Policy paper

Statement of Practice 1 (2018)

Published 20 February 2018

Mutual Agreement Procedure (MAP)

1. This Statement of Practice describes the UK’s practice in relation to methods for reducing or preventing double taxation and supersedes Statement of Practice 1 (2011).

The UK has made efforts to strengthen the efficiency and effectiveness of the dispute resolution process and minimise incidences of unintended double taxation in light of recent experience and developments, in particular Action 14 ‘Making Dispute Resolution more Effective’ (the Action 14 Report) of the Base Erosion Profit Shifting (BEPS) project. The UK has committed to implementing the minimum standard in respect of:

• preventing disputes
• availability and access to MAP
• resolution of MAP cases
• implementation of MAP agreements

2. The Statement of Practice outlines the MAP process and the use of MAP under the relevant UK Double Taxation Agreements and/or the EU Arbitration Convention (EUAC). It also outlines the UK’s approach to the role of arbitration as part of the MAP process.

3. This Statement of Practice should be read in conjunction with HMRC’s guidance in the International Manual (INTM) at INTM 423000 onwards.

Introduction

The aim of MAP

4. A MAP request can be made when a person considers that the actions of one of both countries’ tax administrations result or will result in taxation not in accordance with the relevant tax treaty. The person may request Competent Authority (CA) assistance under the MAP.

Older treaties require that the taxpayer approaches the CA of their country of residence to request relief under a tax treaty. Where the adjustment will affect related parties in both jurisdictions, it’s advisable for each taxpayer to make a separate request for assistance to the CA of the country in which it is resident. Newer treaties contain a provision which provides that the taxpayer can make a request for MAP assistance to the CA of either country.

5. A person who is a resident of European Union may also request access to MAP through the European Union Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, 90/463/EEC (EUAC) if they consider that, for the purposes of taxation, profits which are included in the profits of an associated enterprise of a contracting state are also included or are also likely to be included in the profits of an enterprise of another contracting state on the grounds that the principles set out in Article 4 of the EUAC and applied either directly or in corresponding provisions of the law of the state concerned haven’t been observed.

6. The legal framework for the MAP in the UK is governed by the Taxation of International and Other Provisions Act 2010 (TIOPA 2010), sections 124-125 in respect of MAP through bilateral treaties and sections 126-128 in respect of MAP through the EUAC.

More detailed guidance can be found at INTM 423010.

Eligibility for MAP

Acceptance into MAP

7. There are no administrative or statutory dispute resolution processes in the UK that limit access to MAP. The payment of tax due on any assessments raised or determinations made may be suspended during normal appeals process until the MAP is resolved. Taxpayers should check whether entering into statutory or administrative dispute resolution processes with other tax authorities will prevent bilateral MAP discussions and consider whether doing so is likely to increase the risk of double taxation.

More detailed guidance can be found at INTM 423040.

Rejection of MAP requests

8. In cases where it appears to the UK that the taxpayer’s MAP request may be inadmissible or not justified, the UK will write to the other CA setting out the reasons why the UK believes the request is invalid and invite the other CA to provide its views before deciding to reject the request.

The MAP process

How to make a MAP request

9. In the UK there’s no set form of presentation. HMRC requires that sufficient information and documentation is provided to enable the UK CA to fully assess the request for MAP. More detailed guidance of the information and documentation requirements can be found at INTM 423130. Specific treaties, however, may state that certain information must be provided. It’s therefore advisable to consult the relevant treaty and any public guidance on the matter provided by the UK’s treaty partner if presenting a case to that partner.

More detailed guidance can be found at INTM 423130.

Time limits for submitting a MAP request

10. In order to invoke MAP under a UK tax treaty, TIOPA 2010, section 125(3), requires that a case must be presented before the expiration of 6 years following the end of the chargeable period to which the case relates or such longer period as may be specified in the tax treaty. More recent UK tax treaties follow Article 25 of the Model Convention. This provides that a person must present its case ‘within 3 years of the first notification of the action which results or is likely to result in double taxation’.

Because the first notification may occur after the expiry of 6 years following the chargeable period to which the claim relates, the relevant tax treaty article may extend the basic 6 year time limit. For the presentation of a case under UK tax treaties, the time limit will be interpreted to the advantage of the taxpayer. That is, the time limit of 3 years only commences once first notification has been given. It’s not necessary to await the first notification before presenting a case to invoke MAP.

11. Where MAP is invoked under the EUAC, the time limit for presenting a case is determined by Article 6(1) of the EUAC. This uses wording similar to Article 25 of the Model Convention and therefore also provides that a case must be presented within 3 years of the first notification of the action which results or is likely to result in double taxation. The UK applies the same principles to the determination of the date of first notification for EUAC claims as it does for MAP under bilateral Double Taxation Agreements.

More detailed guidance can be found at INTM 423040.

Concluding the MAP process

Scope for granting relief

12. If the UK CA concludes that an action has led to taxation not in accordance with the treaty (and that the MAP request is admissible and justified) then the UK CA will first consider if the issue can be resolved on a unilateral basis. In this case, the UK CA may grant relief, under the provisions of the treaty, without the need to enter into bilateral discussion with the other tax authority.

