MAP: A Useful Tool to Settle International Tax Disputes

Analysis

Zoltán Pauker, senior manager, Andersen Adótanácsadó Zrt.

In recent years, there have been significant changes in international taxation, transforming the mindset of both the tax authorities and private actors, whether companies or private persons, doing business at the international level. Just think of the BEPS project, the GloBE project, or, more recently, the termination of the U.S.-Hungarian double tax treaty.

If we accept that the purpose of the above projects is to prevent the erosion of tax revenues for the state and imagine what entrepreneurs face in cross-border transactions on a day-to-day basis, it becomes apparent that these entrepreneurs will or already have been challenged by foreign tax authorities.

As a result, it is vital to know what tools we can apply to defend our position and avoid double taxation. Below, we briefly summarize the most important rules of those procedures available for Hungarian taxable persons.

Mutual Agreement Procedure

In Hungary, three mutual agreement procedures (or MAPs) are available for Hungarian taxable persons.

In all three, disputes are raised because of different interpretations of the double tax treaty in force, which leads to double taxation.

As a principal rule, procedures may be initiated before the Ministry of Finance provided that three years have not passed between the disputed first instance resolution of the foreign tax authority and the request submission.

The Classical MAP

The first procedure available for taxable persons is the so-called classical MAP and is based on the given double tax treaty. It is worth applying in those situations where the opposing state is not a member of the European Union.

The procedure has two phases: evaluating the submitted complaint and negotiating with the foreign authority. It is important to note that the ministry cannot reject the complaint on the ground that the taxable person has taken legal steps in the foreign country to challenge the disputed resolution.

Arbitration Procedure

This procedure aims to settle disputes deriving from different interpretations of the transfer pricing clause of the given double tax treaty. The arbitration procedure can be applied should the opposing state be a member of the European Union.

The procedure has three phases: evaluation of the submitted complaint, negotiation with the foreign authority, and the arbitration procedure (if the dispute cannot be settled in the second phase). The complaint can also be submitted to the foreign jurisdiction if the conditions are met.

A period of two years is set aside to resolve the dispute. If that proves impossible, it will be forwarded to the arbitration tribunal.

EU MAP

This procedure is the so-called European Union MAP. It is worth applying in those situations where the opposing state is a member of the European Union.

The procedure has three phases: evaluation of the submitted complaint, negotiation with the foreign authority, and dispute resolution by the Advisory Commission (if the dispute cannot be settled in the second phase).

As a rule of thumb, the complaint should be filed not just with the Ministry of Finance but also with the opposing foreign authority (small and medium-sized enterprises and private persons have the right to submit their complaint to the Ministry of Finance only).

Should the taxable person take steps to challenge the disputed decision domestically, the third phase (dispute resolution by the Advisory Commission) cannot be initiated.

This article was first published in the Budapest Business Journal print issue of May 5, 2023.

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