Strategic considerations for tax controversy risk management and double taxation avoidance

In response to a November 2012 G20 leaders' meeting requesting action on tax base erosion, the OECD issued its February 2013 report, "Addressing Base Erosion and Profit Shifting."

In September 2013, the OECD and G20 countries adopted a concrete 15-point "Action Plan" to address base erosion and profit shifting (BEPS) as set forth in the OECD report, "Action Plan on Base Erosion and Profit Shifting." The Action Plan sought to establish international coherence of corporate income taxation, reinforce substance requirements in the existing international standards, improve both transparency and tax certainty, and implement swiftly the measures in the Action Plan. After the issuance of interim reports, in October 2015 the OECD issued final BEPS reports on the 15 points in the Action Plan.

As with any tax reform, significant uncertainty is bound to exist when new tax rules are implemented. In particular, while the OECD BEPS project seeks to align transfer pricing outcomes with value creation, reasonable people may differ on what activities create value and the relative value of such activities. Further, country-by-country (CbC) reporting introduces reporting requirements that may lend themselves to different interpretations of the arm's-length standard. Whilst we expect that the objective of transparency may be achieved in the post-BEPS world, the objective of greater tax certainty may prove more elusive.

Although there may be less tax certainty, mutual agreement procedures (MAP) pursuant to tax treaties will continue to be an important mechanism providing a relatively high level of certainty that double taxation of income will be avoided. As discussed in further detail below, as a result of increased transfer pricing enforcement, the OECD reports that among OECD countries for 2014 there were 2,266 new MAP cases (a 119% increase from 2006) and 5,423 MAP cases at the end of 2014 (a 131% increase from 2006). See www.oecd.org/ctp/dispute/map-statistics-2014.htm (accessed February 23, 2016).

For OECD countries where data was provided, the average completion time was approximately 24 months for cases resolved during 2014. These publicly available statistics may be understated, because each country does not seem to evaluate its backlog and the completion time using exactly the same methodology, even if it is based on OECD guidance. Whilst Action 14, "Making Dispute Resolution Mechanisms More Effective," is intended to make improvements in the MAP process, implementation of the BEPS Action Plan may place additional stress on a system that is already overtaxed.

Such a substantial tax reform, referred to as a "change in paradigm" by OECD Director for the Centre for Tax Policy and Administration Pascal Saint-Amans, is a departure from prior law, practice, and attitudes toward tax enforcement. Some countries are already introducing the CbC reporting requirement and implementation of other OECD recommendations to ensure that their countries' substantive and procedural rules are consistent with the newly developed OECD standards.

This may lead to an increase in the number of tax audits in some countries, more rigorous tax audits, and greater inclination to assert penalties. Of course, litigation will be available to contest this new approach to transfer pricing by tax administrations. However, MAP remains the only way to avoid the double taxation that may arise from this increased tax audit activity. Even the OECD has recognised that this is the only way to avoid the coming increasing pressure in the area of transfer pricing.

The BEPS action plan introduces two dedicated actions to try to balance the strengthening of other transfer pricing rules by the other actions. The first one, Action 14, identifies approaches to make MAP more effective. Countries participating in the BEPS project identified procedural improvements, including improving access to MAP, speed of resolution, and ensuring the real elimination of double taxation.

The second one, Action 15, is an innovative way to implement, as quickly and as effectively as possible, the new rules coming from the BEPS recommendations, including those connected to MAPs. The goal is to adapt bilateral treaties with a single multilateral document, signed by all participating countries. This will help avoid a multitude of bilateral discussions between treaty partners and work on several tax conventions. It will also afford participating countries reassurance that each treaty partner will apply the same rules with others in the same time frame.

To fully consider the impact of the OECD's Action Plan on future controversies, it is important to understand the current pre-BEPS state.

The OECD's public MAP statistics allow examination of the history of tax administrations' work in international tax areas, and specifically in transfer pricing. While these OECD figures do not indicate the proportion of MAP cases that involve transfer pricing adjustments, the prevailing view is that transfer pricing adjustments represent about 75% of the overall cases taken to MAP. For example, in the US, from 2010 through 2014, approximately 70% of new cases and inventory at year-end were transfer pricing adjustment cases.

