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HMRC internal manual

International Manual

Transfer Pricing: methodologies: Mutual Agreement Procedure: Advice on responding to MAP requests

During a transfer pricing enquiry, any request to initiate MAP should not delay the progress and settlement of the enquiry. Nor need case teams be concerned about any assertion made by the taxpayer that the adjustment will be rejected by the Competent Authority. It is important that case teams consider all the relevant facts in arriving at the arm’s length price, applying the arm’s length principle as set out in TIOPA 2010.

From this it can be seen that it is imperative that an enquiry is expertly conducted, establishes the full facts and comes to a carefully judged conclusion as to how the arm’s length principle applies so that any adjustment can be defended by the UK Competent Authority. If not, the enquiry adjustment could be reduced or eliminated entirely through the MAP.

Four typical things to watch out for are:

  • Do not agree an adjustment on the condition that the taxpayer will not seek Competent Authority assistance. To do so would deny the taxpayer their rights under the relevant treaty. The correct answer to any such approach is to remind the customer that they have the right to seek Competent Authority assistance and encourage them to do so. It is up to the taxpayer to decide whether or not they pursue a resolution under MAP.
  • Do not agree to the bundling or rolling up of many years’ worth of adjustments into one year and to taxing them as one single adjustment in that year. This is a common offer from taxpayers, possibly because it will reduce any interest charges arising where adjustments are made to earlier years’ assessments. It is very difficult to defend such an adjustment to an overseas Competent Authority because it doesn’t sit very easily with the arm’s length principle. Also, such an approach is unlikely to be LSS compliant if it forgoes interest that would otherwise be legally due. Nor should a smaller adjustment plus interest be accepted so as to give the same amount of money as if there had been a larger adjustment with no interest.
  • Do not accept an adjustment that is dependent on a successful outcome of MAP. Typically the taxpayer offers to agree to an adjustment subject to getting relief through the Competent Authority process. This offer must never be accepted. Case teams should point out that the taxpayer cannot be given a guarantee that the MAP will secure an outcome which eliminates double taxation: any UK adjustment should be in accordance with the arm’s length principle and will be inherently defensible by the UK Competent Authority. In practice, any resistance here should be referred to BAI, Transfer Pricing Team to be dealt with by a Competent Authority.
  • Do not accept entries in accounts or computations that purport to reduce UK profits by giving effect to transfer pricing settlements concluded by other fiscal authorities. The only basis for getting relief for these amounts is through the Competent Authority process not by means of a DIY corresponding adjustment. If taxpayers wish to seek relief they should be advised to present their case to the competent authorities at BAI, Transfer Pricing Team.