The Organisation for Economic Cooperation and Development (OECD) published a manual on the Handling of Multilateral Mutual Agreement Procedures (MAPs) and Advance Pricing Arrangements (APAs) on February 1, 2023.
The manual provides guidance on handling Multilateral Mutual Agreement Procedures (MAPs) and Advance Pricing Arrangements (APAs), designed to help taxpayers avoid double taxation and provide greater certainty in their tax affairs.
The Manual is part of the e Forum on Tax Administration (FTA) Tax Certainty Work Program, and like other OECD tax guidance documents, it is not legally binding in itself.
Instead, it supplements the standards, procedures, and guidelines in other documents, such as the OECD Model Tax Convention and the Transfer Pricing Guidelines.
It summarises the practical experiences of tax jurisdictions.
The Manual covers the following five main areas:
Introduction/Overview: This includes a project outlined, common challenges in multilateral cases, and an overview of experiences.
The basis for handling multilateral MAP and APA cases: This includes the definition of multilateral cases, the legal basis for handling multilateral cases, the application process for multilateral cases, and the connection between multilateral procedures and the minimum standards of BEPS Action 14.
Procedural aspects to consider in multilateral cases: This includes the coordination between jurisdictions involved in multilateral cases, methods for conducting consultations, coordination of procedural matters, the form of consultations, the relationship between domestic remedies or procedures and multilateral cases, implementation of agreements, arbitration in the event of failure to reach agreement in mutual agreement procedures, and the rights, obligations, and roles of taxpayers in multilateral procedures.
Examples of multilateral cases
Ideal timeline for a typical multilateral case
1. Challenges and experience in multilateral cases
Compared to traditional bilateral consultations, multilateral mutual agreement procedures and advance pricing arrangements offer greater tax certainty for taxpayers and tax authorities in some cases.
However, due to the complexity of multilateral consultations and the lack of experience in dealing with such procedures by most tax authorities, multilateral cases are more challenging than bilateral cases.
This is mainly due to unclear legislative and procedural provisions. If there is a lack of domestic legislation, cross-border enterprises or tax authorities may be unable to initiate or participate in multilateral consultations relying solely on multiple bilateral tax treaties.
The practice has shown that multilateral mutual agreement procedures best suit transfer pricing cases. For large multinational enterprise groups operating in multiple jurisdictions, multilateral measures and their solutions can provide greater tax certainty than bilateral consultations.
2. Legal Basis for Handling Multilateral Cases
Jurisdictions can consider handling multilateral cases based on the corresponding provisions in their tax treaties, as outlined in Articles 25(1) and 25(2), or Article 25(3) of the OECD Model Tax Convention on Income and Capital (2019 version).
The Handbook encourages jurisdictions to adopt a flexible and open approach to handling applications for multilateral negotiations.
Jurisdictions should clarify the legal basis for handling multilateral cases.
Additionally, since multilateral cases are essentially a combination of bilateral cases, the rights provided to taxpayers in bilateral tax treaties should also be preserved in multilateral measures.
3. Procedural Issues to Consider in Multilateral Cases
Jurisdictions can consider conducting multilateral negotiations simultaneously to reach a multilateral agreement that can be implemented in each jurisdiction (i.e. multilateral approach).
Alternatively, jurisdictions can allow their tax authorities to conduct bilateral negotiations separately to reach multiple bilateral agreements and then avoid or resolve double taxation issues for taxpayers through coordination among the parties (i.e. bilateral approach).
Ideally, the multilateral approach can lead to the timely resolution of cases.
However, jurisdictions that support the bilateral approach argue that the multilateral approach involves too many parties and may not be able to reach a substantive agreement in many cases.
The bilateral approach uses familiar negotiation procedures for tax authorities, avoids complex legal issues, and can quickly and simply resolve problems.
The Handbook suggests that jurisdictions should consider all relevant factors related to the case before choosing which approach to use. To improve the efficiency of multilateral cases, participating tax authorities can agree to designate a coordinating tax authority to assist in coordinating and pushing the case forward.
Since multilateral cases are government procedures, taxpayers can only participate in certain procedures, such as providing information, responding to tax authorities, and accepting or rejecting agreements drafted by tax authorities.
With the agreement of the tax authority, taxpayers can be more actively involved in and assist in multilateral negotiations. In multilateral cases, taxpayers may need to participate more than in bilateral cases, such as providing all information to all relevant tax authorities on a confidential basis.
Taxpayers, as stakeholders in multilateral cases, should regularly receive updates on the latest progress of each procedural step and the expected timetable for reaching an agreement.
4. Example of Multilateral Case
Multilateral cases have a wide range of applications, as listed in Chapter 4 of the Manual, covering various types of transactions, such as production and sales, distribution, services, intangible asset licensing, financing, etc.
Chapter 4 also includes examples of permanent establishments, hybrid entities, and cases involving dual/multiple residencies.
For example,
A multinational enterprise group produces product X. Manufacturing of the semi-finalised products is performed by group Company A in Jurisdiction A.
Group Company A then sells the semi-finalised products to group Company B in Jurisdiction B for assembly.
Group Company B sells the finished products to Group Company C in Jurisdiction C, which sells product X to third-party customers.
In this example, the competent tax authority in Country C analysed the situation.
It concluded that C Company, as a member of the multinational enterprise group, did not receive adequate compensation.
As C Company sold its products to third parties, there was no transfer pricing issue with its sales revenue.
Assuming that B Company received compensation in line with the arm's length principle in its transaction with C Company, the competent tax authority in Country C determined that the issue lies in the high transfer pricing of the related-party transaction between A Company and B Company.
At this point, if the competent tax authority and B Company in Country B accept the view of the competent tax authority in Country C, they must first adjust the transfer pricing of the related-party transaction between A Company and B Company.
Otherwise, adjusting only the transfer pricing of the transaction between B Company and C Company would unilaterally reduce B Company's profits or even cause it to incur losses, which would violate the arm's length principle.
In this case, launching multilateral measures in countries A, B, and C is necessary to address the potential issue of double taxation.
5. Ideal Timetable for Handling Multilateral Cases
Chapter 5 of the Manual sets out an ideal timetable for the multilateral mutual agreement procedure and advance pricing arrangement, which suggests that tax administrations should aim to conclude the mutual agreement procedure within 36 months, compared to the previous goal of 24 months under BEPS Action 14.
The longer target time frame reflects the complexity of multilateral cases. At the same time, the Handbook emphasises that the timing of multilateral cases should also be considered in conjunction with the specific circumstances of each jurisdiction.
Key Takeaway
The OECD manual provides comprehensive guidance for tax administrators, taxpayers, and their advisers on handling Multilateral Mutual Agreement Procedures (MAPs) and Advance Pricing Arrangements (APAs) to provide greater certainty in tax affairs and avoid double taxation.
The emphasis on communication and cooperation between tax authorities is key to achieving effective and efficient resolution of MAP and APA cases.
The mechanisms that are available in Malaysia to prevent and/or resolve transfer pricing disputes include:
Rulings;
Advance Pricing Agreements (APA);
unilateral,
bilateral, and
multilateral.
Mutual Agreement Procedures;
The dispute resolution process for TP and non-TP cases is under the Dispute Resolution Department.
The dispute resolution process is an initiative to allow taxpayers to resolve an appeal or application for relief without the need to be forwarded to the Special Commissioners of Income Tax (SCIT) for a decision.
In the context of the IRBM, this process is a platform for an alternative means of dispute resolution whereby the Dispute Resolution Department, IRBM or State Director’s Office, IRBM acts as a neutral party during a discussion or proceeding held with a taxpayer to reach an out of court settlement.
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