If the UK can’t resolve the issue unilaterally, then the UK CA will take up the matter with their counterpart in the treaty party state. If discussions between the CAs provide adequate evidence to satisfy the UK CA that an adjustment made by the other tax authority is in accordance with the tax treaty, say for example it was required in order to comply with the arm’s length principle, the UK CA will grant a corresponding adjustment.

13. If the CAs can establish that the primary adjustment was excessive (a non-arm’s length amount), they will agree a course whereby the primary adjustment is reduced and the remaining adjustment is relieved in an amount that reflects an arm’s length result. If, however, the UK remains dissatisfied, there’s no obligation on it to grant relief and, at the taxpayer’s request, the matter may progress to arbitration under the EUAC or under the relevant treaty provided that contains an arbitration article.

14. As part of the MAP process, where an agreement is finalised between the relevant CAs, the taxpayer is notified in writing of the decision and is provided with an explanation of the result. Once the taxpayer has accepted the agreement, written confirmation of the agreement is exchanged between the administrations and provided to the taxpayer. The results are processed by the tax administrations and relief is obtained. If the taxpayer doesn’t accept the agreement, then the MAP process will be deemed to be concluded and no adjustment will be implemented.

More detailed guidance can be found at INTM 423060.

Methods of giving relief

15. Where a solution or mutual agreement is reached under the terms of a UK Tax Treaty, it will be given effect despite anything in any enactment (TIOPA 2010, section 124(2)).

16. There may be consequential claims available where the resolution of the MAP increases losses available to the affected person. If the normal time limits have expired before the solution or mutual agreement is reached, a claim for relief consequential to that solution or mutual agreement, for example to carry back losses or to surrender/claim group relief must be made within 12 months following the notification of the solution or mutual agreement (TIOPA 2010, section 124(4)).

17. Where a claim for relief is made in pursuance of an agreement or opinion reached under the EUAC, normal time limits for claiming relief under the Taxes Acts don’t apply so that relevant claims can be made in conjunction with giving effect to the solution or mutual agreement (TIOPA 2010, section 127(5)).

18. Relief may be granted either by discharge, repayment of tax, tax credit or by amended assessment or otherwise (TIOPA 2010 section 124(3)). Following agreement between the CAs, the UK taxpayer will usually be invited to submit its claim or amended assessments online.

19. The normal rules for charging interest on tax paid late apply to tax suspended pending resolution of the MAP discussion. Similarly repayment interest will be paid on tax overpaid on amounts relieved in the UK. The UK will repay the appropriate proportion of any tax-based penalty charged on a UK adjustment that is reduced or withdrawn as a result of an agreement under MAP.

More detailed guidance can be found at INTM 423070.

Arbitration

Arbitration through bilateral treaties

20. It’s UK policy to include a provision for arbitration in its double tax treaties. The scope of arbitration provisions in the bilateral double tax treaties may vary from the OECD Model Convention. Part VI of the Multilateral Instrument (MLI) contains 9 articles that provide the option for signatories to commit to mandatory binding arbitration. The UK has committed to mandatory binding arbitration through the MLI.

Although the arbitration articles in the MLI set out a framework for the contracting states to apply mandatory binding arbitration, this framework allows a degree of flexibility in scope and conduct of arbitration.

More detailed guidance can be found at INTM 423080.

Arbitration through the European Union Arbitration Convention (EUAC)

21. Also available to residents of the EU, the EUAC in connection with the adjustment of profits of associated enterprises, transfer pricing and attribution of profits to permanent establishments profit attribution cases includes provisions for arbitration where the CAs are unable to reach an agreement which fully alleviates the double taxation.

More detailed guidance can be found at INTM 423080.

Other matters

Secondary adjustments

22. Secondary adjustments recognise that while the primary transfer pricing adjustment is to the taxable profits of the associated enterprises, it doesn’t rectify the situation where one enterprise actually benefits from funds that it wouldn’t have held had the transactions in question been conducted on arm’s length terms. A secondary adjustment seeks to rectify this.

The UK will consider the merits of requests to deduct interest relating to the deeming of a constructive loan by the other tax authority following a transfer pricing adjustment. The issue would, however, be subject to the arm’s length principle and would be considered in the light of any relevant provisions relating to payments of interest.

Where the other tax authority applies a secondary adjustment by deeming a distribution to have been made, the UK neither taxes the deemed distribution nor grants relief for tax suffered on the distribution in the other jurisdiction.

More detailed guidance can be found at INTM 423090.

Repatriation of funds

23. The purpose of such a repatriation is to restore the cash position of the associated enterprises to that which would have existed had arm’s length terms applied to the transactions giving rise to a transfer pricing adjustment; some jurisdictions actually encourage repatriation and have specific rules governing the procedure. It’s recommended that any repatriation of funds should only be made following agreement of the transfer pricing reallocation as part of the mutual agreement procedure.

More detailed guidance can be found at INTM 423090.

Advance pricing agreements

24. An advance pricing agreement (APA) is a written agreement that determines, for a fixed period, a method for resolving transfer pricing issues in advance of a return being made. In certain circumstances it may be appropriate to apply the transfer pricing methodology used in the APA to earlier years that may be under enquiry or subject to MAP discussion.

HMRC contacts

25. Requests for more information and for access to MAP should be directed to the designated HMRC CA. Details of their contact information can be found at INTM 423110.