Tax Certainty Day: MAP and APA statistics released!
The 15th of November 2024 was the sixth OECD Tax Certainty Day. The event has its roots in the OECD 2015 report on Action 14 of the original BEPS project: “Making dispute resolution mechanisms more effective” and it marks the annual publishing of key statistics on the progress that 140 tax authorities have made with Mutual Agreement Procedures (“MAP”) and for the first time, Advanced Pricing Agreements (“APA”) during the prior year.
What are MAPs and APAs?
Businesses that operate across more than one tax jurisdiction may end up suffering double taxation as a result of transfer pricing adjustments (e.g. disallowance of an expense, or additional imputed income) in one territory that is not offset by a corresponding adjustment in the other territory. In these cases, provided there is an appropriate tax treaty in place, the businesses in each territory can seek a MAP claim. A MAP claim requests competent authorities (typically a dedicated team within each tax authority) liaise with each other to determine a solution to resolve the double taxation. Remedies can include upholding the original transaction values and waiving the assessment in the first territory, granting a deduction or credit in the second territory, or a combination of both.
Even where a treaty is in place, it is not guaranteed that double taxation will be eliminated – access to MAP can be limited in some instances, and there is always a chance that the respective tax authorities will not agree to a resolution. This is particularly the case where there is no arbitration convention, or that the case will not qualify for arbitration.
An APA is an agreement between a taxpayer and one (unilateral) or more (multilateral) tax authorities with the intention of gaining certainty that the authority/ies agree the terms and conditions of the transaction meet the arm’s length standard. The intention then, is that the risk of an adjustment is mitigated by agreeing the terms in advance. In practice, as can be seen in the data below, it is not uncommon for several accounting periods to lapse while the process of agreeing the APA is underway.
Transfer pricing adjustments are not the only cause for potential double taxation, and not the only reason to enter MAP. As an example, juridical MAP cases may arise in cases where resolution is needed over the tax residence of an otherwise dual-resident entity.
What do the latest figures show?
The most recent figures are for calendar year 2023, and new statistics have been added this year, stratifying the MAP cases by duration open: 52% are under two years old, with 24% over four years old. The current average resolution time is 27.3 months (transfer pricing cases in isolation have an average of 32 months).
The OECD awards a variety of prizes for the territories that are seen to be making the most progress, and some notable winners include:
- The Netherlands managing an average of approximately 22 months to close transfer pricing MAP cases whilst simultaneously closing the highest proportion (52%) of inventory from the ‘large inventory’ group of territories (being those with more than 100 cases left to deal with at the end of the year);
- France placed in the top two spots for most cooperative jurisdiction as France-Canada came 1st and France-Sweden came 2nd for resolving the most transfer pricing cases. This no doubt helped France to pick up the ‘most improved’ award too. UK and Italy came in third. UK also had a strong showing in ‘other’ case resolutions; and
- Japan winning ‘APA Award for focus on dispute resolution’ for almost 85% of its case load being APAs. Singapore and Korea took second and third with ~66% and ~64%, respectively.
Perhaps most interestingly though for those businesses contemplating entering a MAP, or those that are in the 6,175 MAP cases that carried into 2024, is that 62% of cases concluded in this year’s statistics reached resolution to fully eliminate double taxation, 9% resulted in unilateral relief being granted (so that one country effectively gave up its taxing right), and only 2% resulted in a partial resolution.
Unfortunately, there were a number of cases with no agreement or an agreement to disagree (4%), an access denial (4%), or where the objection was not justified/ the authorities concluded no taxation not in accordance with the treaty (6% combined).
This is the first year that APA statistics have been collected and reported. The key messages here are that only approximately 1 in 4 APAs got closed, and the average time to agree an APA is now a shade over three years.
Why are the statistics important?
Broadly, double taxation (or the potential for double taxation) are seen as barriers to international trade and economic development. The OECD’s decision to publish the statistics is therefore seen as a positive move to provide businesses with greater transparency on key tax administration processes, and also as an incentive to tax administrations to ensure they dedicate adequate resources to these functions.
