Kenya’s Double Taxation Agreements (DTAs) contain an Article on Mutual Agreement Procedure (MAP), typically Article 25, which allows two Contracting States to interact with each other with the intent of resolving international tax disputes. These disputes arise from situations where a taxpayer is of the view that they have been subjected to taxation contrary to the provisions of the DTA or from inconsistencies in the interpretation and application of the DTA. The Article also allows for consultation on the elimination of double taxation in cases not provided for in the DTA. The purpose of the Guidance is to set out the MAP process through which taxpayers can request assistance from the Kenyan Competent Authority to resolve disputes arising from taxation that they consider not to be in accordance with the provisions of the relevant DTA ...

In a memorandum issued April 25, 2023, the IRS provides guidance to their employees of the Treaty and Transfer Pricing Operations practice area in the Large Business and International Division with respect to requests from taxpayers for an APA with the IRS. The guidance instructs IRS personnel on how to review and, where appropriate, accept taxpayer APA requests to align the processes for APAs to be consistent with IRS’ strategy and maximize the probability of successful, timely, and comprehensive resolution of transfer pricing issues for both taxpayers and the IRS. Visit IRS’ webpage for more information on the US Advance Pricing and Mutual Agreement Program ...

It would be important to permit resolution of cases of double taxation arising from application of the approach for HTVI through access to the mutual agreement procedure under the applicable Treaty ...

As most OECD member countries at this time have not had much experience with the use of repatriation, it is recommended that agreements between taxpayers and tax administrations for a repatriation to take place be discussed in the mutual agreement proceeding where it has been initiated for the related primary adjustment ...

Where a repatriation is sought, a question arises about how such payments or arrangements should be recorded in the accounts of the taxpayer repatriating the payment to its associated enterprise so that both it and the tax administration of that country are aware that a repatriation has occurred or has been set up. The actual recording of the repatriation in the accounts of the enterprise from whom the repatriation is sought will ultimately depend on the form the repatriation takes. For example, where a dividend receipt is to be regarded by the tax administration making the primary adjustment and the taxpayer receiving the dividend as the repatriation, then this type of arrangement may not need to be specially recorded in the accounts of the associated enterprise paying the dividend, as such an arrangement may not affect the amount or characterisation of the dividend in its hands. On the other hand, where an account payable is set up, both the taxpayer recording the account payable and the tax administration of that country will need to be aware that the account payable relates to a repatriation so that any repayments from the account or of interest on the outstanding balance in the account are clearly able to be identified and treated according to the domestic laws of that country. In addition, issues may be presented in relation to currency exchange gains and losses ...

When the repatriation involves establishing an account receivable, the adjustments to actual cash flow will be made over time, although domestic law may limit the time within which the account can be satisfied. This approach is identical to using a constructive loan as a secondary transaction to account for excess profits in the hands of one of the parties to the controlled transaction. The accrual of interest on the account could have its own tax consequences, however, and this may complicate the process, depending upon when interest begins to accrue under domestic law (as discussed in paragraph 4.69). Some countries may be willing to waive the interest charge on these accounts as part of a competent authority agreement ...

Where a repatriation involves reclassifying a dividend payment, the amount of the dividend (up to the amount of the primary adjustment) would be excluded from the recipient’s gross income (because it would already have been accounted for through the primary adjustment). The consequences would be that the recipient would lose any indirect tax credit (or benefit of a dividend exemption in an exemption system) and a credit for withholding tax that had been allowed on the dividend ...

Some countries that have adopted secondary adjustments also give the taxpayer receiving the primary adjustment another option that allows the taxpayer to avoid the secondary adjustment by having the taxpayer arrange for the MNE group of which it is a member to repatriate the excess profits to enable the taxpayer to conform its accounts to the primary adjustment. The repatriation could be effected either by setting up an account receivable or by reclassifying other transfers, such as dividend payments where the adjustment is between parent and subsidiary, as a payment of additional transfer price (where the original price was too low) or as a refund of transfer price (where the original price was too high) ...

In light of the foregoing difficulties, tax administrations, when secondary adjustments are considered necessary, are encouraged to structure such adjustments in a way that the possibility of double taxation as a consequence thereof would be minimised, except where the taxpayer’s behaviour suggests an intent to disguise a dividend for purposes of avoiding withholding tax. In addition, countries in the process of formulating or reviewing policy on this matter are recommended to take into consideration the above-mentioned difficulties ...

Secondary adjustments are rejected by some countries because of the practical difficulties they present. For example, if a primary adjustment is made between brother-sister companies, the secondary adjustment may involve a hypothetical dividend from one of those companies up a chain to a common parent, followed by constructive equity contributions down another chain of ownership to reach the other company involved in the transaction. Many hypothetical transactions might be created, raising questions whether tax consequences should be triggered in other jurisdictions besides those involved in the transaction for which the primary adjustment was made. This might be avoided if the secondary transaction were a loan, but constructive loans are not used by most countries for this purpose and they carry their own complications because of issues relating to imputed interest. It would be inappropriate for minority shareholders that are not parties to the controlled transactions and that have accordingly not received excess cash to be considered recipients of a constructive dividend, even though a non-pro- rata dividend might be considered inconsistent with the requirements of applicable corporate law. In addition, as a result of the interaction with the foreign tax credit system, a secondary adjustment may excessively reduce the overall tax burden of the MNE group ...

The Commentary on paragraph 2 of Article 9 of the OECD Model Tax Convention notes that the Article does not deal with secondary adjustments, and thus it neither forbids nor requires tax administrations to make secondary adjustments. In a broad sense, the purpose of double tax agreements can be stated as being for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. Many countries do not make secondary adjustments either as a matter of practice or because their respective domestic provisions do not permit them to do so. Some countries might refuse to grant relief in respect of other countries’ secondary adjustments and indeed they are not required to do so under Article 9 ...

A secondary adjustment may result in double taxation unless a corresponding credit or some other form of relief is provided by the other country for the additional tax liability that may result from a secondary adjustment. Where a secondary adjustment takes the form of a constructive dividend any withholding tax which is then imposed may not be relievable because there may not be a deemed receipt under the domestic legislation of the other country ...

Another example of a tax administration seeking to assert a secondary transaction may be where the tax administration making a primary adjustment treats the excess profits as being a constructive loan from one associated enterprise to the other associated enterprise. In this case, an obligation to repay the loan would be deemed to arise. The tax administration making the primary adjustment may then seek to apply the arm’s length principle to this secondary transaction to impute an arm’s length rate of interest. The interest rate to be applied, the timing to be attached to the making of interest payments, if any, and whether interest is to be capitalised would generally need to be addressed. The constructive loan approach may have an effect not only for the year to which a primary adjustment relates but to subsequent years until such time as the constructive loan is considered by the tax administration asserting the secondary adjustment to have been repaid ...

Corresponding adjustments are not the only adjustments that may be triggered by a primary transfer pricing adjustment. Primary transfer pricing adjustments and their corresponding adjustments change the allocation of taxable profits of an MNE group for tax purposes but they do not alter the fact that the excess profits represented by the adjustment are not consistent with the result that would have arisen if the controlled transactions had been undertaken on an arm’s length basis. To make the actual allocation of profits consistent with the primary transfer pricing adjustment, some countries having proposed a transfer pricing adjustment will assert under their domestic legislation a constructive transaction (a secondary transaction), whereby the excess profits resulting from a primary adjustment are treated as having been transferred in some other form and taxed accordingly. Ordinarily, the secondary transactions will take the form of constructive dividends, constructive equity contributions, or constructive loans. For example, a country making a primary adjustment to the income of a subsidiary of a foreign parent may treat the excess profits in the hands of the foreign parent as having been transferred as a dividend, in which case withholding tax may apply. It may be that the subsidiary paid an excessive transfer price to the foreign parent as a means of avoiding that withholding tax. Thus, secondary adjustments attempt to account for the difference between the re-determined taxable profits and the originally booked profits. The subjecting to tax of a secondary transaction gives rise to a secondary transfer pricing adjustment (a secondary adjustment). Thus, secondary adjustments may serve to prevent tax avoidance. The exact form that a secondary transaction takes and of the consequent secondary adjustment will depend on the facts of the case and on the tax laws of the country that asserts the secondary adjustment ...

The amount of interest (as distinct from the rate at which it is applied) may also have more to do with the year to which the jurisdiction making the corresponding adjustment attributes the corresponding adjustment. The jurisdiction making the corresponding adjustment may decide to make the adjustment for the year in which the primary adjustment is determined, in which case relatively little interest is likely to be payable (regardless of the rate of interest), whereas the jurisdiction making the primary adjustment may seek to impose interest on the understated and uncollected tax liability from the year in which the controlled transactions took place (notwithstanding that a relatively low rate of interest may be imposed). The issue of the year to which a corresponding adjustment is attributed is raised in paragraph 4.36. It may be appropriate in certain cases for both competent authorities to agree not to assess or pay interest in connection with the adjustment at issue, but this may not be possible in the absence of a specific provision addressing this issue in the relevant bilateral treaty. This approach would also reduce administrative complexities. However, as the interest on the deficiency and the interest on the overpayment are attributable to different taxpayers in different jurisdictions, there would be no assurance under such an approach that a proper economic result would be achieved ...

Whether or not collection of the deficiency is suspended or partially suspended, other complications may arise. Because of the lengthy time period for processing many transfer pricing cases, the interest due on a deficiency or, if a corresponding adjustment is allowed, on the overpayment of tax in the other country can equal or exceed the amount of the tax itself. Countries should take into account in their mutual agreement procedures that inconsistent interest rules across the two jurisdictions may result in additional cost for the MNE group, or in other cases provide a benefit to the MNE group (e.g. where the interest paid in the country making the corresponding adjustment exceeds the interest imposed in the country making the primary adjustment) that would not have been available if the controlled transactions had been undertaken on an arm’s length basis originally. As noted above, the Report on BEPS Action 14 includes as best practice 10 a recommendation that countries’ published mutual agreement procedure guidance should provide guidance on the consideration of interest in the mutual agreement procedure. In addition, the country mutual agreement procedure profiles prepared pursuant to element 2.2 of the Action 14 minimum standard include information on how interest and penalties are dealt with by specific countries in the context of the mutual agreement procedure ...

The process of obtaining relief from double taxation through a corresponding adjustment can be complicated by issues relating to the collection of tax deficiencies and the assessment of interest on those deficiencies or overpayment. A first problem is that the assessed deficiency may be collected before the corresponding adjustment proceeding is completed, because of a lack of domestic procedures allowing the collection to be suspended. This may cause the MNE group to pay the same tax twice until the issues can be resolved. This problem arises not only in the context of the mutual agreement procedure but also for internal appeals.. The work on Action 14 of the BEPS Action Plan recognised that the collection of tax by both Contracting States pending the resolution of a case through the mutual agreement procedure may have a significant impact on a taxpayer’s business (for example, as a result of cash flow problems). Such collection of tax may also make it more difficult for a competent authority to engage in good faith mutual agreement procedure discussions when it considers that it may likely have to refund taxes already collected. The Report on BEPS Action 14 accordingly includes as best practice 6 a recommendation that countries should take appropriate measures to provide for a suspension of collection procedures during the period in which a mutual agreement procedure case is pending; such a suspension of collections should be available, at a minimum, under the same conditions as apply to a person pursuing a domestic administrative or judicial remedy. In this regard, it should be noted that the country mutual agreement procedure profiles prepared pursuant to element 2.2 of the Action 14 minimum standard (see paragraph 4.62) include information on the availability of procedures for the suspension of collections in specific countries ...

There is no need for the competent authorities to agree to rules or guidelines governing the procedure, since the rules or guidelines would be limited in effect to the competent authority’s relationship with taxpayers seeking its assistance. However, competent authorities should routinely communicate such unilateral rules or guidelines to the competent authorities of their treaty partners and ensure that their country mutual agreement procedure profiles (see paragraph 4.62 above) are kept up-to-date ...

The work on Action 14 also addresses a number of other aspects related to the content of mutual agreement procedure programme guidance: Element 3.2 of the Action 14 minimum standard states that countries should identify in their mutual agreement procedure programme guidance the specific information and documentation that a taxpayer is required to submit with a request for competent authority assistance. Pursuant to element 3.2, countries should not deny access to the mutual agreement procedure based on the argument that a taxpayer has provided insufficient information where the taxpayer has provided the required information and documentation consistent with such guidance. Element 2.6 of the Action 14 minimum standard states that countries should clarify in their mutual agreement procedure programme guidance that audit settlements between tax authorities and taxpayers do not preclude access to the mutual agreement procedure. Certain of the non-binding Action 14 best practices additionally recommend that countries’ mutual agreement procedure programme guidance should include: an explanation of the relationship between the mutual agreement procedure and domestic law administrative and judicial remedies (best practice 8); guidance on the consideration of interest and penalties in the mutual agreement procedure (best practice 10); and guidance on multilateral mutual agreement procedures and advance pricing arrangements (best practice 11). Best practice 9 recommends that this guidance provide that taxpayers will be allowed access to the mutual agreement procedure so that the competent authorities can resolve through consultation the double taxation that can arise in the case of bona fide taxpayer initiated foreign adjustments ...

Taxpayers’ contributions to the mutual agreement procedure process are of course facilitated where public guidance on applicable procedures is readily accessible. The work on Action 14 of the BEPS Action Plan directly recognised the importance of providing such guidance. Element 2.1 of the Action 14 minimum standard states that countries should develop and publish rules, guidelines and procedures regarding the mutual agreement procedure and take appropriate measures to make such information available to taxpayers. Such guidance should include information on how taxpayers may make requests for competent authority assistance. It should be drafted in clear and plain language and should be readily available to the public. The Report on BEPS Action 14 also notes that such information may be of particular relevance where an adjustment may potentially involve issues within the scope of a tax treaty, such as where a transfer pricing adjustment is made with respect to a controlled transaction with an associated enterprise in a treaty partner jurisdiction, and that countries should appropriately seek to ensure that mutual agreement procedure programme guidance is available to taxpayers in such cases. To promote the transparency and dissemination of such published guidance, element 2.2 of the Action 14 minimum standard includes the publication of country mutual agreement procedure profiles on a shared public platform, in order to make broadly available competent authority contact details, links to relevant domestic guidance and other useful country-specific information. These country profiles, prepared by the members of the Inclusive Framework on BEPS4 pursuant to an agreed reporting template developed for that purpose, are published on the OECD website ...

In practice, the competent authorities of many OECD member countries routinely give taxpayers such opportunities, keep them informed of the progress of the discussions, and often ask them during the course of the discussions whether they can accept the settlements contemplated by the competent authorities. These practices, already standard procedure in most countries, should be adopted as widely as possible. They are reflected in the OECD’s Manual for Effective Mutual Agreement Procedures ...

Outside the context of the actual discussions between the competent authorities, it is essential for the taxpayer to give the competent authorities all the information that is relevant to the issue in a timely manner. Competent authorities have limited resources and taxpayers should make every effort to facilitate the process, particularly in complex, fact- intensive transfer pricing cases in which it may be challenging for the competent authorities to develop a complete and accurate understanding of the associated enterprises’ activities. Further, because the mutual agreement procedure is fundamentally designed as a means of providing assistance to a taxpayer, competent authorities should allow taxpayers every reasonable opportunity to present the relevant facts and arguments to them to ensure as far as possible that the matter is not subject to misunderstanding ...

The mutual agreement procedure envisaged in Article 25 of the OECD Model Tax Convention and adopted in many bilateral agreements is not a process of litigation. While input from the taxpayer in some cases can be helpful to the procedure, it must be recalled that the mutual agreement procedure is a government-to-government process and that any taxpayer participation in that process should be subject to the discretion and mutual agreement of the competent authorities ...

