INTRODUCTION
Double taxation avoidance agreements (DTAAs) are agreements between India and other countries to avoid double taxation on the same income by a taxpayer in several jurisdictions. These DTAAs provide treaty parties with norms and processes to avoid economic and juridical double taxation, as well as other types of double taxation and disputes involving transfer pricing adjustments. The taxpayer may apply the Mutual Agreement Procedure whenever there is a problem with double taxation that is not in compliance with the tax treaty.
MUTUAL AGREEMENT PROCEDURE
Mutual agreement procedure (MAP) is an alternative tax dispute resolution mechanism used to settle disputes caused by double taxation. MAP will be initiated when a taxpayer is taxed twice by both jurisdictions and is not taxed in accordance with the existing tax treaties. The problem arises when the taxpayer earns income from multiple jurisdictions because each country has its own rules for defining a person’s residential status and the permanent establishment of a business. And by applying their domestic laws, they end up taxing the same person in both jurisdictions. As a result, the Mutual agreement procedure is a provision in the treaties that the taxpayer can use to avoid such situations.[1]
Regardless of other remedies available under domestic laws, a taxpayer may choose MAP as a procedure. The taxpayer is under no obligation to follow the relief provided by MAP; he may instead seek remedies available under domestic law. The taxpayer has the option to accept or reject the MAP outcome.
The application of MAP was governed by Income Tax Rules 1962, Rules 44G and 44H. The G-20 and OECD countries’ Base Erosion and Profit Shifting programme had advised all countries to improve dispute resolution and publish full MAP guidelines. The Central Board of Direct Taxes changed Rule 44G in May of 2020, replacing Rule 44G with Rule 44H and revising Form 34F. It now specifies the procedures to be performed by CAs as well as the method for implementing the results via MAP. This ruling has been extended to all outstanding cases as well.
COMPETENT AUTHORITY
A competent authority (CA) is a person or entity designated by the government to manage tax-related issues. MAP permits CAs to negotiate tax disputes among treaty countries. Article 25 of the OECD Model Tax Convention specifies when a mutual agreement method may be implemented. When a taxpayer discovers that a contracting state’s actions will result in non-traditional taxation, he must present his case within three years of being notified of the activity. Rule 44G stipulates that the application must use form 34F. Within a reasonable timeframe, the taxpayer must provide any missing information or amend any inaccuracies in the form. CAs may deny MAP access if an application is submitted late or if errors are not resolved.
If the application is submitted to the Indian CA, he must inform the CA of the other contracting state in writing. If the state’s certification authorities reject the application, he must provide an explanation. If both CAs concur that the MAP application is not acceptable, the taxpayer should be notified and MAP should be denied. If MAP is approved, the CAs of both contracting states will analyse and negotiate the matter. Rarely do applications for mutual agreement procedures experience delays. Provisions 245A to 245L of Chapter XIX-A of the 1961 Income Tax Act established the Income Tax Settlement Commission (ITSC), an independent statutory dispute resolution authority. Issues pending or resolved by the ITSC are ineligible for MAP and will be denied. CAs cannot accept MAP applications if AAR has resolved the issue (AAR). CAs may accept MAP applications if neither ITSC nor AAR could fix the issue. The assessee must accept or reject a decision made by the authorities within 30 days.
ARBITRATION UNDER OECD AND UN MODEL
Arbitration is another dispute resolution system available to resolve these tax disputes, as specified in Article 25 of the OECD model tax convention. Arbitration is part of the mutual agreement procedure and is not available on its own. Arbitration can be chosen only if the competent authorities are unable to reach an agreement on one or more of the MAP’s issues. Arbitration is an extension to MAP and is not available to the entire MAP. It is subject to all of MAP’s limitations. Article 25(5) of the OECD model gives the taxpayer the option of requesting that such issues be resolved through arbitration if the competent authorities fail to resolve the case within the specified time (2 years). If such issues are resolved in a domestic court, the taxpayer may not seek arbitration. Apart from OECD provisions, the United Nations Model Double Taxation Convention includes mutual agreement procedures and arbitration. The procedure for MAP and arbitration is also defined in UN Model Article 25. Arbitration is available under the UN model if the MAP issues are not resolved within three years of the start date. Under the UN model, arbitration is available at the request of any competent authority rather than the taxpayer. The main difference between the OECD and UN models is that arbitration is mandatory under the OECD if any of the issues are not resolved by the competent authorities, whereas arbitration is not truly mandatory under the UN model because the competent authority initiates the arbitration procedure[2]. Arbitration is important for the taxpayer because, under MAP, the competent authorities may be unable to resolve the issue, resulting in double taxation, but once the unresolved issues are settled by arbitration, the competent authorities are bound to agree through arbitration. Even if a treaty does not include an arbitration clause, competent authorities have the authority to initiate arbitration without the consent of taxpayers, but both competent authorities of the contracting state must agree to do so. Arbitration is not permitted in few states due to national law. The arbitrators should be chosen by the contracting state’s competent authorities. The panel is made up of three arbitrators. If the case is resolved by the competent authorities while the arbitral proceedings are ongoing, the arbitration may be withdrawn. Only the taxpayer has the right to reject the arbitral decision; until that time, the arbitral decision is binding on the competent authorities and must be implemented through the MAP agreement[3].
