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Transfer pricing: procedures for the elimination of double taxation in 25 countries

Editors: Bruno Gibert Xavier Daluzeau
 
Xavier Daluzeau
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Introduction
Authors
Bruno Gibert, Xavier Daluzeau
Contact
Bruno Gibert
T +33 1 47 38 55 00
E bruno.gibert@cms-bfl.com

Xavier Daluzeau
T +33 1 47 38 55 00
E xavier.daluzeau@cms-bfl.com
The reassessment of the transfer pricing policy of a multinational enterprise results in principle in double taxation. Indeed, the amount reassessed by a State at the level of an affiliated company has already been taxed by another State at the level of the other affiliated company party to the reassessed transaction; the same income is therefore taxed twice. A transfer pricing reassessment can also have a withholding tax impact: in certain countries (such as France), the amount reassessed characterizes a deemed distribution of profit subject (depending on the tax treaty applicable) to a withholding tax. Transfer pricing reassessment can therefore have significant tax impacts.

In many countries, nearly all tax audits include an examination of the transfer pricing policy of the audited company. As a consequence, the transfer pricing policies of multinational enterprises are more frequently reassessed by tax authorities. This trend, that is likely to continue further to the works of the OECD in the context of the Base Erosion and Profit Shifting (“BEPS”) project, have led multinational enterprises to more frequently engage international procedures leading to the elimination of double taxation. The increasing use of such international procedures is shown by the statistics provided by the OECD: according to the figures reported by countries belonging to the OECD, the number of mutual agreement procedures increased by 130% between 2006 and 2014 to reach more than 5,400 cases at the end of 2014.

Two types of international procedures exist further to a transfer pricing reassessment:
  • the mutual agreement (and, sometimes, arbitration) procedure set forth by the applicable tax treaty; and
  • when two European States are involved, the Convention of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (the “European Arbitration Convention”). The practical implementation of this convention gave rise to a code of conduct adopted by the European Council in 2004 and revised in 2009 and in 2015.

In practice, these procedures are generally engaged by the two affiliated companies involved in the reassessed transaction. The delay to engage the procedures is often three years as from the tax reassessment notice but can be shorter. Under a mutual agreement procedure (“MAP”), tax authorities must do their best efforts to eliminate the double taxation but are not obliged to find an agreement (this is however generally the case for procedures involving countries belonging to the OECD). Under an arbitration procedure (which is implemented generally if, after a two-year delay, a MAP has not led to an agreement), a mechanism is implemented so that – further certain steps to be performed in a given timeframe – a solution to eliminate double taxation is defined and imposed to the tax authorities involved. Under an arbitration procedure, either pursuant to a tax treaty or the European Arbitration Convention, taxpayers have certainty that the procedure will result in the elimination of double taxation.

These procedures are unfortunately lengthy: according to the statistics published by the OECD, the average duration between countries belonging to the OECD is around two years. Cases treated under these procedures can obviously be complex and the tax authorities generally have limited resources to deal with these procedures. This is most certainly the main issue of these procedures. Given that it is unlikely that resources of the competent authorities increase where the double taxation cases will increase, new forms of procedures such as the so-called “baseball arbitration” introduced by the United States in their tax treaties can contribute to a quicker resolution of the cases: indeed, under a “baseball arbitration”, the arbitration commission must select one of the proposals to resolve the case made by the States involved and cannot develop a third alternative solution (this technique should lead the States involved to propose reasonable solutions).

These procedures were also the subject of Action 14 of the BEPS project. Further to this Action 14, a minimum standard with respect to the resolution of treaty-related disputes has been developed. This minimum standard aims in particular at:
  • ensuring that treaty obligations related to the MAP are fully implemented in good faith and that MAP cases are resolved in a timely manner (on this last point, countries should commit to seek to resolve MAP cases within an average timeframe of two years);
  • ensuring that taxpayers can access the MAP when eligible.


In addition to the commitment to implement the minimum standard by all countries adhering to the outcomes of the BEPS Project, the following countries have declared their commitment to provide for mandatory binding arbitration in their bilateral tax treaties as a mechanism to guarantee that treaty-related disputes will be resolved within a specified timeframe: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States. This represents an important step as together these countries were involved in more than 90% of outstanding MAP cases at the end of 2013 (as reported to the OECD).
Algeria
Authors
Mourad Nabil Abdessemed, Samir Sayah
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
First of all, we draw your attention to the fact that we are not aware about any transfer pricing reassessment in Algeria so there has been no necessity to eliminate double taxation in that framework.

Generally speaking, eliminating double taxation could be envisaged only through the Double Taxation Treaties (hereinafter “DTT”) signed by Algeria with other countries. There is no domestic procedure provided for by the Algerian regulation.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
The majority of the DTT signed by Algeria follows the OECD Model Tax Convention and provides for a Mutual Agreement Procedure (hereinafter “MAP”). However, to date, no DTT signed by Algeria includes an arbitration clause.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
As mentioned above (see question 1), there is no precedent in the framework of transfer pricing issues to the best of knowledge.

However, as a general remark, the tax administration applies the double tax treaty provisions related to the elimination of double taxation (not only for transfer pricing disputes). For instance, the provisions of the article 24 and 26 of the DTT between Algeria and France about double taxation elimination and MAP are applicable.

The practice shows that it is difficult in such matter to estimate the time line for eliminating the double taxation.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
There are no administrative guidelines but the DTT, such as the one signed with France, generally provide for a three-year time limit starting from the first notification of the action resulting in taxation not in accordance with the provisions of the convention.
5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
Provisions of the double tax treaty apply: the company may initiate a MAP if it considers that the actions of one or both of the Contracting States result or will result for it in taxation not in accordance with the provisions of the double tax treaty. It will present its case to the competent authority of the Contracting State of which it is a resident.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
There are no administrative guidelines.
7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
There are no administrative guidelines.
8. Is tax collection suspended during the procedure?
There are no administrative guidelines.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
There are no administrative guidelines.
10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
There are no administrative guidelines.
11. Any other interesting aspect not addressed above?
We draw your attention to the fact that, to the best of our knowledge, no Algerian resident company initiated a MAP further to a reassessment performed out of Algeria (in the framework of transfer pricing matter or of any other tax matter).
12. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

Austria
Author
Sibylle Novak
Contact
Sibylle Novak
T +43 1 40443 3750
E sibylle.novak@cms-rrh.com
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
An Austrian company may apply for a unilateral correlative adjustment procedure in accordance with Art 25 (2) of the relevant Double Taxation Treaty. Such application may be filed with the Austrian tax authority and will lead to an elimination of the double taxation provided the Austrian tax authority agrees with the transfer pricing reassessment issued by the foreign tax authority. The Austrian tax authority conducts a diligent review of the foreign tax reassessment. In this regard, the Austrian tax authority may (repeatedly) request documents or information in order to approve the foreign tax reassessments. This process may take several months.

If the Austrian tax authority agrees with the foreign tax reassessment, a transfer pricing adjustment may be achieved by way of a unilateral procedure without the requirement of initiating a mutual agreement procedure. Otherwise, a mutual agreement procedure in accordance with Art 25 (2) of the relevant Double Taxation Treaty or the European Arbitration Convention may be initiated. Such mutual agreement procedure is carried out between the two states, from a legal perspective the taxpayer is not party. In practice the taxpayer is however usually involved by the tax authorities and may bring forward its arguments.

If the two above mentioned measures are not successful, the taxpayer may finally apply for a tax waiver in accordance with sec. 48 Austrian Federal Tax Code (Bundesabgabenordnung) (hereinafter “FTC”). Such waiver is a unilateral Austrian measure applied by the Austrian tax authority (in its sole discretion) to protect Austrian companies in cases of insufficient international protection.

The taxpayer may also apply for forbearance with the argument that a tax collection in the respective single case would be unreasonable (cf. § 236 FTC). In practice this instrument is however rarely successful, the decision lies within the sole discretion of the Austrian tax authority.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Based on the updated article 25 sec. 5 of the OECD Model Tax Convention (hereinafter “OECD-MTC”), Austria has incorporated the arbitration clause up to now in the following Double Taxation Treaties (hereinafter “DTT”): Armenia, Azerbaijan, Bahrain, Bosnia and Herzegovina, Germany, Macedonia, Mongolia, San Marino and Switzerland. These clauses have all in common that an arbitration procedure may be initiated only after a mutual agreement procedure based on article 25 of the OECD-MTC has remained unsuccessful for a period of (usually) two years (exception Germany: three years).
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
A unilateral correlative adjustment procedure may take a few months up to one year depending whether the responsible tax officer is satisfied with the submitted information in regard of the foreign tax assessment. The tax officers may request repeatedly information from the taxpayer in order to review the foreign tax assessment.

A mutual agreement procedure usually takes between one and two years. The pace of such procedure depends on the two tax authorities involved in such procedure.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
In both procedures, the mutual agreement procedure under the DTT as well as the mutual agreement procedure under the EU Arbitration Convention, the application for commencement of a procedure must be filed within three years after the “first notification” of the action which results or is likely to result in double taxation. Austrian commentators take the opinion that such “first notification” may be (i) the meeting where the results of the tax audit are finally notified by the tax authority to the taxpayer, or (ii) the date of the relevant tax assessments or (iii) the actual taxation of the taxpayer at the latest.

The preferred timing of initiating a procedure may vary as such decisions depends on the circumstances of the single case.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
The Austrian tax authorities take the opinion that a mutual agreement procedure should be commenced in the contracting state where the headquarters of the group is located.

However, an Austrian subsidiary may apply for a unilateral correlative adjustment procedure with the competent Austrian tax authority.

6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
The prerequisite for initiating an international procedure is a breach or likely breach of a DTT. The application needs to be submitted in writing. There are no specific formal requirements.

The application should contain:
  • Name of the applicant;
  • Address of the applicant or legal seat;
  • Tax number;
  • Competent tax authority of the applicant;
  • Detailed statement of the facts;
  • Relevant tax period(s);
  • Statement why (in the opinion of the applicant) the taxation breached a DTT;
  • Statement about pending appeals (if any);
  • Attachments such as tax resolutions or tax reassessment reports; i.e. each documentation which may be relevant for the procedure;

The competent Austrian tax authority is the department No VI/8 – International Tax Law – at the Federal Ministry of Finance, Johannesgasse 5, 1010 Vienna.

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
Mutual Agreement Procedure pursuant to DTT
Prior to commencing a mutual agreement procedure, the tax authority will review the case at hand and determine whether the material prerequisites for such procedure are fulfilled (Pre-trial). In such pre-trial, the tax authority will also review the possibility of resolving the tax issue at hand on a national level. The material prerequisites are in particular:
  • Legal capacity of the applicant to apply for a mutual agreement procedure;
  • An occurred breach of a DTT or the likelihood of such breach;
  • Compliance with the respective statute of limitation (e.g. three-years term);
  • Justification of the objections made in the application.

