Article 25 - MUTUAL AGREEMENT — U.S. Income Tax Treaty

   Article 25 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. The competent
authorities of the two States are identified in subparagraph 1 h)
of Article 3 (General Definitions).

Paragraph 1

   Paragraph 1 provides that when a person considers that the
actions of one or both Contracting States result or will result
for him in taxation that is not in accordance with the
Convention, he may present his case to the competent authority of
the State of which he is a resident or citizen. 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. (On the other
hand, it may be necessary for the person to present his case to
competent authority in order to claim certain treatment under
domestic law, such as the right to claim foreign tax credits in

the United States. See. e., Rev. Rul. 92-75, 1992-2 C.B. 197.)

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Paragraph 2

   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 State to

avoid taxation not in accordance with the Convention. If agreement is reached under this provision, it is to be imple mented, and any agreed refund made, even if implementation is

otherwise barred by the statute of limitations or by some other

procedural limitation, such as a closing agreement. Because

subparagraph
2 a) of Article 1 (Personal Scope) provides that the Convention
cannot operate to increase a taxpayer's liability, time or other
procedural limitations can be overridden under this paragraph
only for the purpose of making refunds and not to impose
additional tax.

   In order for time or procedural limitations to be overridden

to give effect to a competent authority agreement, however, the competent authority of the second State (i.., not the State to which the taxpayer first brings the case under paragraph 1) must have been notified of the existence of the case within five years from the end of the taxable year to which the case relates. The notification may be given by the competent authority of the other

Contracting State, the taxpayer that has brought the case, or a relevant related party. The person giving notice may do so at

any time after a case is known to exist, and need not wait until

the case is fully resolved in the first-mentioned State. Thus,

as soon as the presence of a case in the first State is known,
the statute of limitations can be held open in the other State by
giving notification.

Paragraph X of the Protocol makes clear that if a taxpayer
is entitled to a refund from Turkey as a result of a mutual
agreement under paragraph 2, such refund must be claimed within a
period of one year from the time the taxpayer has been notified
by the tax administration of the fact that the mutual agreement
has resulted in a refund.

Paragraph 3

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   Paragraph 3 authorizes the competent authorities to seek to
resolve difficulties or doubts that may arise as to the applica
tion 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. With the
exception of subparagraph f), this list is purely illustrative of
authority that is already implicitly given by the introductory
sentence of paragraph 3. The competent authorities may, for
example, 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 alloca
tions are to be made in accordance with the arm's length
principles of Article 7 (Business Profits) and Article 9
(Associated Enterprises). Agreements reached under these
subparagraphs may include agreement on a methodology for
determining an appropriate transfer price, and upon an acceptable
range of results under that methodology. They may also agree to
apply this methodology and range of results prospectively to

future transactions and time periods (seea, in the application of

advance pricing agreements). The competent authorities may also
agree on standards for determining when a relationship between
related parties qualifies as a legitimate cost-sharing arrange
ment, and will not, therefore, if it conforms to those standards,
be treated as a non-arm's-length transaction.

   As indicated in subparagraphs c), d) and e), the competent
authorities may also agree to settle a variety of conflicting
applications of the Convention. Thus, they may agree to
characterize particular items of income in the same way (subpara
graph c)), to apply the same source rules to particular items of
income (subparagraph d)) and to use a common meaning of a term
(subparagraph e)).

   As indicated in subparagraphs c), d) and e), the competent
authorities may also agree to settle a variety of conflicting
applications of the Convention. Thus, they may agree to
characterize particular items of income in the same way (subpara
graph c)), to apply the same source rules to particular items of
income (subparagraph d)) and to use a common meaning of a term

   Subparagraph f) of paragraph 3 authorizes the competent
authorities to increase any dollar amounts referred to in the
Convention to reflect economic and monetary developments. This
refers to Article 17 (Artistes and Athletes). The rule would
permit the competent authority, for example, to increase the
$3,000 exemption threshold for entertainers after the Convention
has been in force for some time and if inflation rates at that

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time have been such as to make the $3000 unrealistically low in
terms of the original objectives intended in setting the thresh
old; the competent authorities in this case could agree to a
higher threshold without the need for formal amendment to the
treaty and ratification by the Contracting States. This authori
ty can be exercised, however, only to the extent necessary to
restore the original objectives. Because of paragraph 2 of
Article 1 (Personal Scope), this provision can be applied only to
the benefit of taxpayers (i.e., only to increase thresholds, not
to reduce them).

