority of the Contracting State to which the case is presented judges the case to have merit, and cannot reach a unilateral solution, it shall seek agreement with the competent authority of the other Contracting State such that taxation not in accordance with the Convention will be avoided. If agreement is reached under this provision, it is to be implemented even if implementation is otherwise barred by the statute of limitations or by some other procedural limitation, such as a closing agreement (but see explanation below of Paragraph 23 of the Protocol). Because, as specified in subparagraph (c) of paragraph I of the Protocol, the Convention cannot operate to increase a taxpayer's liability, time or other procedural limitations can be overridden only for the purpose of making refunds and not to impose additional tax.

Paragraph 3 authorizes the competent authorities to seek to resolve difficulties or doubts that may arise as to the application or interpretation of the Convention. The paragraph includes a non-exhaustive list of examples of the kinds of matters about which the competent authorities may reach agreement. They may agree to the same attribution of income, deductions, credits or allowances between an enterprise in one Contracting State and its permanent establishment in the other (subparagraph (a)) or between related persons (subparagraph (b)). These allocations are to be made in accordance with the arm’s length principles of Article 7 (Business Profits) and Article 9 (Associated Enterprises). The competent authorities may also agree, under subparagraph (c), to settle a variety of conflicting applications of the Convention, including those regarding the characterization of items of income or of persons, the application of source rules to particular items of income and the treatment of income that is regarded as a dividend in one Contracting State and as a different class of income in the other. The competent authorities may agree to a common meaning of a term (subparagraph (d)) and to the common application, consistent with the objective of avoiding double taxation, of procedural provisions of the internal laws of the Contracting States, including those regarding penalties, fines and interest (subparagraph (e)). Agreements reached by the competent authorities under this paragraph need not conform to the internal law provisions of either Contracting State.

Subparagraph (f) of paragraph 3 authorizes the competent authorities to increase the dollar amounts referred to in Articles 17 (Artistes and Athletes) and 20 (Visiting Professors and Teachers; Students and Trainees) of the Convention to reflect economic and monetary developments. If, for example, after the Convention has been in force for some time, inflation rates have been such as to make the $20,000 exemption threshold for entertainers or the $5,000 earned income exemption threshold for students or trainees unrealistically low in terms of the original objectives in setting the thresholds, the competent authorities may agree to a higher threshold without the need for formal amendment to the treaty and ratification by the Contracting States. This provision can be applied only to the benefit of taxpayers, i.e., only to increase thresholds, not to reduce them.

Finally, paragraph 3 authorizes the competent authorities to consult for the purpose of eliminating double taxation in cases not provided for in the Convention, but with respect to the taxes covered by the Convention. An example of such a case might be double taxation arising

from a transfer pricing adjustment between two permanent establishments of a third-country resident, one in the United States and one in Germany. Since no resident of a Contracting State is involved in the case, the Convention does not, by its terms, apply, but the competent authorities may, nevertheless, use the authority of the Convention to seek to prevent the double taxation.

Paragraph 4 provides that the competent authorities may communicate with each other, including, where appropriate, in face-to-face meetings of representatives of the competent authorities, for the purpose of reaching agreement under this Article. The paragraph goes beyond the U.S. and OECD Models, and, to some extent, beyond current practice, by entitling the persons concerned in a particular competent authority case to present their views to the competent authorities of either or both Contracting States. The U.S. competent authority does receive and consider comments from U.S. taxpayers involved in a particular case. While it may also accept and consider comments from German taxpayers, it would not, absent this language, be obligated to do so.

Paragraph 5 introduces an arbitration procedure not found in other U.S. tax treaties. It provides that where the competent authorities have been unable to resolve a disagreement regarding the application or interpretation of the Convention, the disagreement may, by mutual consent of the competent authorities, be submitted for arbitration. Nothing in the provision requires that any case be submitted for arbitration. Paragraph 24 of the Protocol provides that if a case is submitted to an arbitration board, the board's decision in that case will be binding on both Contracting States with respect to that case. The exchange of notes, described below, specifies that the decision is also binding upon the taxpayer.