Paragraph 1 of Article 25 of the OECD Model Tax Convention gives taxpayers the right to submit a request to initiate a mutual agreement procedure. Although the taxpayer has the right to initiate the procedure, the taxpayer has no specific right to participate in the process. It has been argued that the taxpayer also should have a right to take part in the mutual agreement procedure, including the right at least to present its case to both competent authorities, and to be informed of the progress of the discussions. It should be noted in this respect that implementation of a mutual agreement in practice is subject to the taxpayer’s acceptance. Some taxpayer representatives have suggested that the taxpayer also should have a right to be present at face-to-face discussions between the competent authorities. The purpose would be to ensure that there is no misunderstanding by the competent authorities of the facts and arguments that are relevant to the taxpayer’s case ...

More fundamentally, the adoption in tax treaties of a mandatory binding arbitration provision similar to paragraph 5 of Article 25 to resolve issues that the competent authorities have been unable to resolve within the two year period referred to in that provision should considerably reduce the risk of lengthy mutual agreement procedures. See paragraphs 4.177-4.179 ...

Whilst the time taken to resolve a mutual agreement procedure case may vary according to its complexity, most competent authorities endeavour to reach bilateral agreement for the resolution of a mutual agreement procedure case within 24 months. Accordingly, in order to ensure the timely, effective and efficient resolution of treaty-related disputes, the minimum standard that was adopted in the context of the work on Action 14 of the BEPS Action Plan includes a commitment to seek to resolve mutual agreement procedure cases within an average timeframe of 24 months (element 1.3). Countries’ progress toward meeting that target will be periodically reviewed on the basis of the agreed reporting framework for mutual agreement procedure statistics3 that was developed to provide a tangible measure to evaluate the effects of the implementation of the Action 14 minimum standard (see elements 1.5 and 1.6). Moreover, other elements of the Action 14 minimum standard related to the authority of staff in charge of mutual agreement processes (element 2.3), performance indicators for competent authority functions (element 2.4) and adequate competent authority resources (element 2.5) are expected to contribute to the timely resolution of mutual agreement procedure cases ...

Once discussions under the mutual agreement procedure have commenced, the proceedings may turn out to be lengthy. The complexity of transfer pricing cases may make it difficult for the competent authorities to reach a swift resolution. Distance may make it difficult for the competent authorities to meet frequently, and correspondence is often an unsatisfactory substitute for face-to-face discussions. Difficulties also arise from differences in language, procedures, and legal and accounting systems, and these may lengthen the duration of the process. The process also may be prolonged if the taxpayer delays providing all of the information the competent authorities require for a full understanding of the transfer pricing issue or issues ...

In order to minimise the possibility that time limits may prevent the mutual agreement procedure from effectively ensuring relief from or avoidance of double taxation, taxpayers should be permitted to avail themselves of the procedure at the earliest possible stage, which is as soon as an adjustment appears likely. Early competent authority consultation, before any irrevocable steps are taken by either tax administration, may ensure that there are as few procedural obstacles as possible in the way of achieving a mutually acceptable conclusion to the discussions. Some competent authorities, however, may not like to be involved at such an early stage because a proposed adjustment may not result in final action or may not trigger a claim for a corresponding adjustment. Consequently, too early an invocation of the mutual agreement process may create unnecessary work ...

The three-year time limit raises the issue of determining its starting date, which is addressed at paragraphs 21-24 of the Commentary on Article 25. In particular, paragraph 21 states that the three-year time period “should be interpreted in the way most favourable to the taxpayer”. Paragraph 22 contains guidance on the determination of the date of the act of taxation. Paragraph 23 discusses self-assessment cases. Paragraph 24 clarifies that “where it is the combination of decisions or actions taken in both Contracting States resulting in taxation not in accordance with the Convention, the time limit begins to run only from the first notification of the most recent decision or action.” ...

Another time limit that must be considered is the three-year time limit within which a taxpayer must invoke the mutual agreement procedure under Article 25 of the OECD Model Tax Convention. The three-year period begins to run from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention, which can be the time when the tax administration first notifies the taxpayer of the proposed adjustment, described as the “adjustment action” or “act of taxation”, or an earlier date as discussed at paragraphs 21-24 of the Commentary on Article 25. Although some countries consider three years too short a period for invoking the procedure, other countries consider it too long and have entered reservations on this point. The Commentary on Article 25 indicates that the time limit “must be regarded as a minimum so that Contracting States are left free to agree in their bilateral conventions upon a longer period in the interests of taxpayers”. In this regard, it should be noted that element 1.1 of the Action 14 minimum standard includes a recommendation that countries include in their tax treaties paragraphs 1 through 3 of Article 25, as interpreted in the Commentary ...

While it is not possible to recommend generally a time limit on initial assessments, tax administrations are encouraged to make these assessments within their own domestic time limits without extension. If the complexity of the case or lack of cooperation from the taxpayer necessitates an extension, the extension should be made for a minimum and specified time period. Further, where domestic time limits can be extended with the agreement of the taxpayer, such an extension should be made only when the taxpayer’s consent is truly voluntary. Tax examiners are encouraged to indicate to taxpayers at an early stage their intent to make an assessment based on cross-border transfer pricing, so that the taxpayer can, if it so chooses, inform the tax administration in the other interested State, which could accordingly begin to consider the relevant issues with a view to a possible mutual agreement procedure ...

Where a country cannot include the second sentence of paragraph 2 of Article 25 in its tax treaties, element 3.3 of the Action 14 minimum standard states that it should be willing to accept an alternative treaty provision that limits the time during which a Contracting State may make an adjustment pursuant to Article 9(1), in order to avoid late adjustments with respect to which mutual agreement procedure relief will not be available. Such a country would satisfy this element of the minimum standard where the alternative treaty provision was drafted to reflect the time limits for adjustments provided for in that country’s domestic law. That alternative provision, as presented in the Report on BEPS Action 14, reads as follows: [In Article 9]: 3. A Contracting State shall not include in the profits of an enterprise, and tax accordingly, profits that would have accrued to the enterprise but by reason of the conditions referred to in paragraph 1 have not so accrued, after [bilaterally agreed period] from the end of the taxable year in which the profits would have accrued to the enterprise. The provisions of this paragraph shall not apply in the case of fraud, gross negligence or willful default. Element 3.3 of the Action 14 minimum standard also states that such a country accept a similar alternative provision in Article 7 with respect to adjustments to the profits that are attributable to a permanent establishment ...

The work on Action 14 of the BEPS Action Plan directly addresses the obstacle that domestic law time limits may present to effective mutual agreement procedures. Element 3.3 of the Action 14 minimum standard includes a recommendation that countries should include the second sentence of paragraph 2 of Article 25 in their tax treaties to ensure that domestic law time limits (1) do not prevent the implementation of competent authority mutual agreements and (2) do not thereby frustrate the objective of resolving cases of taxation not in accordance with the Convention ...

Where a bilateral treaty does not override domestic time limits for the purposes of the mutual agreement procedure, tax administrations should be ready to initiate discussions quickly upon the taxpayer’s request, well before the expiration of any time limits that would preclude the making of an adjustment. Furthermore, OECD member countries are encouraged to adopt domestic law that would allow the suspension of time limits on determining tax liability until the discussions have been concluded ...

Paragraph 2 of Article 25 of the OECD Model Tax Convention addresses the time limit issue by requiring that any agreement reached by the competent authorities pursuant to the mutual agreement procedure shall be implemented notwithstanding the time limits in the domestic law of the Contracting States. Paragraph 29 of the Commentary on Article 25 recognises that the last sentence of Article 25(2) unequivocally states the obligation to implement such agreements (and notes that impediments to implementation that exist at the time a tax treaty is entered into should generally be built into the terms of the agreement itself). Time limits therefore do not impede the making of corresponding adjustments where a bilateral treaty includes this provision. Some countries, however, may be unwilling or unable to override their domestic time limits in this way and have entered explicit reservations on this point. OECD member countries therefore are encouraged as far as possible to extend domestic time limits for purposes of making corresponding adjustments when mutual agreement procedures have been invoked ...

Time limits for finalising a taxpayer’s tax liability are necessary to provide certainty for taxpayers and tax administrations. In a transfer pricing case a country may under its domestic law be legally unable to make a corresponding adjustment if the time has expired for finalising the tax liability of the relevant associated enterprise. Thus, the existence of such time limits and the fact that they vary from country to country should be considered in order to minimise double taxation ...

Relief under paragraph 2 of Article 9 may be unavailable if the time limit provided by treaty or domestic law for making corresponding adjustments has expired. Paragraph 2 of Article 9 does not specify whether there should be a time limit after which corresponding adjustments should not be made. Some countries prefer an open-ended approach so that double taxation may be mitigated. Other countries consider the open-ended approach to be unreasonable for administrative purposes. Thus, relief may depend on whether the applicable treaty overrides domestic time limitations, establishes other time limits, or links the implementation of relief to the time limits prescribed by domestic law ...

The Action 14 minimum standard also comprises a number of other elements intended to address more generally concerns related to the denial of access to the mutual agreement procedure. These include: a commitment to provide access to the mutual agreement procedure in cases in which there is a disagreement between the taxpayer and the tax authorities making an adjustment as to whether the conditions for the application of a treaty anti-abuse provision have been met or as to whether the application of a domestic law anti-abuse provision is in conflict with the provisions of a treaty (element 1.2); a commitment to publish rules, guidelines and procedures regarding the mutual agreement procedure (element 2.1) and to identify in that guidance the specific information and documentation that a taxpayer is required to submit with a request for mutual agreement procedure assistance (element 3.2); a commitment to clarify that audit settlements between tax authorities and taxpayers do not preclude access to the mutual agreement procedure (element 2.6); and a commitment to ensure that both competent authorities are made aware of requests for mutual agreement procedure assistance by either (i) amending Article 25(1) to permit requests to be made to the competent authority of either Contracting State or (ii) implementing a bilateral notification or consultation process for cases in which the competent authority to whom the case is presented does not consider the taxpayer’s objection to be justified (element 3.1) ...

A fundamental concern with respect to the mutual agreement procedure as it relates to corresponding adjustments is the failure to grant access to the mutual agreement procedure for transfer pricing cases. The undertaking to resolve by mutual agreement cases of taxation not in accordance with the Convention is an integral part of the obligations assumed by a Contracting State in entering into a tax treaty and must be performed in good faith. The failure to grant mutual agreement procedure access with respect to a treaty partner’s transfer pricing adjustments, may frustrate a primary objective of tax treaties. The work on Action 14 of the BEPS Action Plan directly addressed concerns related to the denial of access to the mutual agreement procedure with respect to a treaty partner’s transfer pricing adjustments by including, as element 1.1 of the Action 14 minimum standard, a commitment to provide access to the mutual agreement procedure in transfer pricing cases ...

Concerns that have been expressed regarding the mutual agreement procedure, as it affects corresponding adjustments, include the following, which are discussed separately in the sections below: Taxpayers may be denied access to the mutual agreement procedure in transfer pricing cases; Time limits under domestic law for the amendments of tax assessments may make corresponding adjustments unavailable if the relevant tax treaty does not override those limits; Mutual agreement procedure cases may take a long time; Taxpayer participation may be limited; Published guidance may not be readily available to instruct taxpayers on how the mutual agreement procedure may be used; and There may be no procedures to suspend the collection of tax deficiencies or the accrual of interest pending resolution of the mutual agreement procedure case ...

Taxpayers have also expressed fears that their cases may be settled not on their individual merits but by reference to a balance of the results in other cases. An established good practice is that, in the resolution of mutual agreement cases, a competent authority should engage in discussions with other competent authorities in a principled, fair, and objective manner, with each case being decided on its own merits and not by reference to any balance of results in other cases. To the extent applicable, these Guidelines and proposals detailed in the Report on BEPS Action 14 (bearing in mind the difference between the minimum standard and best practices) are an appropriate basis for the development of a principled approach. Similarly, there may be a fear of retaliation or offsetting adjustments by the country from which the corresponding adjustment has been requested. It is not the intention of tax administrations to take retaliatory action; the fears of taxpayers may be a result of inadequate communication of this fact. Tax administrations should take steps to assure taxpayers that they need not fear retaliatory action and that, consistent with the arm’s length principle, each case is resolved on its own merits. Taxpayers should not be deterred from initiating mutual agreement procedures where Article 25 is applicable ...

While corresponding adjustment and mutual agreement procedures have proved to be able to resolve most transfer pricing conflicts, serious concerns have been expressed by taxpayers. For example, because transfer pricing issues are so complex, taxpayers have expressed concerns that there may not be sufficient safeguards in the procedures against double taxation. These concerns are mainly addressed with the introduction in the 2008 update of the OECD Model Tax Convention of a new paragraph 5 to Article 25 which introduces a mechanism that allows taxpayers to request arbitration of unresolved issues that have prevented competent authorities from reaching a mutual agreement within two years. There is also in the Commentary on Article 25 a favourable discussion of the use of supplementary dispute resolution mechanisms in addition to arbitration, including mediation and the referral of factual disputes to third party experts ...

However, compensating adjustments are not recognised by most OECD member countries, on the grounds that the tax return should reflect the actual transactions. If compensating adjustments are permitted (or required) in the country of one associated enterprise but not permitted in the country of the other associated enterprise, double taxation may result because corresponding adjustment relief may not be available if no primary adjustment is made. The mutual agreement procedure is available to resolve difficulties presented by compensating adjustments, and competent authorities are encouraged to use their best efforts to resolve any double taxation which may arise from different country approaches to such year-end adjustments ...

At least one OECD member country has a procedure that may reduce the need for primary adjustments by allowing the taxpayer to report 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, sometimes known as a “compensating adjustment”, would be made before the tax return is filed. Compensating adjustments may facilitate the reporting of taxable income by taxpayers in accordance with the arm’s length principle, recognising that information about comparable uncontrolled transactions may not be available at the time associated enterprises establish the prices for their controlled transactions. Thus, for the purpose of lodging a correct tax return, a taxpayer would be permitted to make a compensating adjustment that would record the difference between the arm’s length price and the actual price recorded in its books and records ...

Corresponding adjustments can be a very effective means of obtaining relief from double taxation resulting from transfer pricing adjustments. OECD member countries generally strive in good faith to reach agreement whenever the mutual agreement procedure is invoked. Through the mutual agreement procedure, tax administrations can address issues in a non-adversarial proceeding, often achieving a negotiated settlement in the interests of all parties. It also allows tax administrations to take into account other taxing rights issues, such as withholding taxes ...

Once a tax administration has agreed to make a corresponding adjustment it is necessary to establish whether the adjustment is to be attributed to the year in which the controlled transactions giving rise to the adjustment took place or to an alternative year, such as the year in which the primary adjustment is determined. This issue also often raises the question of a taxpayer’s entitlement to interest on the overpayment of tax in the jurisdiction which has agreed to make the corresponding adjustment (discussed in paragraphs 4.65-4.67). The first approach is more appropriate because it achieves a matching of income and expenses and better reflects the economic situation as it would have been if the controlled transactions had been at arm’s length. However, in cases involving lengthy delays between the year covered by the adjustment and the year of its acceptance by the taxpayer or a final court decision, the tax administration should have the flexibility to agree to make corresponding adjustments for the year of acceptance of or decision on the primary adjustment. This approach would need to rely on domestic law for implementation. While not ordinarily preferred, it could be appropriate as an equitable measure in exceptional cases to facilitate implementation and to avoid time limit barriers ...

In the absence of an arbitration decision arrived at pursuant to an arbitration procedure comparable to that provided for under paragraph 5 of Article 25 which provides for a corresponding adjustment, corresponding adjustments are not mandatory, mirroring the rule that tax administrations are not obliged to reach agreement under the mutual agreement procedure. Under paragraph 2 of Article 9, a tax administration should make a corresponding adjustment only insofar as it considers the primary adjustment to be justified both in principle and in amount. The non- mandatory nature of corresponding adjustments is necessary so that one tax administration is not forced to accept the consequences of an arbitrary or capricious adjustment by another State. It also is important to maintaining the fiscal sovereignty of each OECD member country ...

