March 23, 1989
Exchange of Information With Australia
The Internal Revenue Service today announced a working
arrangement with the government of Australia for the spontaneous
exchange of information on double taxation cases. It represents the
first such arrangement ever formalized with another country.
Exchange of information under this arrangement generally will
be limited to allocation and source of gross income adjustments
under section 482 of the Internal Revenue Code. For example, Code
section 482 requires, in the case of intangible property or the
rights to intangible property transferred to or from a related
foreign entity, that the payments for the intangibles be
commensurate with the income attributable to them.
The United States - Australia Income Tax Convention authorizes
the exchange of tax related information for mutual assistance in
administering tax laws and to avoid double taxation. The purpose of
the working arrangement is to identify areas where the Mutual
Agreement Procedure provision is not being used to the extent it
should be. A recent study indicates that there is a large gap
between the number of cases using the agreement's provision and the
number of examinations involving section 482 adjustments.
A hypothetical example of how this arrangement might work: The
IRS examines a U.S. multinational parent company with a subsidiary
in Australia and determines that the royalty agreement between the
two companies does not adequately compensate the parent for use of
its trademark and technical knowhow. The IRS examiner proposes an
adjustment which increases the parent's taxable income. The
increase in taxable income, without a corresponding decrease in the
subsidiary's taxable income, will result in double taxation.
In this situation the working arrangement allows the tax
authorities to identify taxpayers who have been subjected to double
taxation, but have not taken advantage of the agreement's provision.
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