Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘MAP’

Alternative Dispute Resolution (ADR): Australia’s proactive approach

The referenced PwC Alert highlights the proactive efforts by the Australian Tax Office (ATO) to initiate dispute resolution mechanisms in the audit process, as well as focus on relevant internal training to successfully accomplish these objectives.

Click to access TaxTalk-Alert-Tax-Controversy-01Feb14.pdf

The ATO is committed to the following objectives:

  • Early engagement and direct negotiation with taxpayers
  • Improving all dispute resolution processes starting with the assessment
  • ADR utilization at every stage of the dispute resolution process
  • Independent review of the audit position prior to conclusion of the audit aimed to narrow / reconsider the issues
  • Internal ADR training
  • Focused “risk-focused” approach to managing disputes

The ATO’s initiatives are timely, relevant and a welcome effort to adopt Best Practices to resolve disputes prior to costly and time-consuming formal unilateral, bilateral or multilateral appeal avenues via domestic legislation and/or double tax treaty relief.

 

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Audits

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TP Compensating Adjustments: Update

A Report on Compensating Adjustments, issued by the EU Joint Transfer Pricing Forum in January 2014, provides a practical solution to address different approaches by EU Member States.  The Glossary of the OECD Transfer Pricing Guidelines defines a “compensating adjustment” as “an adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer’s opinion, an arm’s length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises.  This adjustment would be made before the tax return is filed.”  In general, an adjustment is made at a later time to the transfer prices set at the time of a transaction.

A link to this report, and an excellent article by CGMA, are provided for reference:

Click to access jtpf_009_final_2013_en.pdf

http://www.cgma.org/magazine/news/pages/20149479.aspx

Highlights of the Report:

  • Compensating adjustments are enacted using one of two approaches, an ex-ante (arm’s length price setting approach), or ex-post (arm’s length outcome testing approach).  The ex-post approach generally involves testing, and possible adjustment, of transfer prices at year-end, prior to closing the books or filing the tax return.
  • When both Member States apply an ex-post approach and require compensating adjustments, a risk of double taxation, or double non-taxation, may arise.
  • An ex-post approach by one Member State, with an ex-ante approach by a separate Member State, presents conflicts on making such adjustments.
  • Guidance by the OECD is limited, with reference to the Mutual Agreement Procedure (MAP) to resolve disputes.  Member States use their discretion re: application of compensating adjustments.
  • A practical solution is described for transactions in which (i) profits are calculated symmetrically, and (ii) a compensating adjustment initiated by the taxpayer should be accepted if various conditions are met.  However, if the Member States have less prescriptive rules for such adjustments, those rules are to apply.
  • Upward as well as downward adjustments should be accepted.
  • The practical solution provided should not limit a tax administration’s ability to make a subsequent adjustment and has no bearing in a MAP procedure.
  • The adjustment should be made to the most appropriate point in an arm’s length range, with reference to OECD guidance.

The subject of compensating adjustments is an important topic in addressing potential double taxation, or double non-taxation.  The Report is timely, offering practical guidance for Member States to achieve consistency, although only within the EU.

It will be interesting to follow this topic, and future guidance, by the OECD, as well as commentaries from EU Member States, UN, and other interested parties.  The practical solution will be most effective if adopted in principle, or in legislation, by the EU Member States, with other countries referring to such guidance to resolve challenging transfer pricing issues fairly and effectively.

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Transfer Pricing

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BEPS Action item 14: OECD Dispute Resolution Focus Group

OECD Working Party 1 has formed a Dispute Resolution Focus Group to address BEPS Action Plan item 14, copied herein for reference.

Focus areas of WP 1:

  • Access to Mutual Agreement Procedure (MAP)
  • Arbitration
  • Multilateral MAPs & APAs
  • Adjustment issues, including timing for corresponding adjustments, self-initiated adjustments, and secondary adjustments
  • Interest & Penalties
  • Hybrid Entities
  • Legal status of a mutual agreement

In the US, IRS has also issued Notice 2013-78 detailing a proposed Rev. Procedure on US Competent Authority procedures, including an emphasis on informal consultation for US Foreign Tax Credit determinations.

