Mutual Agreement Procedure - Program report - 2017

Executive Summary

This is the annual report issued by the Canada Revenue Agency (CRA) on its Mutual Agreement Procedure (MAP) Program. The CRA has published an annual report on this program since the 2001-2002 fiscal year, with the exception of the 2015-2016 fiscal year report. This report provides a summary of the MAP program for the period from January 1, 2017 to December 31, 2017. The publication of this report was delayed to align with the publication of the MAP statistics by the Organisation for EconomicCo-operation and Development (OECD).

This report describes the purpose, history, and current events that are shaping the future of the MAP program. The publication of statistical information makes the MAP program more transparent and provides some insight as to the types of issues addressed by the CRA and its treaty partners. A summary of the key findings presented in this calendar year report is provided here:

• The CRA had 224 negotiable MAP cases on January 1, 2017.
• During 2017, the CRA accepted 93 new MAP cases and closed 141.
• Of the 141 cases closed, 107 cases (76%) resulted in full relief from double taxation after discussions with other competent authorities, 12 cases (9%) resulted in unilateral relief granted, and 22 cases (16%) resulted in other outcomes.
• Of the 141 cases closed in 2017, 102 (73%) were initiated by Canada and 39 (27%) were initiated by other countries.
• The average time to complete a negotiable MAP case was 21.36 months.
• The transactional net margin method (TNMM) continued to be the most frequently employed transfer pricing methodology. The TNMM was used in 71% of the closed cases.

The CRA encourages taxpayers subject to double taxation or taxation not in accordance with an income tax convention to consider the MAP program.

For more information, see Information Circular 71‑17,Guidance on Competent Authority Assistance Under Canada’s Tax Conventions or contact a MAP manager in the Competent Authority Services Division (CASD).  See the list of MAP managers and their telephone numbers at the end of this report.

Introduction

The MAP program is a service provided by the CRA to assist taxpayers in resolving cases of double taxation or taxation not in accordance with the provisions of a tax convention. The MAP process requires co-operation from taxpayers to achieve the goal of resolving such cases.

What is the mutual agreement procedure?

The Model Tax Convention on Income and on Capital (published by the OECD) recommends that bilateral tax conventions include a MAP article as a dispute resolution mechanism. Under such an article, residents in either country may request assistance resolving an issue covered by their convention. In Canada, the Minister of National Revenue authorizes senior CRA officials to try to resolve tax disputes under tax conventions that Canada has with other countries. These senior officials are referred to as the competent authority. A similar authorization usually takes place in Canada's treaty partner countries.

How does the competent authority achieve resolution through the MAP?

• A taxpayer who seeks a MAP resolution generally has to formally request assistance from the competent authority of the country in which the taxpayer is resident.
• After a taxpayer’s request is submitted, the competent authority issues an acknowledgement letter to the taxpayer.
• The request is then reviewed to determine whether it is justified under the applicable income tax convention.
• If the request is rejected, the Canadian competent authority advises the taxpayer and the other competent authority in writing, citing reasons. The file is referred back to the tax services office (TSO) where the taxpayer may pursue other domestic recourse, if available.
• If the request is accepted, the Canadian competent authority issues a letter to the taxpayer and the other country’s competent authority agreeing to pursue the case.

• If the request results from a Canadian-initiated adjustment, the Canadian competent authority makes sure that the necessary facts are available (from both the taxpayer and the TSO that generated the adjustment) in order to prepare a position paper.
• For Canadian-initiated adjustments, the Canadian competent authority sends a formal position paper to the other country’s competent authority.
• The other country’s competent authority reviews the position paper, asks for more information if necessary, and advises the Canadian competent authority of its findings.
• If the other competent authority does not agree with the position of the Canadian competent authority, it may be necessary to negotiate.
• A negotiation usually resolves the tax issue in question to the satisfaction of the two competent authorities.
• The competent authorities exchange correspondence to confirm the details of a resolution.
• The CRA sends the details of the resolution to the taxpayer for acceptance or rejection.
• If the taxpayer accepts the resolution, the Canadian competent authority advises the TSO (and the Appeals Branch, if an objection is filed), providing all necessary details of the resolution.
• The TSO processes the results of the resolution.
• If the taxpayer rejects the resolution, the taxpayer may pursue any other domestic recourse.

