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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