Introduction
With globalization bringing novel changes in the international arena, it becomes essential to have a uniform dispute resolution mechanism accessible to all. The Organisation on Economic Cooperation and Development October 2019 released the sixth batch of peer review reports on matters relating to the implementation of BEPS Action Plan 14, which deals with dispute resolution. This report analyzed the legal framework for implementing the legal and administrative framework relating to MAP in the member countries[1]. This framework broadly covers the following areas
- Preventing disputes
- Availability and access to MAP
- Resolution of MAP cases
- Implementation of MAP agreements
The following research paper broadly analyses the mutual agreement procedure and its importance in the current global scenario.
Page Contents
What is Mutual Agreement Procedure?
Mutual Agreement Procedure is given in Article 25 of the OECD Model Tax Convention. It is a dispute resolution mechanism in which the taxpayer resorts to solving disputes relating to double taxation-juridical or economic. Their respective Double Taxation Avoidance Agreement gives the provision to initiate MAP. Article 25 of the OECD Model Tax Convention deals with Mutual Agreement Procedure, which lays down the general rules for applying MAP for Double Tax Avoidance Agreements. It aims to promote the consistent treatment of individual cases to resolve the difficulties or doubts that come up in the interpretation or application of the conventions or treaties. The time limit for MAP depends upon the respective DTAA signed between the countries. The governments of respective countries designate representatives known as competent authorities. Taxpayers invoke MAP upon request. Most MAP cases arise when the taxation of an individual or an entity is unclear. The mutual agreement procedure is applicable even in the absence of any double taxation contrary to the Convention if the tax dispute is in direct contravention of a rule in the Convention.
Competent Authority under MAP
The term “competent authority” is given in Article 3 of the OECD Model Tax Convention. The competent authority can be a person or a body to whom issues can be addressed within the contracting state that is one of the two parties to a tax convention. It is often the Ministry of Finance or its representatives. A competent authority commits to act in good faith and abides by the DTAAs, OECD Model Tax Conventions, and OECD Transfer Pricing Guidelines[2]. The competent authority is obliged to follow the principles of natural justice, and he shall also consult with the other competent authorities.
The appropriate national tax administration determines the full powers and functions of the competent. The competent authorities are not the only officials designated to work under MAP, and they may be assisted by other authorities provided by the Contracting State’s government.
The working of Mutual Agreement Procedure
The MAP negotiation is a closed-door process. Thus, the taxpayer would not participate in the negotiation between the Competent Authorities. However, they can work with the CAs to explain their position. The MAP resolutions are applicable for the particular issues and the Assessment Years covered in the application under MAP and not for subsequent years. However, since the MAP resolution is like a settlement between two Competent authorities, it cannot be used to support arm’s length nature under the domestic litigation process. To set MAP in motion, the taxpayer must establish that the actions of at least one of the Contracting States result in contravention of the DTAAs. The actions include all acts or decisions, legislative or regulatory, and general or individual applications, having direct and necessary consequences. The time limit is three years, and it continues to run pending any domestic law proceedings. If the tax is charged at the source, the time restriction starts when the income is paid, and if the taxpayer establishes that he just learned about the deduction later, the time limit will start from that date. Some States regard specific issues as not susceptible to resolution by the mutual agreement procedure generally, or at least by taxpayer initiated mutual agreement procedure, because of constitutional or other domestic law provisions or decisions. However, the recognized general principle under Article 27 of the Vienna Convention on the Law of Treaties is that even domestic constitutional law does not justify a failure to meet treaty obligations. It furthers that any justification for what would otherwise be a breach of the Convention needs to be found in terms of the Convention itself. However, such a justification is rare in the international scenario[3].
Mutual Agreement Procedure in India
India has signed numerous Double Taxation Avoidance Agreements with various countries worldwide under section 90 of the Income Tax Act, 1961, almost all having provisions for MAP. According to the 2019 report, India met almost half the elements of the minimum standard mentioned in Action Plan 14[4]. To fully comply with all four key areas of an effective dispute resolution mechanism under the Action 14 Minimum Standard, India had to amend and update a certain number of its tax treaties. In this respect, India signed and ratified the Multilateral Instrument. Until May 2020, rules 44G and 44H of the Income Tax Rules 1962 dealt with MAP. It is now substituted by rule 44G only, which provides for the Mutual Agreement Procedure to be followed by the competent authorities in India which are in accordance with the Action Plan 14. This procedure is convenient for taxpayers, tax officials, tax practitioners, and competent authorities of India and treaty partners. MAP in India is based on Article 25 of the OECD Model Tax Convention.
India’s competent authority operates entirely independently from the audit function of the tax authorities and their performance. In India, the competent authority function is assigned to the Minister of Finance, delegated to the Central Board of Direct Taxes within the Department of Revenue of this Ministry.
The CBDT constitutes the rules through section 295 of the Income Tax Act 1961. Under Rule 44G, an assessee who is a resident of India, if he is aggrieved by any of the actions of the tax authorities of any country or any specific territory outside India owing to inconsistency with the DTAAs, can make an application through Form 34F to the competent authority to invoke Mutual Agreement Procedure. The CAs, upon invocation of MAP, will call for relevant records or the additional documents income-tax authorities or the assessee or his authorized representative in India, or discuss with them, to understand the actions taken[5]. The timeframe for resolving MAP disputes in India is 24 months. Upon arriving at a resolution mutually, the assessee will be communicated regarding the same for which the assessee shall inform regarding his acceptance or non-acceptance within thirty days. A withdrawal from an appeal shall accompany the assessee’s acceptance. It will be forwarded to the Principal Chief Commissioner or the Principal Director General or Director-General, depending on the case as to who in turn shall forward it to the Assessing Officer. The assessee will be given effect to the same within one month based on which he shall pay the tax. The amount of tax, interest, or penalty already determined shall be adjusted as per the resolution. Under the Indian tax Conventions, there is no timeline for disposal of an application under MAP.
Access and denial of access to MAP- India
India provides access to MAP under the following circumstances in their Double Taxation Avoidance Agreements
i. Transfer Pricing adjustments
ii. To determine the existence of a Permanent Establishment (PE)
iii. Profits attribution to Permanent Establishments, irrespective of whether the taxpayer admitted or not
iv. Characterization or re-characterization of an expense or payment as a taxable expense or payment (for example, royalties, fees for technical services (FTS), or interest). of an item of expense or payment as a taxable expense or payment (like Royalty or Fee for Technical Services (FTS) or Interest)
v. Characterization or re-characterization of an item of receipt as a taxable income (like Royalty or Fee for Technical Services (FTS) or Interest)
India shall provide access to MAP even when the Indian tax authorities apply domestic anti-abuse provisions.
a) Unilateral Advance Pricing Agreements[6]– Where a taxpayer enters into a unilateral Advance Pricing Agreement (‘UAPA’) with the CBDT, the CAs of the treaty partners may accept MAP applications from their taxpayers in respect of such UAPAs if there is any discrepancy in the income declared in the returns filed in pursuance of the UAPAs, and notify the CAs of India. The latter would allow access to MAP but would not change the terms and conditions of the UAPA. Instead, they would request the CAs of the treaty partners to provide correlative relief[7].
Regarding UAPA applications under pocess and negotiation, actions of tax during such pendency of such applications could lead to taxation, not under the respective DTAAs. Here, CAs of India or their counterparts may accept MAP applications from their taxpayers and notify one another . While the CAs of India would allow MAP access, they might not process it till the UAPA is acted upon. If the UAPA is brought into force, the CAs of India would not alter the terms and conditions of the UAPA =their counterparts would be asked to provide corresponding relief. However, if the UAPA isn’t entered into , the CAs of India would start the MAP process
b) Safe Harbour – Where a taxpayer applies safe harbour provisions, and the return of income is accepted by the Indian tax authorities, the CAs of the other countries or specified territories may accept MAP applications from their taxpayers if it disturbs the returns filed to enforce the safe harbour provisions. It shall be notified to the Indian CAs who would allow MAP access but the Arm’s length price of the international transactions covered under the safe harbour provisions will remain unchanged
c) Orders of ITAT – the taxpayers can simultaneously avail MAP and domestic remedy proceedings. So, instances may arise where the Income Tax Appellate Tribunal (‘ITAT’) India passes an order in respect of the disputes that are also being enquired upon through MAP. Since the ITAT is an independent statutory appellate body and the highest fact-finding body outside the administrative jurisdiction of the Indian tax authorities, the CAs in India shall not digress from the ITAT orders for the relevant year if decided on merits. the Competent authorities in India would request the CAs of the treaty partners to provide correlative relief if necessary. But, if the order of the ITAT does not resolve the disputes but only sets them aside to be adjudicated afresh, then MAP access will be provided again.
The CAs of India may deny access to MAP under the following circumstances[8]
I. Delayed MAP applications
Suppose the taxpayers make an application for MAP to the CAs of India or the CAs of the treaty partners after the expiry of the time period specified in Article 25 of the OECD Model Tax Convention. In that case, the CAs of India will not provide access to MAP.
II. Taxpayer’s objection not justified
If the CAs of India concluded that the objection raised by the taxpayer on the action of tax authorities is not justified, they could deny access to MAP. However, before denying, the matter shall be discussed with the taxpayer and the CAs of the treaty partners.
III. Incomplete MAP applications/documents/information
When an Indian taxpayer makes an application for MAP through Form No, 34F, it must be complete fully. Suppose the CAs of India point out errors or defects in the application or require additional information or documents to initiate the MAP. In that case, the applicant may produce the same within a reasonable time period. Otherwise, MAP access will be denied.
IV. Income Tax settlement commission
Sections 245A to 245L of the Income-tax Act, 1961, provide for the constitution of a commission called the Income-tax Settlement Commission. If the taxpayer opts for ITSC, access to MAP is denied.
