4. MAP and domestic law
4.5. Relief from collections, interest, and penalties
4.5.2. Interest relief and MAP
It is widely acknowledged that a taxpayer may suffer the economic equivalent of double taxation, even where underlying double taxation is eliminated through a MAP agreement, if there is considerable asymmetry between two countries’ treatment of interest that may accrue on tax liabilities and refunds. For example, this typically happens where one country charges interest on a tax deficiency (or insists on collecting tax from the taxpayer prior to resolution of the dispute) and the other country does not pay interest on tax refunded to the taxpayer upon resolution of the dispute and the result is a notable monetary burden.
For cases where it has been accepted that the tax convention also covers relief of interest under Article 25(1) or 25(3), the competent authorities have the latitude to consider symmetry in their approaches to interest in order to prevent an undue burden on the taxpayer. A related issue involves the tax effect of interest (i.e., whether the taxpayer is taxable on interest received on refunds or is able to deduct interest paid on deficiencies). Countries’ divergent domestic policies may make it difficult to balance out the tax effect of interest receipts and payments on tax amounts that have been in dispute in MAP cases.
In these examples, some countries are willing to offset or relieve interest in this manner to reduce the asymmetry created by the divergent treatment, but these countries usually expect reciprocity from the other country in similar but opposite cases, if applicable. Notwithstanding the complexities, competent authorities who bring a flexible and open attitude to such situations are often able to work out solutions that offer a reasonable level of symmetry to taxpayers.
Regardless of whether a taxpayer’s interest burden is attributable to divergent policies of the two treaty countries, the relief of interest for the period of time a taxpayer is in the MAP process, especially if that period is beyond a reasonable period, may seem warranted given that the taxpayer is not in control of large segments of the MAP process, such as the competent authority to competent authority discussions. In countries where the scope of the convention does not cover interest, some tax administrations have adopted a policy to consider this interest relief via domestic remedies that may be dependent upon factors related to undue delays, hardship, or taxpayer cooperation. These countries, however, often take the position that interest relief should not extend to interest accruing outside the time boundaries of MAP, since it is their view that the MAP process is not the appropriate vehicle to try to harmonise divergent domestic policies in this area.
Best Practice Nº20: Interest relief
It is desirable for competent authorities to consider adopting flexible approaches to diminish any undue interest burden on taxpayers attributable to the countries’ divergent treatment of interest in MAP cases. Although complete harmonization across a treaty network may be unrealistic, competent authorities could consider developing general guidelines in conjunction with their counterparts for known and particularly adverse situations of undue interest burden caused by asymmetrical domestic policies on interest.