OECD Manual on Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements

Transfer pricing and permanent establishment concepts are core to international taxation. The complexity arises as more than one nation is responsible for collecting tax and therefore, revenue sharing and allocation of profits becomes tricky here. The Organization for Economic Cooperation and Development (OECD) published a new Manual on Handling of Multilateral Mutual Agreement Procedures (MAP) and Advance Pricing Arrangements (APA) on 1^st February 2023 (herein referred to as ‘Manual’). Before discussing the OECD’s manual on MAP and APA, let’s understand what it means by mutual agreement procedures and advance pricing arrangements.

What are Mutual Agreement Procedures?

Mutual Agreement Procedure (MAP) is an alternate tax dispute resolution mechanism available for taxpayers in relation to disputes giving rise to double taxation. Almost all the Double Taxation Avoidance Agreements (DTAAs) encompass the MAP article that provides for an alternative dispute resolution mechanism in addition to those available under domestic laws.

What are Advance Pricing Agreements?

Advance Pricing Agreement (APA) is an agreement between a taxpayer and the tax authorities for determining the methodology for transfer pricing in relation to international transactions. The aim is to mitigate uncertainty and bring clarity as to how the transfer pricing and taxation will apply in relation to a particular international transaction.

What are Multilateral MAP and APA?

While we understand the meaning of MAP and APA, a situation may arise whereby the taxpayer may consider that actions by one or both the tax jurisdictions may result in taxation that is not in accordance with the provisions of the tax treaty. In such a case, the taxpayer may present his case to the designated competent authorities of one or both tax jurisdictions.

If both the competent authorities are of the view that the request filed by the taxpayer cannot be resolved without involving a third jurisdiction, then both the competent authorities shall endeavour to present the case with the competent authority of the third state. That is where multilateral MAPs come into the picture. The general MAP provision is invoked to resolve the case by involving the competent authority of the third state.

Similarly, multilateral APAs involve those where the legal basis is derived from the provisions contained in multiple treaties that exist among different jurisdictions. Accordingly, a multilateral case for MAP and APA can be defined as a case where two competent authorities –

1. cannot fully resolve taxation not in accordance with a treaty without resolving taxation not in accordance with other treaties involving third jurisdictions or address double or multiple taxations arising or that may arise owing to the taxation on income or on capital in one or more third jurisdictions; and
2. In such a case, endeavour to find agreement on the case by mutual agreement with the competent authority(ies) of the third jurisdiction(s),

provided there are tax treaties in force between all of the jurisdictions involved containing provisions based on Article 25 of the OECD Model Tax Convention.

OECD Manual on MAPs and APAs

As stated earlier, OECD released a manual on both these aspects to provide guidance to both the taxpayers and tax administrations on how the multilateral MAPs and APAs can be negotiated and implemented under the existing bilateral tax treaties. The OECD manual is divided into 4 sections:

1. Basis of multilateral MAPs and APAs
2. Procedural aspects
3. Examples of multilateral cases
4. The ideal timeframe for multilateral cases

Let’s discuss the OECD manual on MAP and APA in detail.

1. Basis of Multilateral MAPs and APAs

The manual recognises the challenges that can arise in multilateral cases. This can include a lack of consensus between the two states on situations where the multilateral solutions will be appropriate and also a lack of proper agreement among the states as to the most appropriate legal basis to deal with multilateral cases.

As APA is a voluntary process while MAP is a legal right of eligible persons, the manual recognises the need for different approaches.

• Multilateral APA (MAPA): For entering into MAPA, many jurisdictions rely on the equivalent of Article 25(3) of the OECD Model Tax Conventions as the legal basis for discussing and entering into the MAPA. In certain jurisdictions, specific rules under domestic laws may be required for entering into the MAPAs.
• Multilateral MAP (MMAP): The jurisdictions derive the legal basis for entering into the MMAP under one of the two approaches:
  • Article 25(3): Under this approach, some jurisdictions allow taxpayers to make a single MAP request under the equivalent of Article 25(1) of the OECD Model Tax Conventions (MTC) and then invoke Article 25(3) under each other relevant tax treaty for reaching out to the competent authorities of other jurisdictions.
  • Article 25(1): Under this approach, the jurisdictions imply that the MAP cases must be dealt with as per Articles 25(1) and 25(2) of the OECD MTC. Here, the taxpayers shall be required to either file the MAP request under each applicable treaty or file a single request identifying all the relevant jurisdictions to be involved in the multilateral MAP case. One significant advantage of this approach over the other is that it allows implementation of the MAP agreement regardless of the domestic time limits.

2. Procedural Aspects

The OECD manual on MAP and APA also gives due regard to the multiple procedural aspects in relation to the multilateral MAPs and APAs. This includes modalities of conducting the procedures, coordination between the competent authorities for efficient use of time and resources, information sharing between multiple jurisdictions etc. It sets out the steps that the competent authorities should take in approaching the other relevant jurisdictions and determining whether the request is admissible. The manual has suggested two approaches here:

• Multilateral Approach: This approach requires multilateral discussions with all the competent authorities involved at the table at the same time in order to reach a multilateral agreement that can be implemented across each jurisdiction. As the probability of timely resolution is more due to the involvement of all the competent authorities, this approach is preferable.
• Bilateral Approach: This approach involves bilateral discussions among the competent authorities under each of the relevant treaties for reaching multiple bilateral agreements coordinated such that multiple or double taxation is avoided. The competent authorities involved in bilateral discussions may allow the competent authority in the affected transaction and multilateral case to attend the meetings and have access to all the required documents. This approach might be inefficient owing to coordination and communication issues.

3. Examples of Multilateral Cases

There are several examples discussed in the manual highlighting the transactions that would benefit from the multilateral solutions. These cases usually involve transfer pricing, hybrid entities, profit attribution and reallocation, dual or multiple residential statuses etc.

4. Ideal Timeframe for Multilateral Cases

The manual contains the indicative timelines for each step of the multilateral MAPs and MAPA cases according to the guidance contained in the manual. This timeline covers all the key stages including receipt of MAP or APA request, notifying the relevant competent authorities, acceptance or rejection of cases, exchange and conclusion of the position papers and reaching and implementation of the mutual agreement.

In a Nutshell

The OECD Manual on Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements (APA) is a great step for providing a framework to streamline the multilateral cases and bring much-needed clarity for the jurisdictions and competent authorities. This is expected to enhance the efficiency of the dispute resolution and prevention mechanism. It will assist in fostering the collaboration between the taxpayers and tax administration and create efficient tools for bringing in more certainty. In case you need any assistance in relation to international taxation issues and dispute resolution, feel free to reach out to ASC Group.

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