The MAP or how to avoid double taxation?

by Marta Woźnik

3 December 2018 

Transfer pricing is one of the most frequently inspected areas in enterprises that belong to international groups. Tax authorities have recently been given new tools (CIT-TP, CbCR) which allow them to efficiently collect information about associated enterprises and their transactions, which in turn facilitates the selection of entities to be inspected. An increasing number of inspections and their growing effectiveness trigger a more and more frequent risk of double taxation of the same income in two tax jurisdictions. The Mutual Agreement Procedure may be a solution to that.

The threat of double taxation

In economic terms, a tax may be imposed twice on the same income or assets of different entities in different countries when tax authorities assess higher taxable revenues or lower tax-deductible costs during a transfer pricing inspection. An official refusal to recognise transfer prices set between associated enterprises leads to the so-called primary adjustment which increases the taxable revenue of the entity whose transfer prices have been adjusted. In such a case, the other party to the adjusted transaction should adjust prices in its country to decrease its taxable revenue. However, such adjustments are not made automatically and, therefore, income is taxed twice.

Ways to eliminate double taxation

In the international context, there are different solutions to eliminate double taxation. There is the Mutual Agreement Procedure (MAP) under tax treaties and the Arbitration Convention available for EU Member States. The MAP is meant to eliminate double taxation in transactions between entities established in different countries. It involves negotiations between tax administrations of the transacting parties to agree the arm's length terms and conditions of the transactions which are acceptable to both parties.

The MAP may be requested by anyone who believes that the arm's length principle has not been followed and thus his income or assets are at risk of being taxed twice. The taxable person may request the MAP regardless of the remedies available under national law. All tax treaties to which Poland is a party provide for the MAP.

How does it work

The MAP and the formal requirements are described in the Code of conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises. The principles laid down in the Code are reflected in Article 25 of the Regulation of the Minister of Finance dated 10 September 2009 on the method and procedure of determining income of legal persons by way of assessment as well as on the method and procedure for elimination of double taxation of legal persons in the case of adjustment of profits earned by associated enterprises, and in the corresponding regulation applicable to natural persons.
 
The taxable person may submit the relevant request within 3 years of receiving the post-inspection report or a tax assessment letter, which lead, or may lead, to double taxation. A request for MAP must meet certain formal requirements, i.e. it must:

• include the identification data of the local enterprise and the associated enterprises to be involved in the procedure;
• describe the facts and circumstances of the case, including details of the relations between the parties to the relevant transaction(s);
• specify the tax year concerned;
• include copies of documents evidencing the alleged double taxation (tax rulings, audit reports etc.);
• include details of tax proceedings or litigation initiated by entities involved in the MAP, together with any related court rulings;
• state the reasons for the request, including in particular explanations as to the application of the arm's length principle;
• include a statement on the readiness to immediately make all the documents available to the authorities and to provide all the relevant information.

The request should be accompanied by documents relevant to the case, such as transfer pricing documentation, financial statements, contracts and agreements concerning the transaction(s), benchmarking studies justifying the amount of fee, correspondence with foreign tax administrations concerning the tax assessment.

The request and the accompanying documents should be sent to the Ministry of Finance, in Polish and in English. The MAP is an informal procedure and it is free of charge. It allows meetings with the Ministry of Finance officials, both before and after the request, in order to discuss the facts and circumstances of the case in greater detail.

The duration of the procedure depends on the course of cooperation with foreign tax administrations, as well as on effective support of the taxpayer and his delivery of additional information in the course of the procedure. Pursuant to the Arbitration Convention, authorities have 2 years to reach an agreement. Tax treaties do not provide for the deadline to reach an agreement.

The outcome of the completed MAP forms the basis for initiating proceedings to determine the taxpeyer's profit or loss. Once the agreement is reached, it is final and non-appealable.

Transposition of the new laws into the Polish legal system

The MAP is currently the best method of eliminating double taxation. It is worth attention all the more so as the MAP is planned to be cut shorter under the Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union. The provisions of the directive are going to be implemented in the Polish legal system in 2019. It is in the taxpayer's interest to avoid unilateral adjustments and, instead, to strive for bilateral adjustments to recover the tax paid by one of the parties to the transaction.