It can be frustrating to pay taxes on the same amount twice – first in one’s country of residence and then again in a foreign country that claims taxing jurisdiction over those amounts. It is even more challenging if a taxpayer has to engage in legal battles in one or both countries to avoid the double tax. Not being familiar with a jurisdiction’s legal principles, culture, language just adds to these complexities.
How about letting the tax authorities of these two countries negotiate relief from economic double taxation on the taxpayer’s behalf? The mutual agreement procedure (MAP) accomplishes this and Canada strongly encourages the use of the MAP to resolve economic double taxation issues.
The Canada Revenue Agency (CRA) published its annual MAP Program report (Report) for the 2018 calendar year on January 14, 2020. The Report showcases Canada’s performance in implementing the MAP as an effective tool for resolving economic double taxation issues. Canada’s commitment was recognized by the Organization for Economic Co-operation and Development (OECD’s) Forum on Tax Administration with the below accolades:
- Best average completion time for resolving transfer pricing cases (just under 25 months)
- Best cooperation, transfer pricing cases – Canada and United States (represents 54% of MAP cases)
- Biggest case inventory decrease (16%).
What is the MAP?
The MAP is a dispute resolution program offered by the CRA to assist Canadian taxpayers resolve economic double taxation issues (i.e. transfer pricing disputes). The provisions relating to the MAP are embedded in Canada’s tax treaties. As the name suggests, it is a process whereby the tax authorities of one country negotiate economic double taxation issues with a foreign country’s tax authorities on behalf of a taxpayer.
The agreements between the tax authorities are not binding on the taxpayer and do not constitute precedent for future disputes on the same or similar issues.
What is economic double taxation?
Economic double taxation refers to taxation of two different taxpayers with respect to the same amount. For example, Canco exports maple syrup to its US based related entity, USco, at $100 per unit. Canco includes $100 in its income and pays tax on this income in Canada. USco reports a corresponding expense and claims a deduction in the US. The Internal Revenue Service (IRS) audits the transfer pricing policy and reduces the cost of maple syrup to $75 per unit. This adjustment increases USco’s revenues by $25 in the US, but does not provide a corresponding reduction to Canco. Therefore, both Canco and USco pay tax on the transfer pricing adjustment amount.
Who can make a MAP request?
All persons (natural or legal) that are residents of one of the Contracting States under the provisions of the applicable tax treaty, and that have been subject to economic double taxation or taxation not in accordance with the treaty as a result of the actions of one or both the Contracting States, can make a MAP request.
Who are the parties to a MAP?
From the CRA’s perspective, the MAP is the responsibility of the Competent Authority Services Division (CASD), which is a part of the International and Large Business Directorate (ILBD), the government body dealing with international tax disputes.
Generally, the CASD is responsible for the review, analysis, and the negotiation process, however, taxpayers have the option of representing themselves or authorizing a representative for the MAP process.
The MAP Process
The steps throughout the MAP process are:
1. Assistance Request: A taxpayer must submit a formal request for assistance with the competent authority (CA) of the country in which the taxpayer is a resident. Taxpayers must consider the limitation period in the relevant tax treaty. Once filed, the taxpayer will receive an acknowledgment letter from the CA.
2. Review of Request: The CA will review the request and determine whether the request is justified under the tax treaty. The CA can either accept or reject the request.
- Acceptance of Request: The CA will issue a letter to the taxpayer and the foreign country’s CA agreeing to move forward with the request.
- Rejection of Request: The CA will issue a letter to the taxpayer and the foreign country’s CA explaining the reasons for rejecting the request.
3. Preparation of Position Paper: The CA will prepare and send a formal position paper to the foreign country’s CA. This outlines the position taken by the CA on the issues under dispute and any details on adjustments, if applicable.
4. Review by Foreign Country’s CA: The foreign country’s CA will review the position paper and may ask for additional information. Subsequently, the foreign CA will inform the CA of their findings.