Under paragraph 2 of Article 9, a corresponding adjustment may be made by a Contracting State either by recalculating the profits subject to tax for the associated enterprise in that country using the relevant revised price or by letting the calculation stand and giving the associated enterprise relief against its own tax paid in that State for the additional tax charged to the associated enterprise by the adjusting State as a consequence of the revised transfer price. The former method is by far the more common among OECD member countries ...

Paragraph 2 of Article 9 specifically provides that the competent authorities shall consult each other if necessary to determine appropriate corresponding adjustments. This confirms that the mutual agreement procedure of Article 25 may be used to consider corresponding adjustment requests. See also paragraph 10 of the Commentary on Article 25 of the OECD Model Tax Convention (“… the corresponding adjustments to be made in pursuance of paragraph 2 of [Article 9] … fall within the scope of mutual agreement procedure, both as concerns assessing whether they are well-founded and for determining their amount.” However, the overlap between the two Articles has caused OECD member countries to consider whether the mutual agreement procedure can be used to achieve corresponding adjustments where the bilateral income tax convention between two Contracting States does not include a provision comparable to paragraph 2 of Article 9. Paragraphs 11 and 12 of the Commentary on Article 25 of the OECD Model Tax Convention expressly state the view of most OECD member countries that the mutual agreement procedure is considered to apply to transfer pricing adjustment cases, including issues of whether a corresponding adjustment should be provided, even in the absence of a provision comparable to paragraph 2 of Article 9. Paragraph 12 notes that those States that do not agree with this view in practice find means of remedying economic double taxation in most cases involving bona fide companies by making use of provisions in their domestic laws ...

To eliminate double taxation in transfer pricing cases, tax administrations may consider requests for corresponding adjustments as described in paragraph 2 of Article 9. A corresponding adjustment, which in practice may be undertaken as part of the mutual agreement procedure, can mitigate or eliminate double taxation in cases where one tax administration increases a company’s taxable profits (i.e. makes a primary adjustment) as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction. The corresponding adjustment in such a case is a downward adjustment to the tax liability of that associated enterprise, made by the tax administration of the second jurisdiction, so that the allocation of profits between the two jurisdictions is consistent with the primary adjustment and no double taxation occurs. It is also possible that the first tax administration will agree to decrease (or eliminate) the primary adjustment as part of the consultative process with the second tax administration, in which case the corresponding adjustment would be smaller (or perhaps unnecessary). It should be noted that a corresponding adjustment is not intended to provide a benefit to the MNE group greater than would have been the case if the controlled transactions had been undertaken at arm’s length conditions in the first instance ...

Paragraph 5 of Article 25, which was incorporated in the OECD Model Tax Convention in 2008, provides that, in mutual agreement procedure cases in which the competent authorities are unable to reach an agreement within two years of the initiation of the case under paragraph 1 of Article 25, the unresolved issues will, at the request of the person who presented the case, be resolved through an arbitration process. This extension of the mutual agreement procedure ensures that where the competent authorities cannot reach an agreement on one or more issues that prevent the resolution of a case, a resolution of the case will still be possible by submitting those issues to arbitration. Where one or more issues have been submitted to arbitration in accordance with such a provision, and unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both States, the taxation of any person directly affected by the case will have to conform with the decision reached on the issues submitted to arbitration and the decisions reached in the arbitral process will be reflected in the mutual agreement that will be presented to these persons. Where a particular bilateral treaty does not contain an arbitration provision similar to paragraph 5 of Article 25, the competent authorities are not obliged to reach an agreement to resolve their dispute; paragraph 2 of Article 25 requires only that the competent authorities “endeavour … to resolve the case by mutual agreement”. The competent authorities may be unable to come to an agreement because of conflicting domestic laws or restrictions imposed by domestic law on the tax administration’s power of compromise. Even in the absence of a mandatory binding arbitration provision similar to paragraph 5 of Article 25 in a particular bilateral treaty, however, the competent authorities of the Contracting States may by mutual agreement establish a binding arbitration procedure for general application or to deal with a specific case (see paragraph 69 of the Commentary on Article 25 of the OECD Model Tax Convention). It should also be noted that a multilateral Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises2 (the Arbitration Convention) was signed by the Member States of the European Communities on 23 July 1990; the Arbitration Convention, which entered into force on 1 January 1995, provides for an arbitration mechanism to resolve transfer pricing disputes between European Union Member States ...

Article 25 sets out three different areas where mutual agreement procedures are generally used. The first area includes instances of “taxation not in accordance with the provisions of the Convention” and is covered in paragraphs 1 and 2 of the Article. Procedures in this area are typically initiated by the taxpayer. The other two areas, which do not necessarily involve the taxpayer, are dealt with in paragraph 3 and involve questions of “interpretation or application of the Convention” and the elimination of double taxation in cases not otherwise provided for in the Convention. Paragraph 10 of the Commentary on Article 25 makes clear that Article 25 is intended to be used by competent authorities in resolving not only problems of juridical double taxation but also those of economic double taxation arising from transfer pricing adjustments made pursuant to paragraph 1 of Article 9 ...

The mutual agreement procedure is a well-established means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorised by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment. (Members of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) have agreed to a minimum standard with respect to the resolution of treaty-related disputes. This Section C of Chapter IV is not intended to be an explanation of the minimum standard, and thus there is no implication that all members of the Inclusive Framework are in agreement with the guidance contained in this section, except where a particular statement is explicitly identified as an element of the minimum standard. The minimum standard has three general objectives: (1) jurisdictions should ensure that treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that MAP cases are resolved in a timely manner; (2) jurisdictions should ensure that administrative processes promote the prevention and timely resolution of treaty-related disputes; and (3) jurisdictions should ensure that taxpayers that meet the requirements of paragraph 1 of Article 25 can access the mutual agreement procedure. The detailed elements of the minimum standard are set out in OECD (2015), Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Report, OECD/G20 BEPS Project, OECD Publishing, Paris. The minimum standard is complemented by a set of best practices (to which not all members of the Inclusive Framework have committed) that respond to the obstacles that prevent the resolution of treaty- related disputes through the mutual agreement procedure. In addition, although there is currently no consensus among all members of the Inclusive Framework on the adoption of mandatory binding arbitration as a mechanism to ensure the timely resolution of MAP cases, a significant group of countries has committed to adopt and implement mandatory binding arbitration.) ...

This section describes three aspects of transfer pricing compliance that should receive special consideration to help tax jurisdictions administer their transfer pricing rules in a manner that is fair to taxpayers and other jurisdictions. While other tax law compliance practices are in common use in OECD member countries – for example, the use of litigation and evidentiary sanctions where information may be sought by a tax administration but is not provided – these three aspects will often impact on how tax administrations in other jurisdictions approach the mutual agreement procedure process and determine their administrative response to ensuring compliance with their own transfer pricing rules. The three aspects are: examination practices, the burden of proof, and penalty systems. The evaluation of these three aspects will necessarily differ depending on the characteristics of the tax system involved, and so it is not possible to describe a uniform set of principles or issues that will be relevant in all cases. Instead, this section seeks to provide general guidance on the types of problems that may arise and reasonable approaches for achieving a balance of the interests of the taxpayers and tax administrations involved in a transfer pricing inquiry ...

These Guidelines are also intended primarily to govern the resolution of transfer pricing cases in mutual agreement proceedings between OECD member countries and, where appropriate, arbitration proceedings. They further provide guidance when a corresponding adjustment request has been made. The Commentary on paragraph 2 of Article 9 of the OECD Model Tax Convention makes clear that the State from which a corresponding adjustment is requested should comply with the request only if that State “considers that the figure of adjusted profits correctly reflects what the profits would have been if the transactions had been at arm’s length”. This means that in competent authority proceedings the State that has proposed the primary adjustment bears the burden of demonstrating to the other State that the adjustment “is justified both in principle and as regards the amount.” Both competent authorities are expected to take a cooperative approach in resolving mutual agreement cases ...

In order to avoid double taxation, “Fashion Distributor A/S” had requested the Danish Tax Authorities, in parallel to the review of a transfer pricing assessment, to conduct a mutual agreement procedure under Article 6 of the EC Arbitration Convention 1990. The Danish Tax Authorities rejected the request on the grounds that it did not contain the minimum information required by paragraph 5(a) of the Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (EU Code of Conduct 2006). Judgement of the High Court The Court held that the reference in Article 7(1) of the EC Arbitration Convention to Article 6(1) had to be understood as referring only to the ‘timely presented case’ and did not imply that case was also ‘submitted’ within the meaning of Article 7(1). Furthermore, the Court found that the company’s complaint of double taxation undoubtedly appeared justified, and that the tax authorities rejection of the case was therefore unjustified. On that basis it was decided that the Danish Tax Authorities should initiate and pursue the mutual agreement procedure on the basis of the company’s request. Click here for English translation Click here for other translation ...

A request for mutual agreement and arbitration procedure between Spain and Germany was denied due to highly punishable violation of tax regulations committed by the taxpayer. The mutual agreement procedure according to the EU Arbitration Convention is of a mandatory nature and therefore leads to the elimination of double taxation if the requirements are met. However, if it is determined through legal or administrative proceedings that one of the companies involved has committed a highly punishable violation of tax regulations that result in a profit adjustment, then there is no obligation to carry out the mutual agreement and arbitration proceedings. Rather, the competent authority then has to decide on the implementation of the procedure at its due discretion. When assessing whether there has been a serious punishable violation, the person responsible for the company must be taken into account. But whether this person was actually punished for the violation of tax regulations is not decisive. The judicial determination of a criminal or fined violation of the law by this person is sufficient, which, viewed abstractly, can lead to a punishment. The decision to carry out the procedure is also at the dutiful discretion of the competent authority even if the tax adjustment and the criminally determined violation of the tax regulations with regard to the tax periods and the tax amounts do not fully match. The Bundesfinanzhof issued a decision in favor of the tax authorities. Click here for English translation Click here for other translation ...

As most OECD member countries at this time have not had much experience with the use of repatriation, it is recommended that agreements between taxpayers and tax administrations for a repatriation to take place be discussed in the mutual agreement proceeding where it has been initiated for the related primary adjustment ...

Where a repatriation is sought, a question arises about how such payments or arrangements should be recorded in the accounts of the taxpayer repatriating the payment to its associated enterprise so that both it and the tax administration of that country are aware that a repatriation has occurred or has been set up. The actual recording of the repatriation in the accounts of the enterprise from whom the repatriation is sought will ultimately depend on the form the repatriation takes. For example, where a dividend receipt is to be regarded by the tax administration making the primary adjustment and the taxpayer receiving the dividend as the repatriation, then this type of arrangement may not need to be specially recorded in the accounts of the associated enterprise paying the dividend, as such an arrangement may not affect the amount or characterisation of the dividend in its hands. On the other hand, where an account payable is set up, both the taxpayer recording the account payable and the tax administration of that country will need to be aware that the account payable relates to a repatriation so that any repayments from the account or of interest on the outstanding balance in the account are clearly able to be identified and treated according to the domestic laws of that country. In addition, issues may be presented in relation to currency exchange gains and losses ...

When the repatriation involves establishing an account receivable, the adjustments to actual cash flow will be made over time, although domestic law may limit the time within which the account can be satisfied. This approach is identical to using a constructive loan as a secondary transaction to account for excess profits in the hands of one of the parties to the controlled transaction. The accrual of interest on the account could have its own tax consequences, however, and this may complicate the process, depending upon when interest begins to accrue under domestic law (as discussed in paragraph 4.69). Some countries may be willing to waive the interest charge on these accounts as part of a competent authority agreement ...

Where a repatriation involves reclassifying a dividend payment, the amount of the dividend (up to the amount of the primary adjustment) would be excluded from the recipient’s gross income (because it would already have been accounted for through the primary adjustment). The consequences would be that the recipient would lose any indirect tax credit (or benefit of a dividend exemption in an exemption system) and a credit for withholding tax that had been allowed on the dividend ...

Some countries that have adopted secondary adjustments also give the taxpayer receiving the primary adjustment another option that allows the taxpayer to avoid the secondary adjustment by having the taxpayer arrange for the MNE group of which it is a member to repatriate the excess profits to enable the taxpayer to conform its accounts to the primary adjustment. The repatriation could be effected either by setting up an account receivable or by reclassifying other transfers, such as dividend payments where the adjustment is between parent and subsidiary, as a payment of additional transfer price (where the original price was too low) or as a refund of transfer price (where the original price was too high) ...

In light of the foregoing difficulties, tax administrations, when secondary adjustments are considered necessary, are encouraged to structure such adjustments in a way that the possibility of double taxation as a consequence thereof would be minimised, except where the taxpayer’s behaviour suggests an intent to disguise a dividend for purposes of avoiding withholding tax. In addition, countries in the process of formulating or reviewing policy on this matter are recommended to take into consideration the above-mentioned difficulties ...

Secondary adjustments are rejected by some countries because of the practical difficulties they present. For example, if a primary adjustment is made between brother-sister companies, the secondary adjustment may involve a hypothetical dividend from one of those companies up a chain to a common parent, followed by constructive equity contributions down another chain of ownership to reach the other company involved in the transaction. Many hypothetical transactions might be created, raising questions whether tax consequences should be triggered in other jurisdictions besides those involved in the transaction for which the primary adjustment was made. This might be avoided if the secondary transaction were a loan, but constructive loans are not used by most countries for this purpose and they carry their own complications because of issues relating to imputed interest. It would be inappropriate for minority shareholders that are not parties to the controlled transactions and that have accordingly not received excess cash to be considered recipients of a constructive dividend, even though a non-pro- rata dividend might be considered inconsistent with the requirements of applicable corporate law. In addition, as a result of the interaction with the foreign tax credit system, a secondary adjustment may excessively reduce the overall tax burden of the MNE group ...

The Commentary on paragraph 2 of Article 9 of the OECD Model Tax Convention notes that the Article does not deal with secondary adjustments, and thus it neither forbids nor requires tax administrations to make secondary adjustments. In a broad sense, the purpose of double tax agreements can be stated as being for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. Many countries do not make secondary adjustments either as a matter of practice or because their respective domestic provisions do not permit them to do so. Some countries might refuse to grant relief in respect of other countries’ secondary adjustments and indeed they are not required to do so under Article 9 ...

A secondary adjustment may result in double taxation unless a corresponding credit or some other form of relief is provided by the other country for the additional tax liability that may result from a secondary adjustment. Where a secondary adjustment takes the form of a constructive dividend any withholding tax which is then imposed may not be relievable because there may not be a deemed receipt under the domestic legislation of the other country ...

Another example of a tax administration seeking to assert a secondary transaction may be where the tax administration making a primary adjustment treats the excess profits as being a constructive loan from one associated enterprise to the other associated enterprise. In this case, an obligation to repay the loan would be deemed to arise. The tax administration making the primary adjustment may then seek to apply the arm’s length principle to this secondary transaction to impute an arm’s length rate of interest. The interest rate to be applied, the timing to be attached to the making of interest payments, if any, and whether interest is to be capitalised would generally need to be addressed. The constructive loan approach may have an effect not only for the year to which a primary adjustment relates but to subsequent years until such time as the constructive loan is considered by the tax administration asserting the secondary adjustment to have been repaid ...

Corresponding adjustments are not the only adjustments that may be triggered by a primary transfer pricing adjustment. Primary transfer pricing adjustments and their corresponding adjustments change the allocation of taxable profits of an MNE group for tax purposes but they do not alter the fact that the excess profits represented by the adjustment are not consistent with the result that would have arisen if the controlled transactions had been undertaken on an arm’s length basis. To make the actual allocation of profits consistent with the primary transfer pricing adjustment, some countries having proposed a transfer pricing adjustment will assert under their domestic legislation a constructive transaction (a secondary transaction), whereby the excess profits resulting from a primary adjustment are treated as having been transferred in some other form and taxed accordingly. Ordinarily, the secondary transactions will take the form of constructive dividends, constructive equity contributions, or constructive loans. For example, a country making a primary adjustment to the income of a subsidiary of a foreign parent may treat the excess profits in the hands of the foreign parent as having been transferred as a dividend, in which case withholding tax may apply. It may be that the subsidiary paid an excessive transfer price to the foreign parent as a means of avoiding that withholding tax. Thus, secondary adjustments attempt to account for the difference between the re-determined taxable profits and the originally booked profits. The subjecting to tax of a secondary transaction gives rise to a secondary transfer pricing adjustment (a secondary adjustment). Thus, secondary adjustments may serve to prevent tax avoidance. The exact form that a secondary transaction takes and of the consequent secondary adjustment will depend on the facts of the case and on the tax laws of the country that asserts the secondary adjustment ...