The arbitration procedures are to be agreed [upon] by the two Contracting States, and established by exchanges of notes through diplomatic channels. Notes were exchanged at the time of the signing of the Convention which specify a set of procedures to be used in the implementation of paragraph 5. Changes in these procedures may be made through future exchanges of diplomatic notes. The agreed procedures are as follows:

1.The competent authorities may agree to invoke arbitration in a specific case only after fully exhausting the procedures available under paragraphs 1 to 4 of Article 25, and if the taxpayer(s) consent to the arbitration and agree in writing to be bound by the arbitration decision. The competent authorities will not generally accede to arbitration with respect to matters concerning the tax policy or domestic tax law of either Contracting State.

2.The competent authorities shall establish an arbitration board for each specific case in the following manner:

(a) An arbitration board shall consist of not less than three members. Each competent authority shall appoint the same number of members, and these members shall agree on the appointment of the other member(s).

(b) The other member(s) of the arbitration board shall be from either Contracting State or from another OECD member country. The competent authorities may issue further instructions regarding the criteria for selecting the other member(s) of the arbitration board.

(c) Arbitration board members (and their staffs) upon their appointment must agree in writing to abide by and be subject to the applicable confidentiality and disclosure provisions of both Contracting States and the Convention. In case those provisions conflict, the most restrictive condition will apply.

3.The competent authorities may agree on and instruct the arbitration board regarding specific rules of procedure, such as appointment of a chairman, procedures for reaching a decision, establishment of time limits, etc. Otherwise, the arbitration board shall establish its own rules of procedure consistent with generally accepted principles of equity.

4.Taxpayers and/or their representatives shall be afforded the opportunity to present their views to the arbitration board.

5.The arbitration board shall decide each specific case on the basis of the Convention, giving due consideration to the domestic laws of the Contracting States and the principles of international law. The arbitration board will provide to the competent authorities an explanation of its decision. The decision of the arbitration board in a particular case shall be binding on both Contracting States and the taxpayer(s) with respect to that case. While the decision of the arbitration board shall not have precedential effect, it is expected that such decisions ordinarily will be taken into account in subsequent competent authority cases involving the same taxpayer(s), the same issue(s), and substantially similar facts, and may also be taken into account in other cases where appropriate.

6.Costs for the arbitration procedure will be borne in the following manner: (a) each Contracting State shall bear the cost of remuneration for the member(s) appointed by it, as well as for its representation in the proceedings before the arbitration board;

(b) the cost of remuneration for the other member(s) and all other costs of the arbitration board shall be shared equally between the Contracting States; and

However, if it deems appropriate in a specific case, in view of the nature of the case and the roles of the parties, the Competent Authority of a Contracting State may require the taxpayer(s) to agree to bear that Contracting State's share of the costs as a prerequisite for arbitration.

7.The competent authorities may agree to modify or supplement these procedures; however, they shall continue to be bound by the general principles established in the exchange of notes.

This Article is not subject to the saving clause of subparagraph (a) of Paragraph 1 of the Protocol. Thus, rules, definitions, procedures, etc., which are agreed upon by the competent authorities under this Article, may be applied by the United States with respect to its citizens and residents even if they differ from the comparable Code provisions. Similarly, as indicated above, U.S. law may be overridden to provide refunds of tax to a U.S. citizen or resident under this Article.

Paragraph 23 of the Protocol relates to Article 25. It provides that if a taxpayer in a Contracting State has, in reaching an agreement with the tax authorities of that State, waived his right to appeal to the competent authorities tinder Article 25, nothing in the Article will be construed as requiring that State to disregard such waiver. Thus, if a taxpayer has agreed with the tax authority of his Contracting State to waive his rights in a particular matter, and the competent authority of the other Contracting State seeks competent authority agreement in that matter, the competent authority of the first-mentioned Contracting State is not obligated to consider the case.