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How can MAP help resolve transfer pricing disputes in the digital economy?

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Transfer pricing is the practice of setting prices for transactions between related entities within a multinational enterprise (MNE). It affects how much tax MNEs pay in different jurisdictions, and it can also create disputes with tax authorities over the appropriate allocation of profits and losses. How can MNEs avoid or resolve these disputes, especially in the context of the digital economy, where traditional methods of determining the source and value of income may not apply? One possible solution is the mutual agreement procedure (MAP), a mechanism that allows MNEs and tax authorities to negotiate a mutually acceptable outcome. In this article, we will explain what MAP is, how it works, and what benefits and challenges it offers for transfer pricing disputes in the digital economy.

本文章的要点总结

Engage in MAP:

The Mutual Agreement Procedure (MAP) offers a way for multinationals to negotiate directly with tax authorities, resolving disputes out of court. It's a proactive step to prevent double taxation and inconsistent treaty application, saving time and resources.
Establish key transactions:

Encouraging your tax department to focus on the largest related party transactions within existing treaties can mitigate financial risks and strengthen your audit defense. This strategic placement of transactions can make all the difference.

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1 What is MAP?

MAP is a procedure that allows MNEs and tax authorities to seek a resolution of transfer pricing disputes arising from double taxation or inconsistent application of tax treaties. Double taxation occurs when the same income is taxed by two or more jurisdictions, while inconsistent application of tax treaties occurs when different interpretations or implementations of the same treaty provisions lead to conflicting tax outcomes. MAP is based on the mutual agreement articles of tax treaties, which oblige the competent authorities of the contracting states to consult with each other and try to eliminate the double taxation or inconsistency. MAP is usually initiated by the MNE that is subject to the tax adjustment, by filing a request to the competent authority of the state where it is resident or has a permanent establishment.

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Dan Karen

TRANSFER PRICING | GLOBAL TAX CONTROVERSY | INTERNATIONAL TAX
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MAP, which is also know as competent authority relief or double tax relief, is an essential tool in tax risk management and managing tax disputes. One area where a tax department can provide risk management advice to the operational business is, when possible, to establish the largest related party transactions within an established treaty network. The presence of tax treaties and MAP may assist with financial risk, e.g., FIN48, as well as be a powerful tool in audit defense.

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2 How does MAP work?

The MAP process involves several steps, depending on the nature and complexity of the dispute. First, the competent authority that receives the MAP request will review it and decide whether it meets the eligibility criteria, such as the time limit, the evidence, and the scope of the issue. If the request is accepted, the competent authority will notify the MNE and the other competent authority, and start the negotiations. The negotiations can take various forms, such as bilateral meetings, exchange of letters, or video conferences. The goal is to reach a mutual agreement that eliminates the double taxation or inconsistency, and that is acceptable to both the MNE and the tax authorities. If an agreement is reached, it will be implemented according to the domestic laws and procedures of each state. If no agreement is reached, the MNE may have other options, such as arbitration, litigation, or alternative dispute resolution mechanisms.

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Fran?ois Vincent

Partner at Vincent-Charette s.e.n.c.
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There is an additional step that is quite important and often forgotten. After ensuring that the MAP request meets the eligibility criteria, the competent authority’s first obligation is to determine whether it can or should provide unilateral relief. In other words, the competent authority receiving the MAP request must decide whether it believes that the adjustment giving rise to the request is founded and, if so, whether it should adjust the income, expenses, etc., of the taxpayer residing within its borders (or the permanent establishment) in accordance with the adjustment.

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3 What are the benefits of MAP?

MAP offers several benefits for MNEs and tax authorities that face transfer pricing disputes in the digital economy. First, MAP can provide a faster and cheaper way of resolving disputes than litigation, which can be costly, time-consuming, and uncertain. Second, MAP can preserve the relationship between the MNE and the tax authorities, by allowing them to communicate and cooperate in a constructive and respectful manner. Third, MAP can enhance the consistency and certainty of the application of tax treaties, by promoting a common understanding and interpretation of the treaty provisions. Fourth, MAP can support the development of the digital economy, by providing a flexible and adaptable mechanism that can address the specific challenges and opportunities of this sector, such as the allocation of taxing rights, the valuation of intangible assets, and the characterization of income.

