4. MAP and domestic law
4.3. Audit settlements
Audit settlements have been used as a resolution tool in many countries to promote a quicker conclusion of audit files, and both tax administrations and taxpayers alike have welcomed the ability to come to an agreement on the pragmatic conclusion of an audit file. As the word settlement implies, there are usually concessions made on behalf of the parties involved which creates a difficult issue for the MAP process.
One concession tax administrations sometimes seek is a limit on further recourse, in other words the adjustment agreed to at the audit stage is the final adjustment. Unfortunately, some tax administrations have lumped the MAP process into these requested concessions (i.e., by conditioning the audit settlement on the taxpayer’s agreement not to pursue MAP for the issue), and in many cases taxpayers have offered to agree not to seek MAP assistance. The unfortunate result of these types of settlement arrangements can often be the occurrence of double taxation. Effectively, these arrangements preclude the tax administrations from resolving double taxation under MAP in such situations and may indeed cause the other government to deny relief under its domestic law for the tax paid to the first government upon settlement of the audit.
In some jurisdictions where a taxpayer has, in return for giving up the right to relief under MAP, obtained procedural advantages or concessions from a tax administration that would reduce the administration’s competent authority ability to defend its case in a MAP discussion (e.g., where the administration has compromised its proposed adjustment on the understanding the taxpayer would not seek to obtain a further reduction through MAP), then those jurisdictions often impose the policy that the affected issues cannot be reversed or overturned in MAP proceedings. This effectively limits the availability of MAP relief from that competent authority and may cause the other competent authority to resist giving MAP relief as well.
In other jurisdictions a taxpayer cannot forfeit its right to access MAP, regardless of the deals struck at the audit level. Still, even if this right is explicit in these countries, taxpayers may be unwilling to test this right if they have already agreed not to seek the assistance of MAP. This may be especially true in cases where the taxpayer will encounter the same tax administration office and auditor in the next cycle.
As mentioned, sometimes taxpayers offer to settle and not to go to MAP, since they had not planned to go anyway. In these cases, taxpayers often see a larger risk in exposing themselves to the other tax administration, where they have not yet been audited. Cautious taxpayers are often concerned that exposure in the MAP process could potentially lead to an audit referral.
See Best Practice Nº19: Avoid blocking MAP access via audit settlements or unilateral APAs.