The amount of interest (as distinct from the rate at which it is applied) may also have more to do with the year to which the jurisdiction making the corresponding adjustment attributes the corresponding adjustment. The jurisdiction making the corresponding adjustment may decide to make the adjustment for the year in which the primary adjustment is determined, in which case relatively little interest is likely to be payable (regardless of the rate of interest), whereas the jurisdiction making the primary adjustment may seek to impose interest on the understated and uncollected tax liability from the year in which the controlled transactions took place (notwithstanding that a relatively low rate of interest may be imposed). The issue of the year to which a corresponding adjustment is attributed is raised in paragraph 4.36. It may be appropriate in certain cases for both competent authorities to agree not to assess or pay interest in connection with the adjustment at issue, but this may not be possible in the absence of a specific provision addressing this issue in the relevant bilateral treaty. This approach would also reduce administrative complexities. However, as the interest on the deficiency and the interest on the overpayment are attributable to different taxpayers in different jurisdictions, there would be no assurance under such an approach that a proper economic result would be achieved ...

Whether or not collection of the deficiency is suspended or partially suspended, other complications may arise. Because of the lengthy time period for processing many transfer pricing cases, the interest due on a deficiency or, if a corresponding adjustment is allowed, on the overpayment of tax in the other country can equal or exceed the amount of the tax itself. Countries should take into account in their mutual agreement procedures that inconsistent interest rules across the two jurisdictions may result in additional cost for the MNE group, or in other cases provide a benefit to the MNE group (e.g. where the interest paid in the country making the corresponding adjustment exceeds the interest imposed in the country making the primary adjustment) that would not have been available if the controlled transactions had been undertaken on an arm’s length basis originally. As noted above, the Report on BEPS Action 14 includes as best practice 10 a recommendation that countries’ published mutual agreement procedure guidance should provide guidance on the consideration of interest in the mutual agreement procedure. In addition, the country mutual agreement procedure profiles prepared pursuant to element 2.2 of the Action 14 minimum standard include information on how interest and penalties are dealt with by specific countries in the context of the mutual agreement procedure ...

The process of obtaining relief from double taxation through a corresponding adjustment can be complicated by issues relating to the collection of tax deficiencies and the assessment of interest on those deficiencies or overpayment. A first problem is that the assessed deficiency may be collected before the corresponding adjustment proceeding is completed, because of a lack of domestic procedures allowing the collection to be suspended. This may cause the MNE group to pay the same tax twice until the issues can be resolved. This problem arises not only in the context of the mutual agreement procedure but also for internal appeals.. The work on Action 14 of the BEPS Action Plan recognised that the collection of tax by both Contracting States pending the resolution of a case through the mutual agreement procedure may have a significant impact on a taxpayer’s business (for example, as a result of cash flow problems). Such collection of tax may also make it more difficult for a competent authority to engage in good faith mutual agreement procedure discussions when it considers that it may likely have to refund taxes already collected. The Report on BEPS Action 14 accordingly includes as best practice 6 a recommendation that countries should take appropriate measures to provide for a suspension of collection procedures during the period in which a mutual agreement procedure case is pending; such a suspension of collections should be available, at a minimum, under the same conditions as apply to a person pursuing a domestic administrative or judicial remedy. In this regard, it should be noted that the country mutual agreement procedure profiles prepared pursuant to element 2.2 of the Action 14 minimum standard (see paragraph 4.62) include information on the availability of procedures for the suspension of collections in specific countries ...

There is no need for the competent authorities to agree to rules or guidelines governing the procedure, since the rules or guidelines would be limited in effect to the competent authority’s relationship with taxpayers seeking its assistance. However, competent authorities should routinely communicate such unilateral rules or guidelines to the competent authorities of their treaty partners and ensure that their country mutual agreement procedure profiles (see paragraph 4.62 above) are kept up-to-date ...

The work on Action 14 also addresses a number of other aspects related to the content of mutual agreement procedure programme guidance: Element 3.2 of the Action 14 minimum standard states that countries should identify in their mutual agreement procedure programme guidance the specific information and documentation that a taxpayer is required to submit with a request for competent authority assistance. Pursuant to element 3.2, countries should not deny access to the mutual agreement procedure based on the argument that a taxpayer has provided insufficient information where the taxpayer has provided the required information and documentation consistent with such guidance. Element 2.6 of the Action 14 minimum standard states that countries should clarify in their mutual agreement procedure programme guidance that audit settlements between tax authorities and taxpayers do not preclude access to the mutual agreement procedure. Certain of the non-binding Action 14 best practices additionally recommend that countries’ mutual agreement procedure programme guidance should include: an explanation of the relationship between the mutual agreement procedure and domestic law administrative and judicial remedies (best practice 8); guidance on the consideration of interest and penalties in the mutual agreement procedure (best practice 10); and guidance on multilateral mutual agreement procedures and advance pricing arrangements (best practice 11). Best practice 9 recommends that this guidance provide that taxpayers will be allowed access to the mutual agreement procedure so that the competent authorities can resolve through consultation the double taxation that can arise in the case of bona fide taxpayer initiated foreign adjustments ...

Taxpayers’ contributions to the mutual agreement procedure process are of course facilitated where public guidance on applicable procedures is readily accessible. The work on Action 14 of the BEPS Action Plan directly recognised the importance of providing such guidance. Element 2.1 of the Action 14 minimum standard states that countries should develop and publish rules, guidelines and procedures regarding the mutual agreement procedure and take appropriate measures to make such information available to taxpayers. Such guidance should include information on how taxpayers may make requests for competent authority assistance. It should be drafted in clear and plain language and should be readily available to the public. The Report on BEPS Action 14 also notes that such information may be of particular relevance where an adjustment may potentially involve issues within the scope of a tax treaty, such as where a transfer pricing adjustment is made with respect to a controlled transaction with an associated enterprise in a treaty partner jurisdiction, and that countries should appropriately seek to ensure that mutual agreement procedure programme guidance is available to taxpayers in such cases. To promote the transparency and dissemination of such published guidance, element 2.2 of the Action 14 minimum standard includes the publication of country mutual agreement procedure profiles on a shared public platform, in order to make broadly available competent authority contact details, links to relevant domestic guidance and other useful country-specific information. These country profiles, prepared by the members of the Inclusive Framework on BEPS4 pursuant to an agreed reporting template developed for that purpose, are published on the OECD website ...

In practice, the competent authorities of many OECD member countries routinely give taxpayers such opportunities, keep them informed of the progress of the discussions, and often ask them during the course of the discussions whether they can accept the settlements contemplated by the competent authorities. These practices, already standard procedure in most countries, should be adopted as widely as possible. They are reflected in the OECD’s Manual for Effective Mutual Agreement Procedures ...

Outside the context of the actual discussions between the competent authorities, it is essential for the taxpayer to give the competent authorities all the information that is relevant to the issue in a timely manner. Competent authorities have limited resources and taxpayers should make every effort to facilitate the process, particularly in complex, fact- intensive transfer pricing cases in which it may be challenging for the competent authorities to develop a complete and accurate understanding of the associated enterprises’ activities. Further, because the mutual agreement procedure is fundamentally designed as a means of providing assistance to a taxpayer, competent authorities should allow taxpayers every reasonable opportunity to present the relevant facts and arguments to them to ensure as far as possible that the matter is not subject to misunderstanding ...

The mutual agreement procedure envisaged in Article 25 of the OECD Model Tax Convention and adopted in many bilateral agreements is not a process of litigation. While input from the taxpayer in some cases can be helpful to the procedure, it must be recalled that the mutual agreement procedure is a government-to-government process and that any taxpayer participation in that process should be subject to the discretion and mutual agreement of the competent authorities ...

Paragraph 1 of Article 25 of the OECD Model Tax Convention gives taxpayers the right to submit a request to initiate a mutual agreement procedure. Although the taxpayer has the right to initiate the procedure, the taxpayer has no specific right to participate in the process. It has been argued that the taxpayer also should have a right to take part in the mutual agreement procedure, including the right at least to present its case to both competent authorities, and to be informed of the progress of the discussions. It should be noted in this respect that implementation of a mutual agreement in practice is subject to the taxpayer’s acceptance. Some taxpayer representatives have suggested that the taxpayer also should have a right to be present at face-to-face discussions between the competent authorities. The purpose would be to ensure that there is no misunderstanding by the competent authorities of the facts and arguments that are relevant to the taxpayer’s case ...

More fundamentally, the adoption in tax treaties of a mandatory binding arbitration provision similar to paragraph 5 of Article 25 to resolve issues that the competent authorities have been unable to resolve within the two year period referred to in that provision should considerably reduce the risk of lengthy mutual agreement procedures. See paragraphs 4.177-4.179 ...

Whilst the time taken to resolve a mutual agreement procedure case may vary according to its complexity, most competent authorities endeavour to reach bilateral agreement for the resolution of a mutual agreement procedure case within 24 months. Accordingly, in order to ensure the timely, effective and efficient resolution of treaty-related disputes, the minimum standard that was adopted in the context of the work on Action 14 of the BEPS Action Plan includes a commitment to seek to resolve mutual agreement procedure cases within an average timeframe of 24 months (element 1.3). Countries’ progress toward meeting that target will be periodically reviewed on the basis of the agreed reporting framework for mutual agreement procedure statistics3 that was developed to provide a tangible measure to evaluate the effects of the implementation of the Action 14 minimum standard (see elements 1.5 and 1.6). Moreover, other elements of the Action 14 minimum standard related to the authority of staff in charge of mutual agreement processes (element 2.3), performance indicators for competent authority functions (element 2.4) and adequate competent authority resources (element 2.5) are expected to contribute to the timely resolution of mutual agreement procedure cases ...

Once discussions under the mutual agreement procedure have commenced, the proceedings may turn out to be lengthy. The complexity of transfer pricing cases may make it difficult for the competent authorities to reach a swift resolution. Distance may make it difficult for the competent authorities to meet frequently, and correspondence is often an unsatisfactory substitute for face-to-face discussions. Difficulties also arise from differences in language, procedures, and legal and accounting systems, and these may lengthen the duration of the process. The process also may be prolonged if the taxpayer delays providing all of the information the competent authorities require for a full understanding of the transfer pricing issue or issues ...

In order to minimise the possibility that time limits may prevent the mutual agreement procedure from effectively ensuring relief from or avoidance of double taxation, taxpayers should be permitted to avail themselves of the procedure at the earliest possible stage, which is as soon as an adjustment appears likely. Early competent authority consultation, before any irrevocable steps are taken by either tax administration, may ensure that there are as few procedural obstacles as possible in the way of achieving a mutually acceptable conclusion to the discussions. Some competent authorities, however, may not like to be involved at such an early stage because a proposed adjustment may not result in final action or may not trigger a claim for a corresponding adjustment. Consequently, too early an invocation of the mutual agreement process may create unnecessary work ...

The three-year time limit raises the issue of determining its starting date, which is addressed at paragraphs 21-24 of the Commentary on Article 25. In particular, paragraph 21 states that the three-year time period “should be interpreted in the way most favourable to the taxpayer”. Paragraph 22 contains guidance on the determination of the date of the act of taxation. Paragraph 23 discusses self-assessment cases. Paragraph 24 clarifies that “where it is the combination of decisions or actions taken in both Contracting States resulting in taxation not in accordance with the Convention, the time limit begins to run only from the first notification of the most recent decision or action.” ...

Another time limit that must be considered is the three-year time limit within which a taxpayer must invoke the mutual agreement procedure under Article 25 of the OECD Model Tax Convention. The three-year period begins to run from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention, which can be the time when the tax administration first notifies the taxpayer of the proposed adjustment, described as the “adjustment action” or “act of taxation”, or an earlier date as discussed at paragraphs 21-24 of the Commentary on Article 25. Although some countries consider three years too short a period for invoking the procedure, other countries consider it too long and have entered reservations on this point. The Commentary on Article 25 indicates that the time limit “must be regarded as a minimum so that Contracting States are left free to agree in their bilateral conventions upon a longer period in the interests of taxpayers”. In this regard, it should be noted that element 1.1 of the Action 14 minimum standard includes a recommendation that countries include in their tax treaties paragraphs 1 through 3 of Article 25, as interpreted in the Commentary ...

While it is not possible to recommend generally a time limit on initial assessments, tax administrations are encouraged to make these assessments within their own domestic time limits without extension. If the complexity of the case or lack of cooperation from the taxpayer necessitates an extension, the extension should be made for a minimum and specified time period. Further, where domestic time limits can be extended with the agreement of the taxpayer, such an extension should be made only when the taxpayer’s consent is truly voluntary. Tax examiners are encouraged to indicate to taxpayers at an early stage their intent to make an assessment based on cross-border transfer pricing, so that the taxpayer can, if it so chooses, inform the tax administration in the other interested State, which could accordingly begin to consider the relevant issues with a view to a possible mutual agreement procedure ...

Where a country cannot include the second sentence of paragraph 2 of Article 25 in its tax treaties, element 3.3 of the Action 14 minimum standard states that it should be willing to accept an alternative treaty provision that limits the time during which a Contracting State may make an adjustment pursuant to Article 9(1), in order to avoid late adjustments with respect to which mutual agreement procedure relief will not be available. Such a country would satisfy this element of the minimum standard where the alternative treaty provision was drafted to reflect the time limits for adjustments provided for in that country’s domestic law. That alternative provision, as presented in the Report on BEPS Action 14, reads as follows: [In Article 9]: 3. A Contracting State shall not include in the profits of an enterprise, and tax accordingly, profits that would have accrued to the enterprise but by reason of the conditions referred to in paragraph 1 have not so accrued, after [bilaterally agreed period] from the end of the taxable year in which the profits would have accrued to the enterprise. The provisions of this paragraph shall not apply in the case of fraud, gross negligence or willful default. Element 3.3 of the Action 14 minimum standard also states that such a country accept a similar alternative provision in Article 7 with respect to adjustments to the profits that are attributable to a permanent establishment ...

The work on Action 14 of the BEPS Action Plan directly addresses the obstacle that domestic law time limits may present to effective mutual agreement procedures. Element 3.3 of the Action 14 minimum standard includes a recommendation that countries should include the second sentence of paragraph 2 of Article 25 in their tax treaties to ensure that domestic law time limits (1) do not prevent the implementation of competent authority mutual agreements and (2) do not thereby frustrate the objective of resolving cases of taxation not in accordance with the Convention ...

Where a bilateral treaty does not override domestic time limits for the purposes of the mutual agreement procedure, tax administrations should be ready to initiate discussions quickly upon the taxpayer’s request, well before the expiration of any time limits that would preclude the making of an adjustment. Furthermore, OECD member countries are encouraged to adopt domestic law that would allow the suspension of time limits on determining tax liability until the discussions have been concluded ...

Paragraph 2 of Article 25 of the OECD Model Tax Convention addresses the time limit issue by requiring that any agreement reached by the competent authorities pursuant to the mutual agreement procedure shall be implemented notwithstanding the time limits in the domestic law of the Contracting States. Paragraph 29 of the Commentary on Article 25 recognises that the last sentence of Article 25(2) unequivocally states the obligation to implement such agreements (and notes that impediments to implementation that exist at the time a tax treaty is entered into should generally be built into the terms of the agreement itself). Time limits therefore do not impede the making of corresponding adjustments where a bilateral treaty includes this provision. Some countries, however, may be unwilling or unable to override their domestic time limits in this way and have entered explicit reservations on this point. OECD member countries therefore are encouraged as far as possible to extend domestic time limits for purposes of making corresponding adjustments when mutual agreement procedures have been invoked ...

