Mutual agreement procedures (MAPs) are designed to resolve issues arising from the application of tax treaties between contracting states. The principles are outlined in Article 25 of the OECD Model Tax Convention on Income and on Capital (the OECD MTC) and subsequently reflected in bilateral tax treaties. These procedures delegate competent authorities to amicably resolve:
Difficulties or ambiguities concerning the interpretation or application of tax conventions; and
Cases brought forth by taxpayers to prevent taxation contradicting an applicable tax treaty.
Multinational enterprises operating in Europe can activate MAPs under an existing tax treaty in force with their European counterparts but also through the Arbitration Convention (No. 90/463/EEC) mechanism, for instances related to transfer pricing or the attribution of profits to permanent establishments only. Recently, to ensure the effective resolution of disputes concerning the interpretation and application of bilateral tax treaties and the Arbitration Convention, taxpayers have been able to take advantage of the legal framework introduced by the Dispute Resolution Directive, No. 2017/1852.
Especially for transfer pricing disputes, while MAPs are usually triggered by a primary adjustment by tax authorities, the post-BEPS updated commentary on the OECD MTC recognises bona fide taxpayer-initiated adjustments, such as self-amendments for arm’s-length compliance, as valid for initiating MAPs.
This approach is also confirmed by the European Commission directive proposal on transfer pricing, which – under certain conditions set forth in Article 6, paragraph 5 – provides the possibility for member states to grant a downward adjustment even in the absence of a primary adjustment.
MAPs and self-adjustments in Italy
Italy interprets ‘transfer pricing adjustments’ narrowly, recognising that only formal tax assessments qualify for initiating a MAP. The Italian competent authorities do not consider bona fide self-adjustments a valid double taxation issue to be resolved. This stance derives from the reservation included by Italy during the adoption of the revised code of conduct concerning the implementation of the Arbitration Convention. For consistency purposes, the Italian authorities also adhere to this position in cases when the legal mechanism activated is a relevant double tax treaty or when the MAP request is initiated pursuant to the Dispute Resolution Directive (in the latter case, only if the self-adjustment is not a consequence of a tax audit).
In recent years, this restrictive interpretation has limited the possibility for certain multinationals operating in Italy to access the international remedies, leading to undue double taxation when the counterparties amended their tax return to comply with the arm’s-length principle without receiving any formal deed of assessment. Based on experience, these cases mostly regard German taxpayers that are required by law to immediately adjust their tax return if they discover that prices or margins applied in the intercompany transactions were not consistent with the arm’s-length principle.
Italian case law
The first-degree tax court in Rome has recently addressed the self-adjustment issue in two separate but similar cases, condemning the formalistic approach of the Italian competent authorities and recognising bona fide self-adjustment as a measure that may result in double taxation according to the Arbitration Convention and the Dispute Resolution Directive.
In the cases at stake, the Italian taxpayers requested the activation of the Arbitration Convention, but access to the international procedures was denied by the Italian competent authorities because the double taxation did not derive from formal tax assessments. It was a consequence of self-adjustments carried out by German related entities but not reflected in the Italian tax returns.
Both companies lodged their appeals against the denial decision before the relevant first-degree tax court in Rome to defend their position and, among other elements, argued that Article 6 of the Arbitration Convention does not exhaustively list specific actions from which double taxation may be derived. Indeed, the article reads that “the case must be presented within three years of the first notification of the action which results or is likely to result in double taxation”.
In their appeals, the Italian companies clarified that the self-adjustments were mandatory, according to German regulations. Section 153 AO of the General Fiscal Code sets forth that if German taxpayers identify inaccuracies or omissions in their tax returns that result in an underestimation of taxes owed, they must promptly take corrective action to ensure compliance with the law, and to mitigate potential criminal impacts. Moreover, in both cases the self-adjustments followed a tax inspection, even if carried out for previous fiscal years.
Based on this rule, the Italian companies insisted that given the lack of a definitive catalogue of causes for double taxation, the German revised tax returns should be acknowledged as “an action resulting in double taxation”.
The court concurred with the defensive arguments of the taxpayers, clarifying that the dispute was not regarding the occurrence of double taxation itself (clearly existing) but, rather, the absence of a formal assessment. The Arbitration Convention and the Dispute Resolution Directive do not explicitly enumerate the events triggering double taxation, thus accommodating any actions that might generate it. Therefore, even if assessments are the most common causes of double taxation, self-adjustments de facto operate the same way and qualify companies for MAP proceedings.
The positive outcome of the decisions – subject to potential appeal by the Italian competent authorities – sets a critical precedent for multinationals operating in Italy, advocating for a move beyond rigid formalisms towards prioritising the contrast to double taxation. This approach aligns with the aim of tax treaties and further promotes legal certainty and a fair and efficient tax system in a business-friendly European environment.
