Multijurisdictional audits: mutual agreement procedure and advance pricing agreement issues

A session report from the IBA’s 24th Annual US and Europe Tax Practice Trends Conference in Munich

Thursday 11 April 2024

Co-Chairs

Annette Keller, McDermott Will & Emery, Munich

Joshua D Odintz, Holland & Knight, Washington, DC

Speakers

Sven-Eric Bärsch, Flick Gocke Schaumburg, Frankfurt

Nikolaj Bjørnholm, Bjørnholm Law, Copenhagen

Sylvia Dikmans, Houthoff, Amsterdam

Joe Duffy, Matheson, Dublin

David Farhat, Skadden, Arps, Slate, Meagher & Flom, Washington, DC

Reporter

Carina C Federico, Crowell & Moring, Washington, DC

Introduction

This panel explored multijurisdictional trends, including the frequency of multijurisdictional audits, the use of a mutual agreement procedure (MAP), advance pricing agreement (APA) trends, the use of the Organisation for Economic Cooperation and Development’s (OECD) International Compliance Assurance Programme (ICAP) and developments related to information sharing. The panellists shared their perspectives on best practices for businesses and individuals when navigating multijurisdictional audits and handling transfer pricing and other international tax issues with the competent authority in different jurisdictions. The panellists also predicted changes arising from the implementation of Pillar One and Pillar Two, as part the OECD’s Base Erosion and Profit Shifting (BEPS) project, with regard to transfer pricing audits and APAs.

Panel discussion

Multijurisdictional audits

The panellists agreed that multijurisdictional audits are less prevalent than in the past, because tax authorities are now not prioritising them for a number of reasons. Nikolaj Bjørnholm remarked that the Danish tax authorities aren't opening many new multijurisdictional audits due to disagreements between tax authorities about which transactions to review and a lack of success in terms of the audits themselves. Sven-Eric Bärsch agreed that there are few multijurisdictional audits, with some exceptions, such as for well-known internationals. From a German perspective, Bärsch said that while joint audits have increased over the past few years, they are still relatively small in number compared to the amount of audits that take place. He noted that one issue with multijurisdictional audits is that it can be very difficult to align the fiscal years between companies, as well as the timing of the audit.  

Joe Duffy pointed out that from a tax authority perspective, having all of the same information available for audits in European jurisdictions should lead to a more efficient audit. However, different jurisdictions have different priorities and focus on different things, so the end result often is not a more efficient audit.

Information exchange

David Farhat cautioned that taxpayers and tax advisers should be aware that if something is provided to one government, the information will be shared with other governments, whether through information exchanges or competent authorities and regardless of whether there is a multijurisdictional audit. Farhat also noted that businesses need a global tax controversy strategy in place. He added that businesses should maintain an audit file of what they are planning to share with each jurisdiction to keep the information shared consistent.

Sylvia Dikmans pointed out that taxpayers do not always know whether their information has been provided to a foreign tax authority. She also noted that what is deemed relevant information under an information exchange by a tax authority is not always clear and can be quite broad.

Audit trends and the future

All of the panellists agreed that transfer pricing is the biggest audit trend. Farhat noted that the United States government is becoming more aggressive and less willing to settle, as the Internal Revenue Service (IRS) has had greater success in court and has had more access to information. Duffy pointed out that the Irish tax authorities remain interested in situations where a company moves intellectual property out of Ireland, which is common after merger and acquisition activity to align intellectual property with corporate structuring.

Dikmans noted the effect of Pillar Two will be interesting. One potential issue will be if an audit results in a change to transfer pricing and an adjustment to the corporate income tax, because then the effective tax rate for Pillar Two calculations will also change. Farhat agreed that Pillar Two will likely lead to increased controversy, but he does not foresee multijurisdictional audits increasing as a result due to how difficult they are to conduct. He noted that potentially there could be an increase in the use of ICAP for Pillar 2 issues, but cautioned that taxpayers should tread carefully, as there is a risk that taxpayers will not receive a low risk assessment as a result of ICAP.

APAs

The panellists agreed that bilateral APAs are important to avoid controversy and that the number of bilateral APAs is on the rise and that trend is expected to continue. Dikmans said that bilateral APAs can take a long time to conclude. Bärsch said that the value of an APA has increased as audits have increased.

The panellists discussed the strategy behind filing for an APA. Duffy suggested that tax advisers should consider discussing the APA with the competent authority prior to filing to get the competent authority’s views on certain issues, such as whether to have joint meetings with the other competent authorities involved. Both Bärsch and Dikmans noted that their countries, Germany and the Netherlands, respectively, will not enter into an APA with a preferential tax regime, such as Switzerland.

Farhat noted that in the US, the IRS is working on a new Revenue Procedure for APAs that could potentially change the prefiling process. He said that tax practitioners are hopeful that the APA prefiling process under the new IRS Revenue Procedure will not allow IRS examination teams to get more involved in the process, because taxpayers seek to enter into APAs to avoid tax controversy rather than attract it.  

MAP

The panellists agreed that tax advisers should think carefully about whether to use a MAP early in the process. Duffy said that using a MAP may influence what arguments taxpayers can make and the emphasis of certain arguments in order to direct an audit. Farhat added that if the taxpayer is willing to compromise, a MAP can be the better option, while if the taxpayer wants to take a hard stance, a MAP can be more difficult and likely less successful.

Bjørnholm pointed out that one downside of a MAP is that the competent authorities are in charge, not the taxpayer, and that nothing is guaranteed in terms of the results. On the positive side, Bjørnholm said that a MAP can be used to get countries to agree in order to avoid arbitration. Farhat pointed out that in some countries, you lose the right to a MAP if you proceed with domestic remedies first. Dikmans raised the issue that a taxpayer may not be at the top of the list of items to be discussed, and a competent authority might not take the case due to a heavy caseload, which may include cases that the competent authority deems to be more important.

Conclusion and final remarks

The panellists commented that taxpayers should carefully consider all the options when deciding how to resolve transfer pricing and other international tax issues and agreed that there is no one-size-fits all solution for every problem. Tax advisers should be mindful that information shared with one country likely will be shared with others. Also, tax advisers should carefully consider how to proceed, so as not to lose the possibility to use administrative remedies. Lastly, tax advisers should think globally about tax controversy strategies as a decision made by one country’s tax authorities could impact disputes in another country.