Time limits for finalising a taxpayer’s tax liability are necessary to provide certainty for taxpayers and tax administrations. In a transfer pricing case a country may under its domestic law be legally unable to make a corresponding adjustment if the time has expired for finalising the tax liability of the relevant associated enterprise. Thus, the existence of such time limits and the fact that they vary from country to country should be considered in order to minimise double taxation ...

Relief under paragraph 2 of Article 9 may be unavailable if the time limit provided by treaty or domestic law for making corresponding adjustments has expired. Paragraph 2 of Article 9 does not specify whether there should be a time limit after which corresponding adjustments should not be made. Some countries prefer an open-ended approach so that double taxation may be mitigated. Other countries consider the open-ended approach to be unreasonable for administrative purposes. Thus, relief may depend on whether the applicable treaty overrides domestic time limitations, establishes other time limits, or links the implementation of relief to the time limits prescribed by domestic law ...

The Action 14 minimum standard also comprises a number of other elements intended to address more generally concerns related to the denial of access to the mutual agreement procedure. These include: a commitment to provide access to the mutual agreement procedure in cases in which there is a disagreement between the taxpayer and the tax authorities making an adjustment as to whether the conditions for the application of a treaty anti-abuse provision have been met or as to whether the application of a domestic law anti-abuse provision is in conflict with the provisions of a treaty (element 1.2); a commitment to publish rules, guidelines and procedures regarding the mutual agreement procedure (element 2.1) and to identify in that guidance the specific information and documentation that a taxpayer is required to submit with a request for mutual agreement procedure assistance (element 3.2); a commitment to clarify that audit settlements between tax authorities and taxpayers do not preclude access to the mutual agreement procedure (element 2.6); and a commitment to ensure that both competent authorities are made aware of requests for mutual agreement procedure assistance by either (i) amending Article 25(1) to permit requests to be made to the competent authority of either Contracting State or (ii) implementing a bilateral notification or consultation process for cases in which the competent authority to whom the case is presented does not consider the taxpayer’s objection to be justified (element 3.1) ...

A fundamental concern with respect to the mutual agreement procedure as it relates to corresponding adjustments is the failure to grant access to the mutual agreement procedure for transfer pricing cases. The undertaking to resolve by mutual agreement cases of taxation not in accordance with the Convention is an integral part of the obligations assumed by a Contracting State in entering into a tax treaty and must be performed in good faith. The failure to grant mutual agreement procedure access with respect to a treaty partner’s transfer pricing adjustments, may frustrate a primary objective of tax treaties. The work on Action 14 of the BEPS Action Plan directly addressed concerns related to the denial of access to the mutual agreement procedure with respect to a treaty partner’s transfer pricing adjustments by including, as element 1.1 of the Action 14 minimum standard, a commitment to provide access to the mutual agreement procedure in transfer pricing cases ...

Concerns that have been expressed regarding the mutual agreement procedure, as it affects corresponding adjustments, include the following, which are discussed separately in the sections below: Taxpayers may be denied access to the mutual agreement procedure in transfer pricing cases; Time limits under domestic law for the amendments of tax assessments may make corresponding adjustments unavailable if the relevant tax treaty does not override those limits; Mutual agreement procedure cases may take a long time; Taxpayer participation may be limited; Published guidance may not be readily available to instruct taxpayers on how the mutual agreement procedure may be used; and There may be no procedures to suspend the collection of tax deficiencies or the accrual of interest pending resolution of the mutual agreement procedure case ...

Taxpayers have also expressed fears that their cases may be settled not on their individual merits but by reference to a balance of the results in other cases. An established good practice is that, in the resolution of mutual agreement cases, a competent authority should engage in discussions with other competent authorities in a principled, fair, and objective manner, with each case being decided on its own merits and not by reference to any balance of results in other cases. To the extent applicable, these Guidelines and proposals detailed in the Report on BEPS Action 14 (bearing in mind the difference between the minimum standard and best practices) are an appropriate basis for the development of a principled approach. Similarly, there may be a fear of retaliation or offsetting adjustments by the country from which the corresponding adjustment has been requested. It is not the intention of tax administrations to take retaliatory action; the fears of taxpayers may be a result of inadequate communication of this fact. Tax administrations should take steps to assure taxpayers that they need not fear retaliatory action and that, consistent with the arm’s length principle, each case is resolved on its own merits. Taxpayers should not be deterred from initiating mutual agreement procedures where Article 25 is applicable ...

While corresponding adjustment and mutual agreement procedures have proved to be able to resolve most transfer pricing conflicts, serious concerns have been expressed by taxpayers. For example, because transfer pricing issues are so complex, taxpayers have expressed concerns that there may not be sufficient safeguards in the procedures against double taxation. These concerns are mainly addressed with the introduction in the 2008 update of the OECD Model Tax Convention of a new paragraph 5 to Article 25 which introduces a mechanism that allows taxpayers to request arbitration of unresolved issues that have prevented competent authorities from reaching a mutual agreement within two years. There is also in the Commentary on Article 25 a favourable discussion of the use of supplementary dispute resolution mechanisms in addition to arbitration, including mediation and the referral of factual disputes to third party experts ...

However, compensating adjustments are not recognised by most OECD member countries, on the grounds that the tax return should reflect the actual transactions. If compensating adjustments are permitted (or required) in the country of one associated enterprise but not permitted in the country of the other associated enterprise, double taxation may result because corresponding adjustment relief may not be available if no primary adjustment is made. The mutual agreement procedure is available to resolve difficulties presented by compensating adjustments, and competent authorities are encouraged to use their best efforts to resolve any double taxation which may arise from different country approaches to such year- end adjustments ...

At least one OECD member country has a procedure that may reduce the need for primary adjustments by allowing the taxpayer to report 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, sometimes known as a “compensating adjustment”, would be made before the tax return is filed. Compensating adjustments may facilitate the reporting of taxable income by taxpayers in accordance with the arm’s length principle, recognising that information about comparable uncontrolled transactions may not be available at the time associated enterprises establish the prices for their controlled transactions. Thus, for the purpose of lodging a correct tax return, a taxpayer would be permitted to make a compensating adjustment that would record the difference between the arm’s length price and the actual price recorded in its books and records ...

Corresponding adjustments can be a very effective means of obtaining relief from double taxation resulting from transfer pricing adjustments. OECD member countries generally strive in good faith to reach agreement whenever the mutual agreement procedure is invoked. Through the mutual agreement procedure, tax administrations can address issues in a non-adversarial proceeding, often achieving a negotiated settlement in the interests of all parties. It also allows tax administrations to take into account other taxing rights issues, such as withholding taxes ...

Once a tax administration has agreed to make a corresponding adjustment it is necessary to establish whether the adjustment is to be attributed to the year in which the controlled transactions giving rise to the adjustment took place or to an alternative year, such as the year in which the primary adjustment is determined. This issue also often raises the question of a taxpayer’s entitlement to interest on the overpayment of tax in the jurisdiction which has agreed to make the corresponding adjustment (discussed in paragraphs 4.65-4.67). The first approach is more appropriate because it achieves a matching of income and expenses and better reflects the economic situation as it would have been if the controlled transactions had been at arm’s length. However, in cases involving lengthy delays between the year covered by the adjustment and the year of its acceptance by the taxpayer or a final court decision, the tax administration should have the flexibility to agree to make corresponding adjustments for the year of acceptance of or decision on the primary adjustment. This approach would need to rely on domestic law for implementation. While not ordinarily preferred, it could be appropriate as an equitable measure in exceptional cases to facilitate implementation and to avoid time limit barriers ...

In the absence of an arbitration decision arrived at pursuant to an arbitration procedure comparable to that provided for under paragraph 5 of Article 25 which provides for a corresponding adjustment, corresponding adjustments are not mandatory, mirroring the rule that tax administrations are not obliged to reach agreement under the mutual agreement procedure. Under paragraph 2 of Article 9, a tax administration should make a corresponding adjustment only insofar as it considers the primary adjustment to be justified both in principle and in amount. The non- mandatory nature of corresponding adjustments is necessary so that one tax administration is not forced to accept the consequences of an arbitrary or capricious adjustment by another State. It also is important to maintaining the fiscal sovereignty of each OECD member country ...

Under paragraph 2 of Article 9, a corresponding adjustment may be made by a Contracting State either by recalculating the profits subject to tax for the associated enterprise in that country using the relevant revised price or by letting the calculation stand and giving the associated enterprise relief against its own tax paid in that State for the additional tax charged to the associated enterprise by the adjusting State as a consequence of the revised transfer price. The former method is by far the more common among OECD member countries ...

Paragraph 2 of Article 9 specifically provides that the competent authorities shall consult each other if necessary to determine appropriate corresponding adjustments. This confirms that the mutual agreement procedure of Article 25 may be used to consider corresponding adjustment requests. See also paragraph 10 of the Commentary on Article 25 of the OECD Model Tax Convention (“… the corresponding adjustments to be made in pursuance of paragraph 2 of [Article 9] … fall within the scope of mutual agreement procedure, both as concerns assessing whether they are well-founded and for determining their amount.” However, the overlap between the two Articles has caused OECD member countries to consider whether the mutual agreement procedure can be used to achieve corresponding adjustments where the bilateral income tax convention between two Contracting States does not include a provision comparable to paragraph 2 of Article 9. Paragraphs 11 and 12 of the Commentary on Article 25 of the OECD Model Tax Convention expressly state the view of most OECD member countries that the mutual agreement procedure is considered to apply to transfer pricing adjustment cases, including issues of whether a corresponding adjustment should be provided, even in the absence of a provision comparable to paragraph 2 of Article 9. Paragraph 12 notes that those States that do not agree with this view in practice find means of remedying economic double taxation in most cases involving bona fide companies by making use of provisions in their domestic laws ...

To eliminate double taxation in transfer pricing cases, tax administrations may consider requests for corresponding adjustments as described in paragraph 2 of Article 9. A corresponding adjustment, which in practice may be undertaken as part of the mutual agreement procedure, can mitigate or eliminate double taxation in cases where one tax administration increases a company’s taxable profits (i.e. makes a primary adjustment) as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction. The corresponding adjustment in such a case is a downward adjustment to the tax liability of that associated enterprise, made by the tax administration of the second jurisdiction, so that the allocation of profits between the two jurisdictions is consistent with the primary adjustment and no double taxation occurs. It is also possible that the first tax administration will agree to decrease (or eliminate) the primary adjustment as part of the consultative process with the second tax administration, in which case the corresponding adjustment would be smaller (or perhaps unnecessary). It should be noted that a corresponding adjustment is not intended to provide a benefit to the MNE group greater than would have been the case if the controlled transactions had been undertaken at arm’s length conditions in the first instance ...

Paragraph 5 of Article 25, which was incorporated in the OECD Model Tax Convention in 2008, provides that, in mutual agreement procedure cases in which the competent authorities are unable to reach an agreement within two years of the initiation of the case under paragraph 1 of Article 25, the unresolved issues will, at the request of the person who presented the case, be resolved through an arbitration process. This extension of the mutual agreement procedure ensures that where the competent authorities cannot reach an agreement on one or more issues that prevent the resolution of a case, a resolution of the case will still be possible by submitting those issues to arbitration. Where one or more issues have been submitted to arbitration in accordance with such a provision, and unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both States, the taxation of any person directly affected by the case will have to conform with the decision reached on the issues submitted to arbitration and the decisions reached in the arbitral process will be reflected in the mutual agreement that will be presented to these persons. Where a particular bilateral treaty does not contain an arbitration provision similar to paragraph 5 of Article 25, the competent authorities are not obliged to reach an agreement to resolve their dispute; paragraph 2 of Article 25 requires only that the competent authorities “endeavour … to resolve the case by mutual agreement”. The competent authorities may be unable to come to an agreement because of conflicting domestic laws or restrictions imposed by domestic law on the tax administration’s power of compromise. Even in the absence of a mandatory binding arbitration provision similar to paragraph 5 of Article 25 in a particular bilateral treaty, however, the competent authorities of the Contracting States may by mutual agreement establish a binding arbitration procedure for general application or to deal with a specific case (see paragraph 69 of the Commentary on Article 25 of the OECD Model Tax Convention). It should also be noted that a multilateral Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises2 (the Arbitration Convention) was signed by the Member States of the European Communities on 23 July 1990; the Arbitration Convention, which entered into force on 1 January 1995, provides for an arbitration mechanism to resolve transfer pricing disputes between European Union Member States ...

Article 25 sets out three different areas where mutual agreement procedures are generally used. The first area includes instances of “taxation not in accordance with the provisions of the Convention” and is covered in paragraphs 1 and 2 of the Article. Procedures in this area are typically initiated by the taxpayer. The other two areas, which do not necessarily involve the taxpayer, are dealt with in paragraph 3 and involve questions of “interpretation or application of the Convention” and the elimination of double taxation in cases not otherwise provided for in the Convention. Paragraph 10 of the Commentary on Article 25 makes clear that Article 25 is intended to be used by competent authorities in resolving not only problems of juridical double taxation but also those of economic double taxation arising from transfer pricing adjustments made pursuant to paragraph 1 of Article 9 ...

The mutual agreement procedure is a well-established means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorised by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment ...

This section describes three aspects of transfer pricing compliance that should receive special consideration to help tax jurisdictions administer their transfer pricing rules in a manner that is fair to taxpayers and other jurisdictions. While other tax law compliance practices are in common use in OECD member countries – for example, the use of litigation and evidentiary sanctions where information may be sought by a tax administration but is not provided – these three aspects will often impact on how tax administrations in other jurisdictions approach the mutual agreement procedure process and determine their administrative response to ensuring compliance with their own transfer pricing rules. The three aspects are: examination practices, the burden of proof, and penalty systems. The evaluation of these three aspects will necessarily differ depending on the characteristics of the tax system involved, and so it is not possible to describe a uniform set of principles or issues that will be relevant in all cases. Instead, this section seeks to provide general guidance on the types of problems that may arise and reasonable approaches for achieving a balance of the interests of the taxpayers and tax administrations involved in a transfer pricing inquiry ...

These Guidelines are also intended primarily to govern the resolution of transfer pricing cases in mutual agreement proceedings between OECD member countries and, where appropriate, arbitration proceedings. They further provide guidance when a corresponding adjustment request has been made. The Commentary on paragraph 2 of Article 9 of the OECD Model Tax Convention makes clear that the State from which a corresponding adjustment is requested should comply with the request only if that State “considers that the figure of adjusted profits correctly reflects what the profits would have been if the transactions had been at arm’s length”. This means that in competent authority proceedings the State that has proposed the primary adjustment bears the burden of demonstrating to the other State that the adjustment “is justified both in principle and as regards the amount.” Both competent authorities are expected to take a cooperative approach in resolving mutual agreement cases ...

The issue before the court was whether the Canadian revenue service had the ability to issue the second reassessments given the Canadian and US competent authorities subsequently agreed on a MAP settelment. The Tax Court found that a settlement agreed to via the competent authority precluded a subsequent tax-reassessment that attempted to further increase the taxpayer’s income ...

