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4. MAP and domestic law

4.6. Secondary adjustments, withholding tax, and repatriation on transfer pricing adjustments

Transfer pricing adjustments made under domestic law may also give rise to so-called “secondary adjustments”.  For example, the amount of the income adjustment to a subsidiary for its excessive payment on a transaction with a non-resident parent may also be treated by the subsidiary’s jurisdiction as a deemed dividend paid to the parent and therefore a withholding tax may be applicable. Under normal circumstances, these secondary adjustments are reversed if the primary adjustment is reversed or, in the case where correlative relief is provided by the other competent authority, if the taxpayer repatriates funds from the non-resident equivalent to the amount of the transfer pricing adjustment.  In these two instances, relief from the secondary adjustment should be a consequence of the MAP settlement.

A mutually agreed upon settlement between the competent authorities in respect of a transfer pricing adjustment will normally include agreed terms for repatriation of funds involved in the primary adjustment. These terms are specific to the particular settlement between the two governments. The terms may vary, but generally allow for the repatriation of funds to be effected either by a direct reimbursement or through an offset of inter-company accounts. Typically, the agreed terms also allow a taxpayer to repatriate within a mutually agreed reasonable time period, free from withholding taxes by the country out of which the repatriation is made and from any additional taxable treatment in the country to which the repatriation is made. Repatriation may be subject to audit verification.    

Subject to the discussions and best practices on interest relief, normally there is no waiver for interest applicable to the tax liability attributable to the initial primary adjustment, or part thereof, if it remains in place as part of the MAP resolution.  However, where the country to which the repatriation payment will be made would otherwise require that payment to include an interest component to compensate its resident taxpayer for the foreign related party’s use of that taxpayer’s funds between the time of the initial transaction and the repatriation, the competent authorities may agree to allow the repatriation to occur without any interest component, in order to minimize the complications from the repatriation.    

A repatriation agreement reached at an audit stage should not preclude a request by the taxpayer for competent authority assistance nor should it indicate concurrence or agreement with an audit adjustment. Where a taxpayer proceeds to request competent authority assistance after concluding a repatriation agreement, it is appropriate for the competent authority to amend the repatriation agreement for any changes made to the amount of the adjustment as a result of the MAP process and to waive any requirement for the repatriation to include an interest component. Where a taxpayer proceeds to request competent authority assistance without having concluded a repatriation agreement at the audit stage, the competent authority may agree on terms of repatriation with the competent authority of the treaty country.

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