The Mutual Agreement Procedure (“MAP”): Advantages and Potential Pitfalls for Resolution of Double Tax Issues

The Mutual Agreement Procedure (“MAP”) is a useful dispute resolution mechanism for multinational companies facing a transfer pricing or other assessment resulting in double tax, whether in the U.S. or abroad. In order to fully avail themselves of the advantages of the MAP process, taxpayers should pay careful attention to the applicable procedures to optimize their chances of a successful resolution.

Scope of MAP. MAP is a process established by income tax treaties to relieve double taxation arising from tax assessments proposed by one treaty jurisdiction that result in the taxation of income already taxed by the other treaty jurisdiction (i.e., so-called double taxation). Most tax treaties have MAP articles that authorize the competent authorities (the office within the tax authority responsible for treaty matters) to negotiate and implement mutual agreements that remedy double taxation. While the basic objective of all MAP articles is the same, the specific procedures can vary from treaty to treaty.

While MAP is commonly used to address transfer pricing adjustments, it can also be used to resolve double taxation arising from permanent establishment, residency and withholding tax, among other treaty issues. The MAP process generally resolves disputes in one of three ways: (1) through withdrawal of the adjustment by the jurisdiction that asserted it; (2) through correlative relief from double taxation (e.g., a deduction corresponding to a proposed increase in income) from the other jurisdiction; or (3) by some combination of withdrawal and correlative relief. Competent authorities are authorized to, and sometimes do, unilaterally resolve cases by full withdrawal or correlative relief, without involvement of the other treaty partner. However, most MAPs are resolved by a “mutual agreement” between the competent authorities regarding the amounts to be withdrawn and/or the amounts for which correlative relief would be granted.

Revenue Procedure 2015-40 provides the procedural rules for the MAP process applicable to U.S. taxpayers seeking relief from the U.S. competent authority. For this purposes, the “U.S. competent authority” includes the Advance Pricing & Mutual Agreement Program (“APMA”), which is responsible for transfer pricing and other allocation cases, and the Treaty Assistance & Interpretation Team (“TAIT”), which is responsible for all other MAP cases. Under this Revenue Procedure, MAP can be requested for U.S.-initiated, foreign-initiated, or in some cases, taxpayer-initiated adjustments.

OECD BEPS Action 14, which establishes minimum standards and a peer review process for MAP, calls for competent authorities to endeavor to close new MAP cases involving transfer pricing issues within an average timeframe of two years or less. However, this two-year target only sets the standard for average completion times and generally does not require individual cases to be completed within any particular timeframe. This said, an increasing number of treaties now provide for mandatory binding arbitration, if the competent authorities are not able to resolve a MAP issue after a specified period (generally, two years from the agreed “commencement date” for the MAP). The United States’ current income tax treaties with Canada, Germany, France, Belgium, Switzerland, Japan, and Spain contain such arbitration provisions.

Advantages of MAP Process. The MAP process can often be advantageous compared to other methods of resolving transfer pricing and other cross-border disputes within the scope of a treaty. Some of the advantages of MAP include:

• The MAP process can avoid double tax efficiently. Unlike domestic remedies, MAP can simultaneously resolve an issue otherwise subject to audit in the U.S. and another jurisdiction on consistent terms.
• The MAP process is effective. According to statistics provided by the OECD, the MAP process successfully relieves all double tax in most cases. For instance, of the 142 transfer pricing MAP cases closed by the U.S. competent authority in 2019, 115 involved a mutual agreement that fully resolved double taxation while 10 resulted in the U.S. competent authority granting unilateral relief from double taxation.
• The MAP process removes the issue from the examination team. In the case of a U.S.-initiated adjustment, filing a MAP request will transfer “jurisdiction” over the issue from Exam to the U.S. competent authority. Competent authorities are not bound by domestic law. Notably, this means that the U.S. competent authority can consider the OECD Transfer Pricing Guidelines instead of the section 482 regulations. Depending on the issue and the facts, the Guidelines may provide a more favorable framework for resolution than domestic law.
• MAP can be cost-effective. Generally, the resources (including outside advisory fees and internal resources) expended to resolve a MAP are much lower than would be expended in litigation, and often lower than would be expended to resolve an issue through the administrative Appeals process.
• MAP is flexible. Taxpayers are generally free to exit the MAP process and pursue other remedies (g., administrative Appeals) at any time. Even after competent authorities have negotiated a tentative resolution, taxpayers are not bound to accept it.
• A MAP resolution can often be rolled forward. Often, it is possible to roll forward the terms of a successful MAP resolution to subsequent filed but unexamined tax years through the Accelerated Competent Authority Procedure (“ACAP”). It is also often possible to further roll forward the term of a successful MAP resolution for five or more prospective years through the bilateral advance pricing agreement (“APA”) process.

