Disputes with the tax authority are usually a source of stress for many taxpayers, moreover, due to complex tax regulations, these proceedings can drag on for years. In order to protect their interests, this often results in the need to reach for the consultation of a specialist, which entails additional costs for businesses.
However, taxpayers have been equipped with several tools and resources to prevent or resolve tax disputes with the tax authorities, without the need for further disputes in tax court.
The primary tool through which taxpayers can learn the views of the tax authorities on the applicable tax laws and uncertainty are individual tax interpretations issued by the Director of the National Tax Information. Taxpayers, in an application for its issuance, describe the actual state of affairs or a future event that concerns them, and then present their own position on the interpretation of tax laws applicable to the case. The authority then issues an interpretation in which it states whether, the taxpayer’s position is correct, and if not, presents its position on the matter. In case of dissatisfaction with the authority’s opinion, the taxpayer may appeal to the administrative court. The individual interpretation provides protection to the taxpayer for whom it was issued, and the taxpayer cannot suffer negative consequences if he complies with it. Interpretations can address issues of tax payment rules, tax responsibilities, filing of tax returns, tax refund rules.
If taxpayers engage in transactions with related parties, and thus are required to establish correct transfer pricing that ensures compliance with the arm’s length principle in income tax, they can benefit from an advance pricing agreement (APA). An APA is an agreement between a taxpayer and a tax authority, under which the tax authority accepts the choice and methods of applying the transfer price verification method applicable to transactions between related parties. An APA is an agreement that is effective for a period of five years from its conclusion. These agreements can be unilateral or multilateral, in the latter case, they can apply to related parties located in another country.
MAP is designed to address double taxation in transactions between related parties. A taxpayer who believes that one of the tax administrations has taxed inconsistently, may file a request to resolve the dispute. The parties to the MAP process are the authorities of the individual States involved in the dispute, this, however, does not prevent the taxpayer from being involved, in order to present all the facts and circumstances of the case. Applying for a MAP, does not interfere with applying for an APA.
Mechanisms for resolving and preventing tax disputes can be found in the UN Handbook on Dispute Avoidance and Resolution, which provides fair guidance and solutions for tax administrations. The handbook includes mechanisms for disputes that can occur at home and across borders, not only between the taxpayer and tax administration, but also for disputes that can arise between two jurisdictions.