5. Negotiation: If the foreign country’s CA does not agree with the position of the taxpayer’s resident country’s CA, they may consider negotiations, which generally resolve the tax dispute with the agreement of both countries’ CAs. The CAs must attempt to resolve the issues and reach an agreement within 24 months from the date of acknowledgement. If the 24 month period is exceeded, taxpayers can apply for mandatory arbitration (see Article 19 of the Multilateral Instrument, described in our previous Tax Alert). The arbitrator or a panel of arbitrators resolve the matter using ‘baseball arbitration’, i.e., the arbitrator(s) select either of the CAs’ position without modification.
6. Resolution: Once a resolution is reached, the taxpayer’s CA will inform the details of the resolution, which the taxpayer may or may not accept.
Benefits of MAP
The MAP is an informal procedure to resolve cross-border economic double taxation issues. Unlike a legal proceeding, MAP proceedings tend to be less expensive, less time consuming, and involve the taxpayer’s participation, albeit informal, in attempting to resolve the cross-border tax issues. Some of the benefits for taxpayers utilizing the MAP program are:
- Cost & Time: Generally the MAP program is less administratively burdensome on a taxpayer. Once a MAP request is accepted and reviewed, the CAs are responsible for the resolution process thereafter. Further, these services are provided at no cost to a taxpayer.
- Relief from Double Taxation: In Canada, the MAP is the only avenue for taxpayers to obtain relief from economic double taxation.
- Negotiation Experts: The CRA’s experience with negotiating with foreign tax authorities makes the resolution process more efficient and timely.
- Taxpayer’s Representation: Prior to the negotiation stage, a taxpayer is given an opportunity to present its views on economic double taxation, which ensures that its interests are well protected in the negotiations.
- Multiple Year Audit Resolution: In a MAP request, a taxpayer may also request for a resolution of same issues arising in subsequently filed taxation years that have not yet been audited, also known as the accelerated competent authority procedure (ACAP).
- Advanced Pricing Agreement (APA): The MAP may trigger the need to request an APA which provides certainty to the transfer pricing policies applied in cross-border transactions with related entities. The primary difference between the MAP and the APA is the stage at which each program is initiated by the taxpayer. The MAP tends to be a reactive solution for economic double taxation issues, whereas the APA is a proactive avenue for taxpayers to receive future protection.
Overall, as the number of international tax disputes increase with a globalized economy, changing tax treaties and new local tax rules and regulations, the MAP can be a reliable process for taxpayers to address and mitigate double tax.
Barriers to the MAP
Although the MAP can be an effective remedy for relief from economic double taxation, in some cases taxpayers may not be successful in obtaining the desired results. Some situations where complete relief may not be obtained are described below.
- Time Limitation: The year in dispute may be statute-barred or becomes so during negotiations. This responsibility falls on the taxpayer to ensure the years in dispute do not become statue-barred, in both Canada and the respective foreign country.
- Cooperation by Foreign Tax Authorities: The MAP process requires the cooperation by both tax authorities. However, the MAP may fail if the foreign tax authorities refuse to negotiate due to disagreements on interpretations of the treaty, domestic tax rules, or denial of Canadian-initiated adjustments.
- Residency Issues: Some taxpayers may face issues related to disagreements by the tax authorities on the application of the tie-breaker rules (applies to disputes involving taxpayers classified as dual residents for tax purposes.).
- Failure to Provide Information: If the taxpayer does not provide the requested information to the tax authorities, it may cause the entire MAP process to fail.
- Limited Government Resources: In some cases, due to the government’s limited resources (either in Canada or the foreign country), the MAP process may be delayed.
On January 1, 2018, the CRA had a total of 176 open MAP cases and accepted 97 new cases, of which 126 were closed during the year. These cases were closed for various reasons, however, about 80% of Canadian taxpayers were able to obtain full relief from economic double taxation.
On average, the CRA’s completion time for a negotiable MAP case takes 22.8 months (a little less than 2 years). This average has increased slightly from 21.36 months in 2017.
MAP is the way to go
Given Canada’s strong position on implementing the MAP as the primary means of resolving economic double taxation, taxpayers, specifically middle-market businesses, should consider the MAP as a cost and time effective solution.