India issues comprehensive guidance on cross-border tax dispute resolution

India on 7 August issued detailed guidance on the procedure for resolving cross-border tax disputes under the mutual agreement procedure (MAP) set out in India’s tax treaties with other nations.

The guidance addresses critical issues that arise during the MAP process, benefiting not only taxpayers and tax practitioners but also tax authorities and competent authorities of India and treaty partners.

The guidance aims to comply with minimum standards set out in the 2015 OECD/G20 base erosion profit shifting (BEPS) project recommendations.

India’s MAP framework

A taxpayer can make a MAP request if the actions of the tax authorities of one or both tax treaty partners result in double taxation or taxation contrary to the provisions of the tax treaty.

This could include cases involving transfer pricing adjustments; the determination of the existence of a permanent establishment and the associated attribution of profits; or characterization or re-characterization of income and expenses, such as royalties, fees for services, and interest.

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The new guidance follows recent amendments, effective 6 May, to India’s statutory framework (Rule 44G) governing the tax dispute resolution under the MAP route. These amendments dealt with how and to whom to apply for a MAP, the contents of a MAP application, and the timeframe and process to be followed after the resolution of a case under MAP.

The new guidance includes four parts, titled: Introduction and Basic Information, Access and Denial of Access to MAP, Technical Issues, and Implementation of MAP outcomes.

MAP Process

The new guidance lays down the process for acceptance and rejection of a MAP application.

It adds that competent authorities shall exchange position papers on issues involved and comments thereon, and then negotiate a resolution in person or remotely.

If both the competent authorities successfully resolve a MAP case, they would formalise the mutual agreement. The competent authority of India would then intimate the Indian taxpayer who had made the MAP application. While acceptance or rejection of the MAP resolution is the prerogative of the Indian taxpayer, the MAP case will be closed as resolved.

If the competent authorities are unable to resolve a MAP case, they would close the MAP case as unresolved and inform the taxpayer.

The guidance also allows India’s competent authority to engage in MAP discussions with more than one treaty partner where the issue has a bearing on all treaty partners, and the competent authorities of the respective treaty partners agree to negotiate a multilateral MAP.

In terms of process, a multilateral MAP case shall be executed as a series of bilateral MAP cases.

MAP request time limits

The general time limit for making a MAP application in most India’s tax treaties is three years from the first notification of the action giving rise to taxation that is not in accordance with the tax treaty. This  is in line with the BEPS recommendation.

The guidance mentions that India’s tax treaties that deviate from this time limit will be amended to make the period three years through bilateral tax treaty negotiations or use of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).

In line with the recently announced changes to the statutory process, the guidance emphasises that India is committed to try to resolve MAP cases within an average timeframe of 24 months. The guidance clarifies, though, that India does not commit to resolve MAP cases within this timeframe as the process could take longer and depends on various factors.

Access to MAP

The guidance states that India shall provide access to MAP even in a situation where the Indian tax authorities apply domestic anti-abuse provisions.

The guidance also lists certain circumstances where India would provide access to MAP, but the India’s competent authority would not negotiate any outcome other than what has already been achieved. Examples include situations involving unilateral advance pricing agreements, the application of the safe harbour rules, and resolutions by a domestic remedy.

For instance, where a tax tribunal (an independent statutory appellate body which is outside the administrative jurisdiction of Indian tax authorities) has decided a tax dispute which is also subject to MAP proceedings, the competent authority of India shall not deviate from the tribunal’s order, the guidance states.

In such a scenario, the competent authority would request its counterpart to provide correlative relief, if required, and the MAP case will be closed as having been resolved by a domestic remedy.

The guidance also specifies the situations in which India shall not provide access to MAP.

Some of these situations include where the MAP application is incomplete or made beyond the permitted time period, where the competent authority concludes that the taxpayer’s objection to the tax authority’s action is not justified, or where the issue sought to be included in the MAP application has already been adjudicated upon in an advance ruling by the Authority for Advance Rulings in India.

Further, the new guidance states that MAP access shall not be provided for issues that are purely governed by India’s domestic law and that arise due to the implementation of India’s domestic legal provisions.

An example would be proceedings with respect to a withholding tax obligation of a domestic taxpayer making a payment to a non-resident. In such a case, MAP could be resorted to only when the income of the non-resident is finally assessed.

Technical issues

The guidance also deals with how some important technical issues should be addressed as part of MAP proceedings.

In this regard, in cases involving adjustments made by tax authorities of a treaty partner, the guidance enables India’s competent authority to agree to downward adjustments even if Indian tax law does not permit it so that the MAP is effectively implemented.

Other technical issues discussed include resolution of recurring issues, the impact on interest and penalties which may or may not relate to quantum of income which may be the subject matter of MAP proceedings, and issues which are the subject matter of bilateral or multilateral APAs.

Almost all of India’s tax treaties contain a MAP article laying down the conditions for applying for MAP, and hence, this marks an important development for resolution of cross border tax disputes, which earlier lacked clarity on various aspects.

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