Prior to 2015, many treaties did not include arbitration provisions, and access to MAP and arbitration was limited in some cases. The OECD emphasised the importance of MAP in its final action 14 report in 2015, and developed a minimum standard for treaty-related disputes. The OECD began implementing various measures to make the MAP more effective and faster. The online Manual on Effective Mutual Agreement Procedures (MEMAP) is a step toward developing additional dispute resolution mechanisms. MEMAP serves as a guide, providing basic information on the operation of MAP and directing taxpayers and tax administrations to the best MAP practises.
MULTILATERAL INSTRUMENT
A multilateral instrument (MLI) is a multilateral agreement that aims to combat BEPS by implementing tax treaty-related measures. MLI allows states to amend their bilateral tax treaties in accordance with relevant recommendations that are appropriate for their situations. All of the MLI articles are optional. The multilateral instrument’s part V focuses on enhancing dispute settlement.[4] Article 16 refers to the mutual agreement procedure, which is identical to the OECD model’s Article 25.[5] It requires states to make MAP more widely available. Even though the treaty does not contain such provisions, Article 17(3) provides that MAP access shall be allowed in transfer pricing circumstances. Part VI of the MLI contains laws concerning arbitration. If the competent authorities are unable to resolve the dispute within two years, Article 19 states that arbitration must be commenced, and the arbitral ruling must be binding on the competent authorities. Other articles in Part VI of the MLI outline the procedure for appointing arbitrators in cases of arbitration.
INDIA’S STAND ON MANDATORY ARBITRATION
India doesn’t sign Part VI of the MLI, which shows that it doesn’t want to agree to the mandatory binding arbitration mechanism. India’s concern is based on the idea of national sovereignty, which means that if tax disputes were made mandatory to be arbitrated, it would directly hurt the government’s right to tax a non-resident and foreign company.[6] Also, Finance Minister Nirmala Sitaraman said, In the revised model Bilateral Investment Treaty, taxation issues have been left out because taxation is an important part of state sovereignty, so these issues don’t need to be brought up under the treaty dispute settlement mechanism.
CONCLUSION
As a direct consequence of India’s refusal to adopt the required binding arbitration clause, a significant increase in the number of tax cases was brought. Because it is essential to resolve the concerns in a fast and efficient manner, India ought to consent to this condition in order to go forward with the negotiations. If the outcome of the arbitration cannot be legally enforced, then the process of going to arbitration is pointless. Both parties will likely have an incentive in participating in the arbitration process because it is a confidential method for settling disputes. Arbitration is often considered to be a faster and less costly option to other methods for resolving disputes than other procedures.
[1] Valente, A., Partners, C. V. V. A. G. E. B., & Vincenti, F. (2021, April 21). The importance of mutual agreement procedures in International Tax Disputes. International Tax Review. Retrieved May 17, 2022, from https://www.internationaltaxreview.com/article/b1r2tr3f5sbp5m/the-importance-of-mutual-agreement-procedures-in-international-tax-disputes (Accessed on Apr 27, 2022).
[2] Ciat. (1970, September 7). Analyzing mandatory binding arbitration and the map. CIAT. Retrieved Apr 28, 2022, from https://www.ciat.org/ciatblog-analyzing-mandatory-binding-arbitration-and-the-map/?lang=en
[3] Dispute resolution: The Mutual Agreement Procedure- un.org,https://www.un.org/esa/ffd/wp-content/uploads/2013/05/20130530_Paper8A_Ault.pdf (last visited Apr 28, 2022).
[4] Multilateral convention to implement tax treaty related measures to prevent BEPS. OECD. (n.d.) https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm (Accessed on 28, 2022).
[5] Articles of the model convention with respect to taxes on income … – OECD. (n.d.). Retrieved Apr 28, 2022, from https://www.oecd.org/tax/treaties/1914467.pdf
[6] Ashley, S., By, Ashley, S., Harding, S., Harding, S., Mark Martin , Martin, M., Martin, M., & Thomas Bettge, &, & Bettge, T. (2015, September 1). Why India rejected the OECD’s mandatory arbitration plans. International Tax Review. https://www.internationaltaxreview.com/article/b1fygbltqgfd3s/why-india-rejected-the-oecds-mandatory-arbitration-plans (Accessed on Apr 29, 2022).
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