US-Israel Double Tax: The Mutual Agreement Procedure

An American engineer who spent three years on secondment in Tel Aviv files her US return, claims a foreign tax credit for the Israeli tax withheld on her salary, and then receives a notice from the IRS disallowing part of it because the two countries disagree about which one had the right to tax that income. She is now taxed twice on the same dollars, the foreign tax credit did not fully cure it, and arguing with each tax authority on its own is getting her nowhere. What she needs is a mechanism that forces the two governments to talk to each other. That mechanism exists, and it is older and duller than most people expect.

Every US income tax treaty, including the convention with Israel signed on 20 November 1975 and amended by the protocols of 1980 and 1993, contains a mutual agreement procedure. It lives in Article 28. It lets a resident of either country ask the two competent authorities to resolve taxation that is not in accordance with the treaty, and it is one of the few articles that survives the treaty's saving clause in Article 6(3), so a US citizen keeps access to it even though the saving clause otherwise lets the United States tax its citizens as if the treaty did not exist. This guide explains how a US taxpayer actually uses it against an Israeli charge, and it assumes you have already read our overview of the US-Israel tax treaty.

What the Procedure Can and Cannot Do

The first thing to understand is that this is government-to-government, and that shapes everything. You are not a party to the negotiation that follows your request. You supply the file, the two competent authorities talk, and you receive the result. They are obliged to try to reach agreement; they are not obliged to reach one, and in the older US-Israel treaty there is no mandatory arbitration backstop of the kind newer treaties are starting to include.

The procedure is the right tool for genuine treaty conflicts: double taxation of employment income under Article 17, a residence dispute the treaty tiebreaker has not cleanly resolved, a transfer-pricing adjustment the Israel Tax Authority makes on payments between an Israeli subsidiary and its US parent, or a characterisation mismatch where each country calls the same income something different. It is the wrong tool for a simple domestic error, which belongs in an ordinary objection, and for cases too small to justify the cost.

Relief from double taxation itself runs through Article 26, the credit article, which is what a US taxpayer normally relies on through the foreign tax credit on Form 1116. The MAP is what you reach for when the credit mechanism alone leaves you double taxed because the two countries disagree on the underlying allocation.

In Practice: The Israeli side of a MAP is governed by Income Tax Circular 1/2023, issued by the Israel Tax Authority (Rashut HaMisim) on 12 February 2023, and is handled by the MAP unit in the international taxation department at MAP@taxes.gov.il, deliberately kept separate from the assessing officer whose assessment created the problem. Filing a MAP does not pause the domestic 30-day objection deadline under Section 150(a) of the Income Tax Ordinance [New Version] 5721-1961. On a disputed Israeli charge of, say, NIS 400,000, professional costs of running a MAP through to agreement commonly fall between NIS 40,000 and NIS 120,000, which is why the procedure earns its keep on six-figure exposures and rarely below.

Filing on the US Side

A US resident normally presents the case to the US competent authority, which then approaches Israel. The US competent authority is not a single desk. Transfer-pricing and allocation cases, including double tax arising from an adjustment under section 482 of the Internal Revenue Code or its Israeli equivalent, go to the Advance Pricing and Mutual Agreement program (APMA) within the IRS Large Business and International division. Other treaty-interpretation questions go to the Treaty Assistance and Interpretation Team. Both operate under Revenue Procedure 2015-40, which governs competent authority requests filed on or after 30 October 2015 and sets out what the request must contain and when to file a protective notification.

The timing point is the one that decides cases. The 1975 US-Israel treaty does not impose the fixed three-year presentation window that Israel's modern treaties contain, so your real deadlines are domestic. On the US side, the refund statute of limitations under IRC section 6511 controls whether the IRS can still adjust the year, and there is a valuable wrinkle worth knowing: a refund attributable to foreign taxes gets ten years under IRC section 6511(d)(3), not the usual three, which often keeps a US year open long enough for the competent authorities to finish. Do not assume the same generosity on the Israeli side.

