Bilateral MAPs are important for double tax relief but limited. The OECD’s new multilateral manual is a helpful development.
Multilateral MAPs: the new navigation
The main purpose of Double Taxation Conventions (treaties) is to avoid the concurrent imposition of direct taxation by both contracting parties on the same amount of a taxpayer’s income. For those situations involving different interpretations which cannot readily be dealt with in advance, a dispute resolution mechanism is needed. It is helpful, for a taxpayer setting out on a multinational journey, to know that the competent authorities of treaty partners have their back via the mutual agreement procedure (MAP). But tax treaties are generally concluded by jurisdictions bilaterally. Where the circumstances affect multiple jurisdictions, tax certainty may be better achieved by a multilateral agreement. In a timely development, the OECD is supporting greater tax certainty with a new manual for multilateral MAPs and APAs (Advance Pricing Agreements). This guidance will help to support tax authorities, including less-experienced ones, in dealing with the additional navigational challenges of a multilateral agreement.
The positives should be celebrated. Treaties generally provide that tax authorities must only seek to agree, with no guarantees, but nevertheless the latest OECD statistics (for the year ended 31 December 2021) show that 65 percent of transfer pricing MAP cases are fully resolved. There may be evidence also to show that a MAP application may spur tax authorities to press forward with unilateral relief – potentially expediting the outcome. Increasing agreement of arbitration provisions within treaties helps the tax certainty agenda also.
However, the results are far from evenly distributed. This makes a big difference to taxpayers considering the extent to which a potential MAP would represent a reliable mechanism in their own cases. Both the likelihood of a successful resolution, and the time expected, are major considerations. The latter is particularly variable: South Korea and Japan closed roughly the same number of cases in 2021 based on roughly the same volumes but Japan’s cases, although in the great majority successfully concluded, took almost twice as long (41 months compared to less than 23). Perhaps this reflects the Japanese National Tax Agency’s reputation for rigorous challenges to transfer pricing: taxpayers have a good chance of making it to their destination, but by a more complex route. There might also be plenty of company on the way: Italy represents a disproportionately high number of cases, with 721 open at the beginning of 2021 – hopefully to reduce via agreement. These variations and many others reflect the different approaches and levels of experience with MAP among tax authorities.
This is one challenge to the success of MAP. The other major one, as the OECD points out, is that globalisation, intra-group services, and increased supply chain integration are resulting in arrangements that more and more frequently affect multiple jurisdictions: “Transfer pricing issues are no longer per se only bilateral in nature”. In addition, as ‘Pillar Two’, the forthcoming set of rules imposing a global minimum effective tax rate (ETR), beds in, there are likely to be many such cases. For example, transfer pricing disputes covering two ‘Constituent Entities’ of a group may change the ETRs of each, potentially resulting in a knock-on effect for the Top-up Tax payable by the ultimate or an intermediate parent, which could well be resident in a third country. All will be interested in the path ahead.
As multilateral cases proliferate, the OECD has recognised the risk of separate bilateral disputes arising from the same circumstances leading to different outcomes. To this end, it is encouraging to note that the OECD is supporting bringing multiple tax authorities along on the same journey. Based on responses to a survey circulated to 19 jurisdictions in 2020, the OECD has now compiled advice to jurisdictions on handling and resolving multilateral MAP and APA cases. The guidance covers procedural arrangements (including supporting less experienced tax authorities, along with practicalities for agreement between multiple interested parties), the legal basis and possible constraints, and the rights and roles of the taxpayer, including confidentiality questions. There are also some examples and suggested multilateral approaches.
Overall the OECD’s guidance on multilateral MAPs is a welcome addition to the help available for multinationals in navigating the complexities of international tax – indeed bilateral agreements as well as multilateral can benefit. It is to be hoped that tax authorities are sufficiently resourced and supported to find the path to agreement.