Only if the tax authority finds the prerequisites fulfilled, it may initiate a mutual agreement procedure. The decision whether to initiate such procedure lies within the sole discretion of the tax authority. The tax authority may decline the commencement of a procedure in case of tax abuse or tax fraud. A mutual agreement procedure is also excluded if serious penalties were imposed on the taxpayer. In the interpretation of the Austrian tax authorities, such serious penalties are intentional or reckless tax abuses subject to the Austrian Financial Penal Code.

Arbitration Procedure
Subject to an arbitration procedure is generally every dispute in the framework of transfer pricing that may be subject to a mutual agreement procedure (cf. OECD-MTCcommentary recital 68). Hence, the purpose of the arbitration procedure is to resolve all questions, which could not have been resolved in the course of the mutual agreement procedure. Subsequently, however, an arbitration procedure is excluded if serious penalties were imposed on the taxpayer (as in such case the commencement of a mutual agreement procedure was already excluded from the beginning).

8. Is tax collection suspended during the procedure?
For the duration of a mutual understanding procedure, the collection of the taxes may be suspended. Such suspension may be valid up to two years, although subsequent suspensions may be granted. The taxpayer has to apply for such suspension. The prerequisite for the suspension is (i) that the instant collection of the respective tax would lead to a disproportionate financial turmoil of the taxpayer and (ii) that the tax collection will not be endangered by the suspension. In case of a tax suspension, interest is triggered in the amount of 4.5% plus the basis rate2.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
In Austria :
  • Correlative adjustments are performed over the years reassessed in the other state;
  • The taxpayer receives interest on the tax credit at a rate of 2% plus the basis rate;
  • In case of hidden profit distributions, withholding tax may be triggered at a rate of 25% or reduced rates on the basis of DTT.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
In Austria, tax procedures are administrative procedures in the first instance. Such administrative procedures turn into court procedures in case the taxpayer appeals the first-instance decision.

Simultaneous mutual agreement procedure and administrative/court procedure: the taxpayer may simultaneously exercise its national remedies against a decision of a tax authority regardless of the request to initiate a mutual agreement procedure. As the outcome of a mutual agreement procedure is rather uncertain, some Austrian scholars recommend halting the national proceedings until the mutual agreement procedure has come to a result. On the other hand, the taxpayer may also exhaust the national remedies before requesting a mutual agreement procedure.

Simultaneous arbitration and national appeals procedure: the commencement of an arbitration procedure is excluded if a court or tribunal in one of the involved jurisdictions has ruled on the tax issues at hand. In such case, the taxpayer should suspend the appeals procedure as such suspension will allow the commencement of the arbitration procedure. After the arbitration award has been rendered, the taxpayer may accept the arbitration award or continue with the national appeals procedure.

11. Any other interesting aspect not addressed above?
None.
12. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.
  • The basis rate is published by the Austrian national bank on a monthly basis.

Belgium
Author
Olivier Querinjean, Arnout Vaninbroukx
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
Multiple procedures to eliminate double taxation are available in the Belgian jurisdiction; their legal basis is laid down in 1 the European Arbitration Convention (96/436/EEC), 2) the tax treaties concluded by Belgium and 3) the Belgian Income Tax Code.
  • Belgium is a party to the European Arbitration Convention, which is directly applicable under Belgian law. Administrative guidelines on application of the European Arbitration Convention are provided within Circular Letter nr. AFZ/Intern IB/98-0170 dd. 7 July 2000 (as amended by Circular Letter nr. AFZ/Intern. IB/98-0170 dd. 25 March 2003).
  • Mutual agreement procedure (hereinafter “MAP”): most tax treaties concluded by Belgium provide a MAP in line with the OECD Model Tax Convention.
  • Belgian internal legislation provides two procedures to remedy/eliminate double taxation unilaterally: the appeal procedure and the ex officio procedure;
    • The appeal procedure is available only in case a tax assessment notice is issued by the Belgian tax authorities towards a Belgian taxpayer. The procedure has to be initiated within six months as from the third working day following the day on which the assessment notice was sent to the Belgian taxpayer.
    • The ex officio procedure has to be initiated within five years as from the 1st of January of the year in which the tax leading to double taxation was assessed. The procedure is not available insofar the concerned assessments have already been subject to a Belgian administrative appeal procedure in which a final decision was rendered.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Double Taxation Treaties (hereinafter “DTT”) concluded by Belgium with the USA and the UK include an arbitration clause.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
In our experience, the MAP procedure can take one to three years, whereas the ex officio procedure generally takes three to six months.

With regard to the appeal procedure, the Belgian tax authorities are strictly speaking not bound by a deadline to render a decision, but in general a decision is rendered within six months. In case no decision is rendered within six months, the appeal can be brought before the court.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
The starting point for a procedure to eliminate double taxation will be the assessment notice sent to the taxpayer by the tax authorities.

In general, it is recommended to contact the tax authorities that have issued the assessment notice in order to have an informal discussion, as soon as possible after reception of that assessment notice. If these informal contacts demonstrate that no informal settlement can be reached, the appeal procedure is to be initiated (obviously within the applicable deadline of six months as from the third working day following the day on which the assessment notice was sent to the Belgian taxpayer). The MAP can only be initiated after the appeal deadline of six months has expired. The MAP can however be initiated even when the ex officio procedure deadline of five years has not yet expired.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1(your State? the other State concerned? both States?)
According to the procedure as provided within the European Arbitration Convention, the State of residence of the taxpayer that has been reassessed, or the State in which its permanent establishment to which the taxable income is accountable is situated must receive the application for the procedure.

With regard to the MAP, most Belgian DTTs provide that the taxpayer is to present its case to the competent authority of the contracting state of which it is a resident. Exceptionally, e.g. within the tax treaty concluded with the USA, the taxpayer may present its case to the competent authority of the contracting state of its choice.

6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
The procedure as provided by the applicable DTT or the European Arbitration Convention has to be initiated according to the formalities as described by Circular Letter nr. AFZ/Intern IB/98-0170 dd. 7 July 2000 (as amended by Circular Letter nr. AFZ/Intern. IB/98-0170 dd. 25 March 2003).

The written request is to provide all necessary information on the taxpayer and the assessment(s), describing the double (taxation) that has occurred in contradiction to the applicable DTT. It is to include a description of the factual circumstances, and of the applicable Belgian and foreign tax legislation, together with legal arguments opposing the double taxation.

In general, the written request is to be filed within three years as from notification of the assessment notice. It should be filed in the French or Dutch language. It is to be addressed to the competent authority (regional director of the relevant tax assessment office) with copy to the director of International Relations within the General Administrations of Taxes, North Galaxy Building, Koning Albert II-laan 33 bus 22, 1030 Brussels, Belgium). Some DTTs provide specific deadlines for the filing of the request. For example, the DTTs with Canada, Greece, Italy and Portugal provide that the request has to be filed within two years as from the notification.

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The Belgian tax authorities will refuse to engage in a procedure when the concerned tax assessment does not result from a “matter as described within article 4 of the European Arbitration Convention”. No explicit definition of ‘transfer pricing’ or ‘transfer pricing dispute’ is provided.

In case of a final decision or judgment after an administrative or judicial procedure demonstrating that the taxpayer is liable to “serious penalties”, the Belgian tax authorities are entitled to refuse to handle the procedure.

For the term ‘serious penalty’, reference is made to the European Arbitration Convention; “a criminal or administrative penalty in cases, either of a common law offence committed with the aim of tax evasion, or infringements of the provisions of the Belgian Income Tax Code or of decisions taken in implementation thereof, committed with fraudulent intention or with the intention of causing injury”.

According to our experience, are generally regarded as a ‘serious penalty’ in Belgium, the criminal penalties imposed in application of articles 449-451 of the Belgian Income Tax Code.

In general, no similar restrictions exist for the MAP as provided by the DTT concluded by Belgium.

8. Is tax collection suspended during the procedure?
According to Belgian law, tax collection is suspended as long as no final decision has been taken on the disputed tax assessment, unless the tax authorities’ rights are at stake. In case of an international procedure based on the European Arbitration Convention or the applicable DTT, the tax authorities will generally uphold that their rights are at stake, so that tax collection is not suspended.

In case tax collection is indeed suspended, late payment interest will in principle apply at the rate of 7% per annum.

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
If an agreement is reached to cancel double taxation, the regional tax assessment office will generally reassess each year separately. Late payment interest are due at the rate of 7% per annum, unless the agreement decides otherwise.

A transfer pricing reassessment should not give rise to withholding tax.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
The international procedure as provided by the European Arbitration Convention can be initiated even when a case is filed with a Belgian court.

As long as no final judgment has been rendered, the States concerned can still engage an international procedure to reach an agreement, but no advisory commission as referred to in article 7 (1) of the European Arbitration Convention can however be set up.

11. Any other interesting aspect not addressed above?
Some interesting figures/statistics provided by the Belgian tax authorities:
  • Open MAP cases end 2013: 24, of which eight older than two years;
  • Open MAP cases end 2014: 36, of which 11 older than two years;
  • Written requests refused in 2013: 1;
  • Written requests refused in 2014: 0.

12. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

Brazil
Authors
Luis Rogério Godinho Farinelli, Stephanie J. Makin
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
Double Tax Treaties (hereinafter “DTTs”) signed by Brazil do not usually provide for the correlative adjustments set forth in paragraph 2 of article 9 of the OECD Model Tax Convention (hereinafter “OECD-MTC”) and the Brazilian Administrative Tax Courts do not typically apply DTT dispositions to transfer pricing matters.

