Double taxation disputes – good things take time…
Tax Alert - December 2020
By Bart de Gouw & Kirstie Anderson
Tax authorities around the world are ramping up efforts to collect their “fair share” of tax. In the international context this raises the prospect of double taxation for Multinational Enterprises. A network of tax treaties is intended to provide relief from the incidence of double taxation. Most tax treaties contain a provision called the “Mutual Agreement Procedure” (MAP) which allows a taxpayer to present their case for relief from double taxation to the Competent Authority of a treaty partner/state. The OECD has recently released its 2019 MAP statistics, which provide detailed information regarding the MAP activities.
In recognition that the MAP process is not a perfect solution, the OECD’s BEPS Action Plan included measures to improve the international dispute resolution / MAP process. Under BEPS Action 14 (Making Dispute Resolution Mechanisms More Effective), jurisdictions committed to a minimum standard regarding resolution of treaty-related disputes in a timely, effective and efficient manner. All members of the inclusive framework on BEPS committed to implement the Action 14 minimum standard. This standard provides for timely and complete reporting of MAP statistics pursuant to an agreed framework.
We take a look at how things are tracking at both an OECD and a New Zealand level:
- In 2019 there were 2,690 new MAP cases started across OECD members – a 13% increase on the 2,385 new cases that started during 2018 and a 30% increase in new cases since 2017.
- Of these new cases, 43% (1,156) were transfer pricing cases (i.e. involving a question of attribution or allocation of profits). There were more open transfer pricing cases (3,735 in total) at the end of 2019 than there were “other” cases (3,220 in total).
- In terms of success rates, 52% of all OECD MAP cases closed during 2019 were resolved with full relief (i.e. fully eliminating any double tax). A further 21% of cases were resolved through unilateral relief, domestic remedy, or agreement to partially eliminate double tax. Only 2% resulted in no agreement (including agreement to disagree).
- Interestingly, only 40% of MAP cases that were concluded in 2019 resolved transfer pricing issues. The closure rate of transfer pricing cases is slower than for “other” cases. The reporting of pre-2016 cases suggests that these cases have an even lower closure rate (perhaps reflecting the difficult nature of these old cases).
- The average time for transfer pricing cases to be resolved is 30.5 months, compared with an average of 22 months for “other” cases.
New Zealand Specific Observations
- The opening inventory of cases on 1 January 2019 was 13 and the closing inventory was 14 cases.
- 12 new cases were started and 11 cases were closed in 2019, only 3 of those closed related to transfer pricing.
- All three of the transfer pricing cases closed were granted relief unilaterally.
- Of the “other” cases closed during the year, only 50% were granted either full relief or unilateral relief, and the remaining 50% resulted in no agreement or agreement to disagree.
- Consistent with the broader OECD, in a New Zealand context the closure rate for transfer pricing MAP cases is also slower than that of “other” cases – averaging 16.26 months in comparison to 12.3 months.
- On a positive note, some cases took only a week to get the attention and initial action of the Competent Authority once the case was filed.
- Cases with Australia appear to be those that have the fastest resolution, an average of just over 4 months for non-transfer pricing cases.
The OECD’s 2019 MAP statistics show that the number of cases of double taxation requiring a MAP to find a resolution continues to increase, driven by a number of factors including increased globalisation as well as growing confidence in the MAP process. Positively, the number of cases closed is also increasing, however at an insufficient pace to reduce the inventory of cases. Outcomes of the MAP process are also generally positive, with around 85% of the transfer pricing MAP processes concluded worldwide in 2019 fully resolving the issue.
If you have a situation of potential double taxation, pro-actively engaging with the New Zealand Competent Authority may provide a resolution to the matter. If you have these issues talk to your Deloitte tax advisor or the authors.
December 2020 Tax Alert contents
- Tax rate change enacted along with big-brother information gathering powers
- Inland Revenue steps up activity on taxing house sales
- Double taxation disputes – good things take time…
- Snapshot of recent developments