Mutual agreement procedures (MAP) in transfer pricing matters

The mutual agreement procedure (MAP) is a means through which the competent authorities of two or more countries can negotiate with one another. Its purpose is to resolve disputes regarding interpretations and to eliminate double taxation. In transfer pricing issues the MAP procedure can either be based on the articles of Finland’s income tax treaty with the other country (article no 25 of the OECD model tax treaty), or on the provisions of the EU Arbitration Convention (90/436/EEC), or alternatively, on the tax dispute resolution mechanisms in the European Union under Directive EU 2017/1852.

The way a MAP is conducted is not informal. Instead, the Finnish act on the international tax dispute resolution procedure (Laki kansainvälisten veroriitojen ratkaisumenettelystä (530/2019)), effective as of 30 June 2019, sets out definite rules on how the competent authorities should conduct their negotiations and consultations.  

For more information, see the detailed guidance released by the Tax Administration called International tax dispute resolution procedure (the official record no of the original Finnish/Swedish version is VH/2006/00.01.00/2019).

Situations where the procedure can be applied

The aim of a mutual agreement procedure is the elimination of double taxation. International double taxation results from a situation where the tax authorities in one country have made a transfer pricing adjustment to the income of a company resident in that country, and the same income has already been taxed in the other country.

Example: In the opinion of the Swedish Tax Agency (Skatteverket), the size of a management fee paid by “AB” – a Swedish company – to its associated company in Finland called “OY” was not in accordance with the arm’s length principle. For this reason, Skatteverket added an amount to “AB’s” taxable income after which Skatteverket deems the income to be at arm's length. At the same time, AB and OY – companies that have an associated relationship with one another – may find that the transfer pricing adjustment made by the Swedish tax authorities is only partially justifiable. They submit an application to the Finnish and Swedish competent authorities for eliminating the double taxation that arises. Based on the negotiations and after examining the provisions of the Nordic Tax Treaty, the Finnish and Swedish tax authorities may conclude that good grounds exists for the application submitted by the two companies.  As a result, Finland will reduce the taxable income of the OY company while Sweden will reduce the transfer pricing adjustment added to the income of the AB company.

Before submitting a MAP application, a taxpayer company should first contact the competent authority of its country of residence in order to determine whether the company’s transfer pricing issue can be solved by the mutual agreement procedure. The Tax Administration’s detailed guidance “International tax dispute resolution procedure” contains further information on MAP applications and their requirements. See contact details for guidance and submitting the MAP request.

Submitting a MAP request

The first step for starting a mutual agreement procedure is to send a written application to the competent authority. Further instructions on how the application should be set up can be found in legal acts and in the Tax Administration’s detailed guidance. In addition, a precondition for initiating the MAP procedure may be that the applicant submits a reply to the competent authorities' request for additional information. The transfer pricing issues of the Finnish Competent Authority have been placed within the Transfer Pricing Unit of the Large Taxpayer's Office. The proceedings of the mutual agreement procedure are often conducted in English. Accordingly, writing up the application in English is recommended.

The deadlines that apply will vary according to the category of the mutual agreement procedure (which may be an EU-level dispute resolution procedure / an arbitration procedure within the EU / a procedure based on the relevant tax treaty). If a national appeal is made in the same case, it does not cause any changes to the deadline for initiating the mutual agreement procedure. The company must notify the competent authority if it has initiated – or is planning to initiate – a claim for adjustment or appeal on the same issue for which an application for MAP has already been submitted. The enforcement of a tax assessment decision cannot be suspended merely on the basis of a submitted MAP application.

Processing the MAP application

Before the negotiations on the matter are started, a competent authority in one country may accept the transfer pricing adjustment made by the other country and make a corresponding transfer pricing adjustment. If the transfer pricing adjustment made to the income of a company resident in the other country can be deemed to be at arm's length, the double taxation can be eliminated by making a corresponding adjustment in Finland. The corresponding adjustment is made to the income of a Finnish-located group company.

The competent authorities in different countries are the parties to the mutual agreement procedure. The authorities may require the company to provide additional information at various stages: both immediately after submittal of the MAP application and during the processing of the application. The competent authorities negotiate by correspondence, and in many cases, also face to face.

Results of negotiations and the arbitration process

Depending on the way the MAP procedure is carried out, there may be a certain timeframe for the negotiations between the competent authorities. If the competent authorities cannot reach a negotiation result within the timeframe, the issue may (subject to certain restrictions) be transferred to arbitration proceedings in order to be settled there. The rules on tax dispute resolution mechanisms in the European Union and the Union Arbitration Convention both contain provisions that offer the opportunity for arbitration proceedings. Further, certain bilateral income tax treaties concluded by Finland contain provisions on arbitration proceedings. If the procedure is based on a tax treaty, it is important to check whether the relevant tax treaty has provisions on arbitration.

For the outcome of a MAP (either the result of negotiations or the result of arbitration proceedings) to be implemented in the Finnish taxation, the taxpayer must sign a statement declaring that the outcome is fully acceptable and that no appeal on the matter will be pursued at the Finnish national level.

The applicant may withdraw the application during MAP

The taxpayer may withdraw its MAP application at any time during the process; it is sufficient to send the competent authorities a notice to that effect. Withdrawal notices must be made out in writing. The taxpayer may decide to withdraw the MAP application if the competent authority has informed the taxpayer that competent authorities will deem to apply the arm's length principle in a manner that differs from what had been requested in the application.