A Circular released by the Italian Revenue Agency on June 5 2012 clarifies the procedures taxpayers must follow under an arbitration MAP, which is a remedy provided under EU law allowing taxpayers to settle double tax issues arising from transfer pricing adjustments without resorting to litigation.
Giuliana Polacco, of Baker & McKenzie in Milan, said the release of these guidelines is allowing large taxpayers in particular to take advantage of the reduced risk and cost provided by ADR.
“Before June, there was nothing available to clarify transfer pricing dispute resolution procedures for taxpayers but the June 5 guidelines assist both taxpayers and the tax office as to how they should behave in disputes being decided through the competent authority, which makes taxpayers feel more comfortable in opting for this procedure,” said Polacco.
Taxpayers must submit their application for an arbitration MAP to the competent authority if they wish to dispute a transfer pricing adjustment that has caused double taxation and will be guaranteed a resolution within two years.
“Opting to go through the competent authority is less time-consuming for taxpayers and removes an area of big risk since tax court cases can last for many years and the implication of penalties hanging over taxpayers creates great uncertainty,” Polacco added.
Benefits of ADR
One advantage to taxpayers of opting for the arbitration MAP route is that a specialist panel of judges will be appointed who are well acquainted with transfer pricing practices.
“Italy’s tax court does not have a specific section dedicated to multinational companies and transfer pricing while the recent trend in the Supreme Court has been to come down on the side of the tax authorities,” said Polacco.
“This is a worry for large companies and so unless the tax office is being very unreasonable, multinationals are therefore trying to avoid litigation,” she added.
In the past, if a taxpayer had a transfer pricing adjustment which included penalties and did not go to court, the tax assessment became final and the taxpayer was liable for tax and penalties.
Polacco said now, provided a multinational gives adequate national transfer pricing documentation, it can abandon the litigation procedure and opt for the arbitration convention without the risk the assessment will become final.
“Multinationals may, therefore, take the risk not to appeal the tax assessment because in any event penalties will not be applied on the portion of income which may be finally assessed by the competent authority,” said Polacco.
“Taxpayers can then decide not to pursue litigation but to resolve the dispute through the competent authority, and can ask the authority to suspend the payment of the adjusted tax. So for pure transfer pricing cases, where no penalties are applied, competent authority resolution is what we would suggest,” she added.
When to litigate
Taxpayers are advised to use the arbitration convention when they have national documentation present and when dealing with pure transfer pricing cases, such as those where there is an adjustment of the benchmarking analysis or a challenge to the transfer pricing methodology used.
However, there are still certain circumstances when taxpayers must resort to litigation.
“I believe it is risky to deal with a dispute through the competent authority when a taxpayer has penalties because at the end, if the competent authority decides in favour of the tax authority, the penalties will automatically become final if taxpayers have not formally appealed against the tax assessment,” said Polacco.
“Also, resolving cases through the competent authority does not work with management fees because it is not a pure transfer pricing issue and is not covered by the arbitration convention but by normal mutual agreement procedures. In these cases taxpayers must settle or litigate,” she added.
Finding the right balance
Transfer pricing dispute resolution is a key topic on the agenda at International Tax Review and TP Week’s Global Transfer Pricing Forum in Paris next month.
The forum takes place on September 24 and 25 and will feature Giuliana Polacco alongside Matt Frank, General Electric’s senior tax counsel in the US; Amit Gupta, Asia pacific and Japan tax director for Dell; and Brad Rolph, leader of Charles River Associates’ Canadian transfer pricing practice on a panel devoted to the successful resolution of transfer pricing disputes.
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