4.16 Mutual Agreement Procedure and Tax Disputes

Primary Reference to Article 9 – Appeals Process

Some relief from the problem of international double taxation, in the context of a Double Taxation convention, exists through the Mutual Agreement Procedure (MAP).

The MAP article in tax conventions allows designated representatives (the "competent authorities") from the governments of the contracting states to interact with the intent to resolve international tax disputes. These disputes involve cases of double taxation (juridical and economic) as well as inconsistencies in the interpretation and application of a convention.

A noteworthy point is that the MAP article in most conventions does not compel competent authorities actually to reach an agreement and resolve their tax disputes. They are obliged only to use their best endeavours to reach an agreement. Unfortunately, on occasion competent authorities are unable to come to an agreement. Reasons for unresolved double taxation range from restrictions imposed by domestic law on the tax administration's ability to compromise, to stalemates on economic issues such as valuations or transfer pricing.

One important point is the question of interest and possibly penalties on transfer pricing adjustments. Even if an agreement is reached on a transfer pricing dispute, such that one contracting state agrees to a downwards income adjustment and the other takes a corresponding increase, there can on occasion be penalties and often interest will be charged. The contracting state allowing the downward adjustment may or may not give interest on the tax to be refunded, but the other contracting state will invariably charge interest. The question of delay then becomes a real issue as sometimes these matters take many years to resolve. This may leave a taxpayer in a position where substantial interest is paid. Note that the taxpayer may not have any control over how long it takes the competent authorities to come to terms, if they indeed do, and may not have had any overall tax saving. This is fundamentally unfair.

More recent Double Taxation Conventions (and the most recent OECD Model Convention) make provision for compulsory arbitration of unresolved MAP disputes, and the OECD's BEPS action plan addresses difficulties which have arisen under both versions of the MAP article. Unfortunately (particularly in a context where far more occasions for invoking the MAP are likely to arise as a result of other BEPS recommendations) both the present and proposed models are grossly unfair to taxpayers who have no capacity to compel the respective competent authorities either to engage in arbitration of their dispute or grant relief from double taxation in the meantime. Fairness requires at least this entitlement, as well as acceptance that only one level of penalty is appropriate, which should be levied in respect of only one amount of disputed tax (and then taking into account any tax paid in the other jurisdiction), and that interest should be offset.