In Practice: The mutual agreement procedure sits in Article 28 of the US-Israel convention and survives the saving clause in Article 6(3), while relief from double taxation runs through Article 26. On the US side, requests are filed with the IRS competent authority (the APMA program for transfer-pricing cases) under Revenue Procedure 2015-40, and a refund attributable to foreign taxes stays claimable for 10 years under IRC section 6511(d)(3). Both competent authorities are measured against the OECD's 24-month benchmark for closing a MAP, tracked in the BEPS Action 14 peer review.

Keeping the Israeli Position Alive

Here is the sequencing that protects a non-resident. Open the MAP, but do not let it lull you into missing the Israeli domestic deadlines, because the MAP does not extend them. The 30-day objection under Section 150(a) keeps running, and if you let an Israeli assessment become final while you wait for the competent authorities, you may find the Israeli side has nothing left to concede when the negotiation finally reaches it. The practical rule is to file the domestic Israeli objection to preserve the position, exactly as described in our answer on objecting to an Israeli tax assessment as a non-resident, and to run the MAP alongside it rather than instead of it.

Collection is a separate front again. An Israeli tax debt does not automatically freeze because a MAP is pending. If the amount is large, the point to negotiate early with the Israel Tax Authority's collection department is a payment arrangement or security that does not amount to accepting the assessment. The UK-focused mechanics of the same procedure are covered in our answer on making Israel and a foreign tax authority resolve double taxation between them, and the broader menu of relief options appears in our guide on avoiding double taxation on Israeli income.

The Cross-Border Reality for a US Taxpayer

For someone living in the United States, the friction is not the law but the distance. The evidence the Israeli competent authority wants is Israeli: the assessment, the withholding certificates, the Hebrew correspondence with the assessing officer, the transfer-pricing study. That material has to be gathered and often translated from abroad, on Israeli deadlines, while you coordinate a parallel US filing that speaks a different procedural language. Reduced Israeli withholding at source, where it applies, needs an Israel Tax Authority approval obtained before the payment is made, not reclaimed afterward, so a US recipient of Israeli dividends or fees who waits until filing season has usually already lost the timing advantage.

The dual-citizen situation deserves a specific note. Because of the Article 6(3) saving clause, a US citizen resident in Israel remains fully within the US tax net, and the MAP does not change that; it resolves the allocation between the two countries but leaves the citizen filing in both. What the procedure can fix is genuine double taxation of the same income; what it cannot fix is the simple burden of dual filing.

What Often Goes Wrong

Common Mistake: Treating the mutual agreement procedure as a substitute for the Israeli domestic objection. A US taxpayer who opens a MAP and lets the 30-day objection window under Section 150(a) of the Income Tax Ordinance lapse can find the Israeli assessment has become final and unassailable, so that even a sympathetic competent authority has no room to reduce the Israeli charge. The fix costs nothing but attention: file the Israeli objection within 30 days to hold the position open, and run the MAP in parallel.

Practical Checklist

• Confirm the charge is a genuine treaty conflict, not a domestic error, before choosing MAP over an ordinary objection or appeal.
• File the Israeli domestic objection within 30 days under Section 150(a) to keep the position alive, regardless of the MAP.
• Open the US competent authority notification under Rev. Proc. 2015-40, using APMA for transfer-pricing cases, and file protectively where a foreign audit has begun.
• Track the domestic deadlines on both sides, remembering the ten-year foreign-tax refund window under IRC section 6511(d)(3) is a US feature, not an Israeli one.
• Negotiate a collection arrangement with the Israel Tax Authority early on large exposures, since a pending MAP does not freeze collection.

Speak With an Israeli Attorney

A US-Israel MAP is won or lost on the Israeli evidence and the Israeli deadlines, both of which are hard to manage from across the Atlantic. An Israeli attorney can build the Israeli side of the file, keep the Section 150 objection alive alongside it, and deal with the Israel Tax Authority's collection department while the competent authorities talk.

Contact us for a confidential initial consultation.