Plain English
When an authority decides your pricing was wrong, it increases profit in its country. That is the primary adjustment. Unless the other country reduces profit by the same amount — the corresponding adjustment — the same income is taxed twice. A third layer, the secondary adjustment, treats the excess cash as a deemed dividend or loan and can add withholding tax on top.
Technical definition
A primary adjustment under Article 9(1) increases the profits of one enterprise; Article 9(2) provides for a corresponding adjustment by the other state where it agrees the primary adjustment is justified; secondary adjustments recharacterise the resulting cash imbalance under domestic law.
Why it matters
The tax cost is only part of it. Interest, penalties, withholding tax on secondary adjustments and years of MAP effort typically exceed the headline adjustment.
How it works in practice
- 01Authority proposes a primary adjustment following audit.
- 02Taxpayer accepts, appeals domestically, or requests MAP.
- 03Corresponding relief is sought in the counterparty jurisdiction.
- 04Repatriation of the cash difference is agreed to avoid or mitigate secondary adjustment.
Worked example
The full cost stack
A 10m primary adjustment at 25% is 2.5m of tax. Add 20% penalties (0.5m), five years of interest at 5% (roughly 0.7m), and a secondary adjustment treated as a deemed dividend with 10% withholding (1m). Without corresponding relief the other country still taxed the same 10m. The economic cost approaches double the naive estimate.
Common mistakes
- Missing the MAP filing window, which is typically three years from first notification.
- Settling domestically in a way that forfeits treaty relief.
- Overlooking repatriation mechanics that prevent secondary adjustments.
Audit red flags
- Adjustment proposed in a jurisdiction with no MAP-eligible treaty.
- Statute of limitations approaching in the counterparty country.
Documentation & data
Documents to hold
- Audit correspondence log.
- MAP request with supporting analysis.
- Repatriation agreement.
Data you need
- Original documentation for the year under review.
- Treaty and domestic limitation periods for both countries.
Who owns this internally: Group tax controversy lead, with external counsel.
Jurisdiction notes
- European Union
- The Tax Dispute Resolution Directive provides a binding timeline for resolving double taxation disputes between member states.
- Global
- BEPS Action 14 minimum standard commits participating jurisdictions to timely MAP resolution.
Notes by role
CFOs & finance leaders
Model the whole stack — tax, interest, penalties, withholding — when deciding whether to settle or litigate.
Frequently asked
- Is a corresponding adjustment automatic?
- No. The other state grants it only if it agrees the primary adjustment reflects arm's length conditions, usually through MAP.
Sources & status
- Primary source
OECD Model Tax Convention, Article 9(2)
OECD, 2017
- Primary source
OECD Transfer Pricing Guidelines, Chapter IV
OECD, 2022
- Our interpretation
Illustrative cost stack figures
This glossary, 2026 — Rates are illustrative only and vary widely by jurisdiction.
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
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