There is no legal basis in Brazil to eliminate international double taxation arising from a transfer pricing reassessment of a Brazilian company. However, Brazilian Law recently established a domestic procedure in order for Brazilian companies to eliminate double taxation in Brazil arising from transfer pricing adjustments resulting from transactions performed with a controlled company abroad if the profits of said foreign controlled company are taxed in Brazil.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
The DTTs signed by Brazil do not provide for any sort of arbitration procedure.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
Brazil does not establish any procedures to eliminate international double taxation arising from the reassessment of a Brazilian company on transfer pricing matters.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
Brazil does not establish any procedures to eliminate international double taxation regarding transfer pricing matters.
5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
Brazil does not establish any procedures to eliminate international double taxation regarding transfer pricing matters.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
Brazil does not establish any procedures to eliminate international double taxation regarding transfer pricing matters.
7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
Brazil does not establish any procedures to eliminate international double taxation regarding transfer pricing matters.
8. Is tax collection suspended during the procedure?
Brazil does not establish any procedures to eliminate international double taxation regarding transfer pricing matters.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
Brazil does not establish any procedures to eliminate international double taxation regarding transfer pricing matters.
10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
As Brazil does not establish any procedures to eliminate international double taxation regarding transfer pricing matters, Brazilian companies could argue the matter in judicial courts.
11. Any other interesting aspect not addressed above?
Although (i) Brazilian tax legislation does not expressly provide for the elimination of double taxation arising from transfer pricing adjustments, (ii) the DTTs signed by Brazil do not provide for the correlative adjustments set forth in paragraph 2 of article 9 of the OECD-MTC and (iii) the Brazilian Administrative Tax Courts do not typically apply DTT dispositions to transfer pricing matters, in case a company domiciled abroad controlled by a Brazilian legal entity suffered a transfer pricing reassessment relating to transactions performed with its Brazilian controlling entity, such Brazilian legal entity could amend its corporate income tax calculations to exclude such transfer pricing adjustments from the taxable basis of the profits earned abroad, based on a Law enacted in 2014.
12. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

Bulgaria
Authors
Valentin Savov, Alexander Rangelov
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
Double taxation elimination further to a transfer pricing reassessment in Bulgaria may be achieved under:
  • The procedure as provided under the applicable double treaty – currently Bulgaria is party to 69 double tax treaties, all providing a mutual agreement procedure;
  • The European Arbitration Convention – under the European Union (hereinafter “EU”) accession Agreement between Bulgaria and the EU, Bulgaria enters as a party to the Arbitration Convention as of 1 July 2008.


The Bulgarian domestic legislation does not explicitly provide for alternative instruments for the elimination of double taxation further to a transfer pricing adjustment, apart for the above mentioned options. The Transfer Pricing Guidelines issued by the Bulgarian revenue authorities refer to these procedures only.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Currently, no double tax treaty signed by Bulgaria provides for an arbitration procedure.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
There are no explicit rules in the domestic legislation about such procedures, neither there is an established practice of the Bulgarian revenue authorities. There have been very limited number of cases in practice and the timeframe to complete the procedure varies depending on the complexity of the cases.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
The starting point for measuring the three-year term to initiate the procedure, which always applies, starts accruing as of the handling of the tax assessment report1 in a tax audit.

It should be advisable to first start the discussions with the revenue authorities immediately after the delivery of the tax assessment report and to start the actual procedure along with an appeal process.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation2 (your State? the other State concerned? both States?)
According to the applicable procedure, the Bulgarian revenue authorities must receive the application for the international procedure to eliminate double taxation.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
There are no explicit documents required to initiate the procedure, the taxpayer should however substantiate the applicability of the procedure before the competent authority.

In Bulgaria the competent authority to address a claim for the initiation of a procedure is the National Revenue Agency, Sofia Directorate having its address at 21 Aksakov Str, 1000 Sofia.

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
There are no explicit definitions of “transfer pricing dispute” or “serious penalties” in Bulgarian domestic legislation specifically concerning such cases. However, under the general rules a “serious penalty” with respect to taxation matters under Bulgarian practice would be a penalty levied on an violation of tax laws relating to a tax assessment exceeding a total amount of 140 minimum monthly salaries (currently approx. EUR 27 thousand).

As already said above, there are only restricted cases related to transfer pricing matters, especially with regard to the elimination of the double taxation. Currently, there are no specific cases, where the tax administration refused to apply the international procedure to eliminate double taxation.

8. Is tax collection suspended during the procedure?
The procedure for the tax collection would not be automatically suspended under the procedure. In fact, the appeal of an assessment act does not suspend the collection of the sums assessed as being due to the treasury, but such suspension may be achieved further to an explicit request and provision of a guarantee.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
In Bulgaria the adjustments shall be performed over the years concerned.

Interest will be due to the local taxpayer only in cases where a preceding tax assessment imposed by the local tax authorities was decreased/revoked further to the application of a procedure for elimination of double taxation. If the decrease of the tax due results in tax loss for the year, such tax loss may be carried forward under the general rules as of the year of the occurrence (not the year of assessment).

A transfer pricing adjustment of a local company where the amounts paid to a non-resident are considered excessive, usually results in the re-classification of these amounts as hidden profits distribution which renders them as:
  • non-deductible for the local company;
  • deemed dividend distribution subject to withholding tax; and;
  • may also result in an additional penalty.

Withholding tax on deemed distribution is levied according to the applicable double tax treaty. However, the specific treaty may explicitly prohibit withholding tax relief on hidden profit distribution3.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
It should be possible in Bulgaria before courts. Such procedure should suspend the court appeal process. The court appeal process is a two instance procedure- a first instance stage held before the relevant Administrative court and the cassation procedure before the Bulgarian Supreme Administrative Court.
11. Any other interesting aspect not addressed above?
The practice in Bulgaria on such cases is very limited and is yet to develop.
12. References
  • The tax assessment report is a preliminary act in the course of the tax audit in Bulgaria which contains only a preliminary proposal for the actual assessment, to be set in the tax assessment act that finalizes the tax audit process.
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.
  • Recently updated double tax treaties, such as the treaties between Bulgaria and Norway, Switzerland, the UK, Romania respectively contain specific anti-avoidance rules that will not allow dividend tax relief on hidden profit distributions.

France
Authors
Xavier Daluzeau, Valentin Lescroart
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
In France, the legal bases for eliminating double taxation further to a transfer pricing reassessment are either the mutual agreement procedures (hereinafter “MAP”) provided for by tax treaties1 or the European Arbitration Convention2 (hereinafter the “EAC”).

Where applicable, a taxpayer can engage procedures simultaneously under both legal bases. The EAC is limited to transfer pricing matters involving associated enterprises established in two different European States. Applying for both procedures maximizes the protection against the risk of being deprived from the possibility to eliminate double taxation. Indeed, definition of a transfer pricing dispute may vary from one jurisdiction to another. In such a case, the mutual agreement phases pursuant to the tax treaty and the EAC would be carried out simultaneously.

There is not any other formal or informal domestic procedure in France that could lead to eliminate double taxation (except, of course, successfully challenging the reassessment issued by the French tax authorities (hereinafter “FTA”) in front of the FTA or courts). In France, the amount reassessed further to a transfer pricing reassessment characterizes a deemed distribution of profit subject (depending on the tax treaty applicable) to a withholding tax. An internal procedure (article L62A of the French Tax Procedure Code) allows under certain conditions taxpayers to obtain the cancellation of such withholding tax.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
So far, a limited number of tax treaties signed by France contain an arbitration clause. Some of them are old tax treaties for which the arbitration phase is not mandatory and, to our knowledge, has not been implemented in practice (cases of the tax treaties with Germany and Canada). The latest versions of the tax treaties with the UK and Switzerland (signed in 2008 and 2009 respectively) provide for an arbitration phase if the case has not been resolved within a certain delay and if the taxpayer requests such arbitration. The tax treaty with the US provides for an “automatic” arbitration phase (provided certain conditions are met).
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
In theory, MAP based on the EAC should be concluded within two years following the date it was introduced. If not, an arbitration phase starts as well as (in theory) a one-year period for eliminating double taxation. In practice, in 2014, 89 cases were pending at least two years after initiation. Reasons why cases were pending two years after initiation and had not gone to arbitration were the following: some cases were pending before court3, time limit had been waived with the taxpayer’s agreement4 or a settlement was reached but the case was awaiting for exchange of closing letters5. In France, in 2014, among the cases pending two years after initiation, one was supposed to reach the arbitration phase6.

For the completion of a MAP in the framework of a tax treaty, according to the OECD the average time was around two years in 20137. For France, the average time for completing the procedure (or closing without eliminating the double taxation) amounted to 30 months in 20138. Time for closing the procedure may vary depending on the complexity of the case, the efficiency of the taxpayer and the other State involved.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
Further to a transfer pricing reassessment, the starting point of such procedures is the date of receipt by the taxpayer of the notification of a reassessment (“proposition de rectification” in French) which is issued at the end of the tax audit.

If the procedure is initiated under the EAC, the time limit is three years from the notification. However, if the procedure is initiated under a tax treaty, then a specific deadline, which may vary between three months and three years, is set forth by the tax treaty. Some treaties do not provide for any time limit to initiate the MAP.

Further to the receipt of the notification of a reassessment, the taxpayer has a right to discuss it with the FTA, firstly in writing, and afterwards through several meetings with the FTA. Taxpayers generally discuss the reassessment with the FTA prior to initiating any MAP or procedure under the EAC.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation9 (your State? the other State concerned? both States?)
In general, under the tax treaties, the case must be presented to the competent authority of the contracting State in which the entity which was exposed to a double taxation is a resident. Under the EAC, the French administrative guidelines recommend that the case be submitted to the competent authority of the contracting State which performed the transfer pricing reassessment. In practice, the MAP or procedure under the EAC should preferably be initiated in both States unless local regulations provides for specific guidelines.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
Procedures to eliminate double taxation are subject to similar conditions whether they are initiated based on the EAC or a tax treaty. As indicated in the administrative guidelines10 of the FTA, the request of a taxpayer must be sent to the Mission d’expertise juridique et économique internationale (hereinafter “MEJEI”) and include the following information:
  • Identification of the parties concerned by the transaction at stake;
  • Detailed information on the relevant facts and circumstances;
  • Identification of the taxes and fiscal years concerned;
  • Copy of the tax collection notice and notice of reassessment leading to the alleged double taxation;
  • Detailed information on the administrative and judicial procedures (if any) implemented by the parties;
  • Statement of the company committing to answer in a most complete and efficient manner to every reasonable and appropriately formulated questions by any competent tax authority and to keep necessary documents available to such authorities.


In the course of the procedure, additional information may be requested by the tax authorities.

Furthermore, in the framework of the EAC, the taxpayer must provide a summary of the reasons why relations between related parties did not differ from those which would be made between independent enterprises (and thus, why the reassessment is inappropriate).

The contact details of the MEJEI are as follows:
Direction générale des finances publiques
Mission d’expertise juridique et économique internationale
Télédoc 918
Bâtiment Turgot – 86–92 allée de Bercy
75574 Paris Cedex 12
E mejei@dgfip.finances.gouv.fr

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The EAC only applies to transfer pricing issues. In that framework, the FTA reject requests for procedures based on such convention where the dispute is not relating to the arm’s length principle. For instance, the FTA consider that reassessments made on the ground of Article 39, 1-3° of the French Tax Code, which limits the deductibility of interest paid to affiliated companies, are not transfer pricing disputes in the scope of the EAC11. The related double taxation could therefore not be eliminated through the EAC.

Note also that, to engage or participate to a MAP or EAC, the taxpayer must prove that a double taxation occurred (the reduction of losses in one country is considered as a double taxation).

