Two-Sided Adjustment: The Correlative Relief on the TP Adjustment

Definition

The two-sided adjustment is the adjustment that moves both associated enterprises’ profits — as against the primary (one-sided) adjustment, which moves only the examining jurisdiction’s. The OECD framework (Article 9.1) is explicit: where the adjustment is made to one associated enterprise’s profit (the primary adjustment, the TPO’s or the AO’s), the other associated enterprise is entitled to the correlative adjustment (the relief, the corresponding move in its profit) — where the other jurisdiction’s law and the DTA permit it. The two-sided adjustment is the elimination of the double taxation the primary adjustment creates, and its mechanism is the MAP (the mutual agreement procedure) where the DTA carries the article, or the unilateral correlative relief where the other jurisdiction’s law allows it without the treaty.

The primary adjustment (one-sided):
  Jurisdiction A (the TPO): the tested party’s profit ↑ (the price raised,
  the income added) — Jurisdiction B’s enterprise is untouched
  → the same economic profit is now taxed in A (higher) and still in B
    (unchanged) — the double taxation

The two-sided adjustment (the correlative relief):
  Jurisdiction A: the primary adjustment (as above)
  Jurisdiction B: the correlative adjustment (the enterprise’s profit ↓,
  the corresponding deduction / the credit, on the DTA or the local law)
  → the economic profit taxed once, at the combined rate — the double
    taxation eliminated

The element	The content
The primary adjustment	The examining jurisdiction’s move (the TPO’s / the AO’s / the IRS’s) — the tested party’s profit adjusted to the arm’s length level, the income added (or reduced) in Jurisdiction A
The correlative relief	The other jurisdiction’s corresponding move (the associated enterprise’s profit reduced, the deduction allowed, the credit given) — the mirror of the primary, on the DTA article or the local law
The mechanism	The MAP (the competent authorities’ mutual agreement, the DTA’s MAP article — the MAP guide) where the treaty carries it; the unilateral relief (the other jurisdiction’s law allows the correlative adjustment without the treaty) where it does not
The limit	The correlative relief is where permitted — the other jurisdiction’s law and the DTA are the conditions; where they do not permit (the jurisdiction that does not grant the correlative, the DTA without the MAP article), the double taxation stands, and the relief is the tax credit / the refund on the home side, where the home law allows it

The working read (the audit defense guide and the MAP guide): the two-sided adjustment is the resolution of the primary adjustment’s double taxation — and the sequencing is the practical question. The primary adjustment is made first (the TPO’s determination, the AO’s incorporation); the correlative relief follows (the MAP application, the competent authorities’ agreement, the other jurisdiction’s relief). The double taxation exists in the interval (the primary made, the correlative not yet granted) — the interest on it, the cash cost, is the adjustment’s real cost, and the MAP’s timeliness (the application within the window, the MAP timeline) is what shortens the interval.

Example

The Indian tested party (the supplier) sells to the German associated enterprise; the Indian TPO determines the price was too low and raises it (the primary adjustment: the Indian income added, the Indian tax increased). The German enterprise’s corresponding cost was too low (the German deduction reduced by the same amount) — the correlative adjustment (the German deduction restored, the German tax reduced) is the two-sided relief. The DTA (the India-Germany treaty) carries the MAP article: the Indian enterprise applies to the competent authorities (the MAP application), the competent authorities agree (the Indian adjustment, the German correlative), the double taxation is eliminated — the economic profit taxed once, at the combined rate. The interval (the primary made, the MAP pending) carries the interest on the double tax — the cost the MAP’s timeliness addresses.

See also

• MAP and DTAs in India (the guide)
• Section 92 (s.92)
• TP Audit Defense

FAQ

Is the correlative relief automatic, once the primary adjustment is made? No — it is where the other jurisdiction’s law and the DTA permit it. The DTA’s MAP article (the mutual agreement procedure) is the mechanism where the treaty carries it; the other jurisdiction’s local law may allow the unilateral correlative relief (the deduction, the credit) without the treaty. Where neither permits (the jurisdiction that does not grant the correlative, the DTA without the MAP article), the double taxation stands — and the relief, where the home law allows it, is the tax credit / the refund on the home side (the double tax relieved at the home, not at the source). The MAP guide has the mechanism’s conditions.

Two-sided adjustment or unilateral relief — what is the difference? The two-sided adjustment is the both-enterprises move (the primary in Jurisdiction A, the correlative in Jurisdiction B — the profits of both associated enterprises adjusted, the double taxation eliminated at the source). The unilateral relief is the one-jurisdiction move (the home jurisdiction grants the credit / the refund for the foreign tax, without the other jurisdiction adjusting its enterprise’s profit — the double tax relieved at the home, the other enterprise’s profit untouched). The two-sided is the OECD’s standard (the Article 9.1 correlative); the unilateral is the fallback (the home-side relief where the correlative is not granted).

Where does the two-sided adjustment show up in the documentation? In the dispute / the MAP record, not the contemporaneous file: the primary adjustment (the TPO’s determination, the amount, the basis), the correlative application (the MAP, the competent authorities, the DTA article), the agreement (the mutual agreement, the relief granted), and the interval (the interest on the double tax, the timeliness). The contemporaneous file’s role is the prevention (the arm’s length position documented, the adjustment avoided) — and the audit defense guide’s role, where the adjustment is made, is the two-sided resolution sequenced: the primary challenged or accepted, the correlative applied, the interval shortened.