The number of MAP cases, both new cases and cases pending at year end, has almost doubled in only seven years. In 2006, OECD countries reported 2,352 cases waiting for a MAP solution at the end of 2006, and by the end of 2014 (last public information provided by the OECD) there were 5,423 cases. (See www.oecd.org/ctp/dispute/map-statistics-2014.htm (accessed February 23, 2016)). Similarly, in 2006, OECD countries counted 1,036 new MAP requests filed during 2006; there were 2,266 during 2014. The increase in cases has been continuous even following the economic downturn, although it is possible that taxpayers facing economic downturn issues had the double headache of not being able to satisfy tax authorities' expectations of their profitability or lack thereof.

The increase in pending OECD country MAP cases at year end is easily explained: New cases are being initiated at a rate faster than existing cases are being completed by competent authorities. From 2012 through 2014, the highest number of OECD MAP cases resolved was 1,443 (in 2012) and the typical number of cases resolved was approximately 1,400 cases annually. In comparison, the average the number of new cases for the same period was 1,951.

The OECD statistics do not show a significant rise in the average cycle of time for completion of MAP cases. It was 23.79 months in the 2014 reporting period, compared to 22.10 months in the 2006 reporting period (27.30 as a maximum in 2010 and a minimum of 18.93 in 2007). Of course, these figures are averages and some cases take a much longer time than average to resolve. Cases that take longer to resolve may be attributed to some countries taking unprincipled technical positions, differences in procedural views, or the large amount of tax involved.

A careful look at OECD MAP statistics of some countries – Belgium, France, Germany, Italy, Japan, the Netherlands, Spain, UK, and US – shows that the percentage of cases closed or withdrawn without elimination of the double taxation (that is, cases resolved with some level of double tax) was very low over the last seven years. This is a good sign, as OECD countries clearly try their best efforts to avoid situations where taxpayers bear the double taxation coming from tax adjustments. However, figures provided by some countries indicate that they do not hesitate to close or withdraw files without total elimination of the double taxation. This can be seen as a trend for some countries, as figures are slightly increasing over the years, and so this clearly represents a threat in a post-BEPS context (see below).

With one of the larger inventories of MAP cases among OECD countries, the US publishes an annual comprehensive report of its MAP activities. The report contains statistics on cases handled by both the Internal Revenue Service (IRS) Advance Pricing and Mutual Agreement (APMA) programme and the Treaty Assistance and Interpretation Team (TAIT), and includes information on requests received, cases resolved, and pending cases. (See www.irs.gov/pub/irs-utl/2014%20USCA%20Statistics%20Report.pdf (accessed November 9, 2015).)

APMA handles transfer pricing cases, while TAIT handles other types of issues arising under the relevant tax treaty. The key trend the IRS CA statistics reveal is an almost 50% increase in the number of transfer pricing cases the IRS received in 2014 (286 cases received in 2014, compared to 192 received in 2013). (See "IRS Releases MAP Statistics for 2014 Showing Jump in Filings and Inventory," Bloomberg/BNA Transfer Pricing Report, April 16, 2015.)

Historically, the IRS achieved a high degree of success – success being defined as the avoidance of double taxation – in its transfer pricing cases that went through MAP, and 2014 was no different. In 2014, the number of closed cases that resulted in full relief of double tax was 94% (or 88%, measured by the dollar amount of the total adjustments at issue). APMA and TAIT resolved 185 cases in 2014; however, they received a combined total of 354 competent authority requests, which is consistent with the global trend of new cases coming in faster than pending cases can be resolved. If the number of competent authority cases the IRS receives continues to rise in the future, the IRS and other tax authorities will need to increase staffing levels significantly to keep pace with demand.

Reflective of increased examination efforts by the IRS, the percentage of transfer pricing cases received by the IRS relating to US-initiated adjustments increased in 2014 (30% in 2014 compared with 18% in 2013). The processing time for transfer pricing double tax cases was 21.4 months, slightly below the OECD average reported for 2014. Remarkably, US-initiated transfer pricing double tax cases decreased from 23.8 months in 2013 to 15.0 months in 2014, which likely reflects efforts by the IRS to quickly withdraw adjustments in poorly developed cases and cases that have a low probability of success on the merits.