The application of serious penalties, or the behaviour of the taxpayer which showed clear will to not apply the principles set forth by the tax treaty, should deprive the taxpayer from the benefit of the procedures to eliminate double taxation:
  • Serious penalties are defined as criminal penalties, penalties for lack of filing a tax return after an injunction to file, bad faith or wilful default penalties, penalties for fraudulent practice, for opposing a tax audit, for hidden compensation or for abuse of law. However, a penalty for failure to provide a transfer pricing documentation does not qualify as a serious penalty.
  • Another case where the FTA should refuse to engage/participate to such international procedures based on tax treaties is where the taxpayer “on its own” eliminated the double taxation by a tax adjustment and clearly evidenced thereof that it did not consider procedures provided for by tax treaties12. The same could be applicable for the EAC13.

8. Is tax collection suspended during the procedure?
Tax collection is no longer suspended for procedures initiated as from 1st January 2014.

Should a taxpayer want to benefit from a deferral of tax collection, the only way is to introduce concomitantly a procedure in front of courts and apply for a tax collection deferral in that framework (however, such tax collection deferral requires that the taxpayer provides guarantees).

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
In France, corresponding adjustments are generally performed over the years reassessed in the other State.

For corresponding adjustments in France further to a reassessment in the other State, no late interest is paid to the taxpayer.

In France, a transfer pricing reassessment has in principle two impacts: additional corporate income tax (primary adjustment) and, depending on the tax treaty applicable, a withholding tax on the resulting deemed distribution (secondary adjustment). Indeed, amounts transferred abroad characterize a deemed distribution subject to withholding tax in France. French withholding tax on deemed distributions can however be cancelled if the other party to the transaction “reimburses” the reassessment and, therefore, offsets the hidden distribution.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
It is possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of French courts. It should be noted that, in the framework of the EAC, the two-year time limit for the mutual agreement phase starts after the procedure in front of a court has been abandoned.

If the MAP/procedure under the EAC results in a solution which is acceptable to the taxpayer while a case is still pending in front of the courts, the execution of the agreement requires that the taxpayer withdraws its action in front of the courts.

Should an agreement be found between the competent authorities after a court decision is made, it could only be implemented if the French taxpayer waived its right to have the decision in force.

Even if a final decision was made by a French court, it is still possible to introduce a MAP but it could not result in an agreement less favorable to the French taxpayer than the final decision of the court.

11. Any other interesting aspect not addressed above?
In 2013, France had the third highest number of new cases based on a tax treaty14 and the third highest number of new cases based on the EAC15. This shows that:
  • the FTA perform many reassessments leading to double taxation; and
  • as a consequence, French taxpayers often apply for such procedures.

12. References
  • As of 1st January 2015, France has signed more than 120 tax treaties.
  • Convention of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.
  • five cases, http://ec.europa.eu/taxation_customs/taxation/company_tax/transfer_pricing/forum/index_en.htm
  • 76 cases, same reference
  • seven cases, same reference
  • Same reference
  • http://www.oecd.org/ctp/dispute/map-statistics-2006-2013.htm
  • Same reference
  • The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.
  • BOI-INT-DG-20-30-20-20140218, §180 for the European Arbitration Convention and BOI-INT-DG-20-30-10-20140218, §190 for tax treaty.
  • BOI-INT-DG-20-30-20-20140218, §150.
  • BOI-INT-DG-20-30-10-20140218, §150.
  • BOI-INT-DG-20-30-20-20140218, §150.
  • Among countries which reported data. http://www.oecd.org/ctp/dispute/map-statistics-2013.htm
  • http://ec.europa.eu/taxation_customs/taxation/company_tax/transfer_pricing/forum/index_en.htm

Germany
Author
Prof. Dr. Angelika Thies
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
In Germany, the legal bases for eliminating double taxation due to a transfer pricing reassessment are either the mutual agreement procedure agreed in a tax treaty, or the European Arbitration Convention. It is possible to directly apply the tax treaty clause or the European Arbitration Convention, as both have been approved by local law, and sec. 2 German General Tax Code (Abgabenordnung) provides for a primacy of international law over national law.

As most of the tax treaties concluded by Germany include a clause on a mutual agreement procedure, the tax treaty may be applied in order to eliminate the double taxation.

To the extent that the other country is located within the European Union, the European Arbitration Convention can alternatively be applied in case of a transfer pricing reassessment resulting in a double taxation.

Consequently, as Germany is part of the European Union and has concluded more than 90 tax treaties, a bilateral procedure (or even multilateral procedure in case of the European Arbitration Convention) should be available in most cases.

In practice, a unilateral procedure is generally not carried out by the German tax authorities. Based on an explanatory document dated 5 October 2006, which has been issued in connection with advanced pricing agreements, it is stipulated that agreements on transfer pricing should not be granted to a German entity based on a unilateral procedure, if a tax treaty provides for a mutual agreement procedure. This rule seems to apply in general and to all procedures concerning cross-border transfer pricing issues. Therefore, it has to be assumed that a unilateral procedure cannot be achieved with the German tax authorities if a tax treaty including a mutual agreement procedure clause is available (which should very often be the case).

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
An arbitration procedure with the German tax authorities can be applied, in particular, based on the European Arbitration Convention. Besides this, however, some of the tax treaties concluded with Germany provide for an arbitration procedure as well. Such countries, which are partially located in the European Union, i.e. alternatively the European Arbitration Convention can be applied, are as follows:

German Tax Treaties with Arbitration Procedure
Country Arbitration Clause
Austria obligatory
Canada optional
France optional
Jersey optional
Liechtenstein obligatory
Luxembourg obligatory
Sweden European Arbitration Convention for the Peaceful Settlement of Disputes; 
alternatively arbitration procedure
Switzerland obligatory
The Netherlands obligatory
UK obligatory
U.S.A. obligatory

3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
In case of a mutual agreement procedure, German statistics show a broad range of time relating to the duration of a mutual agreement procedure. Depending on the calendar year concerned, the average may vary between 24 and more than 27 months. However, the total range may be between “very fast” and up to four or five years. Partially, so-called “preventing requests” negatively influence the duration of the procedure, as some procedures are only opened as a precaution.

The German entity seeking for a mutual agreement procedure may positively influence the duration of the procedure by filing an application as soon as possible and by submitting full information and documentation as requested under the relevant application.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
Based on Guidelines issued by the German tax authorities, the application for a mutual agreement procedure should be applied as soon as the detrimental double taxation becomes obvious. It is not necessary to wait until the tax assessment notice has been issued. In practice, it is recommended to also inform the tax auditor about the planned application for a mutual agreement procedure if the double taxation seems to become the result of an ongoing tax audit.

For calculating any time limit, generally the date of receiving the relevant taxation measure (in general tax assessment notice) is decisive. In case the tax treaty does not provide any time limitation, the German tax authorities do not accept any application if a time frame of four years is exceeded.

Considering the fact that in the other country the time limitation may be calculated differently, it is recommendable to initiate any mutual agreement procedure as soon as possible, in particular if it becomes obvious that no agreement can be reached with the tax auditor.

Generally, the time frame set in a tax treaty is in line with the OECD Guidelines, i.e. the time frame is three years. However, in some cases the time limit is only two years (e.g. Belgium, Indonesia, Italy, Canada, Pakistan, Portugal and Venezuela). Concerning the US tax treaty, the time frame is four years.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
If a tax reassessment is issued by the German tax authorities, the application for a mutual agreement procedure can be filed by the German entity or by the entity of the other State. In case a double taxation relates to the parent company and a subsidiary, it is the suggestion of the German tax authorities that the application is filed in the country of the parent company. However, this is not mandatory.

In practice, it is recommendable to file an application in all States concerned.

6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
German rules for a mutual agreement procedure require that an application is filed with the responsible tax authorities. Furthermore, the application has to be filed within the applicable time frame, which is determined by the tax treaty or European Arbitration Convention. If no time frame is set, an application has to be filed within four years at the latest, generally starting after the tax assessment notice resulting in the double taxation has been received.

In their explanatory document dated 13 July 2006, the German tax authorities have included a list of documents and information to be provided in order to initiate the mutual agreement procedure. In particular, this includes a detailed description of facts and circumstances, a description of the transactions between the related parties, copies of tax assessment notices, tax audit reports and other documents being relevant in the underlying case. Furthermore, information on administrative and judicial proceedings already initiated, the reasons why the taxation should not be in line with the underlying tax treaty or European Arbitration Convention and why a double taxation is given have to be provided.

Any application has to be submitted to the following address:
  • Bundeszentralamt für Steuern (Federal Central Tax Office)
  • An der Küppe 1
  • 53225 Bonn

The Federal Central Tax Office (Bundeszentralamt für Steuern) is a “superordinate higher federal authority” in the jurisdiction of the German Federal Ministry of Finance. The German Federal Ministry of Finance has transferred the responsibility concerning the implementation of mutual agreement procedures to the Federal Central Tax Office.

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The German tax authorities would generally not agree on a mutual agreement procedure if the requirements, in particular concerning a time limit set in the tax treaty or in the European Arbitration Convention are not met. Furthermore, a mutual agreement procedure would not be implemented if a double taxation is the result of a non-compliance with procedural rules which have not been fulfilled, e.g. non-compliance with preclusive period. Besides this, a mutual agreement procedure can generally not be initiated if a criminal tax proceeding has been opened.

Moreover, it is necessary that the taxpayer has not waived his/her/it rights to apply for a mutual agreement procedure, e.g. in the course of an agreement with the tax auditor concerning a solution of several tax audit findings.

8. Is tax collection suspended during the procedure?
During a mutual agreement procedure, the German entity has generally 2 options:
  • It may be applied for tax collection suspension during the procedure. However, the German tax authorities may ask for a guarantee. To the extent that the tax has to be paid later, an interest of 6% per year would become due.
  • Alternatively, the tax assessed may be paid. In case of a future refund, interest of 6% per year would be paid in addition to any tax refund.

Regarding the calculation of the above-mentioned interest, it should be noted that the interest period concerning taxes on income generally starts only 15 months after the end of the relevant calendar year under dispute.

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
After a mutual agreement procedure has been successfully closed, the German tax authorities would issue adjusted tax assessment notices concerning the relevant fiscal years. To the extent that an additional tax payment becomes due, interest of 6% per year is generally assessed in addition. However, in case of a tax refund, such tax refund is generally increased by interest of 6% per year.

To the extent that the transfer pricing reassessment also results in the application of a withholding tax, e.g. based on a hidden dividend distribution, any withholding tax refund or reduction cannot be part of the mutual agreement procedure in Germany. Instead, the procedure concerning a refund or reduction of withholding tax has to be initiated in addition, which, however, requires that a reduction or exemption of withholding tax has finally been rejected by the other State or the application was made at least two years before.

