Global Tax Alert: OECD Publishes New Manual on Multilateral MAPs and APAs

Prevention and resolution of transfer pricing and permanent establishment profit allocation issues has had a good track record of being solved on a bilateral basis. But as global supply chains have grown more complex, a need for resolution on a multilateral basis has become increasingly important. With that in mind, on 1 February 2023, the Organisation for Economic Co-Operation and Development (OECD) published a new Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements (MoMA). The MoMA was developed by the OECD’s Forum on Tax Administration’s Mutual Agreement Procedure (MAP) Forum under the Large Business International Programme.

The MoMA contains a basis for handling multilateral MAP and advance pricing agreement (APA) cases, procedural aspects to consider in such cases, examples of multilateral cases and the ideal timeline for a typical multilateral case.

Basis for Handling Multilateral MAPs and APAs

The MoMA briefly addresses the legal basis for multilateral APAs. Based on the in-depth comments contained in the MoMA, however, it appears that there is no consensus at the OECD level on the exact legal basis for multilateral MAPs. A jurisdictional difference in potential legal basis could cause trouble for taxpayers in practice, as an application requires extensive knowledge of the administrative guidance of the States involved and may result in the refusal of the multilateral MAP request by one or more States involved in the dispute.

Examples of Multilateral Cases

Due to the nature of transfer pricing adjustments and changes in profit allocation (in case of permanent establishments), disputes on these topics are likely to give rise to multilateral disputes. This is also apparent from the examples included by the OECD in the MoMA, which relate to:

• The supply chain of a vertically integrated company producing and selling certain products;
• A super-distributor hub operating in one jurisdiction in a certain region;
• Intragroup services performed by a company operating in the financial services industry;
• A financing transaction within a multinational group where the funds are used to finance the activities of a permanent establishment in a third country; and
• A company that has multiple permanent establishments in various jurisdictions that have dealings with each other.

Ideal Timeline

The ideal timeline, according to the MoMA, is to resolve multilateral MAP cases within 36 months, with the position papers of the States involved to be shared within the first 18 months of the initiation of the multilateral MAP procedure. A similar timeline is described for multilateral APA cases.

Key Takeaways

Where unilateral advance pricing agreements only provide certainty in one jurisdiction, taxpayers can obtain multi-jurisdictional certainty on their transfer pricing policy through a multilateral APA. The MoMA provides guidance to tax authorities on the conclusion of such multilateral APAs and may, due to this guidance, result in more willingness on the side of tax authorities to enter into multilateral APAs with taxpayers.

Where there is no advance (multilateral) certainty on the transfer pricing policy applied by multinational companies, the States in which these multinational companies operate may impose transfer pricing adjustments. In a complex supply chain, a transfer pricing adjustment in one State may trigger another State to also make a transfer pricing adjustment. In these situations, taxpayers may want to opt for a multilateral MAP in order to resolve the transfer pricing disputes without leaving room for double taxation in all States involved.

Although the MoMA provides guidance to tax authorities on the resolution of multilateral MAPs, the guidance is significantly less clear for multilateral APAs. States may take differing positions on what the correct legal basis is for a multilateral MAP request, requiring taxpayers to be aware of the administrative practice in all the States involved.