Interestingly, during 2014, the processing time of US-initiated non-transfer pricing cases was only about 14.3 months in 2014, while foreign-initiated non-transfer pricing cases processing time was substantially greater at 30.2 months. The increased processing time in foreign-initiated cases appears to be substantially related to withholding tax cases in which competent authority negotiations continue to proceed slowly as a result of differences in treaty interpretation between the US and some treaty partners.

The IRS continues to emphasise the need for US taxpayers to pursue effective and practical remedies, including recourse to competent authority, before claiming a foreign tax credit. (See U.S. Treas. Reg. §1.901-2(e)(5); see also, Procter & Gamble Co. v. U.S., (S.D. Ohio, Case No. 1:08-cv-00608, defendant's motion for summary judgment granted 7/6/10).)

In France, another country with a significant MAP inventory, the number of new MAP requests has regularly increased since 2006, as the number was 93% higher in 2014 than in 2006. (See www.oecd.org/ctp/dispute/map-statistics-2014.htm (accessed February 23, 2016).) The number of cases at the end of the reporting period has also increased significantly, rising from 254 cases at the end of 2006 to 549 cases at the end of 2014.

However, the French figures require explanation. In 2013, France reorganised the tax authority to deal with APAs and MAPs. This reorganisation led to the merger of the previous APA team, imbedded in the Tax Audit Department of the French Tax Administration Headquarters, and the MAP team, part of the Tax Policy Department. The new team was actually created from scratch, meaning that it has been settled in new premises, new people have been hired and more effectiveness has been the main driver of the work. Because the new team effectively commenced its operation only at the end of 2013, the restructuring initially led to an increased backlog of MAP cases, but 2014 figures show France completing cases faster than new cases are coming in. For 2014, France experienced a decrease of 69 MAP cases at year end, while new MAP cases decreased by 15. Similar to the US, France's MAP programme is successful in avoiding double tax and very few cases are closed without complete relief (generally a few cases each year from 2006).

In Canada, the Competent Authority Services Division (CASD) of the Canada Revenue Agency (CRA) has responsibility for the MAP programme. While CRA sets an overall target of 24 months to resolve a case in MAP, it also makes it clear that many factors are beyond the CRA's control. These factors include the cooperation and timely receipt of information from the taxpayer, the complexity of the issue, the time the other competent authority requires to review and respond to a position paper, and the willingness of both competent authorities to adopt reasonable negotiating positions. These factors directly impact the timely processing of not just Canadian MAP cases, but all MAP cases. A large percentage of Canadian MAP cases are with the US and predominantly Canadian-initiated transfer pricing adjustments. Not coincidently, the Canadian goal of resolving a case within 24 months coincides with the mandatory arbitration provision in the Canada-US tax treaty.

Breakdowns in the relationships between competent authorities have been reported sometimes, despite the existence of a tax treaty between the two countries, with good political relationship and business engagements. The overall impact of such breakdown is delay in resolution of existing MAP cases, and piling up of new MAP cases (for example, over half of the pending US transfer pricing MAP cases are with India). Such stalemates cannot be resolved through any legal instrument; putting them back on track can often prove arduous. In such impasse situations, oral exchanges of opinions through a joint commission or a joint working group can bring operation of the mutual agreement procedure on track. The joint commission mechanism or joint working group can help the competent authorities of the two tax jurisdictions arrive at a common framework. Though the OECD commentary on Article 25 does not suggest going through diplomatic channels to resolve the stalemate, in the most difficult situations it can nonetheless be advisable.

As mentioned earlier, the BEPS works, the final recommendations, and the OECD public communication when releasing the final reports have created a very specific climate. The OECD rules have been strengthened, and new obligations are now weighing on taxpayers. On their side, tax administrations and tax auditors of some countries may consider that they have a new opportunity to be more rigorous and use more easily the news tools designed by the OECD.