Click to access n-13-78.pdf

OECD BEPS ACTION 14

Make dispute resolution mechanisms more effective

Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.

(iv) From agreed policies to tax rules: the need for a swift implementation of the measures

There is a need to consider innovative ways to implement the measures resulting from the work on the BEPS Action Plan. The delivery of the actions included in the Action Plan on BEPS will result in a number of outputs.

Some actions will likely result in recommendations regarding domestic law provisions, as well as in changes to the Commentary to the OECD Model Tax Convention and the Transfer Pricing Guidelines. Other actions will likely result in changes to the OECD Model Tax Convention. This is for example the case for the introduction of an anti-treaty abuse provision, changes to the definition of permanent establishment, changes to transfer pricing provisions and the introduction of treaty provisions in relation to hybrid mismatch arrangements.

Changes to the OECD Model Tax Convention are not directly effective without amendments to bilateral tax treaties. If undertaken on a purely treaty-by-treaty basis, the sheer number of treaties in effect may make such a process very lengthy, the more so where countries embark on comprehensive renegotiations of their bilateral tax treaties. A multilateral instrument to amend bilateral treaties is a promising way forward in this respect.

This new initiative highlights innovative and forward thinking by the OECD.

Best Practice thoughts include:

  • Using MAP as a roll-forward mechanism to an APA to cover additional years beyond the MAP request
  • Using simultaneous appeals and Competent Authority relief provisions

These developments merit additional attention to self-initiated adjustments, Best Practices to address secondary / corresponding adjustments and creative thinking to resolve bilateral / multilateral disputes.

Related articles

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OECD / UN

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EU JTPF: Transfer Pricing – Secondary adjustments review

The EU Joint Transfer Pricing Forum (JTPF) report on secondary adjustments was agreed in October 2012.  With the OECD Base Erosion and Profit Shifting (BEPS) Action Plan currently under discussion, it is worthy to review the process of secondary adjustments and their various implications and complexities.  The report discusses the adjustments under the EU Parent Subsidiary Directive, EU Arbitration Convention, and Mutual Agreement Procedure (MAP).  For non-EU countries, it is imperative to review consequences of a secondary adjustment due to additional costs, complication and double taxation risks.

Click to access final_report_secondary_adjustments_en.pdf

It is possible that a transfer pricing adjustment is accompanied by a so-called “secondary adjustment”.

Transfer pricing legislation in some States allows or requires “secondary transactions” in order to make the actual allocation of profits consistent with the primary adjustment. Double taxation may arise due to the fact that the secondary transaction itself may have tax consequences and results in an adjustment.

The OECD MTC does not prevent secondary adjustments from being made where they are permitted under domestic law.

Secondary adjustments may in some Member States be subject to specific penalties or result in penalties under the general penalty regime.

Procedure for removing double taxation: In their responses to the questionnaire on secondary adjustments most Member States which apply secondary adjustments stated that they do not consider double taxation issues resulting from secondary adjustments as being covered by the Arbitration Convention (AC), only a few consider them covered by the AC Convention, and some other MS indicated that the applicability of the AC to secondary adjustments remains an open question for them.  However, most Member States applying secondary adjustments would be willing to address them in the course of a MAP. Therefore, in cases where it is not possible to avoid double taxation at the outset, e.g. by way of applying the Parent Subsidiary Directive (PSD), a taxpayer would – in a case of (potential) double taxation resulting from a secondary adjustment – have to file two requests, i.e. a request under the Arbitration Convention and a request for a MAP. The latter would require in each case a treaty being concluded between Member States that includes a MAP provision comparable to Article 25 of the OECD MTC (preferably including an arbitration clause as per Article 25 (5) OECD MTC).

A review of secondary adjustments, and their application for transfer pricing adjustments, should be reviewed in advance of final audit settlements to ensure additional complexities do not arise.

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Transfer Pricing

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European Commission releases 2012 APA & MAP statistics

The EU Joint Transfer Pricing Forum has released statistics for pending Mutual Agreement Procedures (MAPs) and APAs under the Arbitration Convention.