This year (being figures for calendar 2023) marks the first time in the reporting that there was a decrease in the overall inventory of ongoing MAP cases – facilitated by a new record in case closures, and a significant drop (16%) in new transfer pricing cases, with a slight rise in other MAP cases (up by just under 3%).
How does the UK compare?
Though the UK failed to win top spot in any of the award categories this year, there is a lot to be positive about. The UK has an extensive tax treaty network (128 treaties covering 132 jurisdictions) and a team of approximately 50 personnel within the competent authority function (though some are not exclusively dedicated to this role): there are therefore relatively few territories that businesses with a UK footprint may operate in that will not be covered under treaty, and there is a well-established team to take MAP and APA cases forwards.
The UK specific MAP statistics compare favourably to the OECD average, with a 20.6 month average time to complete a post-2015 MAP case, 363 cases closed in 2023, 61.5% of the 584 closing inventory being under two years old, and approximately one in five being four years or older. Only one MAP case from the pre-2016 period was resolved in 2023, having taken 89.56 months to close.
Businesses will naturally be keen to see average timescales come down, but just as important, if not more, is the nature of the resolution. 68% of all MAP cases closed in 2023 had full elimination of double taxation, 12% had unilateral relief granted – reflecting HMRC’s pragmatism to support businesses when it deems it appropriate – and a further 3% were resolved domestically.
The news is not quite so rosy in respect of APAs though. The reported data is to March 2023 rather than the calendar year, but shows the pending inventory increase by 20 cases to 159, and an average time to grant an agreement of 45.5 months (9 months more than the OECD average).
Moreover, serious question marks linger over the value HMRC places in APAs, and therefore the comfort that businesses can take from an APA to which covers a UK party, following the Refinitiv judicial review case heard at the Upper Tribunal in October 2023.[1] That case asked the narrow question “…whether a Diverted Profits Tax noticed issued to claimants… was inconsistent with an earlier Advance Pricing Agreement the claimants had entered into for Transfer Pricing purposes…”.
The claim was unsuccessful and the case dismissed but was viewed by transfer pricing professionals as something of a landmark, whilst simultaneously expecting that there would be much more to follow given the amounts at stake. Key lessons to take from that case (so far) include:
- It is best to renew an APA when possible, and not to rely on an ‘implied’ agreement for years subsequent to a formal agreement;
- The subject of an APA may be a transaction that is not, at least in the eyes of the tax authority, encompassing all of the arrangements. Having an APA does not therefore preclude further tax authority challenge; and
- A diverted profits tax (“DPT”) charge can arise in respect of a transaction that is covered under a live APA.
This case presents an interesting mix of APAs, DPT and current HMRC thinking, and is particularly relevant as the HMRC arguments put forward in the case appear to be at odds with the tax reforms currently being considered by the new Labour government.
The Corporate Tax Roadmap[2] announced in October 2024 alongside the Autumn Budget proposed consultations to look into revising transfer pricing rules and diverted profits tax (the latter is not currently a tax covered under the UK’s various treaties, but may be brought within the scope of corporate tax in the future).
The opening paragraph of the Roadmap is:
“Economic stability is central to delivering on the government’s objectives for sustained UK economic growth. It is important that we create a stable and predictable environment within which businesses – and those who invest in them – can make long-term investment decisions with confidence.”
This sentiment seems wholly aligned with the purpose of APAs and MAP, so hopefully we will see fewer cases of enquiries that appear to conflict with a APA (historical or otherwise), continued investment into the programmes and the UK featuring more prominently in the OECD tax certainty awards next year.
More details can be found by following the links on the OECD’s TCD page: OECD Tax Certainty Day 2024 | OECD.
If you are contemplating your transfer pricing, considering an APA, or facing an enquiry and would like support, please do get in touch with us.
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Claritas is one of the UK’s leading, full-service tax advisory and compliance practices. By combining our extensive practice and industry experience, we’re able to ensure you receive the very best tax and transfer pricing advice, whether that be in helping you establish new policies, supporting you with compliance, or reviewing your existing policies and procedures to ensure they are still fit for purpose.
[1] The_King__oao__Refinitiv_Limited_and_others_v_HMRC_final_decision_for_issue_to_parties_and_publication_.pdf