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Lilit Sargsyan

Transfer Pricing Leader | Your Partner in Navigating Global Transfer Pricing | Top LinkedIn Leadership Voice
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MAP also promotes consistency and fairness in the allocation of profits between related entities in different countries. In the digital economy, where the value of intangible assets like patents, copyrights, and user data can be challenging to determine, MAP can help ensure a fair distribution of profits.

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Suhash Kantamneni

Transfer Pricing @ Danfoss | EY
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MAP almost always has an upside and less likelihood of a downside. This is because the taxpayer is provided an opportunity to accept or reject the MAP settlement proposal at the end. Domestic litigation processes run parallel and independent of MAP proceedings typically. If the taxpayer does not like MAP settlement arrived at for any reason (e.g., the settlement is a middle ground and can have unfavourable precedence for future years), they can reject it and continue to pursue the domestic litigation mechanisms. It is important to apply for an MAP within the timeline (typically a limitation of 3 years from the event of double taxation). The process for applying for MAP is also generally not tedious and can be done in-house.

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4 What are the challenges of MAP?

MAP also faces some challenges and limitations that may affect its effectiveness and efficiency in resolving transfer pricing disputes in the digital economy. First, MAP depends on the willingness and availability of the competent authorities to engage in good faith and constructive negotiations, which may not always be the case, especially if there are conflicting interests or priorities. Second, MAP may lack transparency and accountability, as the negotiations are confidential and not subject to public scrutiny or judicial review. Third, MAP may not provide a satisfactory or final solution for the MNE or the tax authorities, as the agreement may not fully eliminate the double taxation or inconsistency, or may be subject to further adjustments or challenges. Fourth, MAP may not be able to cope with the increasing volume and complexity of transfer pricing disputes in the digital economy, as it may require more resources, expertise, and coordination from the competent authorities and the MNEs.

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Fran?ois Vincent

Partner at Vincent-Charette s.e.n.c.
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Fifth, unless the MAP article governing the negotiations contains a mandatory binding arbitration clause, there is nothing that prevents the negotiations from dragging on, nor is there anything that forces the competent authorities to relieve double taxation. Experience shows that, in the past, complex issues have taken a very long time to get settled in MAP, if they were settled at all.

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5 How can MAP be improved?

There are several ways that MAP can be improved to address the challenges and enhance the benefits of this procedure for transfer pricing disputes in the digital economy. First, there should be more guidance and best practices on how to apply MAP in this context, such as the OECD Transfer Pricing Guidelines, the OECD Action 14 on Making Dispute Resolution Mechanisms More Effective, and the UN Manual on Effective Mutual Agreement Procedures. Second, there should be more cooperation and coordination between the competent authorities and the MNEs, such as through advance pricing agreements, joint audits, or multilateral consultations. Third, there should be more options and safeguards for the MNEs and the tax authorities, such as mandatory arbitration, independent oversight, or appeal rights. Fourth, there should be more innovation and adaptation of MAP to the specific features and needs of the digital economy, such as using digital tools, data analysis, or artificial intelligence.

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Fran?ois Vincent

Partner at Vincent-Charette s.e.n.c.
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This is the most important paragraph of the article but also the weakest. The first two recommendations listed are simply generalities. The third one lacks specificity and even contains a recommendation that would actually weaken the MAP (I will explain below). And the fourth one could be improved by adding transparency of MAP results. The second recommendation should indicate that it is mandatory binding MAP arbitration that would be recommended. Each of the words is important. It must be mandatory so that competent authorities cannot avoid it by simply declaring the MAP terminated on their own. It must be binding so that the result is definitive. And there should be no right of appeal - contrary to what is said in the recommendation.

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How can MAP help resolve transfer pricing disputes in the digital economy?

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1 What is MAP?

2 How does MAP work?

3 What are the benefits of MAP?

4 What are the challenges of MAP?

5 How can MAP be improved?

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