The MAP comparables provide interesting observations for countries in which there is no activity in contrast to active case developments in France, Germany, and the UK.  The average cycle time noted in several countries ranges from 9 to 47 months, which presents additional challenges in timely case resolution.  Reasons provided for cycle time variations included 24% being waived for the time limit with taxpayer’s agreement, 16% pending before court and 15% settled in principle, waiting exchange of closing letters for MAP.

The APA statistics reflect 222 EU and 168 Non-EU APAs in force at the end of 2012, 561 EU and 119 Non-EU APA requests in 2012, while 353 EU and 85 Non-EU APAs were granted in 2012.

Click to access jtpf_012_2013_en.pdf

Click to access jtpf_013_2013_en.pdf

The statistics for seeking resolution via the EU Arbitration Convention provide additional insight for evaluation of issues that are not being settled effectively at the local country level.

 

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Transfer Pricing

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OECD Country MAP Profiles & Statistics – Valuable tools

http://www.oecd.org/ctp/dispute/countrymapprofiles.htm

http://www.oecd.org/ctp/dispute/mapstatistics20062011.htm

The links provide reference to the OECD Country MAP Profiles and MAP Statistics 2006-2011.  The OECD MAP content provides valuable information that should be included as an integral component of audit risk strategies.

The Country MAP Profiles provide the following content for OECD member countries, in addition to Argentina, People’s Republic of China, Russia, and South Africa:

  • Competent Authority contact information
  • Organisation of the Competent Authority
  • Scope of MAP & MAP Advance Pricing Arrangements (APAs)
  • References to domestic guidelines and administrative arrangements
  • MAP request content, timelines, fees and documentation requirements
  • Provisions on tax collection, penalties and interest pending outcome of the MAP process
  • Other dispute resolution mechanisms, and
  • Links to websites for the relevant jurisdiction.

The MAP Statistics include information on MAP inventories, cases initiated, completed, withdrawn, and average cycle time.  These statistics are provided for the OECD member countries and some non-OECD economies.  This information is very helpful in reviewing the trend of MAP filings in relevant jurisdictions.  There were 3,838 open MAP cases by OECD member countries at the end of 2011, with an average completion time of 25 months.

The OECD Forum on Tax Administration (FTA) convenes later this year to discuss Best Practices for improving MAP: refer to prior post 27 June 2013.

With the increase of transfer pricing controversies that are inherently complex and subjective in nature, MAP is a tool that is being used more frequently worldwide.  Examples of Best Practices to strategize MAP are provided for insight:

  • Document domestic and bilateral/multilateral avenues of appeal upon commencement of an audit to facilitate advance planning.
  • Review Double Tax Treaties for relevant Arbitration provisions that are providing an impetus for some jurisdictions to finalize negotiations.
  • Determine the interplay of domestic appeals (informal settlement, formal Appeals, Court filings, etc.) with MAP early in the audit process.
  • Outline deadlines for domestic appeals, MAP and other bilateral/multilateral tools (i.e. EU Arbitration Convention)
  • Develop a pro-forma multilateral calculation to strategize solutions minimizing double taxation.
  • Ensure MAP and other appeal strategies are integrated in the Tax Risk Framework.

    OECD Map with accession (green) and discussion...

    OECD Map with accession (green) and discussion (pink) countries added (Photo credit: Wikipedia the relevant jurisdictions)

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Audits, OECD / UN, Tax Risk Management

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OECD FTA MAP forum to develop Best Practices

A new forum, open to all members of the Forum on Tax Administration (FTA), will convene later this year to discuss Best Practices for improving MAP.  Topics that may be discussed include:

  • Development of a strategic plan
  • Resource limitations
  • Relationship building
  • Identifying trends in disputes
  • Increasing APA’s and accelerated CA procedures
  • Roll-over adjustments
  • Multilateral case procedures
  • Taxpayer’s involvement in MAP resolution
  • Achieving certainty sooner for a win-win result

This new forum will be an interesting development for all.

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Audits, OECD / UN, Tax Risk Management

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