B4.183 Transfer pricing and mutual agreement procedure
The discussion on APAs in B4.181–B4.182 shows one way in which taxpayers can seek to avoid double taxation prospectively. There are, however, occasions on which a multinational group does suffer double taxation, whether economic (taxation by two authorities of the same profits in the hands of two different companies) or juridical (taxation of profits accruing to a single company by two tax authorities).
This double taxation can usually be eliminated by means of the competent authority provisions in various double taxation agreements. This is known as the mutual agreement procedure (MAP)1. The vast majority of UK tax treaties contain a MAP provision based on the provisions of Article 25 of the Model Convention2 which states that:
'… where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of either Contracting State.'
Some older tax treaties require that the tax payer approaches the competent authority in their country of residence. The competent authorities of each affected territory will then usually try to reach a mutual agreement so that the double taxation is eliminated.
Any transfer pricing adjustments by one taxing authority could well lead to effective double taxation and so MAP may be appropriate. Consider the case of Company A, in the UK, which sells