Article 25. MUTUAL AGREEMENT PROCEDURE

This Article provides for cooperation between the competent authorities of the Contracting States to resolve disputes that may arise under the Convention and to resolve cases of double taxation not provided for in the Convention.

Paragraph 1 provides that where a person considers that the actions of one or both Contracting States will result for him in taxation that is not in accordance with the Convention he may present his case to the competent authority of his State of residence or 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. Also, the Convention does not limit the time during which a case may be brought.

Paragraph 2 provides that, if the competent authority of the Contracting State to which the case is presented considers the case to have merit, and if it cannot reach a unilateral solution, it will seek agreement with the competent authority of the other Contracting State to avoid taxation not in accordance with the Convention. If agreement is reached under this provision, it is to be implemented even if implementation would be otherwise barred by the statute of limitations or by some other procedural limitation, such as a closing agreement. Because, as specified in paragraph 2 of Article 1 (General Scope), the Convention cannot operate to increase a taxpayer's liability, the Convention overrides time or other procedural limitations of domestic law

only for the purpose of making refunds (not for the purpose of imposing 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 a resident of one Contracting State and its permanent establishment in the other, and to the allocation of income, deductions, credits or allowances between persons. These allocations are to be made in accordance with the arm's length principles of Article 6 (Business Profits) and Article 7 (Associated Enterprises). The competent authorities may also agree to settle a variety of conflicting applications of the Convention, including those regarding the characterization of items of income, the application of source rules to particular items of income, differences in meanings of a term, and differences in applying penalties, fines and interest. Agreements reached by the competent authorities under this paragraph need not conform to the internal law provisions of either Contracting State. The competent authorities also may address cases of double taxation not foreseen by the Convention and attempt to reach an agreement that would prevent that result.

Paragraph 4 authorizes the competent authorities to communicate with each other directly for these purposes. It is not necessary to communicate through diplomatic channels.

Paragraph 5 provides for an arbitration procedure, to be implemented subsequently by an exchange of diplomatic notes. The competent authorities will consult after the Convention has been in force for three years to decide whether it is appropriate to exchange the notes. One of the key factors for the U.S. competent authority in making that decision will be the U.S. experience under the arbitration provisions of the U.S.-Germany treaty, which entered into force in 1991 and which contains the first arbitration provision of any U.S. income tax treaty. If the competent authorities decide to exchange the diplomatic notes to implement an arbitration procedure in this Convention, they will also agree to procedures to be followed in arbitration. It is expected that such procedures will ensure that arbitration will not generally be available where matters of either State's tax policy or domestic law are involved, that the arbitrators will be bound by the Convention's confidentiality and disclosure provisions, and that the decision in arbitration will be premised upon the Convention, the provisions of each State's domestic law, and the principles of international law. The procedures to be established by the exchange of notes also will address the costs of arbitration and the composition of the arbitration board.

Point 9 of the Protocol also provides for the competent authorities to consult whenever either believes that the law of the other Contracting State is or may be applied in a manner that significantly limits or eliminates a benefit provided by the Convention. In that event, the competent authorities shall consult with a view to restoring the balance of benefits. The State of which the request to consult is made shall accede to the request by beginning consultations within three months of the request. If the States are unable to agree on how to modify the Convention to restore the balance of benefits, the affected State may terminate the Convention in accordance with Article 29 (Termination) even if the Convention has been in force fewer than five years. Alternatively, the affected State may resort to other procedures permitted under the general principles of international law.

This Article 25 represents another exception to the saving clause of paragraph 3 of Article 1 (General Scope); the benefits of this Article are thus available to residents of either Contracting State and to U.S. citizens. (See paragraph 4(a) of Article 1.)