Article 17 of MLI – Corresponding Adjustments


What is the corresponding adjustment? When the contracting jurisdiction carries out the adjustment in the price between the associated enterprises, it may lead to economic double taxation. The enterprise in a Contracting jurisdiction whose profits are revised upwards will be liable to tax on profit already taxed in the hands of its associated enterprise in the other jurisdiction. To relieve this double taxation, Article 17 of MLI provides for the corresponding adjustment.

Article 17 Corresponding Adjustment
Article 17 of MLI | Corresponding Adjustment

Action 14 Report provides that jurisdictions provide access to the mutual agreement procedure in transfer pricing cases and implement the resulting mutual agreements. The Action 14 Report noted that it would be more efficient if jurisdictions also could provide corresponding adjustments unilaterally in cases in which they find the taxpayer’s objection to being justified. Article 17 of the Convention provides a mechanism for Parties to implement this Best Practice.

Corresponding Adjustment – Article 17(1) of MLI

Article 17(1) of the MLI provides that the other contracting jurisdiction (say State B) shall make an appropriate corresponding adjustment :

  • if it finds the profits would have correctly accrued to the associate enterprises
  • and the Contracting Jurisdiction of the associate enterprise has made an upward revision
  • considering if the two entities had been independent enterprises.

It also provides that while making such corresponding adjustment, due regard shall be given to the other provisions of the CTA, and the competent authorities of the contracting jurisdiction shall if necessary consult each other in determining such adjustment.

Compatibility Clause – Article 17(2) of MLI

Paragraph 2 of Article 17 of MLI contains a compatibility clause that describes the relationship between Article 17(1) of the MLI and provisions of Covered Tax Agreements.

It provides that Article 17(1) shall apply to Covered Tax Agreements in the place or absence of a provision requiring that a Contracting Jurisdiction shall make a corresponding adjustment where the other Contracting Jurisdiction makes an adjustment that reflects the arm’s length profits of an enterprise.

Reservation Clause

Article 17(3) of MLI allows a party to reserve the right not to apply Article 17(1) of MLI only on the basis that in the absence of the provisions described in Article 17(2) in CTA, either:

  • The Party making the reservation will adjust as referred to in Article 17(1) of MLI; or,
  • Contracting Jurisdictions competent authority will try to resolve a transfer pricing case under the mutual agreement procedure provision of its tax treaty; or
  • If the Contracting Jurisdiction has expressed a reservation on Article 16(2) because it would accept an Article in its bilateral treaty negotiations by which either country will not make any adjustment after a mutually agreed period in respect of profits :
    • attributable to any enterprise or
    •  profits that would have accrued to the enterprise but did not accrue to being associated enterprises.

Notification Clause

Article 17(4) of MLI requires countries other than a country with reservations under Article 17(3) to notify the Depositary whether each of its Covered Tax Agreements contains provision for the corresponding adjustment. If such provision exists, the article and paragraph number of each such provision has to be notified.

The provisions of paragraph 1 will replace such provisions where all Contracting Jurisdictions to a Covered Tax Agreement have made such a notification. In other cases, paragraph 1 will apply to the Covered Tax Agreement but will supersede existing provisions of a Covered Tax Agreement only to the extent that those provisions are incompatible with paragraph 1.

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