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4 MAP and domestic law - 4.5. Relief from collections, interest and penalties - 4.5.3


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4. MAP and domestic law

4.5. Relief from collections, interest, and penalties

4.5.3. Collections and MAP

There are several reasons why suspension of the collection of tax pending resolution of MAP can be a desirable policy. Any requirement to pay a tax assessment specifically as a condition of obtaining access to MAP in order to get relief from that very tax would generally be inconsistent with the policy of making MAP broadly available to resolve such disputes. Even if a MAP agreement ultimately eliminates any double taxation or other taxation not in accordance with the Convention, the requirement to pay tax prior to the conclusion of the MAP may permanently cost the taxpayer the time value of the money represented by the amount inappropriately imposed for the period prior to the MAP resolution, at least in the fairly common case where the respective interest policies of the relevant Contracting States do not fully compensate the taxpayer for that cost. Thus, this means that in such cases the MAP would not achieve the goal of fully eliminating, as an economic matter, the burden of the double taxation or other taxation not in accordance with the Convention. Moreover, even if that economic burden is ultimately removed, a requirement on the taxpayer to pay taxes on the same income to two Contracting States can impose cash flow burdens that are inconsistent with the Convention’s goals of eliminating barriers to cross border trade and investment. Finally, another unfortunate complication may be delays in the resolution of cases if a country is less willing to enter into good faith MAP discussions when a probable result could be the refunding of taxes already collected.  If the tax in question is in jeopardy of being lost due to bankruptcy or due to the taxpayer becoming a flight risk, then collection practices allowing for immediate recovery seem appropriate.  Collection practices generally assess risk and therefore one would expect that a similar assessment could be made of the MAP applicants.

If risk assessment is not a possibility for some tax administrations, then allowing for the provision of security or the payment of interest by the tax administration on refund balances (if current laws or policies do not allow this already) could minimise this detrimental effect of double taxation.  This provision is less desirable than outright suspension, since a taxpayer’s working capital and therefore liquidity is normally affected by the encumbrance of an asset or the provision of the type of security required by a tax administration.  

Best Practice Nº21:   Suspension of collections during MAP

The collection of tax as a condition to entering a program to relieve that very tax is generally considered to be unreasonable. Thus, it is a best practice and goal for tax administrations to provide a procedure for suspension or deferral of the requirement to pay a tax liability (including interest thereon) or the collection action of a tax administration on income tax that is the subject of the request for competent authority assistance.  The decision to suspend or defer collection could be made after a risk assessment has been conducted by the tax administration to determine ability to pay or the creditworthiness of the taxpayer.  The suspension/deferral could begin at the time of application and remain in place until the resolution of the case by the competent authorities.

In some countries suspension or deferral of collection actions is not possible due to various reasons beyond a policy determination.  In these cases, the acceptance of security in lieu of payment during competent authority proceedings may be an opportunity to lessen the effect of double taxation.   

Many states may require legislative changes to implement the suggested best practices on both interest relief and the suspension/deferral of collections.  

The Commentary (with proposed revisions) to the OECD Model Tax Convention provides for further guidance on the interaction of collections, interest, and penalties with MAP.

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