Transfer pricing compliance in the UAE has become a matter of utmost importance for multi-national enterprises (MNEs) since the introduction of corporate tax. Transfer pricing involves setting the prices of products, services, and intellectual property (IP) at arm’s length when they are transferred between the divisions of an MNE located in different tax jurisdictions.
It means the MNEs need to treat the transactions between their associated enterprises the same way they would between unrelated companies in comparable circumstances. Transfer pricing determines how much tax an MNE need to pay in different tax jurisdictions. It can also create disputes with tax authorities over the allocation of profits & losses. The Mutual Agreement Procedure (MAP) is one possible solution with which MNEs can avoid or resolve transfer pricing disputes.
In this blog, we will enrich your transfer pricing knowledge by shedding more light on MAPs. However, it is advisable to consult with transfer pricing consultants in Dubai before making any transfer pricing decision. Read ahead for more insights on the provision of MAP:
What are MAPs in transfer pricing?
MAP is a well-established procedure used by tax administrations to resolve transfer pricing disputes arising from double taxation or inconsistent application of tax treaties. MEPs can be used to eliminate double taxation that could arise from a transfer pricing adjustment. The issue of double taxation in transfer pricing arises when an MNE is taxed in two or more tax jurisdictions on the same income.
On the other hand, inconsistent application of tax treaties occurs when different interpretations or implementations of the same treaty provisions lead to conflicting tax outcomes. MAPs allow two or more tax authorities to negotiate and come up with a resolution for such transfer pricing disputes. Transfer pricing advisers in Dubai can help you with more information on MAPs.
Areas where MAPs are commonly used
Article 25 of the OECD Model Tax Convention states the three areas where the use of MAP is common. They are:
- A taxpayer who is resident in one of the tax jurisdictions contends that he or she is not taxed as per the provisions of the treaty
- The tax authorities on their own initiative resolve questions of interpretation or application of the treaty
- Double taxation cases that are not provided for in the substantive articles of the treaty
What are the Typical Cases of MAPs?
The commonly seen cases where an MAP is involved can be divided into cases initiated by taxpayers, CAs and other double tax cases. The given below are examples for each of the three cases:
- Taxpayer-initiated cases: Transfer pricing disputes; Article 7 allocation of profit disputes; Existence of PE; Dual residence
- CA initiated cases: Common interpretation of treaty term
- Other double tax cases: Third country resident with PE in both States
What are the benefits of MAP in transfer pricing?
The use of MAPs offers multiple benefits to both MNEs and tax authorities that face transfer pricing disputes. The following are some of the benefits of using MAPs:
- Faster and cost-effective way of resolving disputes
- Eliminates litigation, which can be costly, time-consuming and uncertain
- The use of MAP can help MNEs maintain their relationship with tax authorities
- MAPs improve consistency and certainty of the application of tax treaties
What happens when no resolution is reached?
If tax authorities fail to reach an agreement in MAP cases within two years of its initiation, such cases can be resolved through arbitration. Article 25 of the OECD Model Tax Convention provides that the arbitration can be initiated at the request of the person who presented the case to resolve the unresolved cases.
This extension of the mutual agreement procedure ensures that where the competent authorities cannot reach an agreement on one or more issues that prevent the resolution of a case, a resolution of the case will still be possible by submitting those issues to arbitration.
Hire the Best Transfer Pricing Advisers in Dubai, UAE
MAPs can be an effective tool when it comes to transfer pricing disputes without opting for costly litigations. MAPs are used by both tax authorities and taxpayers depending on the nature of the case. However, MNEs may need professional advice to resolve transfer pricing disputes effectively. Transfer pricing advisers in Dubai such as Tax Gian can come in handy when it comes to MAPs.
Tax Gian, a brand of Jitendra Tax Consultants (JTC), has a team of highly qualified tax experts in Dubai who can advise you on any corporate tax or transfer pricing issues. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. We can help you navigate the complex provisions of transfer pricing. Call us today to avail yourself of comprehensive corporate tax advisory services in Dubai, UAE.