Developing countries will probably increase their efforts on transfer pricing audits, following what can be seen as a signal coming from the OECD BEPS works. This will further increase the burden on MNEs and the results may be large adjustments.

With both developed and developing countries focused on transfer pricing, this means that a quantum leap can be anticipated on international tax adjustments increasing the possibility of double taxation and corresponding penalties.

The global increase in transfer pricing enforcement will require countries to expand their treaty networks lest their taxpayers get caught in the net of double tax. Despite the need for countries to increase their treaty networks, sometimes treaty ratifications became caught up in politics. For example, the US Senate has not ratified a tax treaty in over five years and currently has pending tax treaties and protocols with Chile, Hungary, Japan, Luxembourg, Poland, Spain, and Switzerland. In a statement to the US Senate Committee on Foreign Relations on October 29, 2015, Robert Stack, the US Treasury Deputy Assistant Secretary (International Tax Affairs) discussed the delay in the ratification of these pending treaties as follows:

It denies US businesses important protections against double taxation. It denies our law enforcement community the tools they need to fight tax evasion. It jeopardizes US leadership on issues of transparency. It causes other countries to question our reliability as a treaty partner and makes it harder to gain cooperation in other matters important to the US.

Stack stated that the Obama administration is committed to eliminating barriers to cross-border trade and investment, providing greater certainty to taxpayers regarding their potential liability for tax in foreign jurisdictions, greater ability to avoid double taxation, and toward eliminating discriminatory taxation in foreign jurisdictions. Tax treaties are the most effective means for achieving these objectives.

In a post-BEPS world with increased transparency and enforcement, there is a greater need for countries to broaden their treaty networks. In the absence of broad treaty networks, trade barriers are likely to impact economic growth and subject multinational enterprises to double taxation.

Foreign direct investment (FDI) depends largely on unalterable factors such as natural endowment of physical resources, efficiency of political institutions, market size, and productivity of the local labour force. But there are other factors that support FDI inflow. These factors, in the context of tax, are ease of profit repatriation, corporate tax rate, and existence of double taxation avoidance treaties.

The importance of tax treaties, in fact, has been increasing against the background of a rise in international investment activity. A tax treaty is an important legal instrument to coordinate cross-border taxation, eliminate double taxation, and resolve disputes between different tax jurisdictions. Accordingly, it is important to a country's FDI that the country's MAP process operate effectively and efficiently and achieve the intended objective of eliminating double taxation. Thus, a tax treaty and effectively functioning MAP process mitigate uncertainty for the foreign investor as to how the overseas profits will be taxed as earned and repatriated, and this can often positively influence FDI inflow.

Transfer pricing has always been a matter of interest for tax auditors. However, as detailed earlier, it is becoming even more a matter of concern in the post-BEPS context, as the recommendations are strengthening the transfer pricing rules, transfer pricing enforcement, and even providing an audit trail to investigate an MNE's intragroup transactions.

Multinational groups have to consider a proactive strategy to anticipate unavoidable detailed transfer pricing scrutiny. Such strategies will include increased time and resources in the preparation of robust transfer pricing documentation to prevent tax adjustments. Preventing an adjustment from arising in the first place is preferred to defending against an asserted adjustment.

Multinational groups should also allocate more resources to defend transfer pricing adjustments at an early stage in the audit process. In most cases, the quality of elements provided at an early stage of an audit is decisive on the audit results. Providing strong support for the group's position at this early stage increases the group's chances of a positive outcome.

Knowing that a transfer pricing adjustment is the starting point of a long process, which will only end with the MAP settlement in most cases, none of the steps in that process should be neglected. Groups will benefit from dedicating appropriate resources to the follow-up of the audit, which may include settlement negotiations, litigation, MAP, and/or an APA.

Increased numbers of transfer pricing adjustments and uncertainty regarding application of the new transfer pricing rules are expected to increase the risk of double taxation and corresponding penalties and interest.

As long as tax administrations continue to be slow processing MAP requests, partly because of insufficient resources, but also because the procedure is not efficient (the BEPS Action 14 report includes recommendations in this area), taxpayers may fear double taxation.

