NUARY/ FEBRUARY 2002 It is surprising how little use has been made of coordinated attain general agreement on clarifying and supplementing audits. The benefits of this instrument are clearly evident. relevant bodies of law and on stopping loopholes. A suc The initial open questions have since been settled. Adher- cessful MAP is a procedure usually based upon an agree ing to the principles of economy in administration, person- ment between two countries which is adopted and trans nel can be deployed as effectively as possible. It also formed into domestic law by the legislature of each lessens the administrative burden on the taxpayer. A suc- country. Thus, competent authorities are authorities autho- cession of audits can be avoided as can the resulting recip- rized by law to enter into a mutual agreement for purposes rocal adjustments, laborious investigations and protracted described in the agreement mutual agreement procedures While the individual is required to meet his or her tax li- 2.1.2. The legal position of the taxpayer is more than exposed to the tax demands of two or more countries with- In the past, the mutual agreement procedure has been out compensation. The taxpayer's compliance costs can be extensively criticized. It generally takes a long time and it reduced, the solution of problems accelerated and in com- are the tax authorities that control the procedure, the tax plex transfer price cases the quality of data on which the payer enjoys no particular legal protection. The taxpayer affected tax authorities base their assessment can be has neither the right to demand a mutual agreement proce- erature(e. g guarantee of tax secrecy, increase in the extent ing treaty principles. The taxpayer has no right to be heard of the taxpayer's disclosure obligations and de facto dou- or to otherwise be involved, and has no right to be ble taxation where definitions have not been reconciled) informed of the decision itself or of the grounds on which are persuasive only insofar as they relate to the lack of any it was taken. Moreover, there is no obligation to disclose binding obligation for the tax authorities involved to reach the agreement. This absence of mandatory problem reso- an agreement in the event of dispute lution is the largest disadvantage of the procedure The provisions in income tax treaties corresponding to However taxpayers generally appreciate that the MAP has those in Art. 26 of the OECD Model Treaty form the legal not been overly formalized and can be easily invoked asis for administrative agreements on coordinated audits. However, frustration occasionally occurs when it is felt Contrary to the view of the OECd and to that of the Ger- that competent authorities do not make a good faith effort man tax authorities (which makes reference only to the to resolve a case in a timely fashion. There is no indication exchange of information article as a legal basis ), a simul- hat the procedure is under-utilized by taxpayers On the taneous audit comprises, in the author's opinion, elements other hand, the question arises from time to time as to of a mutual agreement or consultation procedure in add- whether taxpayers are able to resolve double taxation situ- tion to the exchange of information. The prevention of ations on their own(e.g. in transfer pricing cases without double taxation must form an integral part of an agreement having competent authorities involved). All in all, the on simultaneous audits for the benefit of the taxpayer, cedure seems to work reasonably well. Nevertheless, serv whereas the OECD merely reminds the countries involved ing the taxpayer better would mean a narrowing of the that they should attempt to attain a result that avoids dou- time frame for a case to be resolved ble taxation for the multinational group of enterprises in question 2.1.3. The tax authorities very rarely reject a claim for the nitiation of a mAP 2. INSTRUMENTS FOR SETTLING AND PREVENTING DISPUTES While it must be conceded that the arrangement is unsatis factory from the taxpayer's perspective, it needs to be said 2.1. Mutual agreement procedure hat the German tax authorities follow the request of a tax payer to start a MAP. In the last 30 years less than half a dozen cases are known in which the tax authorities have 2.1.1. An effective tool to solve controversies among tax ment between the taxpayer and the tax authorities is there refused to enter into a MAP. Only in the case of an agree authorities of different jurisdictions a risk of rejection. Most of the German MAPs hithert need for aspecific provide for the avoidance of double conducted have been brought to a satisfactory conclusion ol to cope with the difficulties arising from the dictated by considerations of what is equitable. The rate of application of an applicable tax treaty. Therefore, income success in terms of avoidance of double taxation is well tax treaties include a special kind of procedure known as beyond 90% Nevertheless there is rarely a case that is mutual agreement procedure(hereinafter: MAP), which is resolved in less than one year and in some cases it takes generally modelled on Art. 25 of the OECD Model Treaty. several years. To this extent, the MAP has shown itself to The great advantage of the MAP for both the tax author- be a useful means of settling international disputes over ities and taxpayers is its flexibility and relatively unbur- taxation. Taxpayers should not shrink from applying for a eaucratic nature. Tax authorities are enabled to resolve MAP if double taxation has occurred or is likely to arise oblems in a direct procedure conducted on an informal basis. Not only does the mutual agreement procedure 2. 4. Improvements were realized in the last decades allow taxation contravening treaty provisions to be cor- As early as 1975. the International Fiscal Association rected in an individual case, but it can also be used to(hereinafter: IFA)proposed in its general report on occa E 2002 internat onai Bureau of Fiscal Documentation