MAPping the way forward in international tax disputes

Statistics released by the OECD for 2019 (see here) show that the trend for increasing use of the mutual agreement procedure (“MAP”) as a tool for resolving tax disputes at an international level is continuing: applications for MAP nearly doubled between 2016 and 2019. The OECD suggest this is down to growing confidence in and knowledge of the MAP process as well as increased globalisation; but there remains a question over whether it is a productive route for taxpayers to pursue.

It is fair to acknowledge that there has been an increase in the number of MAP cases closed over the period from 2016 to 2019. However, those do not match the number of new cases, despite competent authorities having increased their operating capacity, and so the stack of pending cases is getting higher in most jurisdictions. The growing caseload is particularly an issue in relation to transfer pricing cases - for which read cases involving "allocation" (of profits between enterprises in different jurisdictions) or "attribution" (of profits to a permanent establishment). There were 20% more of these cases at the end of 2019 compared with the end of the previous year.  Although there has been a slight improvement in the average length of time taken to resolve them (31 months in 2019 versus 33 months in 2018), more than 20% of cases have been pending for longer than five years.

Using MAP to resolve Pillar One and Two disputes

This is a problem not just for the taxpayers involved but because the thorny issues around allocation of taxing rights and attribution of profits continue to be debated within the context of Pillar One of the OECD's proposals for reforming the international tax system for the digitalised and global economy (as discussed in further detail here and here). A key component of the Pillar One proposals will be new rules on prevention and resolution of disputes, especially to prevent prolonged disputes about the portion of residual profits of a multinational enterprise (“MNE”) that are allocated to market jurisdictions ("Amount A"). But while there is general agreement that some kind of mandatory binding dispute prevention / resolution mechanism will be required in relation to Amount A, no consensus has been reached on the extent to which a similar mechanism should apply in relation to other aspects of the proposed rules. For the largest MNE groups within scope of the Pillar One proposals, the current suggestion is that a new mandatory and binding dispute resolution mechanism would similarly be introduced for all disputes related to transfer pricing and permanent establishment issues - but only as a tool of last resort after other options, essentially the MAP process, have been exhausted.

MAP is also currently the favoured method for resolving disputes arising from the application of the Pillar Two global anti-base erosion (“GloBE”) proposals for a worldwide minimum rate of tax, although the possibility of extending the proposed Pillar One multilateral instrument on dispute prevention / resolution to the Pillar Two context remains under discussion.

Taking MAP a step further

So the MAP process seems here to stay with the upward trend in new applications likely to continue. In apparent recognition of that, alongside the latest statistics, the OECD has published a consultation seeking stakeholder input on various proposals to strengthen the BEPS Action 14 Minimum Standard for the MAP. These broadly fall into the following buckets:

• Preventative measures - expanding bilateral advance pricing agreement (“APA”) programmes and access to training on international tax issues for those conducting audits, so there are fewer cases of adjustments that might lead to a MAP.
• Improving access to MAP in appropriate cases - including through greater clarity over application requirements, removing effective barriers to MAP by aligning the timing of collection of tax and charging of interest and penalties with MAP outcomes and allowing the multi-year resolution of recurring issues.
• Improving positive outcomes - by introducing a proper legal framework to ensure MAP agreements can be implemented and (as is suggested in the Pillar One blueprint) implementing binding arbitration or other dispute resolution mechanisms in the absence of agreement through the MAP process.

While encouraging, these proposals are hardly ground-breaking; many of them simply involve making mandatory the “best practice” options left open under the existing BEPS Action 14 Minimum Standard. Even the proposal for implementing binding dispute resolution mechanisms simply echoes the encouragement in the BEPS Action 14 report for jurisdictions to adopt binding MAP arbitration. Nor, for the most part, do they really go to the heart of the issue, which (especially for transfer pricing cases) is often simply that the jurisdictions involved have different views as to how the OECD Transfer Pricing Guidelines apply to the facts and find it difficult to reach agreement. That will be a familiar difficulty for those with experience of transfer pricing disputes.

Our suggestions to MNEs 

So, bearing all of this in mind, what should an MNE faced with the prospect of double taxation do about it? 

First, we would suggest considering all of the options that could be pursued, including MAP, to identify a primary route and, importantly, which option(s) might be pursued as a fallback if MAP, or subsequent binding arbitration if required under the relevant treaty, does not ultimately provide a (satisfactory) resolution. An obvious alternative to MAP is domestic litigation but there may be others, including within Europe action under the domestic rules implementing the EU Disputes Resolution Directive.  If MAP is the preferred primary option, thought should also be given to whether it is necessary to take any steps in tandem with a MAP application in order to preserve the ability to pursue other avenues in the future (as Glencore has done: see here).  

Secondly, if MAP is pursued, it’s critical that proper care is taken in presenting the facts as part of the application. Often the key to breaking the deadlock in a domestic dispute is ensuring that both sides are working from a shared view of the facts. While the MAP process is conducted between the competent authorities of the relevant jurisdictions with limited taxpayer involvement, the presentation of the facts to the competent authorities involved is one thing the affected MNE can influence. Whether the MAP application is to one treaty partner or both, perhaps the most important thing the MNE can do is to ensure that both jurisdictions are furnished with the same, clearly articulated and evidenced set of facts.

Our final recommendation would be for MNEs to insist on (or, at least, make clear their expectation of) more transparency from the competent authorities involved in the MAP regarding the status of the case and progress of their discussions.  A lack of transparency regarding these points is one of the frustrations with the MAP process often experienced by taxpayers. However, the OECD’s manual on effective mutual agreement procedures (“MEMAP”) encourages tax administrations to increase the transparency of the process through regular communication with the taxpayer regarding the status of a case (effectively as a quid pro quo for taxpayer cooperation in advancing a common understanding of the facts) and taxpayers can use that guidance as a lever to encourage tax administrations to do better on this front.  There is no guarantee it will result in a swifter resolution (although that is certainly the ambition), but it should at least give the taxpayer a more informed perspective on the MAP process and where it might end up.

To sum up: MAP is here to stay and is set to become even more important in resolving disputes round the new OECD Pillar One and Pillar Two frameworks.  However, it remains an imperfect, often slow and sometimes opaque process so taxpayers considering embarking on MAP should also think carefully about the alternatives if MAP does not produce a (satisfactory) resolution.  A considered and flexible strategy that is grounded a common set of facts is a critical building block to effective resolution but taxpayers should also push the competent authorities to adopt OECD best practices on transparency and efficiency, while keeping their options open for alternative dispute resolution proceedings if necessary.