Annex to Chapter IV: Guidelines for Conducting Advance Pricing Arrangements under the Mutual Agreement Procedure (“MAP APAs”) Background A.1 Introduction Advance Pricing Arrangements (“APAs”) are the subject of extensive discussion in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations at Chapter IV, Section F. The development of working arrangements between competent authorities is considered at paragraph 4.164: Between those countries that use APAs, greater uniformity in APA practices could be beneficial to both tax administrations and taxpayers. Accordingly, the tax administrations of such countries may wish to consider working agreements with the competent authorities for the undertaking of APAs. These agreements may set forth general guidelines and understandings for the reaching of mutual agreement in cases where a taxpayer has requested an APA involving transfer pricing issues. It should be noted that the use of the term “agreement” in the above quotation is not intended to give any status to such procedural arrangements above that provided for by the Mutual Agreement Article of the OECD Model Tax Convention. Additionally, the Committee on Fiscal Affairs stated at paragraph 4.160 of the Guidelines that it intended “to monitor carefully any expanded use of APAs and to promote greater consistency in practice amongst those countries that choose to use them.” This annex follows up on the above recommendations. The objective is to improve the consistency of application of APAs by providing guidance to tax administrations on how to conduct mutual agreement procedures involving APAs. Although the focus of the annex is on the role of tax administrations, the opportunity is taken to discuss how best the taxpayer can contribute to the process. This guidance is intended for use by those countries – both OECD members and non-members – that wish to use APAs. A.2 Definition of an APA Many jurisdictions have had, for some time, procedures (e.g. rulings) enabling the taxpayer to obtain some degree of certainty regarding how the law will be applied in a given set of circumstances. The legal consequences of the proposed action are determined in advance, based on assumptions about the factual basis. The validity of this determination is dependent upon the assumptions being supported by the facts when the actual transactions take place. The term APA refers to a procedural arrangement between a taxpayer or taxpayers and a tax administration intended to resolve potential transfer pricing disputes in advance. The APA differs from the classic ruling procedure, in that it requires the detailed review and to the extent appropriate, verification of the factual assumptions on which the determination of legal consequences is based, before any such determination can be made. Further, the APA provides for a continual monitoring of whether the factual assumptions remain valid throughout the course of the APA period. An APA is defined in the first sentence of paragraph 4.123 of the Guidelines as “an arrangement that determines, in advance (emphasis added) of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time.” It is also stated in paragraph 4.131 that “The concept of APAs also may be useful in resolving issues raised under Article 7 of the OECD Model Tax Convention relating to allocation problems, permanent establishments, and branch operations.” In the Guidelines (see paragraph 4.129) the arrangements solely between a taxpayer or taxpayers and a tax administration are referred to as “unilateral APAs”. The Guidelines encourage bilateral APAs and recommend at paragraph 4.162 that “Wherever possible, an APA should be concluded on a bilateral or multilateral basis between competent authorities through the mutual agreement procedure of the relevant treaty.” A bilateral APA is based on a single mutual agreement between the competent authorities of two tax administrations under the relevant treaty. A multilateral APA is a term used to describe a situation where there is more than one bilateral mutual agreement. Although, commonly an APA will cover cross-border transactions involving more than one taxpayer and legal enterprise, i.e. between members of a MNE group, it is also possible for an APA to apply to only one taxpayer and legal enterprise. For example, consider an enterprise in Country A that trades through branches in Countries B, C and D. In order to have certainty that double taxation will not occur, countries A, B, C and D will need to share a common understanding of the measure of profits to be attributed to each jurisdiction in respect of that trading activity under Article 7 of the OECD Model Tax Convention. This certainty could be achieved by the negotiation of a series of separate, but mutually consistent, bilateral mutual agreements, i.e. between A and B, A and C and A and D. The existence of multiple bilateral mutual agreements raises a number of special issues and these are discussed further in Section B, paragraphs 21-27 of this annex. It is important to distinguish the different types of APAs and so the bilateral or multilateral APAs, which are the main subject of this annex, are hereafter referred to as “MAP APAs”. The APAs that do not involve a mutual agreement negotiation are referred to as “unilateral APAs”. The generic term “APA” is used where the feature to be discussed applies to both types of APA. It should be noted that, in the vast majority of cases a bilateral APA will be concluded under the mutual agreement procedure of a double tax convention. However, in some cases where a bilateral APA has been sought and the treaty is not appropriate, or where a treaty is not applicable, the competent authorities of some countries may nevertheless conclude an arrangement using the executive power conferred on the heads of tax authorities. The term MAP APA should be interpreted, with the necessary adaptations, as including such exceptional agreements. The focus of this annex is on providing guidance to enable tax authorities to resolve disputes through the mutual agreement procedure, thereby helping to ...

The amount of interest (as distinct from the rate at which it is applied) may also have more to do with the year in which the jurisdiction making the corresponding adjustment attributes the corresponding adjustment. The jurisdiction making the corresponding adjustment may decide to make the adjustment in the year in which the primary adjustment is determined in which case relatively little interest is likely to be paid (regardless of the rate of interest paid) whereas the jurisdiction making the primary adjustment may seek to impose interest on the understated and uncollected tax liability from the year in which the controlled transactions took place (notwithstanding that a relatively low rate of interest may be imposed). The issue of in which year to make a corresponding adjustment is raised in paragraph 4.36. Therefore, it may be appropriate in certain cases for both competent authorities to agree not to assess interest from the taxpayer or pay interest to the taxpayer in connection with the adjustment at issue, but this may not be possible in the absence of a specific provision addressing this issue in the relevant bilateral treaty. This approach would also reduce administrative complexities. However, as the interest on the deficiency and the interest on the overpayment are attributable to different taxpayers in different jurisdictions, there would be no assurance under such an approach that a proper economic result would be achieved ...

Whether or not collection of the deficiency is suspended or partially suspended, other complications may arise. Because of the lengthy time period for processing many transfer pricing cases, the interest due on a deficiency or, if a corresponding adjustment is allowed, on the overpayment of tax in the other country can equal or exceed the amount of the tax itself. Tax administrations should be aware that inconsistent interest rules across the two jurisdictions may result in additional cost for the MNE group, or in other cases provide a benefit to the MNE group (e.g. where the interest paid in the country making the corresponding adjustment exceeds the interest imposed in the country making the primary adjustment) that would not have been available if the controlled transactions had been undertaken on an arm’s length basis originally, and this should be taken into account in their mutual agreement proceedings ...

The process of obtaining relief from double taxation through a corresponding adjustment can be complicated by issues relating to the collection of tax deficiencies and the assessment of interest on those deficiencies or overpayment. A first problem is that the assessed deficiency may be collected before the corresponding adjustment proceeding is completed, because of a lack of domestic procedures allowing the collection to be suspended. This may cause the MNE group to pay the same tax twice until the issues can be resolved. This problem arises not only in the context of the mutual agreement procedure but also for internal appeals. Countries that do not have procedures to suspend collection during a mutual agreement procedure are encouraged to adopt them where permitted by domestic law, although subject to the right to seek security as protection against possible default by the taxpayer. See paragraphs 47-48 of the Commentary on Article 25 ...

There is no need for the competent authorities to agree to rules or guidelines governing the procedure, since the rules or guidelines would be limited in effect to the competent authority’s domestic relationship with its own taxpayers. However, competent authorities should routinely communicate such unilateral rules or guidelines to the competent authorities of the other countries with which mutual agreement procedures are undertaken ...

In publicising such rules and procedures it could be made clear, for example, how the taxpayer may bring a problem to the attention of the competent authority in order to start a discussion with the other country’s competent authorities. The publication could indicate the official address to which the problem should be referred, the stage at which the competent authority would be prepared to take the matter up, the nature of the information necessary or helpful to the competent authority in handling the case, and so on. It could be helpful also to give guidance on the policy of the competent authorities regarding questions of transfer pricing and corresponding adjustments. This possibility could be explored unilaterally by competent authorities and, where appropriate, descriptions of their rules and procedures should be given suitable domestic publicity (respecting, however, taxpayer confidentiality) ...

It would be helpful to taxpayers if competent authorities were to develop and publicise their own domestic rules or procedures for utilising the mutual agreement procedure so that taxpayers may more readily understand the process. OECD member countries and a number of non-OECD economies have agreed to include references to their domestic rules or procedures in their regularly updated Dispute Resolution Country Profiles on the OECD website. The development and publication of such rules could also be helpful to tax administrations, especially if they are faced with the possibility of a large or growing number of cases in which mutual agreement with other tax administrations may be necessary or desirable, possibly saving them the need to answer a variety of enquiries or to develop procedures afresh in every case ...

In practice, the tax administrations of many OECD member countries routinely give taxpayers such opportunities, keep them informed of the progress of the discussions, and often ask them during the course of the discussions whether they can accept the settlements contemplated by the competent authorities. These practices, already standard procedure in most countries, should be adopted as widely as possible. They are reflected in the OECD’s MEMAP ...

Outside the context of the actual discussions between the competent authorities, it is essential for the taxpayer to give the competent authorities all the information that is relevant to the issue in a timely manner. Tax administrations have limited resources and taxpayers should make every effort to facilitate the process. Further, because the mutual agreement procedure is fundamentally designed as a means of providing assistance to a taxpayer, the tax administrations should allow taxpayers every reasonable opportunity to present the relevant facts and arguments to them to ensure as far as possible that the matter is not subject to misunderstanding ...

The mutual agreement procedure envisaged in Article 25 of the OECD Model Tax Convention and adopted in many bilateral agreements is not a process of litigation. While input from the taxpayer in some cases can be helpful to the procedure, the taxpayer’s ability to participate should be subject to the discretion of the competent authorities ...

However, although the taxpayer has the right to initiate the procedure, the taxpayer has no specific right to participate in the process. It has been argued that the taxpayer also should have a right to take part in the mutual agreement procedure, including the right at least to present its case to both competent authorities, and to be informed of the progress of the discussions. It should be noted in this respect that implementation of a mutual agreement in practice is subject to the taxpayer’s acceptance. Some taxpayer representatives have suggested that the taxpayer also should have a right to be present at face-to-face discussions between the competent authorities. The purpose would be to ensure that there is no misunderstanding by the competent authorities of the facts and arguments that are relevant to the taxpayer’s case ...

Paragraph 1 of Article 25 of the OECD Model Tax Convention gives taxpayers the right to submit a request to initiate a mutual agreement procedure. Paragraph 34 of the Commentary on Article 25 provides that such requests should not be rejected without good reason. Circumstances in which a State may wish to deny a taxpayer access to the mutual agreement procedure and the appropriate ways to handle such circumstances are analysed at paragraphs 26-29 of the Commentary on Article 25 ...

More fundamentally, the introduction of an arbitration clause similar to the one at paragraph 5 of Article 25 to resolve issues after two years should considerably reduce the risk of lengthy mutual agreement procedures ...

It may be possible to reduce the amount of time involved to conclude a mutual agreement procedure. Reducing the formalities required to operate the procedure may expedite the process. In this regard, personal contacts or conferences by telephone may be useful to establish more quickly whether an adjustment by one country may give rise to difficulty in another country. Such contacts are expensive but in the long run may prove to be more cost-effective than the time-consuming process of just a formal written communication. The OECD has developed an online Manual on Effective Mutual Agreement Procedures (MEMAP) which identifies a series of best practices that countries are encouraged to use to improve the effectiveness of their mutual agreement procedures ...

Once discussions under the mutual agreement procedure have commenced, the proceedings may turn out to be lengthy. The complexity of transfer pricing cases may make it difficult for the tax administrations to reach a swift resolution. Distance may make it difficult for the tax administrations to meet frequently, and correspondence is often an unsatisfactory substitute for face-to-face discussions. Difficulties also arise from differences in language, procedures, and legal and accounting systems, and these may lengthen the duration of the process. The process also may be prolonged if the taxpayer delays in providing all the information the tax administrations require for a full understanding of the transfer pricing issue. However, delays do not always occur and, in practice, the consultations often result in a settlement of the problem in a relatively short time ...

Nevertheless, the competent authorities should be prepared to enter into discussions under the mutual agreement procedure relating to transfer pricing issues at as early a stage as is compatible with the economical use of their resources ...

In order to minimise the possibility that time limits may prevent the mutual agreement procedure from effectively ensuring relief from or avoidance of double taxation, taxpayers should be permitted to avail themselves of the procedure at the earliest possible stage, which is as soon as an adjustment appears likely. If this were done, the process of consultation could be begun before any irrevocable steps were taken by either tax administration, with the prospect that there would be as few procedural obstacles as possible in the way of achieving a mutually acceptable conclusion to the discussions. However, some competent authorities may not like to be involved at such an early stage because a proposed adjustment may not result in final action or may not trigger a claim for a corresponding adjustment. Consequently, too early an invocation of the mutual agreement process may create unnecessary work ...

The three year time limit raises an issue about determining its starting date, which is addressed at paragraphs 21-24 of the Commentary on Article 25. In particular, paragraph 21 states that the three year time period “should be interpreted in the way most favourable to the taxpayer”. Paragraph 22 contains guidance on the determination of the date of the act of taxation. Paragraph 23 discusses self-assessment cases. Paragraph 24 clarifies that “where it is the combination of decisions or actions taken in both Contracting States resulting in taxation not in accordance with the Convention, it begins to run only from the first notification of the most recent decision or action.” ...

Another time limit that must be considered is the three year time limit within which a taxpayer must invoke the mutual agreement procedure under Article 25 of the OECD Model Tax Convention. The three year period begins to run from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention, which can be the time when the tax administration first notifies the taxpayer of the proposed adjustment, described as the “adjustment action” or “act of taxation”, or an earlier date as discussed at paragraphs 21-24 of the Commentary on Article 25. Although some countries consider three years too short a period for invoking the procedure, other countries consider it too long and have entered reservations on this point. The Commentary on Article 25 indicates that the time limit “must be regarded as a minimum so that Contracting States are left free to agree in their bilateral conventions upon a longer period in the interests of taxpayers” ...

The time limit issue might also be addressed through rules governing primary adjustments rather than corresponding adjustments. The problem of time limits on corresponding adjustments is at times due to the fact that the initial assessments for primary adjustments for a taxable year are not made until many years later. Thus, one proposal favoured by some countries is to incorporate in bilateral treaties a provision that would prohibit the issuance of an initial assessment after the expiration of a specified period. Many countries, however, have objected to this approach. Tax administrations may need a long time to make the necessary investigations to establish an adjustment. It would be difficult for many tax administrations to ignore the need for an adjustment, regardless of when it becomes apparent, provided that they were not prevented by their domestic time limits from making the adjustment. While it is not possible at this stage to recommend generally a time limit on initial assessments, tax administrations are encouraged to make these assessments within their own domestic time limits without extension. If the complexity of the case or lack of cooperation from the taxpayer necessitates an extension, the extension should be made for a minimum and specified time period. Further, where domestic time limits can be extended with the agreement of the taxpayer, such an extension should be made only when the taxpayer’s consent is truly voluntary. Tax examiners are encouraged to indicate to taxpayers at an early stage their intent to make an assessment based on cross-border transfer pricing, so that the taxpayer can, if it so chooses, inform the tax administration in the other interested state so it can begin considering the issue in the context of a prospective mutual agreement procedure ...

Where a bilateral treaty does not override domestic time limits for the purposes of the mutual agreement procedure, tax administrations should be ready to initiate discussions quickly upon the taxpayer’s request, well before the expiration of any time limits that would preclude the making of an adjustment. Furthermore, OECD member countries are encouraged to adopt domestic law that would allow the suspension of time limits on determining tax liability until the discussions have been concluded ...

Paragraph 2 of Article 25 of the OECD Model Tax Convention addresses the time limit issue by requiring that an agreement reached pursuant to the mutual agreement procedure be implemented regardless of any time limits in the domestic law of the Contracting States. Time limits therefore do not impede the making of corresponding adjustments where a bilateral treaty includes this provision. Some countries, however, may be unwilling or unable to override their domestic time limits in this way and have entered explicit reservations on this point. OECD member countries therefore are encouraged as far as possible to extend domestic time limits for purposes of making corresponding adjustments when mutual agreement procedures have been invoked ...

Time limits for finalising a taxpayer’s tax liability are necessary to provide certainty for taxpayers and tax administrations. In a transfer pricing case a country may be legally unable to make a corresponding adjustment if the time has expired for finalising the tax liability of the relevant associated enterprise. Thus, the existence of such time limits and the fact that they vary from country to country should be considered in order to minimise double taxation ...

Relief under paragraph 2 of Article 9 may be unavailable if the time limit provided by treaty or domestic law for making corresponding adjustments has expired. Paragraph 2 of Article 9 does not specify whether there should be a time limit after which corresponding adjustments should not be made. Some countries prefer an open-ended approach so that double taxation may be mitigated. Other countries consider the open-ended approach to be unreasonable for administrative purposes. Thus, relief may depend on whether the applicable treaty overrides domestic time limitations, establishes other time limits, or has no effect on domestic time limits ...