What are the benefits of seeking relief through the MAP?

• The MAP process is the only mechanism under Canada’s network of tax treaties to relieve double taxation or taxation not in accordance with a convention.
• The resolution of double taxation or taxation not in accordance with a convention is a free service offered by the CRA.
• The MAP process requires co-operation from the taxpayer and regular communication between tax administrations. The views of the taxpayer, as presented in a MAP request, are given due consideration.
• After a MAP request has been accepted and all the facts reviewed, the resolution process is strictly between the two tax administrations, ending further taxpayer time and expense.
• With the experience of having negotiated hundreds of double tax cases, the CRA’s highly skilled staff (accountants, financial analysts, economists and lawyers) are able to prepare a quality position paper and achieve timely case resolution.
• The MAP process can resolve matters for one or more audited tax years. In addition, taxpayers may ask for an accelerated competent authority procedure (ACAP). This procedure is intended to provide assistance for later tax years on the same issues included in a MAP. Advice on ACAPs may be found in the CRA’s Information Circular, 71-17, Guidance on Competent Authority Assistance Under Canada's Tax Conventions, and its Transfer Pricing Memorandum 12, Accelerated Competent Authority Procedure (ACAP).
• If a tax issue concerns transfer pricing, taxpayers may find it appropriate to ask for an advance pricing arrangement (APA) request to cover future tax years (generally up to five years). Further guidance from the CRA on APAs may be found in the current version of Information Circular 94-4 International Transfer Pricing: Advance Pricing Arrangements.
• As the number of international audits increases and the issues become more complex, the MAP process continues to be the most effective and efficient mechanism to resolve international tax disputes.
• The CRA is committed to making taxpayers aware of the MAP program. The CRA expects that its commitment to the improvement of the program, combined with steadily increasing international audit activity, will result in more taxpayers seeking assistance through the MAP process.

Who is involved in the MAP?

The CASD, which has responsibility for the MAP program, is part of the International and Large Business Directorate (ILBD). The ILBD is part of the International, Large Business and Investigations Branch of the CRA. The director of the CASD is an authorized competent authority for Canada. The director is responsible for cases involving double taxation and taxation not in accordance with a convention, as well as for the overall administration of the MAP program. For information on the requests handled by the CASD see Information Circular 71-17.

The CASD is responsible for:

• The negotiation and resolution of disputes with foreign tax administrations regarding double taxation or taxation not in accordance with the treaty under MAP articles of our tax treaties;
• The negotiation of advance pricing arrangements (APAs) with foreign tax administrations to determine appropriate transfer pricing methodologies for complex cross-border transactions between related parties; and
• The exchange of information with Canada's treaty partners.

As of December 31, 2017, there were 54 employees in the CASD. This included 1 director, 7 managers and 46 staff. The 46 staff have the following tasks:

• 23 (including 8 economists) are assigned to the Mutual Agreement Procedure – Advance Pricing Arrangement teams with the main responsibility of handling transfer pricing cases
• 5 are assigned to the Mutual Agreement Procedure – Technical Cases Team
• 18 are assigned to the Exchange of Information Services teams.

When the CRA receives a MAP request from a taxpayer, the request is registered in a tracking system and assigned to one of the four MAP – APA sections or to the MAP – Technical Cases Section. The MAP case is then assigned to a lead analyst, who is responsible for the review, analysis, negotiation and resolution of the MAP case. If needed the analyst may seek support from other areas of the CRA including ILBD’s International Tax Division, the Income Tax Rulings and Legislative Policy directorates of the Legislative Policy and Regulatory Affairs Branch, or from legal counsel with the Department of Justice Canada.

The international auditors at the TSOs also play an important role in the MAP process. Where a MAP case arises from Canadian-initiated audit adjustments, international auditors provide the lead analyst with background information, working papers and the rationale for audit adjustments. Where a MAP case arises from foreign-initiated audit adjustments, the international auditors assist the lead analyst by reviewing the adjustments and providing the analyst with information and feedback.