As explained above, the post-BEPS context increases risks for multination groups to bear heavy penalties. This is of course a financial issue, but it is also a matter of concern as some countries do not accept to open a MAP when some penalties have been applied by tax auditors. One could consider that this is a "double penalty," as taxpayers bear the penalty itself but are also deprived of their right to access the MAP.

The BEPS initiative has resulted in changes to substantive transfer pricing rules, increased complexity, and increased transparency. Taxpayers' current transfer pricing arrangements must be reconsidered in light of these new rules. Taxpayers and the advisers assisting those taxpayers to redesign their transfer pricing policies as a result of BEPS will have no experience with how tax authorities will seek to apply the new transfer pricing rules. Additionally, CbC reporting may trigger audits for pre-CbC years as tax authorities may seek to apply these new standards retroactively to open tax years. As a result, taxpayers should expect increased uncertainty for past, current, and future tax years.

In October 2015, the International Accounting Standard Board (IASB) issued Draft IFRIC Interpretation DI/2015/1 Uncertainty over Income Tax Treatments, which addresses uncertain tax positions under International Financial Reporting Standards (IFRS). Existing IFRS standards for accounting for income tax, International Accounting Standard (IAS) 12, does not address uncertainty over income tax treatments. IFRIC Interpretation DI/2015/1, paragraph7. Under the draft IFRS standard, taxpayers are required to assume that tax authorities have full knowledge of all relevant information.

With regards to recognition, if an entity concludes that it is probable that the taxation authority will accept an uncertain tax treatment, the accounting for income tax will be consistent with the tax treatment used or planned to be used in its income tax filings. Alternatively, if an entity concludes that it is not probable that the taxation authority will accept an uncertain tax treatment, then the accounting for income tax will be reflected in the financial statements based on one of two available methods.

The first option is "the most likely amount", which is the single most likely amount in a range of possible outcomes. The draft guidance indicates that the most likely amount may provide the better prediction if the possible outcomes are binary (either one result or another result). The second option is the expected value – the sum of the probability-weighted amounts in a range of possible amounts. The expected value may provide the better prediction if the possible outcomes are widely dispersed. An entity is expected to use the method that, in its judgment, is a better prediction of the resolution of the uncertainty. With limited exceptions, most transfer pricing issues are not binomial and reflect a range of potential arm's-length outcomes; therefore, assuming the draft standard is finalised in its current form, we would expect taxpayers to measure their transfer pricing exposures on an expected value basis.

Interestingly, the draft IFRS standard contemplates uncertain tax positions for transfer pricing and provides a specific transfer pricing example in determine the expected value of a transfer pricing outcome. Under the example, six potential outcomes under which additional taxable would be assessed by a particular jurisdiction are assigned corresponding probabilities and an expected value for additional taxable income is determined. The example's assumptions indicate that the "relevant tax rules indicate that this particular tax jurisdiction's decision would not affect decisions to be made by taxation authorities in other tax jurisdictions, in respect of these tax treatments". It may be surmised that under this example competent authority relief was either not available or practicable. If competent authority relief was available, we would expect that a similar calculation would be determined for assessing the expected reduction of taxable income achieved through a corresponding adjustment from the counterparty jurisdiction.

In quarterly and annual financial statements filed with the US Securities and Exchange Commission, multinational companies frequently attribute changes in their reserves for income taxes due to uncertainty over transfer pricing. (See, e.g., Bloomberg BNA Transfer Pricing Report, Securities and Exchange Commission Financial Statements Filed During October 2015, Detailing Transfer Pricing Issues.) In a post-BEPS world where transfer pricing uncertainty has attracted attention from accounting standards setters, both increased frequency of these disclosures and increased magnitude of such uncertain tax liabilities may be expected.

Taxpayers often face transfer pricing issues for which there is no applicable tax treaty MAP. In other cases, when there is an applicable tax treaty with a MAP article, taxpayers will assess the validity of the transfer pricing adjustment and whether it expects that a challenge of such adjustment under available administrative processes is likely to be successful.