Paragraph 5 of Article 25, which was incorporated in the OECD Model Tax Convention in 2008, provides that, in the cases where the competent authorities are unable to reach an agreement within two years of the initiation of a case under paragraph 1 of Article 25, the unresolved issues will, at the request of the person who presented the case, be solved through an arbitration process. This extension of the mutual agreement procedure ensures that where the competent authorities cannot reach an agreement on one or more issues that prevent the resolution of a case, a resolution of the case will still be possible by submitting those issues to arbitration. Where one or more issues have been submitted to arbitration in accordance with such a provision, and unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both States, the taxation of any person directly affected by the case will have to conform with the decision reached on the issues submitted to arbitration and the decisions reached in the arbitral process will be reflected in the mutual agreement that will be presented to these persons. Where a particular bilateral treaty does not contain an arbitration clause similar to the one of paragraph 5 of Article 25, the mutual agreement procedure does not compel competent authorities to reach an agreement and resolve their tax disputes and competent authorities are obliged only to endeavour to reach an agreement. The competent authorities may be unable to come to an agreement because of conflicting domestic laws or restrictions imposed by domestic law on the tax administration’s power of compromise. Note however that even in the absence of an arbitration clause similar to the one of paragraph 5 of Article 25 in a particular bilateral treaty, the competent authorities of the contracting States may by mutual agreement establish a similar binding arbitration procedure (see paragraph 69 of the Commentary on Article 25 of the OECD Model Tax Convention). Note, too, that the member States of the European Communities signed on 23 July 1990 their multilateral Arbitration Convention, which entered into force on 1 January 1995, to resolve transfer pricing disputes among them ...

Article 25 sets out three different areas where mutual agreement procedures are generally used. The first area includes instances of “taxation not in accordance with the provisions of the Convention” and is covered in paragraphs 1 and 2 of the Article. Procedures in this area are typically initiated by the taxpayer. The other two areas, which do not necessarily involve the taxpayer, are dealt with in paragraph 3 and involve questions of “interpretation or application of the Convention” and the elimination of double taxation in cases not otherwise provided for in the Convention. Paragraph 9 of the Commentary on Article 25 makes clear that Article 25 is intended to be used by competent authorities in resolving not only problems of juridical double taxation but also those of economic double taxation arising from transfer pricing adjustments made pursuant to paragraph 1 of Article 9 ...

The mutual agreement procedure is a well-established means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorised by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment ...

The OECD Manual on Effective Mutual Agreement Procedures (MEMAP) is part of a broader project to improve the functioning of existing international tax dispute procedures and to develop supplementary dispute resolution mechanisms. More information about the project, the proposed supplementary dispute resolution mechanism, and other suggested improvements to the Mutual Agreement Procedures (MAP) process can be found at www.oecd.org under Dispute Resolution. The Manual is intended as a guide to increase awareness of the MAP process and how it should function. It will provide tax administrations and taxpayers with basic information on the operation of MAP and identify best practices for MAP without imposing a set of binding rules upon Member countries. The following points are important elements to consider in understanding the status of the manual and its interaction with other OECD guidance: The manual does not, and is not intended to, modify, restrict or expand any rights or obligations contained in the provision of any tax convention. Information contained in this manual complements, and should not be considered a substitute for, the criteria, procedures, and guidance specified in the current versions of the OECD Model Tax Convention on Income and Capital (OECD Model Tax Convention) and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Transfer Pricing Guidelines). To the extent that there are any statements or information in the MEMAP which appear to conflict, or to be incompatible with a convention, domestic guidance provided by a country, the OECD Model Tax Convention, its Commentary, or the OECD Transfer Pricing Guidelines, then the latter guidance is controlling. “Best practice” is the term used in this manual to describe what is generally thought to be the most appropriate manner to deal with a MAP process or procedural issue. There is no priority or significance associated with their order or with the length of discussion of a particular practice. Although taxpayers and tax administrations should ideally strive towards implementing these best practices, it is recognised that it may not always be possible to apply a best practice as described in the manual or there may be situations where their application may not be appropriate ...

As most OECD Member countries at this time have not had much experience with the use of repatriation, it is recommended that agreements between taxpayers and tax administrations for a repatriation to take place be discussed in the mutual agreement proceeding where it has been initiated for the related primary adjustment. The Committee on Fiscal Affairs is studying the issue of secondary adjustments and repatriation as necessary to develop additional guidance that might be given to taxpayers and tax administrations in this area ...

Where a repatriation is sought, a question arises about how such payments or arrangements should be recorded in the accounts of the taxpayer repatriating the payment to its associated enterprise so that both it and the tax administration of that country are aware that a repatriation has occurred or has been set up. The actual recording of the repatriation in the accounts of the enterprise from whom the repatriation is sought will ultimately depend on the form the repatriation takes. For example, where a dividend receipt is to be regarded by the tax administration making the primary adjustment and the taxpayer receiving the dividend as the repatriation, then this type of arrangement may not need to be specially recorded in the accounts of the associated enterprise paying the dividend, as such an arrangement may not affect the amount or characterisation of the dividend in its hands. On the other hand, where an account payable is set up, both the taxpayer recording the account payable and the tax administration of that country will need to be aware that the account payable relates to a repatriation so that any repayments from the account or of interest on the outstanding balance in the account are clearly able to be identified and treated according to the domestic laws of that country. In addition, issues may be presented in relation to currency exchange gains and losses ...

When the repatriation involves establishing an account receivable, the adjustments to actual cash flow will be made over time, although domestic law may limit the time within which the account can be satisfied. This approach is identical to using a constructive loan as a secondary transaction to account for excess profits in the hands of one of the parties to the controlled transaction. The accrual of interest on the account could have its own tax consequences, however, and this may complicate the process, depending upon when interest begins to accrue under domestic law (as discussed in paragraph 4.68). Some countries may be willing to waive the interest charge on these accounts as part of a competent authority agreement ...

Where a repatriation involves reclassifying a dividend payment, the amount of the dividend (up to the amount of the primary adjustment) would be excluded from the recipient’s gross income (because it would already have been accounted for through the primary adjustment). The consequences would be that the recipient would lose any indirect tax credit (or benefit of a dividend exemption in an exemption system) and a credit for withholding tax that had been allowed on the dividend ...

Some countries that have adopted secondary adjustments also give the taxpayer receiving the primary adjustment another option that allows the taxpayer to avoid the secondary adjustment by having the taxpayer arrange for the MNE group of which it is a member repatriate the excess profits to enable the taxpayer to conform its accounts to the primary adjustment. The repatriation could be effected either by setting up an account receivable or by reclassifying other transfers, such as dividend payments where the adjustment is between parent and subsidiary, as a payment of additional transfer price (where the original price was too low) or as a refund of transfer price (where the original price was too high) ...

In light of the foregoing difficulties, tax administrations, when secondary adjustments are considered necessary, are encouraged to structure such adjustments in a way that the possibility of double taxation as a consequence thereof would be minimised, except where the taxpayer’s behaviour suggests an intent to disguise a dividend for purposes of avoiding withholding tax. In addition, countries in the process of formulating or reviewing policy on this matter are recommended to take into consideration the above-mentioned difficulties ...

Secondary adjustments are rejected by some countries because of the practical difficulties they present. For example, if a primary adjustment is made between brother-sister companies, the secondary adjustment may involve a hypothetical dividend from one of those companies up a chain to a common parent, followed by constructive equity contributions down another chain of ownership to reach the other company involved in the transaction. Many hypothetical transactions might be created, raising questions whether tax consequences should be triggered in other jurisdictions besides those involved in the transaction for which the primary adjustment was made. This might be avoided if the secondary transaction were a loan, but constructive loans are not used by most countries for this purpose and they carry their own complications because of issues relating to imputed interest. It would be inappropriate for minority shareholders that are not parties to the controlled transactions and that have accordingly not received excess cash to be considered recipients of a constructive dividend, even though a non-pro-rata dividend might be considered inconsistent with the requirements of applicable corporate law. In addition, as a result of the interaction with the foreign tax credit system, a secondary adjustment may excessively reduce the overall tax burden of the MNE group ...

The Commentary on paragraph 2 of Article 9 of the OECD Model Tax Convention notes that the Article does not deal with secondary adjustments, and thus it neither forbids nor requires tax administrations to make secondary adjustments. In a broad sense, the purpose of double tax agreements can be stated as being for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. Many countries do not make secondary adjustments either as a matter of practice or because their respective domestic provisions do not permit them to do so. Some countries might refuse to grant relief in respect of other countries’ secondary adjustments and indeed they are not required to do so under Article 9 ...

A secondary adjustment may result in double taxation unless a corresponding credit or some other form of relief is provided by the other country for the additional tax liability that may result from a secondary adjustment. Where a secondary adjustment takes the form of a constructive dividend any withholding tax which is then imposed may not be relievable because there may not be a deemed receipt under the domestic legislation of the other country ...

Another example of a tax administration seeking to assert a secondary transaction may be where the tax administration making a primary adjustment treats the excess profits as being a constructive loan from one associated enterprise to the other associated enterprise. In this case, an obligation to repay the loan would be deemed to arise. The tax administration making the primary adjustment may then seek to apply the arm’s length principle to this secondary transaction to impute an arm’s length rate of interest. The interest rate to be applied, the timing to be attached to the making of interest payments, if any, and whether interest is to be capitalised would generally need to be addressed. The constructive loan approach may have an effect not only for the year to which a primary adjustment relates but to subsequent years until such time as the constructive loan is considered by the tax administration asserting the secondary adjustment to have been repaid ...

Corresponding adjustments are not the only adjustments that may be triggered by a primary transfer pricing adjustment. Primary transfer pricing adjustments and their corresponding adjustments change the allocation of taxable profits of an MNE group for tax purposes but they do not alter the fact that the excess profits represented by the adjustment are not consistent with the result that would have arisen if the controlled transactions had been undertaken on an arm’s length basis. To make the actual allocation of profits consistent with the primary transfer pricing adjustment, some countries having proposed a transfer pricing adjustment will assert under their domestic legislation a constructive transaction (a secondary transaction), whereby the excess profits resulting from a primary adjustment are treated as having been transferred in some other form and taxed accordingly. Ordinarily, the secondary transactions will take the form of constructive dividends, constructive equity contributions, or constructive loans. For example, a country making a primary adjustment to the income of a subsidiary of a foreign parent may treat the excess profits in the hands of the foreign parent as having been transferred as a dividend, in which case withholding tax may apply. It may be that the subsidiary paid an excessive transfer price to the foreign parent as a means of avoiding that withholding tax ...

The amount of interest (as distinct from the rate at which it is applied) may also have more to do with the year in which the jurisdiction making the corresponding adjustment attributes the corresponding adjustment. The jurisdiction making the corresponding adjustment may decide to make the adjustment in the year in which the primary adjustment is determined in which case relatively little interest is likely to be paid (regardless of the rate of interest paid) whereas the jurisdiction making the primary adjustment may seek to impose interest on the understated and uncollected tax liability from the year in which the controlled transactions took place (notwithstanding that a relatively low rate of interest may be imposed). The issue of in which year to make a corresponding adjustment is raised in paragraph 4.36. Therefore, it may be appropriate in certain cases for both competent authorities to agree not to assess interest from the taxpayer or pay interest to the taxpayer in connection with the adjustment at issue, but this may not be possible in the absence of a specific provision addressing this issue in the relevant bilateral treaty. This approach would also reduce administrative complexities. However, as the interest on the deficiency and the interest on the overpayment are attributable to different taxpayers in different jurisdictions, there would be no assurance under such an approach that a proper economic result would be achieved. Thus, secondary adjustments attempt to account for the difference between the redetermined taxable profits and the originally booked profits. The subjecting to tax of a secondary transaction gives rise to a secondary transfer pricing adjustment (a secondary adjustment). Thus, secondary adjustments may serve to prevent tax avoidance. The exact form that a secondary transaction takes and of the consequent secondary adjustment will depend on the facts of the case and on the tax laws of the country that asserts the secondary adjustment ...

Whether or not collection of the deficiency is suspended or partially suspended, other complications may arise. Because of the lengthy time period for processing many transfer pricing cases, the interest due on a deficiency or, if a corresponding adjustment is allowed, on the overpayment of tax in the other country can equal or exceed the amount of the tax itself. Tax administrations should be aware that inconsistent interest rules across the two jurisdictions may result in additional cost for the MNE group, or in other cases provide a benefit to the MNE group (e.g. where the interest paid in the country making the corresponding adjustment exceeds the interest imposed in the country making the primary adjustment) that would not have been available if the controlled transactions had been undertaken on an arm’s length basis originally, and this should be taken into account in their mutual agreement proceedings ...

The process of obtaining relief from double taxation through a corresponding adjustment can be complicated by issues relating to the collection of tax deficiencies and the assessment of interest on those deficiencies or overpayment. A first problem is that the assessed deficiency may be collected before the corresponding adjustment proceeding is completed, because of a lack of domestic procedures allowing the collection to be suspended. This may cause the MNE group to pay the same tax twice until the issues can be resolved. This problem arises not only in the context of the mutual agreement procedure but also for internal appeals. Countries that do not have procedures to suspend collection during a mutual agreement procedure are encouraged to adopt them where permitted by domestic law, although subject to the right to seek security as protection against possible default by the taxpayer ...

There is no need for the competent authorities to agree to rules or guidelines governing the procedure, since the rules or guidelines would be limited in effect to the competent authority’s domestic relationship with its own taxpayers. However, competent authorities should routinely communicate such unilateral rules or guidelines to the competent authorities of the other countries with which mutual agreement procedures are undertaken ...

In publicising such rules and procedures it could be made clear, for example, how the taxpayer may bring a problem to the attention of the competent authority in order to start a discussion with the other country’s competent authorities. The publication could indicate the official address to which the problem should be referred, the stage at which the competent authority would be prepared to take the matter up, the nature of the information necessary or helpful to the competent authority in handling the case, and so on. It could be helpful also to give guidance on the policy of the competent authorities regarding questions of transfer pricing and corresponding adjustments. This possibility could be explored unilaterally by competent authorities and, where appropriate, descriptions of their rules and procedures should be given suitable domestic publicity (respecting, however, taxpayer confidentiality) ...

It would be helpful to taxpayers if competent authorities were to develop and publicise their own domestic rules or procedures for utilizing the mutual agreement procedure so that taxpayers may more readily understand the process. The development and publication of such rules could also be helpful to tax administrations, especially if they are faced with the possibility of a large or growing number of cases in which mutual agreement with other tax administrations may be necessary or desirable, possibly saving them the need to answer a variety of enquiries or to develop procedures afresh in every case ...

In practice, the tax administrations of many OECD Member countries routinely give taxpayers such opportunities, keep them informed of the progress of the discussions, and often ask them during the course of the discussions whether they can accept the settlements contemplated by the competent authorities. These practices, already standard procedure in most countries, should be adopted as widely as possible ...

Outside the context of the actual discussions between the competent authorities, it is essential for the taxpayer to give the competent authorities all the information that is relevant to the issue in a timely manner. Tax administrations have limited resources and taxpayers should make every effort to facilitate the process. Further, because the mutual agreement procedure is fundamentally designed as a means of providing assistance to a taxpayer, the tax administrations should allow taxpayers every reasonable opportunity to present the relevant facts and arguments to them to ensure as far as possible that the matter is not subject to misunderstanding ...

The mutual agreement procedure envisaged in Article 25 of the OECD Model Tax Convention and adopted in many bilateral agreements is not a process of litigation. While input from the taxpayer in some cases can be helpful to the procedure, the taxpayer’s ability to participate should be subject to the discretion of the competent authorities ...