Taxpayers may choose to represent themselves or authorize a representative to pursue a MAP request on their behalf. Taxpayers, or their representatives, are involved to the extent that the CRA may ask for more information during a MAP process, and such co-operation is needed to resolve a case.

A brief history of the MAP program in Canada

Canada’s MAP program dates back to 1942, when it signed its first tax treaty with the United States, (which contained a MAP provision). Published taxpayer guidance dates back to 1971, with the release of Information Circular 71-17. This information circular has been revised several times, and the CRA now operates under Information Circular 71-17R5, Guidance on Competent Authority Assistance Under Canada’s Tax Conventions, dated January 1, 2005.

The number of MAP requests in Canada has grown steadily over the years. The CASD has continued reorganizing and implementing a number of initiatives to improve the quality and timeliness of services to taxpayers. These service improvements include the introduction of case management techniques to ensure that MAP requests are progressing on schedule, as well as ongoing efforts to improve the bilateral process with other tax administrations.

Current state of the MAP program in Canada

Recent developments

A new treaty between Canada and Israel, and a tax arrangement between the Trade and Economic Offices of Canada and Taiwan, entered into effect in 2017. The entry into force of Canada’s treaties with Belgium, Lebanon, Madagascar and Namibia is still pending and negotiations with Germany, Switzerland and the Republic of San Marino are still ongoing. Status of International Tax Treaty Negotiations

On June 7, 2017, Canada signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). Once ratified, the MLI will modify many of Canada’s tax treaties, and may affect time limits and other MAP-related provisions contained in them. A Government bill, Bill C-82, to implement the MLI was introduced in Canada’s Parliament on June 20, 2018. Bill C-82 has had a second reading and it has been referred to the Standing Committee on Finance

Canada is an active member of the OECD’s Forum on Tax Administration (FTA) MAP Forum and participant in its peer review process. Canada provided detailed peer input to other jurisdictions in the framework of their peer review and made constructive suggestions on how to improve the process with the concerned assessed jurisdictions. Canada also provided peer input on best practices for other jurisdictions. Furthermore, Canada was part of the first batch of countries subject to the MAP peer review and is now in the process of completing Stage 2 of the peer review. In 2017, the OECD published Canada’s (Stage 1) final report: The final report (for Canada) as well as best practices for Canada.

The Canada Revenue Agency is working on updating its MAP and APA guidance and will issue an updated version of Information Circular 71-17R5, Guidance on Competent Authority Assistance Under Canada’s Tax Conventions and Information Circular  94-4R  International Transfer Pricing: Advance Pricing Arrangements.

Timeline: general

When a case involves negotiation with another tax administration, every effort is made to resolve the tax issue as quickly as possible.

The target for resolving a case is 24 months. However, there are many factors beyond the CRA’s control, which may result in this target not being met. Factors include the co-operation and timely receipt of information from the taxpayer, the complexity of an issue, the time that the other competent authority needs to review and respond to a position paper, and the willingness of both competent authorities to adopt reasonable negotiating positions.

The CRA’s in-house tracking system allows CASD management and staff to monitor the status of MAP cases and report statistics on a number of performance measures, including the average time taken to:

• issue letters after a request is received;
• develop a position paper; and
• negotiate and conclude a case.

See table 1 for statistics on the average time to complete negotiable cases.

The CRA continues to enhance its management system to follow new developments of the MAP statistic reporting framework (the “framework”) to monitor the timelines for MAP cases.

Timeline: negotiable MAP case completions

Beginning in 2016, MAP reporting has been done for calendar years instead of fiscal years. This is in line with the new framework for reporting purposes. This report shows previous fiscal year data for comparative purposes presented on a fiscal year, and it shows the 2016 and 2017 data by calendar year.

The table below shows the average time (in months) needed to complete negotiable MAP cases (Canadian-initiated and foreign-initiated) for the last five reporting periods.

As a result of requirements under the framework, 2016 completed MAP cases were categorized as either pre-2016, referring to cases with a start date prior to January 1, 2016, or post-2015, referring to cases with a start date after December 31, 2015. The statistical analysis shows the results for pre-2016 and post-2015 cases completed in 2017.

The times shown above for 2017 include the completion of the pre-2016 and post-2015 negotiable MAP cases. There were 141 MAP cases closed during 2017, of which 76 have a start date before 2016 and 65 have a start date after January 1, 2016. To calculate the average time taken to resolve pre-2016 MAP cases, the date of filing of the MAP request was the start date and the date of the closing letter sent to the taxpayer was the end date.

The framework requires time reporting by the following different stages:

Start to end: time elapsed between the start date and the end date
Received to start: time from the moment when a request is received until the start date
Start to position paper: time between the start date and when the position papers were sent by the CRA or received from a treaty partner
Position paper to end: time between the position papers being sent by the CRA (or received from a treaty partner) and the end date.

As mentioned in the 2016 MAP Report, subsequent reports will continue to follow the above-mentioned stages.

Under the framework, the start date is generally five weeks from the receipt of a taxpayer’s MAP request. The end date is the date of an official communication (typically in the form of a letter) from the competent authority to advise the taxpayer of the outcome of their request or the date the competent authority receives a notification that they have withdrawn their request.

Pre-2016 negotiable MAP cases

The chart and table below show the average time (in months) taken to complete the various stages of cases during 2017 for pre-2016 negotiable MAP cases. Also shown is the breakdown between Canadian-initiated and foreign-initiated cases.

*The start date for pre-2016 cases is the same as the received date.
**The average is calculated using cases where a position paper was sent or received.

On average, pre-2016 Canadian-initiated MAP cases were completed within 34.58 months and foreign-initiated MAP cases were completed within 28.23 months.

Post-2015 negotiable MAP cases

The chart and table below show the average time (in months) taken to complete the stages of a case for post-2015 negotiable MAP cases during 2017. Also shown is a breakdown between Canadian-initiated and foreign-initiated cases.

*The average is calculated using cases where a position paper was sent or received.

On average, Canadian-initiated MAP cases were closed within 7.43 months and foreign-initiated MAP cases within 5.08 months. The average time taken to resolve cases for post-2015 follows the framework.

In summary, of the 141 cases closed in 2017, there were 102 cases initiated by Canada and 39 cases initiated by other countries. On average, it took 21.36 months to resolve MAP cases, in 2017. For Canadian-initiated cases it took 24.26 months and for foreign-initiated cases, it took 13.61.

Resolving double taxation

The CRA tries to set and maintain effective dispute resolution procedures with all of its treaty partners. This requires that tax administrations try to resolve cases in a fair and timely fashion. Although existing procedures generally work to provide full relief from double taxation, sometimes an agreement cannot be reached on a case.

Examples of situations for which there may be partial relief or no relief of double taxation:

• when not enough notification is given, or a tax year is statute-barred or becomes statute-barred during negotiations in either jurisdiction
• refusal of another tax administration to give full relief of a Canadian-initiated adjustment that has been settled through the Canadian domestic tax appeals process
• inability of another tax administration to vary an adjustment, due to its domestic tax rules
• the Canadian and foreign administrations cannot agree on the interpretation of an issue involving the treaty or a bilateral advance pricing arrangement
• a foreign adjustment that is not recognized for Canadian tax purposes such as a notional charge, or a Canadian adjustment not recognized by a foreign tax administration
• no response received from another tax administration with respect to Canada’s request for a MAP
• residency issues where the Canadian and foreign administrations cannot agree on how to apply the tie-breaker rules
• refusal of a taxpayer to provide information requested by one or both tax administrations.

MAP results

The analysis of the MAP caseload relates to the calendar year period starting on January 1, 2017, and ending on December 31, 2017. During this period, 93 cases were started and 141 cases were closed. At the start of the period, there were 224 pending MAP cases, and at the end of the period there were 176 cases.

Of the 141 MAP cases closed in the 2017 calendar year, 107 cases (76%) resulted in full relief from double taxation upon negotiation, 12 cases (9%) resulted in unilateral relief granted, and the remaining cases were closed with other outcomes. The following table shows the outcomes and percentages for each category of closed case:

*The sum may not add up to 100% due to rounding.