Based on German law (sec. 175a German General Tax Code/Abgabenordnung), the relevant tax assessment period does not expire before one year after the result of the mutual agreement procedure has become effective. This ensures that the possibility to adjust a German tax does not expire as long as the mutual agreement procedure has not been settled.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
In Germany, it is possible to open an international mutual agreement procedure in parallel to a local procedure, e.g. administrative or judicial proceeding against a tax assessment. In practice, however, the local procedure is interrupted as long as the international procedure has not been finalized.

Under German law, any assessment, even a court decision, may become subject to an arbitration procedure and may be adjusted if this is required under the solution found through the mutual agreement procedure or the arbitration procedure (sec. 175a German General Tax Code/Abgabenordnung, sec. 110 (2) Code of Procedure of Fiscal Courts/Finanzgerichtsordnung).

11. Any other interesting aspect not addressed above?
Based on statistics of the German tax authorities, there are relatively few mutual agreement procedures concerning transfer pricing issues applied and initiated by Germany, compared to the total amount of mutual agreement procedures and considering the importance of transfer price adjustments in practice. For example, in 2012 about 77 (out of 277) and in 2013 about 60 (out of 267) new procedures were opened in relation to transfer pricing issues. However, the likelihood that the procedure will be implemented and finally be concluded is relatively high. Therefore, it seems to be worthwhile to go for a mutual agreement procedure if a substantial double taxation has occurred and the company wishes to eliminate such double taxation.
12. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

Italy
Author
Giovanni Battista Calì
Contact
Giovanni Battista Calì
T +39 06 4781 5305/06
E giovanni.cali@cms-aacs.com
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
Legal bases for the elimination of double taxation in Italy are:
  • European Arbitration Convention;
  • mutual agreement procedures provided for by tax treaties

Unilateral remedies are hardly applicable when the assessment is notified to the Italian entity of the group. In this case the only unilateral remedy is to convince the Italian tax administration or the Italian tax court that transfer prices were right and the assessment is wrong.

On the contrary, if the assessment is notified to the foreign entity of the group, its Italian counterpart may invoke a unilateral remedy asking to the Italian tax administration to refund taxes paid in excess in Italy as a consequence of revenues higher than appropriate or costs lower than appropriate due to intra-group transfer pricing policies. In this case, the foreign assessment may be shown to the Italian authorities to support the refund claim.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Arbitration clauses have been introduced in 14 treaties out of the 92 signed by Italy. Reference is made to the treaties signed by Italy with the following countries:
  • Armenia
  • Canada
  • Croatia
  • Georgia
  • Ghana
  • Jordan
  • Kazakhstan
  • Liban
  • Moldavia
  • San Marin
  • Slovenia
  • US
  • Uganda
  • Uzbekistan

Please note that, with the sole exception of the Italy-San Marin treaty, the said arbitration clauses require that the two countries and the taxpayer express their consensus in order to start the arbitration procedure. In other words, they do not provide a mandatory arbitration.

Moreover, in 5 of these 13 tax treaties the arbitration procedure is also subject to an agreement between the two countries about the operational aspects of the procedure (formation of the arbitration commission, criteria for the designation of the relevant members, allocation of the relevant costs, selection of the language of the procedure, etc.). Reference is made to the treaties signed by Italy with the following countries:
  • Canada
  • Ghana
  • Kazakhstan
  • US
  • Uzbekistan

For the sake of clarity, we report hereunder the arbitration clause included in the treaties signed by Italy with Canada and the US.

Article 24, paragraph 5, of the Italy-Canada treaty signed on 3 June 2002:
“If any difficulty or doubt arising as to the interpretation or application of the Convention cannot be resolved by the competent authorities pursuant to the preceding paragraphs of this Article, the case may be submitted for arbitration if both competent authorities and the taxpayer agree and the taxpayer agrees in writing to be bound by the decision of the arbitration board. The decision of the arbitration board in a particular case shall be binding on both States with respect to that case. The procedure shall be established in an exchange of notes between the Contracting States”.

Article 25, paragraph 5, of the Italy-US treaty signed on 25 August 1999:
“If an agreement cannot be reached by the competent authorities pursuant to the previous paragraphs of this Article, the case may, if both competent authorities and the taxpayer agree, be submitted for arbitration, provided that the taxpayer agrees in writing to be bound by the decision of the arbitration board. The competent authorities may release to the arbitration board such information as is necessary for carrying out the arbitration procedure. The award of the arbitration board shall be binding on the taxpayer and on both States with regard to that case. The procedures shall be finalized by the Contracting States by means of notes to be exchanged through diplomatic channels after consultation between the competent authorities. The provisions of this paragraph shall not have effect until the date specified in the exchange of diplomatic notes”.

The sole exception to the above mentioned approach is represented by the arbitration clause included in the Italy-San Marin treaty signed on 21 March 2002. Indeed, based on Article 25, paragraphs 5, 6 and 7, of such treaty, if the two countries do not reach an agreement on the elimination of double taxation within two years, an arbitration commission is set up subject to the previous (i) acceptance by the taxpayer of any outcome of the arbitration procedure and (ii) waiver of any domestic litigation eventually in place. The arbitration commission has to release its opinion within six months and the two countries have to agree on the remedies to avoid the double taxation, even not in compliance with the said opinion, within the following six months. Otherwise, the opinion becomes binding.

3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
In our experience at least three years are necessary to eliminate double taxation under the European Arbitration Convention or the mutual agreement procedure set forth by a tax treaty.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
The starting point to initiate in Italy a procedure to eliminate double taxation resulting from a transfer pricing reassessment is the notification of the reassessment. However, in many cases the assessment procedure starts with an inspection at the taxpayer’s premises that is concluded by the notification to the taxpayer of the inspection report; such document may not be appealed since it only represents the position of the inspectors and is subject to further evaluation by the competent Revenue Agency office in order to eventually issue a reassessment; in these cases, the procedure to eliminate (prevent) double taxation may be initiated after the notification of the inspection report without waiting for the notification of the reassessment.

The time limit depends on the specific procedure. Usually Italian treaties provide a two years term. However, certain treaties provide different terms. For example, the Italy-France treaty provides a six months term while the Italy-UK treaty provide a three years term.

Notwithstanding the above, before initiating a procedure it is in general advisable to discuss the case with the Italian tax administration in order to see whether it is possible to convince the latter that the reassessment is fully or partly wrong.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
The position of the Italian tax administration is that, in general, the procedure should be initiated in Italy by the Italian entity that has received the notification of the reassessment and that, if the additional taxable base reassessed in Italy has already been taxed abroad, the procedure can also be initiated abroad by the foreign entity.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
In order to initiate an international procedure in Italy the taxpayer has to file a written claim to the Ministry of Finance. In the claim it should describe the parties involved, their relationship, the position of the tax administration and reason to contest such position. It should also file a number of documents that are substantially in line with those requested by the EU Code of Conduct of 22 December 2009.
7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
Typically the Italian tax administration refuses to participate to an international procedure to eliminate double taxation when the reassessment challenges the existence or the inherence of an item of income rather than the congruity of its quantification. This may be the case, for example, when a reassessment denies the deduction of costs charged pursuant to a management service agreement. In a similar circumstance it happened that the Italian tax administration refused to initiate the procedure because the denial to deduct was grounded on the fact that the services were not rendered to the Italian entity or were not beneficial to the latter rather than on the inadequacy of the cost sharing system in place or level of mark-up adopted.

Another typical situation where the Italian tax administration is reluctant to participate to an international procedure to eliminate double taxation is represented by the existence of an agreement between the Italian entity and the Italian tax administration to settle the reassessment. Indeed, the Italian tax administration considers the settlement as final and does not accept to amend it for whatever reason, including an international procedure. In this regard please note that on 5 October 2015 the OECD has published the final report on action plan 14 (Making Dispute Resolution Mechanisms More Effective) in the context of the BEPS project. Para. 2.6 of such report states as follows: “Countries should clarify in their MAP guidance that audit settlements between tax authorities and taxpayers do not preclude access to MAP. If countries have an administrative or statutory dispute settlement/resolution process independent from the audit and examination functions and that can only be accessed through a request by the taxpayer, countries may limit access to the MAP with respect to the matters resolved through that process. Countries should notify their treaty partners of such administrative or statutory processes and should expressly address the effects of those processes with respect to the MAP in their public guidance in such processes and in their public MAP programme guidance”. As far as we know, Italy has not made any of the above mentioned notifications so far. Moreover, the Italian tax administration has no clarified whether the “accertamento con adesione” procedure (settlement before litigation) should be considered as an “audit settlement between tax authorities and taxpayers” (that does not preclude access to MAP) or as an “administrative or statutory dispute settlement/resolution process independent from the audit and examination functions and that can only be accessed through a request by the taxpayer” (that precludes access to MAP).

Finally, the Italian tax administration typically refuses to activate the European Arbitration Convention when serious penalties have been applied. Italy has taken the view (through a unilateral declaration attached to the Arbitration Convention) that “the term ‘serious penalties’ means penalties laid down for illicit acts, within the meaning of the domestic law, constituting a tax offence”. In line with the recommendation of the above mentioned Code of Conduct the Italian tax administration usually considers that serious penalties occur only in exceptional cases of fraudulent behaviors, generally not arising in transfer pricing cases.

8. Is tax collection suspended during the procedure?
The law does not provide any suspension of tax collection in the framework of a mutual agreement procedure initiated on the basis of a treaty. The taxpayer may however get access to the remedies ordinarily available, such as the administrative suspension or the suspension granted by a tax court. To that end, it is necessary to demonstrate that the reasons invoked by the taxpayer to oppose the reassessment are somehow grounded (fumus boni iuris) and that the collection would cause severe damages to the taxpayer (periculum in mora).

The situation is different with regard to the European Arbitration Convention. In fact, the law that has ratified the Convention provides that, while the procedure is pending, the Italian tax administration may authorize the suspension of the collection of taxes, interest and penalties. However, if the taxpayer is carrying on at the same time an appeal against the same items falling into the scope of the international procedure initiated, the authorization about the suspension of the tax collection is granted subject to condition that the taxpayer withdraws from the appeal.

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
The agreement is in general implemented through a reduction (or cancellation) of the reassessment that has provoked the procedure. If the collection was not suspended, amounts already paid in excess of those due based on the reduced reassessment are refunded to the taxpayer with interest.
10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
Most of the treaties entered into by Italy contain an interpretative provision saying that the mutual agreement procedure is not alternative to the national contentious proceedings, which shall be preventively initiated when the claim is related to an assessment of Italian tax not in accordance with the Convention.
The parallel progress of a MAP and a domestic court appeal might potentially lead to a conflicting outcome between the domestic court judgment and the agreement achieved by the competent authorities involved.
If this happens, the Italian tax administration would be unable to comply with the mutual agreement. As a result:
  • should the competent authorities agree to eliminate double taxation before a judgment is issued by an Italian tax court, the taxpayer can accept this agreement, but must stop the procedure initiated in front of courts in order to give execution to the agreement;
  • should a judgment be issued before the competent authorities reached an agreement, the Italian competent authority will inform its foreign counterpart of the outcome of the domestic litigation and, if double taxation has not been eliminated by the judgment, it may not be avoided unless the foreign competent authority adopts the same position expressed by the Italian tax court.

