Bilateral APAs and mutual agreement procedures (MAPs): why the interest due may differ
Your Tax Controversy strategy can save you a lot of interest!
Bilateral or multilateral APAs (hereinafter: BAPAs) and mutual agreement procedures (hereinafter: MAPs) are agreements between a taxpayer and a state or multiple states in which a company’s profit is determined based on transfer pricing and whereby double taxation is avoided.
Interest on tax due and late payment interest (hereinafter: interest) also often play a role in the adjustment or reassessment of the profit. Sates involved maintain different national rules on interest, which can result in a considerable interest expense during the mutual agreement procedure and/or the run-up period to the conclusion of a BAPA. At the time of writing, the Netherlands charges 8% (!) interest on any tax due, which can add up to quite a hefty sum.
The applicable legislation offers the Dutch Minister of Finance the option to deviate from national rules on interest on tax due and late payment interest in MAPs. In a MAP, the taxpayer may ask for the interest charged to be lowered. In cases where the Netherlands has charged interest in respect in line with the outcome of a MAP, the Dutch competent authority will generally be open for lowering this interest based on principles of reasonableness and fairness.
This lowering of interest only applies to MAPs. In principle, interest is not lowered for advance certainty in the form of BAPAs. The legal basis for doing so and the policy contained in the Decree on Mutual Agreement Procedures only applies to MAPs not to BAPAs. However, in some cases, the end result of interest due in BAPAs can be very unreasonable for the taxpayer. For example, the fact that there can be a very long lead time for concluding a BAPA effectively means that there is no longer any question of advance certainty because the original requested term of the BAPA has already ended or is set to end soon, thus making it a retrospective agreement. BAPAs and MAPs both aim to avoid double taxation. The difference is the timing: the one is in advance; the other belatedly.
If BAPAs are used to obtain advance certainty, there is in principle no need to lower the interest on tax due and late payment interest, as the levying of tax will, in theory, take place in relation to future years (or at least years in which the tax return deadline has not lapsed yet). The disadvantage is that the long lead time of a BAPA also often means belated certainty, and that the current interest rules therefore do not align with existing practice. In such cases it is important to discuss the best strategy with your Tax Controversy advisor. A taxpayer does not have to accept the outcome of a BAPA or enter into an agreement with the relevant competent authorities based on that outcome. If tax assessments are subsequently imposed in which the agreed outcome of the discussions with the relevant competent authorities results in supplementary tax assessments being imposed in the Netherlands (and thus double taxation), the taxpayer can initiate a MAP to request double tax relief, while at the same time also asking to have any interest charged lowered. Given that the rate for interest on tax due and late payment interest is 8%, this is a worthwhile step to take and may turn out to be considerably more beneficial than if a BAPA is concluded. There are also countries we know of where the Dutch competent authorities always must contend with a long lead time for concluding BAPAs. Here, too, it’s also important to clearly discuss your strategy beforehand with an experienced Tax Controversy specialist so that, in addition to having to wait a long time before the BAPA is concluded, you also avoid any unnecessary interest being charged.
If you’re interested in hearing more about what Meijburg can do for your organization with regard to tax controversy and tax dispute management, feel free to contact Janneke Versantvoort for an introductory meeting.