Withholding tax disputes: could MAP offer a route to relief?
Tax controversy is increasing across Europe. Broader reporting obligations, greater cross-border exchange of information and more sophisticated, data-driven audits are enabling tax authorities to identify and pursue cross-border issues more quickly.
Multinational groups are familiar with transfer pricing audits and the risk of adjustments to cross-border transactions. Increasingly, however, foreign tax authorities are also imposing withholding tax assessments during those audits, sometimes alongside a transfer pricing adjustment.
These assessments often stem from a different characterisation of a payment or a different interpretation of the applicable tax treaty. Examples include disputes concerning:
- alleged embedded royalties in product or service payments,
- beneficial ownership discussions,
- cross-border interest payments,
- Withholding tax imposed on transfer pricing adjustments and
Other differences in the treaty characterisation of payments.
The result may be double taxation: the same income or profit is taxed in two (or more) jurisdictions through a combination of a transfer pricing adjustment and a withholding tax assessment.
MAP may extend beyond transfer pricing adjustments
A Mutual Agreement Procedure (MAP) under an applicable tax treaty is commonly used to address double taxation resulting from transfer pricing adjustments. Depending on the wording of the treaty and the facts of the case, MAP may also be available where a withholding tax assessment leads to taxation that is not in accordance with the treaty.
In such a case, the taxpayer can ask the competent authorities of the jurisdictions concerned to examine the treaty issue and seek an agreed resolution. This can be particularly relevant where domestic relief alone would not remove the double taxation.
MAP and domestic remedies
Domestic litigation may be appropriate in some withholding tax disputes, but it can be lengthy and uncertain, particularly where the central issue is the interpretation or application of a tax treaty rather than domestic law.
MAP is not necessarily a substitute for domestic proceedings. Depending on the jurisdictions involved, the two routes may be available in parallel or may interact. It is therefore important to consider the overall dispute strategy at an early stage, including the need to preserve domestic appeal rights.
Timing matters
MAP filing deadlines and procedural requirements differ between treaties and jurisdictions, with a three-year filing period commonly applying under many treaties. The relevant time limit may start before a domestic dispute is finally determined. Taxpayers should therefore assess MAP eligibility promptly when an assessment or other relevant measure is notified, confirm the formal filing and documentation requirements in each jurisdiction and ensure that the submission is sufficiently complete to avoid delay or rejection. Depending on the case and local practice, a pre-filing meeting and a well-supported position paper may also help frame the issues effectively.
How we can help
When a withholding tax assessment arises, businesses should assess whether the taxation is consistent with the applicable treaty and consider the available remedies before committing to a single route.
We assist multinational clients with withholding tax and related transfer pricing disputes, MAP cases. By combining tax controversy, transfer pricing and international tax expertise across the jurisdictions concerned, we help clients assess treaty protection, preserve procedural rights and determine the most appropriate route to relief. Our local teams understand the procedural requirements and practices in each jurisdiction and can support pre-filing discussions, the preparation of position papers and coordination of a consistent strategy across countries.
If your organisation is facing a withholding tax assessment, transfer pricing adjustment or treaty interpretation issue, our Tax Controversy team would be pleased to discuss whether MAP, domestic remedies or a combination of both may provide the most effective strategy.
