• Type: Publication series
  • Date: 3/17/2014

The Mutual Agreement Procedure – a tool to avoid transfer pricing double taxation 


Teodora Alecu

Director, Transfer Pricing

In the current economic climate, which continues to be challenging, group companies have tried to integrate most of their activities, resulting in a higher number and volume of intra-group transactions. Given this background, transfer pricing has come under intense scrutiny, with both taxpayers and the tax authorities focusing on double taxation.


Gratiela Bogaciu

Tax Consultant, Transfer Pricing


Transfer pricing adjustments made in relation to transactions carried out between group companies mostly result in taxation of the same income in more than one jurisdiction. This increases significantly the tax burden for the group, and in a competitive environment this can have a significant impact on its business.

To avoid these situations, conventions for the avoidance of double taxation include provisions on how double taxation should be settled, including several dispute resolution mechanisms, such as the Mutual Agreement Procedure (MAP) and the Arbitration Procedure. However the use and interpretation of these concepts by tax authorities can be complicated.


According to the OECD Transfer Pricing Guidelines, the MAP is ”a well-established means through which tax administrations consult to resolve disputes regarding the application of double tax conventions”. It mainly involves the taxpayer, which has suffered the consequences of double taxation as a result of a tax or transfer pricing adjustment, submitting a request to both tax administrations involved (the residence jurisdiction and the corresponding jurisdiction where the related party is situated). It is then up to the two tax administrations to come to an agreement on where tax should be levied and on the amount.


Even though the MAP looks quite straightforward in theory, in practice it can be a lengthy and complicated process in most EU countries. According to the OECD’s annual statistical report, the average time for the completion of MAP cases within the OECD member states was more than 25 months in 2012. In addition, a recent EU Joint Transfer Pricing Forum (EU JTPF) publication, included an inventory of the MAP cases under the Arbitration Convention initiated and completed in 2012 in the EU, as well as the average cycle time for cases completed. It showed that the average time needed to settle a MAP varies between 9 months (in Luxembourg) and 38 months (in Belgium). 


If during the MAP procedure the two tax administrations involved do not reach agreement, the Arbitration Procedure is initiated, with a subsequent delay in resolving the double taxation. Because of the time and, significant resources involved, multinationals tend to be reluctant to apply for such procedures in practice.


A survey conducted by Business Europe among ten of the Europe’s largest multinationals in relation to double taxation outside the Transfer Pricing area for the 2008-2012 period led to the conclusion that double taxation is perceived as an obstacle to cross border trade and investment. Domestic legislation in relation to allocation of common group costs, limitation of the deductibility of interest, foreign tax credits and permanent establishments has proved to be a source of double taxation, according to the same survey. In addition, the survey has shown that recent proposals published by the OECD in relation to transfer pricing, such as the Base Erosion and Profit Shifting (BEPS) project, are seen by businesses as potential sources of double taxation.


In the interests of the smooth functioning of business and the overall wellbeing of the global economy, there is a clear need for harmonization and the application of effective Dispute Resolution Mechanisms by all tax administrations.
Romania is also at the beginning of its learning curve when it comes to MAP and the Arbitration Procedure. According to the EU JTPF publication, only two MAP cases were initiated under the Arbitration Convention in 2012 and one case was initiated before 2012. Even though related legislation has been introduced into Romanian tax law, there is still little guidance on the steps to be undertaken for the application of these procedures.


The problem of double taxation and ways of settling it remain a matter of concern for multinationals which are seeking to develop and effectively use their available resources. There is an increasing expectation among the business community that tax authorities worldwide should improve the tax and transfer pricing framework.


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