   Subparagraph g) makes clear that the competent authorities:
can agree to the common application, consistent with the objec
tive of avoiding double taxation, of procedural provisions of the
internal laws of the Contracting States, including those regard
ing penalties, fines and interest. One of the more important
elements that may be dealt with by the competent authorities
under this subparagraph is the question whether interest will be
charged on deficiencies and paid on refunds growing out of
competent authority adjustments. A mismatching of the rules of
the Contracting States on such matters can lead to unresolved
double taxation (if the State making the initial adjustment
charges interest on the deficiency but the State making the
secondary, correlative, adjustment does not pay interest) or to a
windfall benefit (if the former State does not charge interest,
but the latter State pays interest). It would be useful for the
competent authorities to be able to agree to a bilateral proce
dure regarding the charging and payment of interest in a manner
that will avoid both double tax and windfalls. It might be
agreed, as a general matter, for example, that interest will be
charged by a Contracting State on deficiencies only when the
other Contracting State pays interest on refunds. It might also
be possible, even when a general solution cannot be found, for
the competent authorities to agree on a procedure for particular
cases. A similar difficulty may arise from currency fluctuations
associated with adjustments to income. If exchange rates from
different time periods (ea., the time of the original
transaction and the time of the adjustment) are used, the amount
of the allocation of income and the correlative adjustment can be
affected. Competent authorities may seek agreement on where the

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risks of currency fluctuation should be borne and how to take
account of that fluctuation in reaching a mutual agreement.

Finally, paragraph 3 authorizes the competent authorities to
consult for the purpose of eliminating double taxation in cases
not provided for in the Convention. This provision is intended
to permit the competent authorities to implement the Convention
in particular cases in a manner that is consistent with its ex
pressed general purposes. It permits the competent authorities
to deal with cases that are within the spirit of the provisions
but that may not be specifically addressed. An example of such
a case might be double taxation arising from a transfer pricing
adjustment between two permanent establishments of a third-count
ry resident, one in the United States, and one in Turkey. Since
no resident of a Contracting State is involved in the case (both
permanent establishments being residents of the third State), the
Convention does not, by its terms, apply, but the competent
authorities may, nevertheless, use the authority of the Conven
tion to seek to prevent the double taxation. The provision is
not, however, intended to authorize the competent authorities to
resolve problems of major policy significance that normally would
be the subject of negotiations between the Contracting States
themselves.

   Agreements reached by the competent authorities under
paragraph 3 need not conform to the internal law provisions of
either Contracting State.

   Paragraph 4

   Paragraph 4 provides that the competent authorities may
communicate with each other directly for the purpose of reaching
an agreement. This makes clear that the competent authorities of
the two Contracting States may communicate without going through
diplomatic channels. Such communication may be in various forms,
including, where appropriate, through face-to-face meetings of
representatives of the competent authorities.

   Relation to other articles

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   By virtue of the exceptions in paragraph 4 a) of Article 1
(Personal Scope), this Article is not subject to the saving

clause of paragraph 3 of that Article. Thus, rules, definitions,

procedures, etc., that are agreed upon by the competent authori

ties under this Article may be applied by the Contracting States
with respect to their citizens and residehts even if they differ

from the comparable internal law provisions. Similarly, as
indicated above, internal law may be overridden by a Contracting
State to provide refunds of tax to its citizens or residents
under this Article.