However, although the taxpayer has the right to initiate the procedure, the taxpayer has no specific right to participate in the process. It has been argued that the taxpayer also should have a right to take part in the mutual agreement procedure, including the right at least to present its case to both competent authorities, and to be informed of the progress of the discussions. It should be noted in this respect that implementation of a mutual agreement in practice is subject to the taxpayer’s acceptance. Some taxpayer representatives have suggested that the taxpayer also should have a right to be present at face-to-face discussions between the competent authorities. The purpose would be to ensure that there is no misunderstanding by the competent authorities of the facts and arguments that are relevant to the taxpayer’s case ...

Paragraph 1 of Article 25 of the OECD Model Tax Convention gives taxpayers the right to submit a request to initiate a mutual agreement procedure. Paragraph 23 of the Commentary on Article 25 provides that such requests should not be rejected without good reason ...

A number of countries have found that the delegation of authority can be a useful expedient once a mutual agreement procedure has been initiated between competent authorities. For example, the following procedure has been used successfully between some countries. The competent authorities ask their case officers in the field to prepare a joint report on the case under investigation on, inter alia, the following lines: the case officers establish the facts and co- ordinate their findings so that both countries will base their decisions on the same facts and circumstances; they then specify those questions of law (if any) on which the reporting authorities disagree, and, where problems of evaluation are involved, may set up agreed lower and upper limits for the appropriate price (where possible), thus providing a range within which the competent authorities can reach a decision. In this way both delegation to lower levels and supervisory control by the competent authorities have been satisfactorily achieved. This kind of procedure may not be appropriate in all cases, however. In particular, a joint report of case officers can be administratively burdensome and may even present legal problems for some countries outside the context of a simultaneous examination procedure ...

The procedure could be expedited by delegating the authority to engage in mutual agreement procedure consultations on transfer pricing issues to knowledgeable senior officials below the competent authority itself. The mutual agreement procedure has generally been regarded as requiring that high-level officials of the tax administrations be involved. Reasons for this approach are sound; the fewer officials that are involved, the greater the likelihood of ensuring a consistent approach and the confidentiality of taxpayer information. Indeed, without the supervisory control of experts in a central and high-level position, there would be a real danger of inconsistent decisions and, as a result, of failure to achieve equitable results. It is therefore recommended that any delegation of authority below the competent authority itself should be limited to a small number of senior officials. An ancillary matter generally agreed upon by OECD Member countries is that when considering to which officials any delegation of the competent authority’s role should be given, the officer responsible for the development of the primary adjustment should not be placed in charge of proceedings but might, quite appropriately, advise and participate in the proceedings. This approach reinforces the independence of the mutual agreement procedure and of the role of the competent authority ...

It may be possible to reduce the amount of time involved to conclude a mutual agreement procedure. Reducing the formalities required to operate the procedure may expedite the process. In this regard, personal contacts or conferences by telephone may be useful to establish more quickly whether an adjustment by one country may give rise to difficulty in another country. Such contacts are expensive but in the long run may prove to be more cost-effective than the time-consuming process of just a formal written communication ...

Once discussions under the mutual agreement procedure have commenced, the proceedings may turn out to be lengthy. The complexity of transfer pricing cases may make it difficult for the tax administrations to reach a swift resolution. Distance may make it difficult for the tax administrations to meet frequently, and correspondence is often an unsatisfactory substitute for face- to-face discussions. Difficulties also arise from differences in language, procedures, and legal and accounting systems, and these may lengthen the duration of the process. The process also may be prolonged if the taxpayer delays in providing all the information the tax administrations require for a full understanding of the transfer pricing issue. However, delays do not always occur and, in practice, the consultations often result in a settlement of the problem in a relatively short time ...

Nevertheless, the competent authorities should be prepared to enter into discussions under the mutual agreement procedure relating to transfer pricing issues at as early a stage as is compatible with the economical use of their resources ...

In order to minimise the possibility that time limits may prevent the mutual agreement procedure from effectively ensuring relief from or avoidance of double taxation, taxpayers should be permitted to avail themselves of the procedure at the earliest possible stage, which is as soon as an adjustment appears likely. If this were done, the process of consultation could be begun before any irrevocable steps were taken by either tax administration, with the prospect that there would be as few procedural obstacles as possible in the way of achieving a mutually acceptable conclusion to the discussions. However, some competent authorities may not like to be involved at such an early stage because a proposed adjustment may not result in final action or may not trigger a claim for a corresponding adjustment. Consequently, too early an invocation of the mutual agreement process may create unnecessary work ...

The three year time limit raises an issue about determining the date of the adjustment action. Paragraph 18 of the Commentary on Article 25 states that the three year time period “should be interpreted in the way most favourable to the taxpayer”. In addition, it clarifies that “where it is the combination of decisions or actions taken in both Contracting States resulting in taxation not in accordance with the Convention, it begins to run only from the first notification of the most recent decision or action.” ...

Another time limit that must be considered is the three year time limit within which a taxpayer must invoke the mutual agreement procedure under Article 25 of the OECD Model Tax Convention. The three year period begins to run from the time the tax administration first notifies the taxpayer of the proposed adjustment, described as the “adjustment action”. Although some countries consider three years too short a period for invoking the procedure, other countries consider it too long and have entered reservations on this point. The Commentary on Article 25 indicates that the time limit “must be regarded as a minimum so that Contracting States are left free to agree in their bilateral conventions upon a longer period in the interests of taxpayers” ...

The time limit issue might also be addressed through rules governing primary adjustments rather than corresponding adjustments. The problem of time limits on corresponding adjustments is at times due to the fact that the initial assessments for primary adjustments for a taxable year are not made until many years later. Thus, one proposal favoured by some countries is to incorporate in bilateral treaties a provision that would prohibit the issuance of an initial assessment after the expiration of a specified period. Many countries, however, have objected to this approach. Tax administrations may need a long time to make the necessary investigations to establish an adjustment. It would be difficult for many tax administrations to ignore the need for an adjustment, regardless of when it becomes apparent, provided that they were not prevented by their domestic time limits from making the adjustment. While it is not possible at this stage to recommend generally a time limit on initial assessments, tax administrations are encouraged to make these assessments within their own domestic time limits without extension. If the complexity of the case or lack of cooperation from the taxpayer necessitates an extension, the extension should be made for a minimum and specified time period. Further, where domestic time limits can be extended with the agreement of the taxpayer, such an extension should be made only when the taxpayer’s consent is truly voluntary. Tax examiners are encouraged to indicate to taxpayers at an early stage their intent to make an assessment based on cross-border transfer pricing, so that the taxpayer can, if it so chooses, inform the tax administration in the other interested state so it can begin considering the issue in the context of a prospective mutual agreement procedure ...

Where a bilateral treaty does not override domestic time limits for the purposes of the mutual agreement procedure, tax administrations should be ready to initiate discussions quickly upon the taxpayer’s request, well before the expiration of any time limits that would preclude the making of an adjustment. Furthermore, OECD Member countries are encouraged to adopt domestic law that would allow the suspension of time limits on determining tax liability until the discussions have been concluded ...

Paragraph 2 of Article 25 of the OECD Model Tax Convention addresses the time limit issue by requiring that an agreement reached pursuant to the mutual agreement procedure be implemented regardless of any time limits in the domestic law of the Contracting States. Time limits therefore do not impede the making of corresponding adjustments where a bilateral treaty includes this provision. Some countries, however, may be unwilling or unable to override their domestic time limits in this way and have entered explicit reservations on this point. OECD Member countries therefore are encouraged as far as possible to extend domestic time limits for purposes of making corresponding adjustments when mutual agreement procedures have been invoked ...

Time limits for finalizing a taxpayer’s tax liability are necessary to provide certainty for taxpayers and tax administrations. In a transfer pricing case a country may be legally unable to make a corresponding adjustment if the time has expired for finalising the tax liability of the relevant associated enterprise. Thus, the existence of such time limits and the fact that they vary from country to country should be considered in order to minimize double taxation ...

Relief under Article 9(2) may be unavailable if the time limit provided by treaty or domestic law for making corresponding adjustments has expired. Paragraph 2 of Article 9 does not specify whether there should be a time limit after which corresponding adjustments should not be made. Some countries prefer an open-ended approach so that double taxation may be mitigated. Other countries consider the open-ended approach to be unreasonable for administrative purposes. Thus, relief may depend on whether the applicable treaty overrides domestic time limitations, establishes other time limits, or has no effect on domestic time limits ...

Perhaps the most significant concerns that have been expressed with the mutual agreement procedure, as it affects corresponding adjustments, are the following, which are discussed separately in the sections below:a) time limits under domestic law may make corresponding adjustments unavailable if those limits are not waived in the relevant tax treaty;b) mutual agreement procedures may take too long to complete;c) taxpayer participation may be limited;d) published procedures may not be readily available to instruct taxpayers on how the procedure may be used; ande) there may be no procedures to suspend the collection of tax deficiencies or the accrual of interest pending resolution of the mutual agreement procedure ...

Taxpayers have also expressed fears that their cases may be settled not on their individual merits but by reference to a balance of the results in other cases. Similarly, there may be a fear of retaliation or offsetting adjustments by the country from which the corresponding adjustment has been requested. It is not the intention of tax administrations to take retaliatory action; the fears of taxpayers may be a result of inadequate communication of this fact. Tax administrations should take steps to assure taxpayers that they need not fear retaliatory action and that, consistent with the arm’s length principle, each case is resolved on its own merits. Taxpayers should not be deterred from initiating mutual agreement procedures where Article 25 is applicable ...

While corresponding adjustment and mutual agreement procedures are able to resolve most transfer pricing conflicts, serious concerns have been expressed by taxpayers. For example, because transfer pricing issues are so complex, taxpayers fear that there may not be sufficient safeguards in the procedures against double taxation. These concerns are addressed in the Commentary on Article 25, which discusses the use of advisory opinions from an impartial third party, submission of questions to the Committee on Fiscal Affairs, or arbitration as alternative methods ...

However, compensating adjustments are not recognized by most OECD Member countries, on the grounds that the tax return should reflect the actual transactions. If compensating adjustments are permitted in the country of one associated enterprise but not permitted in the country of the other associated enterprise, double taxation may result because corresponding adjustment relief may not be available if no primary adjustment is made. It may be possible to use the mutual agreement procedure to resolve difficulties presented by compensating adjustments ...

At least one OECD Member country has a procedure that may reduce the need for primary adjustments by allowing the taxpayer to report 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, sometimes known as a “compensating adjustment”, would be made before the tax return is filed. Compensating adjustments may facilitate the reporting of taxable income by taxpayers in accordance with the arm’s length principle, recognizing that information about comparable uncontrolled transactions may not be available at the time associated enterprises establish the prices for their controlled transactions. Thus, for the purpose of lodging a correct tax return, a taxpayer would be permitted to make a compensating adjustment that would record the difference between the arm’s length price and the actual price recorded in its books and records ...

Corresponding adjustments can be a very effective means of obtaining relief from double taxation resulting from transfer pricing adjustments. OECD Member countries generally strive in good faith to reach agreement whenever the mutual agreement procedure is invoked. Through the mutual agreement procedure, tax administrations can address issues in a non-adversarial proceeding, often achieving a negotiated settlement in the interests of all parties. It also allows tax administrations to take into account other taxing rights issues, such as withholding taxes ...

Once a tax administration has agreed to make a corresponding adjustment it is necessary to establish whether the adjustment is to be attributed to the year in which the controlled transactions giving rise to the adjustment took place or to an alternative year, such as the year in which the primary adjustment is determined. This issue also often raises the question of a taxpayer’s entitlement to interest on the overpayment of tax in the jurisdiction which has agreed to make the corresponding adjustment (discussed in paragraphs 4.64-4.66). The first approach is more appropriate because it achieves a matching of income and expenses and better reflects the economic situation as it would have been if the controlled transactions had been at arm’s length. However, in cases involving lengthy delays between the year covered by the adjustment and the year of its acceptance of by the taxpayer or a final court decision, the tax administration should have the flexibility to agree to make corresponding adjustments for the year of acceptance of or decision on the primary adjustment. This approach would need to rely on domestic law for implementation. While not ordinarily preferred, it could be appropriate as an equitable measure in exceptional cases to facilitate implementation and to avoid time limit barriers ...

Corresponding adjustments are not mandatory, mirroring the rule that tax administrations are not required to reach agreement under the mutual agreement procedure. Under paragraph 2 of Article 9, a tax administration should make a corresponding adjustment only insofar as it considers the primary adjustment to be justified both in principle and in amount. The non-mandatory nature of corresponding adjustments is necessary so that one tax administration is not forced to accept the consequences of an arbitrary or capricious adjustment by another State. It also is important to maintaining the fiscal sovereignty of each OECD Member country ...

Under paragraph 2 of Article 9, a corresponding adjustment may be made by a contracting state either by recalculating the profits subject to tax for the associated enterprise in that country using the relevant revised price or by letting the calculation stand and giving the associated enterprise relief against its own tax paid in that State for the additional tax charged to the associated enterprise by the adjusting State as a consequence of the revised transfer price. The former method is by far the more common among OECD Member countries ...

Paragraph 2 of Article 9 specifically recommends that the competent authorities consult each other if necessary to determine corresponding adjustments. This demonstrates that the mutual agreement procedure of Article 25 may be used to consider corresponding adjustment requests. However, the overlap between the two Articles has caused OECD Member countries to consider whether the mutual agreement procedure can be used to achieve corresponding adjustments where the bilateral income tax convention between two Contracting States does not include a provision comparable to paragraph 2 of Article 9. Paragraph 10 of the Commentary on Article 25 of the OECD Model Tax Convention now expressly states the view of most OECD Member countries that the mutual agreement procedure is considered to apply to transfer pricing adjustment cases even in the absence of a provision comparable to paragraph 2 of Article 9. Paragraph 10 also notes that those OECD Member countries that do not agree with this view in practice apply domestic laws in most cases to alleviate double taxation of bona fide enterprises ...

To eliminate double taxation in transfer pricing cases, tax administrations may consider requests for corresponding adjustments as described in paragraph 2 of Article 9. A corresponding adjustment, which in practice may be undertaken as part of the mutual agreement procedure, can mitigate or eliminate double taxation in cases where one tax administration increases a company’s taxable profits (i.e. makes a primary adjustment) as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction. The corresponding adjustment in such a case is a downward adjustment to the tax liability of that associated enterprise, made by the tax administration of the second jurisdiction, so that the allocation of profits between the two jurisdictions is consistent with the primary adjustment and no double taxation occurs. It is also possible that the first tax administration will agree to decrease (or eliminate) the primary adjustment as part of the consultative process with the second tax administration, in which case the corresponding adjustment would be smaller (or perhaps unnecessary). It should be noted that a corresponding adjustment is not intended to provide a benefit to the MNE group greater than would have been the case if the controlled transactions had been undertaken at arm’s length conditions in the first instance ...

The mutual agreement procedure does not compel competent authorities to reach an agreement and resolve their tax disputes. The competent authorities are obliged only to endeavour to reach an agreement. The competent authorities may be unable to come to an agreement because of conflicting domestic laws or restrictions imposed by domestic law on the tax administration’s power of compromise. Some unresolved cases may have recourse to arbitration, although such procedures are new and not universally accepted by all OECD Member countries. The Member States of the European Communities signed on 23 July 1990 their multilateral Arbitration Convention, which entered into force on 1 January 1995 ...

Article 25 sets out three different areas where mutual agreement procedures are generally used. The first area includes instances of “taxation not in accordance with the provisions of the Convention” and is covered in paragraphs 1 and 2 of the Article. Procedures in this area are typically initiated by the taxpayer. The other two areas, which do not necessarily involve the taxpayer, are dealt with in paragraph 3 and involve questions of “interpretation or application of the Convention” and the elimination of double taxation in cases not otherwise provided for in the Convention. Paragraph 9 of the Commentary on Article 25 makes clear that Article 25 is intended to be used by competent authorities in resolving juridical and economic double taxation issues arising from transfer pricing adjustments made pursuant to paragraphs 1 and 2 of Article 9 ...

The mutual agreement procedure is a well-established means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorized by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment ...