Certainty on tax issues has today become one of the key drivers for business decisions, especially where the transactions encompass various jurisdictions. Although there is a robust procedure under the Indian domestic tax law for resolution of tax disputes, the lack of speed and effectiveness of such procedures has increased demand for mutual agreement procedures (MAP). MAP is an alternative dispute resolution mechanism provided under the tax
At a very broad level, MAP is a process where the tax disputes are resolved by discussions and negotiations between States through the diplomatic channels.
MAP under the Indian tax treaties – a brief overview
Scope of MAP under the tax treaties
Typically, the Indian tax treaties cover the following scenarios where MAP could be of use:
a) Where the action by one or both the states has resulted or will result in taxation not in accordance with the relevant tax treaty;
b) Resolving difficulties arising as to interpretation and application of the tax treaty; and
c) Elimination of double taxation in cases not provided for in the tax treaty.
However, certain Indian treaties (for example, treaties with countries like Australia, Belgium, UK) do not specifically cover cases of elimination of double taxation in cases not provided for in the tax treaty under the MAP.
Common issues for MAP
Some of the common issues under MAP include:
- Issues relating to existence of a permanent establishment (PE) in one of the states;
- Issues relating to attribution of profits to a PE in the other state;
- Issues on determination of residence status under the tax treaty; and
- Characterisation of income.
Of late, considering the aggressive transfer pricing adjustments made by the Indian tax authorities, there have instances where some multinational companies have taken recourse to MAP as an alternate dispute resolution mechanism.
MAP – procedural guidelines
MAP needs to be initiated by the taxpayer before the competent authority (CA) in the country of his residence. The procedure to be followed has the following two-fold requirement:
i) The application should first be presented to the CA of the resident country which shall endeavour to resolve the dispute itself.
ii) If the CA of the country of residence is not itself able to arrive at an appropriate solution, it may endeavour to resolve the same by mutual agreement with the CA of the other state.
Most of the Indian tax treaties (for example, treaties with countries like Australia, Belgium, Finland, US, Sweden, Switzerland) specify a time limit within which the application can be presented to the CA. Typically, the time limit is two to three years, from the date of receipt of the first notification of an action (a notice) which gives rise to taxation not in accordance with the tax treaty.
Rule 44G and 44H of the Income-tax Rules
- Rule 44G – This rule prescribes a specified form (Form No 34F) in which the taxpayer resident in India can make an application to the CA in India. The form requires the taxpayer to give relevant details relating to the case, along with documentary support.
- Rule 44H – This rule prescribes the procedure to be followed by the CA of India in a case where a reference is received from the CA of another country. Broadly speaking, the rule provides that the CA in India shall endeavour to arrive at a resolution based on the provisions of the relevant tax treaty.
- Rule 44H further prescribes that any resolution arrived at under MAP is to be given effect by the tax officer within ninety days from the receipt of the same by the Chief Commissioner or Director General of Income-tax, if the taxpayer:
i) gives acceptance to the resolution taken under MAP; and
ii) withdraws an appeal, if any, pending on the issue which was the subject matter for adjudication under MAP.
MAP is not a substitute to domestic provisions
Generally, the Indian tax treaties clarify that the MAP provisions can be initiated irrespective of the remedies provided by the domestic law. Further, it is also a considered view that the MAP provisions are in addition and not in substitution of the remedies before the domestic tax authorities and Courts [Andhra Pradesh High Court in CIT v Visakhapatnam Port Trust (1983) 144 ITR 146].
The Central Board of Direct Taxes (CBDT), vide its instruction no. 12/2002, dated November
Practical issues in initiating MAP in India
Though a MAP process may appear to be a complete resolution mechanism, one also needs to be aware of some practical issues which one may encounter. Some of the issues have been highlighted below:
- The tax treaty provisions typically provide that it shall be the endeavour of the CA of both the states to seek a resolution but there is no guarantee that a resolution would be reached. There have been cases where the CAs of the states have failed to reach an agreement on the issues. In such a case, the matter would get resolved through the dispute resolution mechanism as provided under the domestic law (the regular appellate procedure).
- The CA of both the states may not meet quite often to discuss the issues before them. Further, with no time limit fixed for the resolution, the process could be slow.
- A resolution under MAP is valid only for the issues raised for that particular year. There is no guidance on whether a MAP resolution for one year would apply equally
forother years, with similar facts and issues.
Depending upon the matter involved, the resolution
There are no clear guidelines on the payment of the tax demands when the MAP process has been initiated. However, the Indian and the US competent authorities have entered into a memorandum of understanding (MoU) which provides that tax demand would be kept in suspension during the pendency of MAP. The suspension would be dependent upon various conditions, which include