V. Advance ruling
If an advance ruling is pronounced with respect to taxation under the Income Tax Act, 1961, the Competent Authorities of India shall not provide MAP access to an Indian taxpayer who has already obtained an advance ruling regarding the subject of dispute. Such advance ruling covers the matters sought to be included in the MAP application.
The European Union on Mutual Agreement Procedure
The main instrument currently existing at the EU level for dispute resolution is the Arbitration Convention, which aims to define a procedure for dispute resolution arising from Transfer Pricing. In cases of TP adjustment by one of the contracting states, it may be presented to the CAs of its state of residence so that a MAP within three years[9]. If the relevant authorities do not achieve an agreement within 2 years, an arbitration procedure shall be initiated by setting up an advisory commission which shall opine to eliminate double taxation within six months. the competent authorities shall decide on the elimination of the double taxation within the following six months. This decision does not have to conform to the opinion expressed by the advisory commission necessarily. Article 8 of the Arbitration Convention states that the competent authority is not obliged to initiate the MAP or the arbitration when one of the concerned enterprises is liable to severe penalties arising from the acts leading to the profit adjustments[10].
The importance of Mutual Agreement Procedure
Mutual Agreement Procedure is a special procedure outside the domestic law. The main benefit of resorting to Mutual Agreement Procedure is eliminating double taxation. MAP resolution eliminates the need for prolonged litigation. It creates certainty in the minds of all stakeholders. MAP is provided simultaneously with domestic remedies. The initiation of MAP brings pressures from another tax administration to the attention of the tax authorities with whom taxpayers are in dispute. For TP disputes, A MAP can be used by taxpayers to avoid double taxes as a result of a country’s transfer pricing adjustment. The 2019 statistics clearly indicate that MAP is a well-accommodating procedure to resolve disputes relating to transfer pricing. MAP is also used in many countries to initiate bilateral advance pricing agreements (APAs). A dual resident taxpayer can invoke MAP to ascertain which country has the right to impose a tax as the country of residence. In such cases, tax authorities may agree on the MAP in the country where the taxpayer is resident for treaty purposes. The taxpayers do not have to prove that their transactions meet the domestic or treaty anti-abuse rules to access MAP.
Conclusion
While cross-border disputes have been raised, the Mutual Agreement Procedure is still underused, though the number of MAP cases has increased internationally. The chief reason it that it is due to the lack of understanding of the MAP process and perceived legal and practical obstacles. However, taking into account India’s position, there is a risk that access to MAP is denied in eligible cases where the issue under dispute is pending substantive determination or has already been decided by the Authority for Advance Rulings in India, now the Board for Advance Ruling. A critical defect of the MAP is that a taxpayer’s participation is limited. Certain countries have signed up for compulsory arbitration under their MAP process. These countries may face higher pressure to resolve MAP cases because unresolved cases will be subject to binding arbitration by third parties. It is looked forward that the MAP process will become more effective as competent authorities interact more closely as a result of BEPS.
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[1] OECD (2015), Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264241633-en.
[2] Guidelines to the Mutual Agreement Procedure under the tax treaties, https://www.un.org/esa/ffd/wp-content/uploads/2014/10/ta-Guide_MAP.pdf ,) (last visited May 3, 2022)
[3] OECD (2017), “Commentary on Article 25”, in Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing, Paris, https://doi.org/10.1787/mtc_cond-2017-28-en.
[4] OECD (2021), Making Dispute Resolution More Effective – MAP Peer Review Report, India (Stage 2): Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/cc6e7579-en.
[5] Notification issued by the Ministry of Finance, on 6th May 2020, https://taxguru.in/income-tax/cbdt-amends-rule-44g-form-34f-application-give-effect-dtaa.html ) (last visited May 3, 2022)
[6] Anonymous, Mutual Agreement Procedure (MAP) guidelines by CBDT, Taxguru, https://taxguru.in/income-tax/mutual-agreement-procedure-map-guidance-cbdt.html (last visited May 3, 2022)
[8] Anonymous, Mutual Agreement Procedure (MAP) guidelines by CBDT, Taxguru, https://taxguru.in/income-tax/mutual-agreement-procedure-map-guidance-cbdt.html (last visited May 3, 2022)
[9] Alessandro Valente, Federico Vincenti, The importance of Mutual Agreement Procedure in International Tax Disputes, International Tax Review https://www.internationaltaxreview.com/article/b1r2tr3f5sbp5m/the-importance-of-mutual-agreement-procedures-in-international-tax-disputes, (last visited May 2, 2022)
[10] Deloitte Transfer Pricing Global et al., The rise and rise of mutual agreement procedures in the EU International Tax Review (2021), https://www.internationaltaxreview.com/article/b1nj4cnb41sl0h/the-rise-and-rise-of-mutual-agreement-procedures-in-the-eu (last visited May 3, 2022).
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