Tax controversy update vol. 6 ‐ Thoughts on the “Mutual Agreement Procedures (MAP) Report for 2020”

The EY Controversy Team not only supports tax examinations, but also provides support services related to requests for reviews, tax litigation matters, and MAPs. For this issue, we will refer to the latest data released by the NTA to share our views on MAPs often used as a means of eliminating international double taxation resulting from transfer pricing assessments, as well as on MAPS related to securing advance pricing agreements (APAs) which increase the predictability of taxpayers.

In October of this year, the NTA published its “Mutual Agreement Procedures (MAP) Report for 2020.” The following appendix from the report displays the fluctuations in the number of MAPs.

Based on the appendix above, the number of MAPs being initiated is on a downward trend over the last few years. While the effects of COVID-19 are considered to be the primary factor, the number of cases initiated decreased from 219 in 2018 to 185 in 2020, a 16% decrease. The number of cases resolved decreased in a similar manner from 187 to 155, a 20% decrease. It is a fair assumption that the number of cases resolved is more drastically affected by the pandemic due to MAPs with other countries needing to be conducted over the phone rather than face-to-face.
In addition, other parts of the report discuss the status of MAPs with non-OECD jurisdictions.

We can see that despite the effects of COVID-19, the number of MAP cases related specifically to APAs has stayed relatively strong.

The number of MAPs initiated was on the rise not only because of continued expansion of Japanese companies into Asian member countries, but also because the enforcement of transfer pricing measures in such countries was being bolstered even before the pandemic (business year 2018).

While cases with Western member countries are resolved and concluded relatively smoothly, cases with Asian member countries tend to be more difficult.

• The average processing duration among all cases is 29.4 months, with the average processing duration for Asian member countries being 32.9 months. This is likely due to the counterpart countries having a lack of personnel and experience handling such cases, as well as an overall firmer stance when it comes to negotiations.
  
  

As a result, the number of cases initiated in business year 2020 was 41, which accounted for only 22% of the total 185 cases. However, the number of unresolved cases reached 256, which accounted for 45% of the total 572 unresolved cases.
In regard to non-OECD jurisdictions, it is likely the following inferences can be made from the statistics provided.

① For transactions with countries with functional MAPs and APAs, APAs accompanied by MAPs should be leveraged. If retroactive application of an APA is permitted, it should be applied to prior business years.

② For resolving transfer pricing assessments for transactions in countries with a short track record of MAPs, it is necessary to consider utilizing remediation procedures pursuant to domestic laws in addition to MAPs.

➂ Many non-OECD jurisdictions do not have sufficiently functional remediation procedures for post-transfer pricing assessment matters, and any resulting tax liabilities tend to be difficult to resolve. As such, it is necessary to reduce risks in advance by appropriately managing the profits and losses of foreign-related parties based on transfer pricing policies in place.