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notification of the adjustment giving how the counterparty entity came into
rise to double taxation. While coun- A secondary possession of the relevant funds. These
tries’ interpretations of what exactly deemed transactions can have significant
constitutes “first notification” vary, the adjustment reflects consequences: Deemed distributions
general principle is clear: If a tax author- an inferred secondary can trigger sizeable withholding tax
ity takes seven years to conduct an audit obligations to the extent they qualify as
before notifying the taxpayer that it is transaction that dividends, and inbound deemed divi-
resolves the
proposing an adjustment, the timeline dends that relate to years before passage
for presenting a case runs from that discrepancy caused of the law known as the Tax Cuts and
notification, not from the inception of Jobs Act, P.L. 115-97, can create U.S.
by the primary
the audit. taxable income.
Because presentation time limits are adjustment. The U.S. rules permit taxpayers to
generally not problematic, taxpayers avoid these deemed transactions by
can be taken by surprise when dealing instead aligning the book situation with
with the handful of U.S. tax treaties that are agnostic as to how that is achieved. the tax treatment, i.e., by electing to
include a notification time frame in lieu Whatever the goal, it is important to make a repatriation payment under Rev.
of a presentation time frame. The two consider the likelihood of different Proc. 99-32 to move the funds from the
most notable examples are the Canada outcomes. As a consensus-based process, counterparty to the adjusted entity. A
and Mexico treaties, with notification MAP tends to facilitate compromises to repatriation payment must include an
deadlines, respectively, six years from eliminate double tax, rather than all-or- arm’s-length interest component and
the end of the relevant tax year and 4½ nothing determinations. must be accomplished within 90 days to
years from the due date or filing date — Yet, simply thinking through the avoid the default secondary adjustment
whichever is later — of the return in the primary adjustment and any correlative treatment. If the primary adjustment
state receiving the notification. relief is not enough. Many countries, relates to older years, the mandatory
If a U.S. or foreign transfer-pricing including the United States, Germany, interest inclusion can be significant.
audit drags on too long, an adjustment and India, also require secondary ad- Thankfully, U.S. taxpayers are often
may not be proposed until after the justments. (Many others — including able to avoid these issues in MAP.
notification time frame has expired, and China, Japan, and the United Kingdom Under Rev. Proc. 2015-40, the taxpayer
failure to comply with notification time — do not, making this a conceptu- may request competent authority repa-
frames can cost a taxpayer its chance at ally fraught area.) In countries that do triation. Competent authority repatria-
MAP. For vigilant taxpayers, however, recognize secondary adjustments, it tion follows the same general principles
this should not be a problem: A treaty is crucial to consider the impact they as Rev. Proc. 99-32, but it is not bound
notification may be submitted before may have on potential resolutions and by its specific rules, allowing the com-
an adjustment is proposed, and in the how they can be managed through the petent authorities to negotiate the terms
United States it must be updated annu- MAP process. of any repatriation obligation. Most
ally in accordance with the rules of Rev. Secondary adjustments address the notably, competent authorities com-
Proc. 2015-40. Notification issues are by book-tax discrepancy that arises from monly agree to the waiver of interest on
no means insuperable, but they do mean a primary transfer-pricing adjustment: repatriation payments, which is generally
that taxpayers need to be thinking about from a tax perspective, one entity’s an ideal means of implementing the sec-
MAP before an exam concludes. income has been increased, and its ondary adjustment from the taxpayer’s
counterparty’s income has been de- perspective. Importantly, a request for
Planning for the endgame creased; from a book perspective, the competent authority repatriation must
Taxpayers’ goals for the MAP process funds that correspond to the adjustment be submitted in writing before a tenta-
vary. Some are hoping that the leverage remain with the counterparty entity. tive MAP resolution has been reached,
of the competent authority in the coun- In the United States, this discrepancy making it crucial for taxpayers to con-
terparty jurisdiction will induce a tax can be resolved in two ways. By default, sider these issues early in the process.
authority to withdraw or substantially one or more deemed transactions (i.e.,
reduce a proposed adjustment. Others deemed distributions or deemed capital Thinking a step ahead
agree with the proposed adjustment and contributions) will be inferred to align The traps for the unwary discussed
are seeking correlative relief. Many sim- the tax treatment with the book treat- above illustrate the importance of fore-
ply want relief from double taxation and ment and explain, from a tax perspective, thought and careful planning. In cases

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