Even if experience shows that a settlement with a tax administration does not ease a MAP resolution, as it is not a way to convince the treaty partner that the remaining tax adjustment is correct, it may be a good solution to stop the dispute with the tax administration that initiated the assessments, when an appropriate outcome results from this national negotiation.

Settling with a tax authority should be viewed cautiously. Some countries exclude a taxpayer from the MAP, once a settlement is signed, considering that such a settlement is a recognition of the appropriate level to be taxed. Under these circumstances, the country that made the adjustment may not be willing to negotiate any reduction of the adjustment agreed to with taxpayer, and a taxpayer may be subject to double taxation as the other country involved may preclude access to MAP, not provide any correlative adjustment, or allow only for a correlative adjustment that provides for less than full double tax relief.

When the administrative appeals process is not independent from the audit and examination functions of the tax administration, the BEPS Action 14 report recommends that audit settlements not preclude access to MAP. See BEPS Action 14 Report, paragraph30-31.

Each transfer pricing audit case is unique. But administrative remedies should not be ignored, even if the final outcome may not guaranty the elimination of double taxation. Depending on the details of the case, taxpayers may consider challenging transfer pricing adjustments, whether in an internal administrative appeal process or in a court proceeding. For example, pertinent case law may exist that indicates the tax administration may not have a strong position.

Internal administrative appeals may represent a simple way to significantly decrease the initial tax adjustments, if not to avoid it. Introducing the case in front of a judge may also lead to the cancelation of the assessment, if robust elements have been prepared ahead of the tax audit or gathered during the procedure.

It can also be a remedy to tax collection, as a MAP request may not stop collection in some countries while the case is being negotiated by the treaty countries. This would then lead to initiate a litigation process and a MAP request in parallel.

In some cases, which will be highly dependent on the jurisdiction involved and the specific factual circumstances, it may be more efficient to seek to resolve the issue through available administrative processes as opposed to going to through the MAP process. In such instances, taxpayer should have full knowledge as to whether it has waived any rights to subsequently request MAP.

In the US, a multinational enterprise facing a foreign transfer pricing adjustment must exhaust effective and administrative remedies, including pursuing available MAP processes, lest it lose foreign tax credits associated with such adjustment. (U.S. Treas. Reg. §1.901-2(e)(5).) Other countries, where foreign tax credits are an issue, may have similar rules. Under recently published US MAP procedures, the IRS invites taxpayers to informally discuss its considerations as to whether or not to request MAP. (Rev. Proc. 2015-40, §2.03.)

Once an adjustment is asserted, MAP is usually the best avenue to avoid double taxation. Under some treaties, due to the existence of mandatory arbitration provisions, it will greatly increase the likelihood that double taxation will be eliminated. (See, for example, the European Union Arbitration Convention, applicable to transfer pricing adjustments between EU member states, and US treaties with Canada, Belgium, France, Germany, and the UK.)

Even if it is sometimes seen as burdensome, long and expensive, this is an adequate procedure to make tax administrations realise the possible inconsistency of its position (a double check will be performed before entering in negotiation with the treaty partner) and a way to continue negotiations with a new partner within the tax administration (and not with the tax audit service anymore-even it can still be involved in the procedure in some countries).

This remedy can be improved by the tax administrations, as the BEPS Action 14 report on this area has suggested several recommendations connected to clarification of treaties, utilisation of resources, publishing of guidance on utilizing MAP, and quality of work among competent authorities.

In some cases, MAP can be seen as an investment. To increase the outcome of that investment, MNEs may have interest to enter in the APA process at the same time. This may not be possible in each country (some of them do not accept an APA request when a MAP is pending). However, when possible, this would provide a solution for the past, but also for the future, granting a complete security on the covered transactions.

Experience shows that entering simultaneously into a MAP and an APA may also provide for more flexible negotiating room between competent authorities. For example, for a taxpayer with historical losses during the tax years under MAP, the transfer pricing method in an APA may be an opportunity to reverse its fortune or by the situation may be viewed more favourably if a longer time horizon of combining the APA and MAP years is considered. On their side, MNEs may have more security, as the final solution will include past years, future years, and intervening years. However, some countries do not accept to bridge the two procedures into a single negotiation, or do not agree to cover past years that have not been audited.