With regard to the European Arbitration Convention, as Italy is one of those jurisdictions where administrative authorities cannot deviate from the decision of a judicial body, the arbitration phase may be activated only and insofar as the deadline to file an appeal has expired, or the entreprise has withdrawn any such appeal before a decision has been delivered. Moreover, should the request for opening the procedure be submitted before withdrawing from the judgment, the two years period only runs from the date the enterprise has withdrawn from the first grade of appeal.

Accordingly, in the event the taxpayer simultaneously submits a mutual agreement procedure opening request and carries on the appeal against the reassessment, the existence of a litigation proceeding does not prevent the mutual agreement procedure to begin and/or the competent authorities to exchange views regarding the case or information on the pending judicial proceeding. However, in the event a judicial decision occurred and yet double taxation has not been eliminated, the latter will not be removed unless the foreign competent authority signs a mutual agreement consistent with the domestic judicial decision.

11. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

Japan
Author
Yushi Hegawa
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
The legal bases of eliminating double taxation are twofold in Japan, i.e.
  • one is a mutual agreement procedure between the competent authorities of Japan and the counterpart country, pursuant to the mutual agreement provision set forth in the tax treaty between Japan and that country;
  • while the other is a domestic administrative appeals and in-court litigation procedure, pursuant to the Special Taxation Measures Law (which is the substantive tax law governing transfer pricing matters in Japan).

Generally speaking, with respect to a transaction involving the country where competent authority relief is effective (particularly advanced countries in North America and Europe), taxpayers tend to seek it. However, with respect to a transaction involving a country where competent authority relief is not effective (even if a relevant treaty allows such relief) or not available in the first place (particularly emerging countries in Asia, Africa and South America), the domestic administrative appeals and in-court litigation procedure is often virtually the only option that the taxpayer may seek.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Yes. Tax treaties with some advanced counties that are recently entered into or amended provide for an arbitration procedure, e.g., the United Kingdom, the Netherlands, Sweden, New Zealand, Portugal and Hong Kong. A recent amending protocol to the treaty with the United States and the new treaty with Germany also contain an arbitration procedure, however, these treaties have not yet entered into force.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
Mutual agreement procedures appear to generally take one to three years.

Domestic administrative appeals and in-court litigation procedure could finish in about two years if the taxpayer prevails at the administrative level, but could take five to seven years in total if the matter is brought up to the Supreme Court of Japan.

In any event, the length of the period significantly differs depending upon the complexity of the case.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
As to the starting point of the mutual agreement procedure, most of the tax treaty provisions point to time when the action of the Japanese government “results or will result” in taxation not in accordance with the provisions of the applicable tax treaty. However, in practice, in most cases an application for a mutual agreement procedure is filed after a formal transfer pricing assessment is issued by the Japanese tax authorities, and it appears not very common that a taxpayer does so before such transfer pricing assessment (or in the midst of the transfer pricing audit). As for the time limit, a majority of the tax treaties have a statutory limitation of two or three years, where the starting point is interpreted to be the first notice of the transfer pricing assessment.

As to the domestic administrative appeals and in-court litigation procedure, the starting point is when a formal transfer pricing assessment is issued by the Japanese tax authorities. Within two months from this assessment, a taxpayer must file an administrative appeal; otherwise the taxpayer is legally barred from disputing the assessment by the domestic procedure.

In practice, in most cases, the subject taxpayer (i) files a domestic administrative appeal only in order to reserve the track of the domestic procedure in case it becomes necessary in the future (e.g., where the mutual agreement procedure fails), within two months of the assessment, (ii) at the same time files an application for a mutual agreement procedure, and (iii) requests the relevant tax office to hold in abeyance the domestic appeals procedure until the mutual agreement procedure is finalized (whether or not it is successful or fails).

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
Technically legally speaking, when a taxpayer is subject to a transfer pricing assessment by the Japanese tax authorities, the taxpayer must file an application with the Japanese competent authority. However, in practice, in most cases an application is filed in the state of the counterparty affiliate simultaneously, by coordinating with one another.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
A taxpayer who has been subject to a transfer pricing assessment by the Japanese tax authorities must file an application for a mutual agreement procedure with the Office of the Competent Authority of the National Tax Agency (hereinafter “NTA”). The procedures including required documents are stipulated in the Administrative Guidelines concerning Mutual Agreement Procedures of the NTA as well as in the Instruction on Form of Application for Mutual Agreement Procedures. Among other matters, the taxpayer must explain in detail the facts relating to the transaction that was the subject of the assessment and the taxpayer’s argument to support that the taxation by the assessment is not in accordance with the tax treaty, and must attach the documents to establish the taxpayer’s contentions. Documents in foreign language must accompany a Japanese translation.
7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The practice of the Office of the Competent Authority of the NTA is that it generally refuses an application for a mutual agreement procedure if the relevant assessment was made on the ground that the taxpayer made a donation to its foreign affiliate (which is nondeductible). Under Japanese tax law, transfer pricing and donation are separate taxation regimes, and a mutual agreement procedure is treated to be only available for the transfer pricing assessment. This is because a donation is only a matter of domestic tax law and has no relevance to tax treaties, on which mutual agreement procedures are based. Whether an assessment is made on the ground of transfer pricing or donation is made clear in the reasons for the assessment attached to the notice of the assessment. However, many Japanese practitioners comment that it is difficult to draw a clear line between transfer pricing and donation, and some point out that the Japanese tax authorities tend to prefer a donation with a view to effectively precluding taxpayers from a mutual agreement procedure.

Under Japanese tax laws and practice, there is no rule to preclude the taxpayer from a mutual agreement procedure if heavy penalty tax (which is imposed if the taxpayer committed concealment or fabrication of facts) is imposed on the taxpayer. However, as far as transfer pricing assessments are concerned, it is very rare that heavy penalty tax is imposed, and in most cases ordinary deficiency penalty tax is imposed. In this case the taxpayer is not precluded from a mutual agreement procedure.

8. Is tax collection suspended during the procedure?
No. Neither an application for a mutual agreement procedure or a domestic administrative appeals procedure suspends the collection or enforcement. As such, in principle, the taxpayer must once pay the full amount of the tax assessed including penalty (deficiency penalty tax) and interest (delinquency tax). Otherwise, interest (delinquency tax) continues to accrue to add burden.

However, as an exception, when the subject taxpayer files an application for a mutual agreement procedure, it may apply for temporary suspension of collection of the tax assessed, by providing certain eligible security. If the temporary suspension is granted, the collection is not made until the mutual agreement procedure is finalized (whether it is successful or fails), and interest (delinquency tax) does not accrue.

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
If a Japanese taxpayer is subject to a Japanese transfer pricing assessment and if a mutual agreement is reached to cancel all or part of the assessment, the Japanese tax authorities issue a reassessment to cancel all or part of the original assessment without any action from the taxpayer.

If a foreign affiliate of a Japanese taxpayer is subject to a foreign transfer pricing assessment and if a mutual agreement is reached so that the foreign transfer pricing assessment is partially sustained, the corresponding taxable income of the Japanese taxpayer has to be reduced. For this purpose, the Japanese taxpayer must file a request for downward reassessment within two months from the mutual agreement so reached, and, based upon that request, the Japanese tax authorities make a corresponding adjustment (or a downward reassessment) to the taxable income of the Japanese taxpayer. The adjustment or reassessment is performed over the financial years reassessed in the foreign jurisdiction. Interest is not generally paid to the Japanese taxpayer in connection with the refund of the tax pertaining to the reduced taxable income.

There may arise an issue of whether or not the Japanese taxpayer should make a so-called secondary adjustment, that is, an actual remittance of money between a Japanese taxpayer and its foreign affiliate corresponding to the reassessment(s) made in accordance with the mutual agreement. Under Japanese tax law, this is not mandatory, and generally there would not arise issues of Japanese withholding tax in connection with such remittance (whereas in some other jurisdictions withholding tax issues may arise on the basis that such remittance may constitute deemed dividends).

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
No. The two procedures cannot run simultaneously. If a Japanese taxpayer first prefers a mutual agreement procedure, it will so request with the Japanese competent authority, while pending the domestic procedure. If it turns out that the mutual agreement procedure would unlikely result in elimination of double taxation, the Japanese taxpayer must stick to it, or withdraw the mutual agreement procedure altogether and then turn to the domestic procedure. On the other hand, while a domestic procedure is actively pending at administrative tribunals or courts, an application for the mutual agreement procedure is not generally allowed.
11. Any other interesting aspect not addressed above?
Arbitration is rather new to Japan, so we would have to monitor how the practice develops.
12. References
  • The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

Serbia
Author
Nebojša Pejin
Contact
Nebojša Pejin
T +381 11 3208900
E Nebojsa.Pejin@cms-rrh.com
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
Legal bases for eliminating double taxation in Serbia are mutual agreement procedures provided by double tax treaties (hereinafter “MAP”) and administrative procedures in accordance with the domestic law.

By contrast, Serbia does not apply the European Arbitration Convention. Furthermore, the double tax treaty signed with Malaysia is the only treaty that does not provide for MAP.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Serbia does not have an arbitration clause in any of its double tax treaties.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
The length of MAP depends on many factors such as complexity of the case, availability of documentation, standpoints of the tax authorities, etc. In practice, it usually takes a few months to eliminate the double taxation via MAP.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
The starting point for calculation of the time limit for initiating a MAP is the notification of a reassessment.

The time limit for initiating a MAP is five years in the framework of the double tax treaties signed with the Netherlands and Norway), two years (in the framework of the double tax treaties signed with Italy and Indonesia), no time limit (in the framework of the double tax treaties signed with the UK, France and Sweden), while for all other countries which have a double tax treaty with Serbia the time limit is three years.

Still, even for countries without a time limit provided for by the double tax treaty, the statute of limitation provided for by domestic law would generally apply (five years, starting from the beginning of the year following the year in which the reassessment was done).

Pursuant to the provisions of the tax treaties, an agreement on a way to cancel double taxation is applicable regardless of any time limitations imposed by the domestic law. By way of exception, such a provision is not specified in the double tax treaties signed with the UK, France, Italy, the Netherlands, Belgium, Sweden, Slovakia, Indonesia and Montenegro. As a result, time limitations could apply in that framework.