Procedural Pitfalls. At the same time, MAP has its own procedural considerations, which taxpayers contemplating MAP should familiarize themselves with. Some common pitfalls in the MAP process involve the timing of the request itself. For example:

• Going to Appeals can essentially bar taxpayers from later accessing MAP. A taxpayer that chooses to go to Appeals only has a sixty-day window from the opening conference to stay or sever the transfer pricing issue from the IRS Appeals proceeding. If the taxpayer does not do so, the taxpayer is precluded from pursuing MAP.[1]SeeRev. Proc. 2015-40, sec. 6.04. This means that if the Appeals settlement results in double tax (i.e., it is less than a full concession of the proposed adjustment), the taxpayer cannot seek correlative relief through MAP and is generally stuck with the resulting double tax.
• Hot interest can apply if the MAP request is filed too late. In the case of a U.S.-initiated adjustment, “hot interest” (the additional 2% interest on large corporate underpayments, see IRC § 6621(c)) can apply if the MAP request is filed after the 30-day letter. SeeIRM 4.60.2.3(1)f (“The imposition of IRC section 6621(c) interest on proposed adjustments will be automatic if the proposed tax remains unpaid 30 days after the issuance of a 30-day or 90-day letter.”). Hot interest can generally be avoided without paying the tax by filing the MAP request prior to the issuance of the 30-day letter.
• MAP may not be available for all cross-border issues. While most MAP requests are accepted by the competent authorities, there are some issues for which the right to MAP access can be disputed. These include, for example, cases involving supply chains where non-treaty jurisdiction entities play a key role, as well as cases where a foreign tax authority relies on a domestic anti-avoidance provision rather than the transfer pricing rules to support an adjustment.
• Entering into settlements with foreign tax authorities without first consulting APMA can risk denial of relief. Under Rev Proc. 2015-40, the U.S. competent authority can deny access to MAP if the taxpayer agrees to a foreign adjustment “involving significant legal or factual issues in a manner that impeded the U.S. competent authority from engaging in full and fair consultations with the foreign competent authority.” Rev. Proc. 2015-40, sec. 7.02(3)(a). While taxpayers may still resolve “routine” issues with foreign tax authorities without risking a denial of MAP access, when in doubt, taxpayers should consider consulting with APMA before entering into a foreign tax settlement if the amount at issue is material, if the issue is factually or legally complex or novel, or if the settlement would potentially be binding on the foreign competent authority.
• Different treaties impose different “deadlines” for commencing MAP. Under most of the United States’ treaties, the deadline is typically a number of years (g., 3 or 5 years) from receipt of the assessment. However, under some treaties, the deadline is a specified number of years from the end of the applicable tax years (e.g., Canada) or due date or filing date of the return (e.g., Mexico). If it is not possible or practical to file a MAP request within the prescribed period, the taxpayer may preserve its rights by filing a “treaty notification” with the U.S. competent authority. Treaty notifications must be updated on an annual basis, until an actual MAP Request is filed.
• Protective claims may also be necessary to fully preserve your right to relief. While a timely MAP request or treaty notification is sufficient to preserve a taxpayer’s right to MAP relief under a treaty, a protective claim for refund may be necessary as a backstop to preserve a taxpayer’s right to relief under domestic law (for example, if the MAP does not result in resolution on acceptable terms). Protective claims can be filed either with the competent authority request or in a separate letter, and can also be combined with a treaty notification in a single filing when it is necessary or prudent to file both. As with treaty notifications, after filing a protective claim, the taxpayer must file annual notifications until a MAP request is filed.
• Failure to make a “substantially complete submission” can delay the process. As a best practice, taxpayers should file complete submissions and not wait for APMA to ask for items that are explicitly required by Proc. 2015-40. Failing to file a substantially complete submission will likely result in a longer process for both acceptance and resolution, and in some cases, could result in the MAP request being rejected by the U.S. or foreign competent authorities. Indeed, given competent authorities’ resource restraints, it is sometimes advantageous to go beyond the minimum requirements of Rev. Proc. 2015-40 by proactively addressing issues likely to arise during the course of the MAP process.

This all goes to show that, like any method of resolving tax disputes, the MAP process has its own procedural considerations. However, MAP offers a unique set of advantages, including efficiency, effectiveness, flexibility and relief from double taxation. Thus, successful navigation of the MAP process can position taxpayers to achieve an effective resolution of double tax issues.

[1] A special Simultaneous Appeals Procedure (“SAP”) allows taxpayers to obtain an Appeals officer’s review of the issue in an advisory capacity while still pursuing MAP. SAP is not affected by this rule.