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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer Pricing: methodologies: Mutual Agreement Procedure: SP1/11: introduction

Statement of Practice 1/11: introduction

The text of HMRC Statement of Practice 1/11, dealing with the Mutual Agreement Procedure, is reproduced below and on the following pages.

This statement describes the UK’s practice in relation to methods for reducing or preventing double taxation and supersedes Tax Bulletins 25 and 31 which previously provided guidance in this area.

The statement considers the use of mutual agreement procedure (MAP) under the relevant UK Double Taxation Convention and/or the EU Arbitration Convention and also describes the UK’s approach to the use of arbitration where MAP is unsuccessful. It has particular relevance to transfer pricing and multinational enterprises.

OECD Model Convention and UK Tax Treaties

Chapter IV of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The Guidelines) contains details of administrative approaches to avoiding and resolving transfer pricing disputes. One approach to which it refers is that provided for under MAP, which is described and authorised by Article 25 of the OECD Model Convention (the OECD Convention) and is discussed in the Commentary on Article 25 of the OECD Convention. Article 25(1) has broad application and provides for MAP where a taxpayer considers he has been or will be taxed other than in accordance with the Convention, for example in a way contrary to Article 24, the Non-Discrimination Article. Article 25(3) may be used to resolve any difficulties or doubts arising as to the interpretation of the OECD Convention and for the elimination of double taxation in cases not provided for by the Convention. More specifically, to eliminate double taxation in transfer pricing cases, tax administrations may consider requests for corresponding adjustments as described in paragraph 2 Article 9 of the OECD Convention. That paragraph recommends that the competent authorities of treaty partner states consult each other if necessary to determine corresponding adjustments. This demonstrates that the MAP of Article 25 of the OECD Convention may be used to consider corresponding adjustment requests. In 2010 the OECD introduced a new version of Article 7 to the OECD Convention. This Article deals with the attribution of profits to permanent establishments and the new version includes an avenue for entering MAP similar to that in Article 9 of the OECD Convention.

The UK has tax treaties with over 100 countries. These treaties seek to protect taxpayers from double taxation, provide for the appropriate allocation of taxing rights in relation to profits from cross-border economic activities, and prevent fiscal discrimination by their signatories. The UK seeks to encourage and maintain an international consensus on international tax treatment of cross-border activity, and plays an important role in this field through its membership of the OECD. Accordingly, where the other signatory is agreeable the UK frequently adopts the terms of the OECD Convention into its own tax treaties and is guided in its interpretation of those tax treaties by the Commentary on the OECD Convention (The Commentary).

In this respect MAP performs an important function, establishing a process by which the UK competent authority and the competent authorities of tax treaty partners to our conventions can consult each other to resolve matters relating to the application of our tax treaties. As part of its work on improving the resolution of cross-border tax disputes the OECD has published a Manual on Effective Mutual Agreement Procedures (MEMAP) which highlights the best practices of the competent authorities of OECD Member countries in relation to MAP.

European Arbitration Convention

The European Union ”Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises”, 90/463/EEC (the Arbitration Convention), may provide an alternative to the MAP procedure under the UK’s tax treaties where residents of EU member states are potentially subject to double taxation. The UK and other member states are signatories to the Arbitration Convention which came into force on 1 January 1995. MAP may be invoked under one of the UK’s tax treaties, under the Arbitration Convention or under both simultaneously.