United Nations launches MAP and Tax Dispute Resolution Handbook

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October 25, 2021
2021-1932

Executive summary

In October 2021, the United Nations (UN) Committee of Experts on International Cooperation in Tax Matters (the Committee) launched, among other documents, a Handbook on the Avoidance and Resolution of Tax Disputes (the Handbook). The Handbook is available in electronic form in English and Spanish. It provides a comprehensive guide to various mechanisms for avoiding and resolving tax disputes. The Handbook has been drafted with a focus on the least developed countries and their particular challenges. However, it can be a useful guide for all tax administrations, as well as for taxpayers interested in a deeper dive into tax dispute resolution mechanisms

The document has two sections: Part I covers measures to avoid and resolve tax disputes on domestic cross-border matters, and Part II covers the mutual agreement procedure (MAP) under tax treaties. The latter showcases the growing importance of the MAP as the go-to tool for resolving international tax disputes.

This Alert summarizes the key measures under Part I and Part II of the Handbook.

Detailed discussion

Measures that would help avoid tax disputes outlined in Part I of the Handbook include: (i) clear and accessible interpretative guidance; and (ii) awareness on the tax authorities’ part of the interaction between domestic law and a country’s international obligations (i.e., those under tax treaties), as well as effective risk assessment programs.

This outline is followed by a description of various approaches used by countries to avoid tax disputes (e.g., the guidance on general tax matters provided by the Australian Taxation Office and the Kenya Tax Authority, the pre-filing process offered by the United States (US) Internal Revenue Service and the Indonesian Advance Pricing Arrangement (APA) program, which is an example of an APA program in a developing country). Part I also includes examples of various cooperative compliance approaches (e.g., the Brazilian Tax Compliance Incentive Program and the International Compliance Assurance Programme (ICAP)). In addition, Part I contains a description of the various domestic mechanisms to resolve tax issues, along with practical guidance to countries that want to improve their dispute resolution processes.

Part II of the Handbook focuses exclusively on the MAP under bilateral tax treaties. It explains the mechanisms of the MAP and its crucial role in ensuring that countries respect their treaty obligations. It provides guidance to countries that do not have MAP experience and makes a number of references to the minimum standard and best practices under Base Erosion and Profit Shifting (BEPS) Action 14. It takes a deep dive into the various steps of a MAP initiated upon the request of a taxpayer and includes a diagram and a flowchart showing the different actions typically involved, as well as sample documents that could be issued in a MAP.

The chapter on MAP arbitration analyzes the “perceived concerns and perceived benefits” raised by the members of the UN Committee. It discusses different aspects of the procedural rules that competent authorities should consider adopting to facilitate MAP arbitration proceedings, including the type of arbitration to be used (“independent opinion” vs “last best offer”); logistical arrangements for meetings of the arbitration panel; ensuring confidentiality of taxpayer information exchanged and costs of the proceedings.

Finally, Part II of the Handbook addresses possible improvements to the MAP, particularly in developing countries. These include provision of technical assistance to a country under a program such as the UNDP-OECD Tax Inspectors Without Borders; technical training on the MAP aimed at improving the capacity of developing countries to manage MAP cases; the use of framework agreements between competent authorities under paragraph 3 of Article 25, such as the agreement reached between US and Indian competent authorities for resolving longstanding competent authority cases involving Indian-resident affiliates performing information technology-enabled services or software development services.

Implications

Over the past few years there has been marked improvement in access to and efficacy of the MAP in both transfer pricing and other international tax matters. The publication of this Handbook, along with other UN capacity development initiatives and the ongoing BEPS Action 14 peer review process, is expected to help this trend continue. While it is not a binding legal instrument, the Handbook can serve as a primer on tax dispute resolution and offers valuable interpretative guidance, as well as insight into the challenges that tax authorities in developing countries are facing when dealing with tax disputes.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Ottawa