The jury is still out on whether the OECD’s base erosion and profit shifting project is improving the international tax framework, or making it even more uncertain. However, if the OECD is correct then one aspect of the BEPS plan is having a positive effect on international business and commerce by reducing the time and resources taxpayers spend to resolve double taxation disputes, with this improvement largely attributable to a process known as the Mutual Agreement Procedure, or MAP.
What Is MAP?
The report on BEPS Action 14 (Making Dispute Resolution Mechanisms More Effective) contains a commitment by countries to implement a minimum standard to ensure that they resolve tax treaty-related disputes in a timely, effective and efficient manner. In practice, this means attempting to resolve MAP cases within an average of 24 months.
All 110-plus members of the Inclusive Framework on BEPS, under which countries are implementing four key BEPS recommendations, have committed to the implementation of the Action 14 minimum standard, and to “timely and complete” reporting of MAP statistics under an agreed reporting framework.
2016 MAP statistics were recently reported by the OECD for the first time under the new framework. They show that approximately 8,000 cases were in the inventory of the reporting jurisdictions as of 1 January 2016, and almost 25% of these were closed during 2016. In addition, 1,500 cases were newly initiated during 2016 and a quarter of these were also closed by the end of the year – that is, within less than 12 months.
According to the statistics, cases involving multinationals' transfer prices, which account for slightly more than half of the MAP cases, continued to take the longest to resolve.
Such transfer pricing cases took an average of 33.5 months to complete, compared with 26.5 months for all cases. However, countries are beginning to reduce the backlog of transfer pricing cases, with a reduction from the start to the end of 2016 of 4,451 to 4,032.
Significantly, of the cases closed in 2016, the average time taken was 22.5 months, considerably faster than for cases begun before 1 January 2016 (when the BEPS Action 14 standard was agreed.)
Over 85% of MAPs concluded in 2016 resolved the issue. Almost 60 percent of MAP cases closed were resolved with an agreement fully resolving the taxation not in accordance with the tax treaty and almost 20% of them were granted a unilateral relief while almost 5% were resolved via domestic remedy.
Of the 15% not resolved, 5% of the MAP cases were withdrawn by taxpayers while approximately 10% were not resolved for various other reasons.
Small But Significant Progress
These statistics show that cross-border tax disputes can still take a long time to resolve, and for the taxpayers involved they can be a major drain on resources, and a hindrance to effective international tax planning. However, with the widespread take-up of the MAP recommendations, hopefully the days of seemingly never-ending treaty-based disputes may become a thing of the past.