Disputes in matters of taxation are inevitable. As the economy of a country grows and its affairs become more intertwined with those of other countries, issues proliferate. While tax treaties play a crucial role in ensuring that income is not doubly taxed in two or more countries, by demarcation of taxation rights or by providing a mechanism of foreign tax credits in the home country, complexities in transactions do make disputes unavoidable.
It is no surprise that mutual agreement procedures (MAP), which aid in dispute resolutions, are gaining in importance. Large taxpayers are increasingly seeking this route for dispute resolution.
However, flexible processes alone can offer the possibility of satisfactory resolution and fortunately headway is being made in this direction, within the MAP structure.
Simply put, MAP provides a mechanism through the tax treaty for a taxpayer to seek competent authority (CA) assistance when it is believed that the actions of either or both of the contracting countries (countries that are party to the tax treaty) will result in taxation that is contrary to the provisions of such a treaty.
In India, the CA is an officer from the Central Board of Direct Taxes (CBDT) appointed by the central government while in other countries, it is generally the apex tax authority that represents, through tax commissioners, tax directors or their representatives.
A MAP mechanism supplements the remedies available to the taxpayer under the domestic tax laws. An aggrieved tax payer applies to the CA of its country and if the application is accepted by the CA of the resident country, it is then forwarded to the CA of the source country (country from where the income is derived).
A MAP settlement is achieved usually through negotiations between the CAs of both contracting countries and any agreement reached is typically binding on the tax authorities of the respective countries.
Effective dispute resolution is a very important aspect of the international law obligation of good faith implementation of tax treaties, and MAP provides the vehicle to achieve this.
The Organisation for Economic Cooperation and Development (OECD) has consistently recognised and emphasised the growing importance of dispute resolution. In February 2007, OECD released its report on Improving mechanisms for the resolution of tax treaty disputes.
Subsequently, paragraph 5 has been added to Article 25 (MAP) in OECDs model convention (MC) in its July 2008, update.
In essence, this newly inserted paragraph provides that: Where CAs of the two countries are unable to reach an agreement under the MAP procedure, within two years, the unresolved issues can be submitted to arbitration at the request of the person who presented the case to the CA.
However, unresolved issues shall not be submitted to arbitration if a decision on these issues has been rendered by a court/tribunal of either country.
At present, the practice of including a clause on arbitration in the Article relating to MAP in bilateral treaties is not common. Only a few countries have taken this step. For instance , tax treaties between UK-Netherlands , or US-Canada provide for the same.
As regards the MAP process, OECD has made some further valuable suggestions. Its manual: Effective Mutual Agreement Procedures (2007), provides non-binding best practice guidelines aimed at transparency and timeliness.
Illustrations of best practices include early resolution, publishing issues of interpretation, allowing electronic submissions, permitting taxpayer presentations before CAs, and suspension of collections during MAP proceedings.
India is no longer isolated from the action in the global playing field; we are, in fact, getting to be in the thick of it. With a network of more than 70 tax treaties, MAP provisions contained in these treaties provide for dispute resolution.
Indeed, this process has been adopted for settlement of disputes ranging from existence of a permanent establishment, attribution of profits to such permanent establishment, to name a few instances.
Yet, the entire process suffers from certain lacunae. Unlike an advance ruling application where it is mandatory for the authority to pronounce its judgment within six months of receipt of the application, in a MAP situation, the CAs of the respective countries are not bound to reach an agreement. Hence, there is a potential risk to the taxpayer that the MAP can be inconclusive.
Having regard to the hardships faced by taxpayers during the course of a prolonged MAP, an understanding has been reached between the CA of India with their counterparts in the UK, US and Denmark to suspend collection of taxes during the pendency of MAP proceedings, provided a bank guarantee is furnished by the taxpayer. India could enter into similar arrangements with other countries.
A progressive step would be introduction of an arbitration mechanism in MAP proceedings in our new treaties, and perhaps a US/UK/Denmark type of arrangement for some other key countries. The main benefits of an arbitration mechanism would be a reduction in time, costs and the burden of resolving the dispute itself.