It is advisable to initiate the MAP after the discussion with the tax authorities, but prior to the issuance of the tax bill.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
The State of the other taxpayer’s residence must first receive the application. The State which received the application will then notify it to the competent authority in Serbia and initiate MAP.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
Formal conditions for initiating MAP are the following:
  • MAP is initiated by the competent authority of the other State should the reassessment be performed abroad or in Serbia;
  • taxpayer seeking protection under the double tax treaty is a resident or citizen of the other State;
  • time limit for initiating a MAP pursuant to a double tax treaty or statute of limitation pursuant to the domestic law has not expired.

There is no list of documents to provide for MAP purposes. In practice, the tax authorities require all the relevant documents to be submitted immediately.

The request is sent to the Serbian Ministry of Finance by the competent authority of the other State.

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The Serbian Ministry of Finance may refuse to engage or participate in a MAP if the conditions provided for by the applicable double tax treaty are not met (time limit was exceeded, the person is not a resident or a citizen of the other State), the MAP was not initiated by the competent authority of the other State and if reassessment was due to tax evasion.
8. Is tax collection suspended during the procedure?
No, tax collection is generally not suspended during the procedure. However, the tax collection may be suspended upon the request from a taxpayer and subject to the discretionary approval of the tax authorities.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
The agreement is implemented via an official decision from the Serbian Tax Administration.

Correlative adjustments are generally performed in Serbia over the years reassessed in the other State. No interest is paid to the taxpayer.

Transfer pricing reassessment may trigger withholding tax as a secondary adjustment. However, certain DTTs concluded by Serbia have provisions which do not allow the application of a withholding.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
Yes, it is possible to engage concomitantly in a MAP and in a litigation in front of the Administrative Court. It is not necessary to abandon the litigation in order to conclude the international procedure, but the tax authorities may choose to suspend the international procedure until the decision from the Administrative Court.
11. Any other interesting aspect not addressed above?
The outbound reimbursement (e.g. from a Serbian to a French entity), reimbursing an adjustment in France by the French Tax Authorities could trigger additional withholding on this amount.
12. References
  • The terms "international procedure to eliminate double taxation" mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

Spain
Authors
María González Fornos, Marta Rodriguez
Marta Rodriguez
E Marta.rodriguez@cms-asl.com
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
In Spain, regulations concerning direct taxation-related mutual agreement procedures (hereinafter “MAPs”) are established in Royal Decree 1794/2008 (hereinafter “RD”).

Said RD regulates the rules that the Spanish tax authorities must follow in order to solve cases of double taxation together with the other Tax Authorities involved. In this respect, two types of procedures can be found in RD 1794/2008:
  • The procedure relating to the implementation of the European Convention of July, 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/EEC), (hereinafter the “EAC”); and
  • The procedure provided for in the Double tax treaties (hereinafter the “DTT”) signed by Spain to resolve cases of taxation not in accordance with the treaty, which prevails in situations where a non-European country with which Spain has signed a Treaty is involved.

Aside from the above, Spain does not provide for internal solutions for avoiding double taxation deriving from foreign transfer pricing adjustments.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Spain has concluded only one treaty containing an arbitration clause: tax treaty with Chile, which was signed on 7 April 2003.
However, its arbitration clause has a very limited scope, applicable only with regard to the application of the General Agreement on Trade in Services (GATS).

Furthermore, the new version of the DTT between Spain and the US would introduce mandatory binding arbitration but is currently awaiting ratification.

3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
According to the provisions of the RD mentioned in paragraph 1 above, the estimated duration of the procedure could range between two or three years. However, it varies depending on the difficulty of the case.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
Generally, the starting point is the notification of the reassessment.

Deadline for initiating the procedure depends on the procedure:
  • In the framework of DTT: the deadline depends on the concrete convention (e.g. in the DTT signed between Spain and France, time limit is three years);
  • In the framework of the EAC: deadline is three years.

In Spain, when the Spanish tax authorities issue a reassessment, taxpayers usually discuss it with them.

MAP could also be understood as an alternative to the challenge of the reassessment by the way of an internal procedure (before the Spanish tax administration or even, in further steps, before the Spanish tax Courts). However, in our experience, taxpayers do not introduce “directly” a MAP. They usually would try to fight against the reassessment internally previously.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
The competent authority is usually the Spanish General Directorate of Taxes, that is to say that the application would be received by Spain. The other State involved would take part in further steps of the process, but the application would be managed by Spain at least at the firsts stages.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
The application should be submitted, by written, to the competent authority in Spain. In particular, this “competent authority”, as commented previously, is the Spanish General Directorate of Taxes.

Additionally, there is a list of documents to provide. Mainly:
  • Complete identification data of the person who is filing the application. Also, identification of the other parties involved in the transaction that is being analyzed;
  • Identification of the tax administration involved in the other State;
  • Identification of the article of the convention that, in the view of the taxpayer, has been applied incorrectly (this requirement is only applicable for the DTT procedure);
  • Identification of the tax periods involved;
  • Detailed description of the background and circumstances related to the case. It should be included here the amounts under discussion, and any other data related to the situation and transaction structures of the entities involved in the procedure;
  • The taxpayer must indicate any claims submitted (before the tax administration or the Courts) in respect of the case analyzed, by the taxpayer or any other related party (related party in the sense of party involved in the procedure). Also, it should be reminded any resolution issued in relation to the question to be analyzed in the procedure, if any;
  • The taxpayer must indicate if, in connection to the same question raised in the procedure (or a similar one), he has submitted a previous application before the competent authority;
  • Declaration on whether the application submitted includes any issue that could be considered as part of an Agreed Prior Assessment Process2 or similar procedure;
  • Commitment of the taxpayer (who applies for the procedure) to answer in the most complete and quickest way to any request from the tax authorities, and additionally, to keep at the request of the latter all the documentation related to the case;
  • Date and signature of the taxpayer applying for the procedure, or, if applicable, of its legal representative.

Moreover, it should be attached additional documentation to the application:
  • copy of the final audit report;
  • any transfer pricing documentation required by the Corporate Income Tax regulations;
  • copy of any resolution issued in connection to the procedure by the tax administration/authorities of the other State;
  • and, if applicable, accreditation of the representation (in the event of taxpayers acting through legal representatives).

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The competent authority in certain cases could deny the application. However, the denial has to be motivated.

Cases, where the application could be refused are, mainly the following (please note however that the competent authority can consider the denial in more situations than the ones included below):
a. In respect of the DTT procedure:
  • If it does not exist a DTT which includes an article related to MAPs;
  • When the application is submitted out of the timeline envisaged in the DTT or if it is submitted by a person who is not entitled;
  • When the tax issue is not derived from a disagreement in the application of the DTT procedure (i.e. when it is derived from an inconsistency related to the domestic legislation);
  • When it has been proved that the behavior of the taxpayer aimed at avoiding tax any of the States involved;
  • When the application relates to the opening of a new procedure in respect of a tax issue that has already been discussed in other mutual agreement procedures;
  • When the fulfillment of the requirements is met due in time, but those requirements were not completed (e.g. cases where a requirement of extra documentation has been issued but the submission of said documentation was not completed as required).


b. In respect of the EAC:
  • When requirements settled in article 4 of the 90/436/ECC Convention are not met;
  • When the application has not been submitted within the limits included in 90/436/ECC Convention i.e. when serious penalties were applied. In Spain, “serious penalties” are the ones characterized as significant and critical according to the Spanish General Tax Law, and the ones related to criminal offenses.

8. Is tax collection suspended during the procedure?
It can be suspended.

In this regard, certain conditions should be met:
  • It is required to have previously submitted an application for one of the two MAPs foreseen in RD 1794/2008 (DTT or EAC);
  • The suspension could not be obtained through the alternatives available according to the domestic legislation (i.e. in front of Tax Administrative or Jurisdictional Courts);
  • Guarantees are required (i.e. total amount of the tax debt, plus any recharges applicable, should be covered by said guarantees, being usually constituted by financial endorsement)

Additionally, please note that according to the new measures recently introduced in the Spanish tax law, in certain procedures (e.g. recovery of sums unduly paid) the suspension of the procedure would not in principle require the provision of guarantees (i.e. automatic suspension).

9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
In principle, and according to the provisions of RD 1794/2008, the implementation of the MAP results has an impact on the financial year where the MAP is resolved and not in any prior year, regardless of whether it is an open tax year or not.

However, in our experience, the tax administration usually issues a new liquidation related to the transfer pricing adjustment and in connection to the tax period where said adjustment is referred to.

Additionally, if the procedure results in a decrease of tax, this reduction gives rise to the payment of interest to the local taxpayer.

The application of withholding tax in respect to transfer pricing reassessments is a controversial tax issue that, up to date, is still pending to be solved by the tax authorities. A case by case analysis is required to determine whether it applies (and therefore whether it can be cancelled in the framework of the MAP)

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
To the best of our knowledge, this alternative is not possible.
11. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.
  • Agreed Prior Assessment Process or Advance Pricing Agreement (“Acuerdo previo de valoración or APAs”) is a domestic mechanism for ensuring legal certainty regarding transfer pricing between associated entities, through a prior determination of the fair market value of the consideration for the proposed transactions. It is mainly a procedure through which taxpayers negotiate APAs with the Spanish tax authorities in order to prevent disputes between the tax authorities and taxpayers in cases involving imposed adjustments to the value of transactions.

United States
Author
Rocco V. Femia (Miller & Chevalier Chartered)
1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
In the United States, if there is a transfer pricing reassessment (a proposed adjustment), there are three ways to eliminate the potential double taxation. A taxpayer may begin a judicial proceeding, present an action for administrative review with the Office of Appeals of the Internal Revenue Service (hereinafter “IRS”), or initiate a mutual agreement procedure with the Advance Pricing and Mutual Agreement (hereinafter “APMA”) Program of the IRS pursuant to the relevant double tax treaty. APMA acts as the U.S. competent authority in the context of transfer pricing matters. If the taxpayer chooses, it may combine an action for administrative review with an initiation of the mutual agreement procedure.

For competent authority requests filed on or after October 30, 2015, the domestic procedures governing the mutual agreement procedure process are contained in Revenue Procedure 2015-40. This document provides procedures for filing competent authority requests, describes the required content of such requests, provides procedures for coordinating the mutual agreement process with U.S. domestic law processes, and provides information regarding the processing of competent authority requests.

The U.S. competent authority may eliminate double taxation unilaterally by withdrawing the reassessment. In our experience, however, the U.S. competent authority will engage in discussions with the other relevant competent authority before taking such an action.

2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
The United States has four tax treaties in force with a mandatory binding arbitration procedure. These treaties are with Belgium, Canada, France, and Germany.

Three U.S. treaties or protocols to U.S. treaties that would introduce mandatory binding arbitration currently are awaiting ratification. These treaties are with Japan, Switzerland, and Spain.

