No. 200: How Tax Complexity Affects the Bilateral Resolution of Double Taxation

Due to increasing numbers of unresolved double taxation issues and the prominent discussion in the OECD BEPS project, mutual agreement procedures (MAPs) gained large attention during the last years. Even though experts acknowledge the role of tax complexity in curbing caseloads, little is known about its influence on the occurrence and outcome of MAPs. For this purpose, we first provide a theoretical framework based on transaction cost theory to explain the dynamics in the two-stage MAP process. This is followed by an empirical investigation of 5,975 MAP deals from 2018 to 2021 that we tie onto the tax complexity index by Hoppe et al. (2023). Thereby, we differentiate between the influence of tax code and tax framework complexity. Our main results are as follows: First and counterintuitively, tax code complexity has a positive effect on the occurrence and bilateral resolution as outcome of MAPs. Second and as expected, tax framework complexity has a negative effect on the occurrence and bilateral resolution as outcome of MAPs. By being the first to empirically investigate this relation, we draw a differentiated picture on the influence of tax complexity on the bilateral resolution of MAPs: First, MAPs seem to be an accepted instrument for taxpayers to resolve double taxation issues in complex legal environments. Second, high tax code complexity might hint to the use of ‚package deals‘ where complex, but similar cases are bundled and decided as a whole and not individually. Third, highly complex tax frameworks might have a ‚deterring effect‘ on taxpayers to actually step into the process and also hinder authorities in achieving a bilateral resolution as outcome of MAPs. In contrast, we can show that a high tax framework complexity in both countries leads to more unilateral double tax relief by tax authorities.