North America leads global increase in MAP uptake

The US and Canada are at the forefront of a global increase in new mutual agreement procedures (MAPs) being initiated, OECD figures show.

There were 1,910 new MAPs in 2013, a 14% increase from 2012, when there were 1,678 new MAPs. North America accounted for most of this growth, with more than 200 new MAPs in Canada and the US.

“The reported increase in MAP cases is consistent with the sharp upward trend in MAP inventory seen over the last several years,” said Michael Danilack, a principal in PwC’s Washington National Tax Services’ transfer pricing practice.

“The growing MAP inventory reflects a rapidly increasing number of adjustments to companies’ reported tax positions by government tax enforcement functions around the globe, as well as a marked failure to keep pace by the competent authorities charge under tax treaties with eliminating the double taxation of company profits that typically arises from such adjustments,” he added.

The country with the largest proportional increase in MAPs was New Zealand, which saw its figures more than quadruple from three MAPs in 2012 to 14 in 2013.

In North America, the US saw a 71% increase from 236 to 403, while the number of new MAPs in Canada grew by 46% from 87 to 127.

“We see increasing usage of the MAP procedures by our clients,” said Brandon Siegal of McCarthy Tétrault in Canada. “This is consistent with the 30% growth in the past five years in the MAP programme according to the latest published statistics.”

Steven Wrappe, national leader of transfer pricing and dispute resolution (TPDR) team at KPMG in the US, said he was a little surprised at the data. “The increase in cases I am seeing is not nearly as pronounced as [the OECD] numbers would indicate,” he said.

He also said that it was worth noting that MAP filing numbers in recent years have been down from a peak of 326 new US MAP filings reached in 2009.

A continuing trend?

“MAP cases are seemingly more difficult to resolve because of increasingly aggressive positions staked out by government tax auditors in many jurisdictions, which in at least some cases deviate from previously accepted international tax principles,” said Danilack.

“This problem has been widely acknowledged throughout the international tax community and is the subject of a new task force recently initiated by the [OECD’s] Forum on Tax Administration (FTA),” he added.

“The majority of the cases are with the United States,” said Siegal. “This is driven by trade flows and strong cross-border relationships as many US multinationals have Canadian affiliates, meaning an increased flow of intangibles cross-border and more aggressive positions from the field.”

Despite work by the FTA to try to find a solution, it is likely that the number of new MAP cases will continue to rise globally.

“The combination of new countries enforcing transfer pricing and the potential additional disputes stemming from the BEPS country-by-country reporting could certainly produce a sustained global increase in MAP filings,” said Wrappe, who is also the deputy head of global TPDR at KPMG.

“It is difficult to imagine that this trend can continue for very long because effective use of MAP to eliminate double taxation is critical to ensuring that companies can make business decisions in a stable tax environment,” added Danilack. “But no clear solution is immediately apparent, and it may be that companies will have to deal with greater tax uncertainty and conflict for some years to come.”

The situation has not gone unnoticed by the Canadian and US governments, however, and there is cause for cautious optimism as steps have been taken to improve dispute resolution processes.

“In 2008 the Fifth Protocol to the Canada-US Income Tax Convention introduced mandatory arbitration,” said Siegal. “This has mitigated the many stranded MAP files that otherwise encouraged advisers and taxpayers to pursue an MAP where litigation or alternatives were otherwise being pursued.”

“As well as this, in 2009 the CRA added a fourth MAP-APA Section and additional economists to address growing caseloads and to respond to the legislative time constraints imposed by the arbitration provision,” he continued.

“As a result, the Canadian competent authority is now able to frequently resolve MAP files within its 24-month target. We have seen that the US has made similar administrative improvements since the Fifth Protocol.”

While the figures for North America showed a definite increase in MAP cases, many other countries saw the number of new MAPs falling. Sweden saw a 35% drop from 100 to 65, Austrian cases fell 33% to 41, and in Germany, although numbers were still high at 267, there was a 4% decrease from the previous year.

Meanwhile France, Japan, the UK and Switzerland saw increases of 19%, 16%, 14% and 9% respectively.

“While it is hard to say precisely what the North American numbers signify, the increase is most likely attributable to the rising number of audit adjustments directed against US companies doing business throughout the world, including in Mexico and Canada,” said Danilack.

“Some portion of the new filings may be due to continued transfer pricing disputes in India; also, some countries new to transfer pricing enforcement may have added to the new MAP filings,” said Wrappe.

Both advisers agreed that the increase in global MAP uptake represents a worrying underlying trend for taxpayers.

“The ability to file for MAP assistance is an important benefit conveyed by treaty, but the need to file indicates that a taxpayer is exposed to double taxation,” said Wrappe.