Introduction
It is no secret that in recent times the Federal Inland Revenue Service (FIRS) has become more aggressive in the audit of multinational enterprises (MNEs). From the oil and gas sector to the telecommunications industry, the tax authorities have embarked on more transfer pricing (TP) audits now than ever before to fulfil its mandate to generate more tax revenue for the government. With the rise in TP audits, it more likely than not that most audits would lead to an adjustment which could result in double taxation. To avoid this, MNE Groups must put in place procedures to encourage the conduct of matching adjustments by the tax authorities in the second jurisdiction.
To illustrate the application of the above remedy, consider the example of a parent company (PC) in Country A which previously transacted with its related entity (SC) in Country B. During a TP audit, the tax authorities in Country A reviewed the intercompany pricing arrangement and, after applying the arm's length principle to the transaction between PC and SC, increased the price at which PC sold goods to SC, thereby increasing PC's taxable profit. This increase gave rise to double taxation as there was no corresponding decrease in the taxable profit of SC to account for the increase in the price of goods it bought from PC. In order to resolve this, PC decided to initiate a mutual agreement procedure (MAP) between the tax authorities in Country A and B. You might be wondering how feasible this is. In this article, we would introduce you to the concept of MAP and how taxpayers and tax authorities can utilize it to avoid double taxation.
MAP and Transfer Pricing
Before we proceed to discuss the ways that taxpayers can use MAP to their advantage, let's first understand the concept of a MAP. According to the Organisation of Economic Co-operation and Development (OECD) Guidelines, MAP can be defined as a well-established means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. The procedure is usually set out in Double Tax Treaties (DTTs) and aids Contracting States resolve disputes resulting from judicial and economic double taxation.1 Let's remember that the purpose of a DTT is to eliminate double taxation.
When a TP adjustment occurs in one Contracting State, without a corresponding adjustment in the other State, it leads to economic double taxation. To prevent this, a corresponding adjustment should be made by the other contracting state(s) according to Paragraph 2 of Article 9 of the OECD Model Convention. This adjustment is carried out through a MAP.
The MAP serves as a tool to stir up discussions between two competent authorities in Contracting States about transfer pricing and the reasonableness of any adjustments carried out by one of the authorities. Corresponding adjustments could either be through the recalculation of profit subject to tax by using the revised price or by maintaining the initial profit and providing relief on the tax paid by the associated enterprise, depending on the state's preference. A corresponding adjustment is not mandatory and cannot be forced on a contracting state. Therefore, care should be taken to ensure that the initial assessment/adjustment is reasonable and in line with the arm's length principle.
Globally, competent authorities have seen a steady increase in MAPs from 1,777 cases before 1 January 2016 to 4,644 cases after 2016.2 Out of the 1,777 MAP cases before 1 January 2016, 912 relate to MAP transfer pricing cases prior to the implementation of the Action 14 minimum standard by jurisdictions in the Inclusive Framework. The number of transfer pricing cases increased by 2,555 after 1 January 2016, when these jurisdictions committed to the implementation of the Action 14 minimum standard.
Although there has been an increase in MAP requests initiated by taxpayers around the globe, there has also been a corresponding increase in the resolution of MAP cases. This is an indication that significant progress is being made in dispute resolution between jurisdictions. One of two things could result from a dispute resolution process – either the initial adjustment made is withdrawn or a correlative relief is carried out by the other jurisdiction. There are also instances, where part of the adjustment is withdrawn, and part relief is provided.
Procedures for MAP in Nigeria
The FIRS published a guideline on MAP in February 2019, to provide guidance on how taxpayers can access MAP to resolve disputes between Nigeria and its DTT partners. To qualify for a MAP in Nigeria, the taxpayer must either be a resident in the country or one who is not resident in Nigeria but subject to the provision of the relevant tax treaty.
The first step for a taxpayer, before a MAP request is made, is a pre-filing consultation with the FIRS. This is usually in form of a meeting or through writing. A MAP request is usually initiated by the taxpayer following the receipt of an assessment notice. This request should be made in writing and addressed to the relevant officer at the address listed in the Guidelines. It should contain information such as:
- The name, address, and Taxpayer Identification Number (TIN) of the taxpayer.
- The name of the Treaty Partner's tax authority.
- The Tax Treaty Article(s) which the taxpayer asserts is not being correctly applied, and the taxpayer's interpretation of the application of the Article.
- If the MAP is a request for corresponding adjustment, the name, address and, the TIN of the related party involved in the other Treaty country.
- The relationship between the Nigerian taxpayer and the related Treaty Partner's taxpayers involved.
- The taxation years or periods involved, the amount of income and tax in dispute together with copies of the notices of assessment.
- A summary of the facts and an analysis of the issues for which competent authorities' assistance is requested, including any specific issues raised by the Treaty Partner's tax authority or relevant tax authority in Nigeria affecting the Nigerian taxpayer and the related amounts.
- A statement as to whether the request for competent authorities' assistance involves issues that are currently or were previously considered as part of an Advance Pricing Agreement (APA) in Nigeria or in similar proceedings in the Treaty Partner's country.
- A statement indicating whether the taxpayer has filed a notice of objection or a notice of appeal
- If the request is made by an authorised representative and a consent has not already been provided for the person to act as authorised representative, a signed statement that the representative is authorised to act for the taxpayer in making the request.
- A copy of any previous settlement or agreement reached with the Treaty Partner's tax authority which may affect the MAP process
- Any other relevant facts.
Once the request is submitted, it would be reviewed and evaluated by the Nigerian competent authorities. Once accepted, the Nigerian competent authorities will notify the competent authority of the Treaty Partner and negotiation commences once the two competent authorities have accepted the case for MAP consideration. For a detailed guide on MAP application, please refer to the Guidelines on MAP in Nigeria issued by the FIRS.
MAP and countries who do not have DTT
MAPs are incorporated into DTTs and serve as a basis for resolving tax disputes. However, one might wonder if it is possible to take advantage of MAP in the absence of DTTs. Although we have established the benefits of the MAP, it is important to note that a MAP case could be a tasking procedure that may linger before its finally closed. In some instances, even with a DTT in place, the Contracting States would have to resort to arbitration in order to close the case.
Notwithstanding the above, it is not impossible for two jurisdictions, that do not have DTTs, to mutually agree on how to resolve transfer pricing cases in order to avoid double taxation. Taxpayers can therefore keep an open mind and engage with their tax authorities where they have transactions with related entities in jurisdictions that have no DTTs.
Conclusion
Asides being an efficient and effective means of resolving tax disputes, MAP is very cost effective. It is a much cheaper option than litigation or an appeal process. Taxpayers who are subject to TP audits and have received an assessment should explore the option of a MAP where the affected transactions were conducted with a jurisdiction with which Nigeria has a DTT to mitigate the risk of economic double taxation.
Footnotes
1. Double taxation may result from the inclusion of the same income in the tax base of more than one tax administration (economic double taxation) or income in the hand of the same juridical entity (juridical double taxation, for permanent establishments). - OECD Guidelines
2. https://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics.htm
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.