Finally, there are six treaties in force that contain procedures for voluntary arbitration: Switzerland, Ireland, Kazakhstan, Mexico, the Netherlands, and Italy. In general, these procedures have not been used. As a result, the United States has committed to negotiating mandatory binding arbitration provisions with willing treaty partners.

3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
On average, it takes approximately two years for the IRS to reach a mutual agreement with its counterparty. The IRS publishes processing times annually. The average processing time for mutual agreement cases resolved in 2014 in the transfer pricing context was 21.4 months. The 2014 average processing times were shorter than had been the case in prior years; from 2011-2013, the average processing times ranged from 26 to 28 months.

In general, mutual agreement cases initiated as a result of an IRS adjustment take less time to resolve than those initiated as a result of a foreign adjustment. For U.S.-initiated adjustments, the average processing time for cases resolved in 2014 was 15.0 months, and, for foreign-initiated adjustments, the average time was 25.3 months.

4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
The IRS will not accept a competent authority request with respect to an issue that arises from an examination by the IRS before the IRS has communicated the amount of the proposed adjustment in writing to the taxpayer. This is typically done in a Notice of Proposed Adjustment. With respect to foreign-initiated adjustments, the IRS typically will not consider a competent authority request until the foreign tax authority has provided the taxpayer with a written communication providing the amount of the potential adjustment and an explanation for such adjustment.

Most U.S. tax treaties provide that a mutual agreement may be implemented notwithstanding the expiration of time limits (e.g., statutes of limitation) or other procedural limitations under U.S. law or by any similar law in the treaty country. However, the IRS prefers that taxpayers take protective measures to ensure that statutes of limitation are kept open in each jurisdiction to maximize the flexibility of each jurisdiction in eliminating double taxation.

Many U.S. tax treaties provide for specific notice or other procedural requirements. If these requirements are applicable and are not met, then the IRS or the foreign tax authorities may decline to accept a competent authority request, or may decline to provide a corresponding adjustment.

As a result, a taxpayer facing the potential of double taxation in a matter involving the United States must consult the relevant treaty to determine whether there are notice or other procedural requirements that must be met, and the extent to which it would be advisable to keep open relevant local law statutes of limitation.

In our experience, it is advisable to initiate the competent authority procedure as soon as written notification is received by the taxpayer. For an issue that arises from an examination by the IRS, the U.S. competent authority will not accept a request before the IRS has communicated the amount of the proposed adjustment in writing to the taxpayer, typically in a Notice of Proposed Adjustment. With respect to foreign-initiated adjustments, the IRS typically will not consider a competent authority request until the foreign tax authority has provided the taxpayer with a written communication providing the amount of the potential adjustment and an explanation for such adjustment. Taxpayers are otherwise encouraged to file a competent authority request promptly after receiving notice that a competent authority issue is likely to arise.

The IRS welcomes informal pre-filing meetings with taxpayers to discuss matters that may lead to competent authority requests. Pre-filing conferences are required for certain cases, such as cases involving aggregate foreign-initiated adjustments of over USD 50m.

5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation1 (your State? the other State concerned? both States?)
U.S. tax treaties sometimes specify the State (or States) with which a taxpayer must initiate a mutual agreement procedure, but often provide that a taxpayer may initiate a mutual agreement procedure with either State. In practice, taxpayers typically file requests with both States.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
The formal conditions for initiating a mutual agreement procedure are contained in Revenue Procedure 2015-40. An Appendix to that Revenue Procedure provides a list of documents which must be included in a request. The IRS may reject a request that does not comply with these requirements. The content of a request may be discussed with the IRS in a pre-filing conference.

In general, a competent authority request includes information about the taxpayers at issue, the adjustments proposed, and relevant factual, legal, or procedural context for the matter. U.S.-specific authorizations, disclosures, consents, and notifications are also required.

The U.S. competent authority conducts the competent authority process through two offices, APMA and the Treaty Assistance and Interpretation Team. APMA has primary responsibility for cases arising out of transfer pricing reassessments.

For cases over which APMA has jurisdiction, a competent authority request must be sent to the following address:
  • Deputy Commissioner (International)
  • Large Business and International Division
  • Internal Revenue Service
  • 1111 Constitution Avenue, N.W.
  • Washington, D.C. 20224
  • SE:LB:IN:ADCI:TPO:APMA:M3-370
  • (Attention: APMA)

7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
There are a number of different cases in which the U.S. competent authority may refuse to engage or participate in a procedure to eliminate double taxation. The U.S. competent authority typically will notify and, as appropriate, consult with the relevant foreign competent authority before taking this type of action.

The circumstances under which the U.S. competent authority may decline to accept a request or cease providing assistance include, but are not limited to, the following:
  • The taxpayer does not comply with the procedural requirements set forth in Revenue Procedure 2015-40 (although the taxpayer will be given a reasonable opportunity to correct or remedy any deficiencies in its request or in its other submissions before this step is taken).
  • According to a plain reading of the U.S. tax treaty, the taxpayer is not eligible for the treaty benefit or for the assistance requested (for example, if the taxpayer is not a resident of either contracting state).
  • The taxpayer’s conduct before or after filing its competent authority request has undermined or been prejudicial to the competent authority process. This type of behavior includes but is not limited to conduct that has significantly impeded the ability of IRS Examination, the U.S. competent authority, or any other part of the IRS, or the foreign tax authority, to adequately examine the competent authority issues for which assistance has been requested. This type of behavior also includes conduct that has significantly impeded the ability of the U.S. or foreign competent authority to undertake substantive consideration of and resolve the competent authority case.

Examples of conduct that undermines or prejudices the competent authority process include instances where:
  • The taxpayer has agreed to or acquiesced in a foreign-initiated adjustment or entered into a unilateral APA with foreign tax authorities, and the manner in which the taxpayer agreed to that adjustment or entered into that unilateral APA impeded the U.S. competent authority from engaging in full and fair consultations on the issues.
  • The taxpayer entered into a unilateral APA with the IRS when the competent authority issue could reasonably and practically have been covered by pursuing a bilateral APA instead.
  • The taxpayer rejected a request to extend the period of limitations for assessment of tax for taxable periods covered by the competent authority request.
  • During the competent authority process, the taxpayer presents new material information or evidence that reasonably could have been presented to IRS Examination during the examination of the taxable years covered by the competent authority request.


The U.S. competent authority will accept cases involving an adjustment that has been initiated by the taxpayer. A pre-filing conference is required in such cases. In addition, the IRS may reject a request for assistance if the taxpayer has not made a timely request or otherwise has pursued competent authority assistance in a way that has undermined or prejudiced the competent authority process. This includes situations where the taxpayer has impeded the U.S. or foreign competent authority from engaging in full and fair consultations on the competent authority issue(s) involved.

Under U.S. law, the IRS may assert penalties when proposing a transfer pricing adjustment. The most typical penalties in such a case are for inadequate contemporaneous documentation and are determined as a percentage of the amount of the adjustment. The U.S. competent authority may consult with its foreign counterpart with respect to ancillary issues such as penalties. In addition, any reduction in the amount of the adjustment as a result of a mutual agreement may have the effect of reducing penalties. Although the assertion of penalties does not automatically bar taxpayers from accessing the mutual agreement process, it is possible that the perceived behavior which led to the assertion of a penalty could also constitute conduct that undermines or prejudices the competent authority process. In such a case, as described above, such conduct could prevent access to the mutual agreement process.

8. Is tax collection suspended during the procedure?
Under Revenue Procedure 2015-40, tax collection is suspended during the mutual agreement process. Pursuant to that revenue procedure, when a taxpayer invokes the competent authority process, the U.S. competent authority will assume exclusive jurisdiction within the IRS over all competent authority issues in that request. Any further administrative action by the IRS, such as assessment and collection procedures, with respect to those issues will be suspended unless the U.S. competent authority instructs otherwise. Standard administrative procedures will apply to issues over which the U.S. competent authority has not assumed jurisdiction.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
Once the U.S. and foreign competent authorities reach a tentative competent authority resolution, that resolution will be presented to the taxpayer for consideration. If the taxpayer accepts the resolution, the U.S. competent authority will direct the relevant offices within the IRS to begin implementing its terms, including with respect to collateral or ancillary adjustments. To the extent authorized under the applicable U.S. tax treaty, the competent authority resolution will be implemented notwithstanding any time limits or other procedural limitations of U.S. law.

The timing of each correlative adjustment will depend on the terms of the competent authority resolution. In our experience, the U.S. competent authority typically implements correlative adjustments over the financial years reassessed in the other State. The IRS has been open to other approaches to the extent the taxpayer can demonstrate that the approaches do not harm the interests of the IRS and are in the interest of sound tax administration.

Unless otherwise agreed, adjustments implemented by the IRS as a result of a mutual agreement are treated in the same manner as adjustments made pursuant to U.S. domestic law. Thus, to the extent interest would be owed to a taxpayer as a result of a refund of tax under U.S. domestic law, such interest would be owed to the taxpayer as a result of a refund of tax pursuant to a mutual agreement, assuming the taxpayer has made a protective claim of refund under U.S. procedures. The competent authorities may come to an agreement with respect to interest and other ancillary issues.

Under U.S. law, a secondary adjustment would generally be treated as a distribution or a capital contribution, as appropriate. A distribution may be treated as a dividend and may be subject to withholding tax. Revenue Procedure 99-32 provides taxpayers with the ability to establish an interest bearing account receivable to avoid the consequences of the secondary adjustment that would otherwise result. In such a case, if the receivable is paid within 90 days of the amended return that reflects the primary adjustment, then the taxpayers will be considered to have advanced and repaid the requisite amounts without the withholding tax and other consequences that could attach to a distribution. Although Revenue Procedure 99-32 requires the payment of interest on the advance, the U.S. competent authority is empowered to waive interest in appropriate circumstances.

10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
In the United States, it is generally not possible to engage concomitantly in the mutual agreement process and litigation. Under Revenue Procedure 2015-40, the U.S. competent authority will not accept or continue to consider a competent authority request regarding an issue and taxable period that has been designated by the IRS for litigation. Nor will the U.S. competent authority generally accept or continue to consider an issue and taxable period that is pending in a U.S. federal court.

During the competent authority process, a taxpayer may be asked to join the IRS in a motion to sever any competent authority issues, delay trial, or stay proceedings pending the outcome of the taxpayer’s competent authority case. The final decision on severing issues, delaying trial, or staying proceedings rests with the relevant court. Nevertheless, if the court denies a motion to sever competent authority issues, delay trial, or stay proceedings, the U.S. competent authority will terminate any ongoing consideration of the competent authority request.

11. Any other interesting aspect not addressed above?
Not applicable
12. References
  • The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty.

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