Any MAP case that is not defined as an attribution/allocation MAP case is defined as other. This may include requests involving juridical double taxation. This is taxation contrary to a convention where either the mutual agreement procedure is required to resolve an issue (for example the taxation of pension and annuities or other income) or a permanent establishment determination is required.

 

The following two tables segregate the number of MAP cases closed by pre-2016 and post-2015.

Program statistics

The table below shows the number of cases, including non-negotiable cases that were accepted and completed for the fiscal years 2013–2014 through 2015–2016, and for the 2016 and 2017 calendar years.

*Unpublished statistics for the 2015-2016 fiscal year are shown for comparison purposes.

MAP cases by type

The following table shows the acceptance and completion of MAP requests by type, negotiable and non-negotiable, and by year, for the period 2013 to 2017.
Negotiable cases require bilateral negotiations with another tax administration to resolve double taxation or taxation not in accordance with an income tax convention.

Non-negotiable cases are resolved by an agreement between Canada’s competent authority and taxpayers. These cases do not involve another tax administration.

*Unpublished statistics for the 2015-2016 fiscal year are shown for comparison purposes.

Negotiable MAP cases by category

The following table shows a breakdown by category for negotiable cases for 2017:

Negotiable MAP cases completed: foreign-initiated and Canadian-initiated

The following table shows a breakdown of completed cases resulting from foreign-initiated and Canadian-initiated audit adjustments:

*Unpublished statistics for the 2015-2016 fiscal year are shown for comparison purposes.

Negotiable MAP cases completed for industry and individuals

Negotiable MAP cases completed by transfer pricing methodology

* If a MAP case involves an issue of taxation contrary to a convention, a transfer pricing methodology generally does not apply.

For more information about transfer pricing methodologies, see Information Circular 87-2, International Transfer Pricing.

Non-negotiable MAP cases by category

The Pensions category involves elections under the Canada – United States convention on taxing income and capital to defer the taxing of undistributed accrued pension income.

The Gains category includes deferred-gains agreements for all treaties and the application of the transitional rule in the Canada-United States convention on taxing income and capital.

The Other category generally includes all other assistance and advice given to taxpayers and other areas of the CRA, including matters of miscellaneous rules, estate rollovers and United States “S” corporations.

Ending inventory: Canadian-initiated vs foreign-initiated

The following table shows the ending inventory of 176 cases, categorized by Canadian-initiated or foreign-initiated, maintaining the distinction between post–2015 cases and pre–2016 cases:

Of the 176 cases open on December 31, 2017, 77% were Canadian-initiated, and 23% were foreign-initiated. Most of the foreign initiated cases are with the United States.

Ending inventory by industry

The 176 MAP cases in the CASD’s ending inventory relate to many industries, with significant representation in the industries of construction equipment and materials (16%), T1 personal tax (15%) and metals and minerals (13%).

The following table shows the ending inventory of 176 cases, categorized by industry and individuals on December 31, 2017:

* Includes cases in several other industries, such as agriculture, food & beverage, machinery, management & administrative services, transportation & warehousing services, wholesale trade as well as wood and paper.

Contacts

Donna O’Connor
Director
Competent Authority Services Division
Telephone: 613-946-6022

MAP Managers
Sudha Dukkipati
Manager – Section 1
Telephone: 613-946-8897

Dan Quinn
Manager – Section 2
Telephone: 613-952-6960

Charles McSpaden   
Manager – Section 3
Telephone: 613-941-9281

Brian Busby
Manager – Section 4
Telephone: 613-946-6169

Johanne Desparois
Manager – Technical Cases
Telephone: 613-946-6085

How to contact the Competent Authority Services Division

If you have comments or questions about this report or the services offered by the Competent Authority Services Division, please contact the division:

• by phone, at one of the numbers listed above,
• by fax, at 613-990-7370,
• by email, at MAP-APA/PAA-APP.CPB/DGPO@cra-arc.gc.ca,
• by post or courier:

Director
Competent Authority Services Division
International and Large Business Directorate
International, Large Business and Investigations Branch
Canada Revenue Agency
8th floor,
427 Laurier Avenue West
Ottawa ON  K1A 0L5
Canada