Some countries mandate that taxpayers prepare transfer pricing documentation, while others that do not require documentation will provide penalty relief if documentation is prepared. In some countries, documentation is required only if the transactions exceed a certain threshold. Some countries that allow for relief from penalties if documentation is prepared require contemporaneous preparation of the documentation. For example, in the US, documentation for a tax year is considered contemporaneous if prepared before filing of a timely filed tax return for such year. (IRC §6662(e)(3)(B)(ii)(II); U.S. Treas. Reg. §1.6662-6(d)(2)(iii)(A).) These requirements reflect the anxiety of tax administrations over the protection of their tax bases and the common perception among tax administrations that MNEs reduce local income taxes through transfer pricing manipulation. A proactive approach to analysing and documenting intercompany transactions has been vital to managing transfer pricing audit risk for multinational companies. Maintenance of documentation is important for two other reasons. First, it enables a taxpayer to explain its facts and transfer pricing policies to tax authorities and the success of determination of the arm's-length price depends on its acceptance by the tax authorities. Most importantly, the documentation allows the taxpayer to frame, in a favourable fashion, the facts and issues for the tax authority. Second, it makes business sense to have the process of determination of price in intragroup transactions well documented.

Documentation may be necessary for a taxpayer to meet the burden of proof. In cases when the burden of proof is on taxpayers, it is necessary for taxpayers to maintain proper documentation to justify determination of the arm's-length price. While compiling the documentation, it should bear in mind that the core objective is to determine the arm's-length price for the international transactions in question. The OECD recommends that the extensiveness of the documentation process be determined by prudent business management principles. The greater the complexity and rarity of the international transaction, the more comprehensive the documentation should be. Even when the burden of proof lies with the tax authority, the tax authority might still reasonably oblige the taxpayer to produce the documentation about its transfer pricing, because without adequate documentation the tax administration would not be able to examine the case properly.

When MNEs anticipate reactions from tax auditors, a simple and safe way to deal with the problems is to request an APA. This procedure is appropriate to work with tax administrations on problems related to transfer pricing methods, or if transactions involving large amounts are involved, to avoid misinterpretation, or to avoid penalties.

Not all transactions may be covered by an APA. But the most significant (in financial or technical terms) can be selected and submitted to some tax administrations. The countries can be chosen depending on the efficiency of their APA programmes, or their ability to accept the method suggested.

Some multinationals will seek APAs in all countries where they have significant transfer pricing risk. Other multinationals may selectively choose several key jurisdictions to obtain bilateral (or multilateral) APAs. In this selective approach, the APAs obtained will serve as an anchor for the multinationals' transfer pricing policies in jurisdictions where they do not have APAs. If a multinational enterprise's transfer pricing policies are challenged in a jurisdiction where it does not have an APA, one or more bilateral APAs obtained in other jurisdictions may provide persuasive support for the transfer pricing policies applied in such non-APA jurisdictions.

Although there is no consensus among all OECD and G20 countries on mandatory arbitration, the BEPS Action 14 report on MAP identified the countries that have declared a commitment for mandatory binding MAP arbitration in their bilateral tax treaties to ensure treaty-related disputes will be resolved within a specified time frame. Those countries are: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the UK and the US. These countries are involved in more than 90% of outstanding MAP cases at the end of 2013, as reported to the OECD.

Mandatory arbitration is important to resolving MAP cases on a timely and principled basis and, most importantly, ensures that the issues will be resolved without double taxation of income. Unfortunately, it is not uncommon to observe some treaty partners embark on a strategy of delay and dubious positions when there is no provision for mandatory arbitration. Accordingly, wider implementation of mandatory arbitration is a welcome development. The objective of mandatory arbitration is not to actually have large numbers of cases go to arbitration; rather, the objective is for competent authorities to adopt reasonable negotiating positions and resolve cases in a timely manner.

Some jurisdictions that have adopted mandatory arbitration require substantially more information up front than previously required to ensure they have all the information they might need due to the time limit involved. Also, some jurisdictions do not start the clock (the "commencement date" of the MAP request) until they deem the MAP request complete.

Overall, multinational companies should welcome mandatory arbitration as it provides greater certainty that double taxation will be avoided, but also is expected to provide more speedy resolution of MAP requests. Mandatory arbitration is one provision cited in the BEPS Action 15 report as being as being ripe for inclusion in a multilateral instrument to modify existing bilateral treaties.

In a post-BEPS world, dispute prevention will be the preferred road for multinationals. However, BEPS initiatives are likely to increase the number of transfer pricing disputes, and taxpayers will use the MAP process to resolve many of these disputes. As a result, it is important that MAP processes function efficiently and effectively on a global basis. Implementation of the recommendations in the BEPS Action 14 report is expected to facilitate MAP processes and pave a smoother road for taxpayers' future MAP trips.

Darrin Litsky Deloitte 1633 Broadway New York, NY 10019 Tel: +1 212 436 5760 Fax: +1 212 653 7883 dlitsky@deloitte.com Darrin Litsky is a transfer pricing professional in Deloitte's New York office. Trained as a lawyer and a certified public accountant, Darrin has a diverse background with 25 years of professional tax and accounting experience with industry, Big 4 public accounting, a major law firm, and the IRS' Advance Pricing Agreement (APA) Program. While in industry, Darrin served as general tax counsel of a publicly owned telecommunications company and was responsible for its worldwide transfer pricing policies in more than 40 countries. Darrin served as a team leader with the IRS APA Program for four years. Including his time in government practice, Darrin has been substantively involved in well over 100 APA requests involving a variety of different countries and industries, including telecommunications and insurance. His current transfer pricing practice is primarily APA request representation, mutual agreement procedure matters, and audit defence. Darrin is a recent past chairman of the Transfer Pricing Committee of the American Bar Association (ABA) Tax Section. Over the past 10-plus years, he served as the committee's chairman and vice chairman, led subcommittees on APAs and intercompany services, among others, and received the committee's Outstanding Service Award for 2003/2004. In 2014, Darrin led an ABA task force that provided formal comments to the IRS on proposed procedures for obtaining an APA. Similarly, in 2005, Darrin was responsible for leading the ABA's formal comments to the IRS on the operation of the APA Program. As part of this effort, he provided oral testimony on the APA Program at a public hearing held in Washington. Darrin holds a BS in economics (magna cum laude) from the Wharton School, and a JD degree from Georgetown University Law Center. He is a member of the District of Columbia Bar and a CPA. He is a regular speaker at events organised by the ABA, TEI and others.

Sanjay Kumar Senior Advisor, Tax, Transfer Pricing Deloitte Haskins & Sells Tel: +91 124 679 3601 kumarsanjay@deloitte.com Sanjay Kumar is a senior adviser in the transfer pricing group of Deloitte India and is responsible for advance pricing agreement (APA) and mutual agreement procedure (MAP) projects. He is also involved in tax policy initiatives, including on BEPS. Sanjay has more than 28 years of experience with the Indian Revenue Service. Sanjay has also been senior fellow and adjunct professor of public policy at the Duke University in North Carolina, US since 2007. He has published a number of papers on tax, transfer pricing, trade and industry issues in reputed international and national journals.

Eric Lesprit Transfer Pricing Partner Attorney-at-law Deloitte/Taj Paris Tel: +33 (0) 1 40 88 86 75 elesprit@taj.fr Eric Lesprit was the former Head of advance pricing agreements and mutual agreements procedures regarding double taxation elimination at the French Tax Administration. He has more that 15 years of experience in transfer pricing and international tax with the French Tax Administration. Major projects He participated in the design and the creation of the APA programme in France; he negotiated and concluded the firsts agreements. He has led the French APA programme since late 2008. In 2013, he created the new French Competent Authority, merging the APA programme and the mutual agreement procedures into a single department, and constituted the new team. At the international level, he intervened in the definition of French positions during the European Community and OECD working sessions, especially regarding the fight against tax havens and the negotiation of tax information exchange with non-cooperative territories. From 2003 to 2006, he was technical adviser for the IMF in Washington DC for public revenues (taxes and customs duties).