Introduction
The Organisation for Economic Co-operation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project, had, under the Action Plan 14 (Making Dispute Resolution More Effective) had recommended that all countries that implement BEPS package of recommendations, must publish comprehensive guidance on Mutual Agreement Procedure (MAP).
In the later
part of 2019, the OECD had also released a peer review report on India’s
journey on MAP, wherein it had provided its comprehensive recommendations on the
India MAP programme. These recommendations inter alia covered many aspects
which Indian Revenue Authorities (IRA) were expected to act upon, covering
changes in treaties and bringing out detailed guidance in relation to the MAP
process which were essential for making taxpayers and other stakeholders aware
of how India’s MAP regime functions.
Considering
the above and in continuation of various initiatives taken by the Central Board of Direct Taxes (CBDT) for bolstering the Alternate Dispute Resolution (ADR)
mechanisms comprising of Advance Pricing Agreements (APAs), Safe Harbour etc., as well as recently announced “Vivad
Se Vishwas” Scheme, the CBDT has released first of its kind MAP guidance on 7th August
2020. While the Indian Income-tax Rules, 1962 (the
Rules) covered the process and
administrative aspects vide Rules 44G
and 44H, a detailed information and guidance
on MAP was missing in a comprehensive and consolidated manner.
In this
article, we endeavour to discuss the guidance in a threadbare manner and also
put up certain interesting assertions and take a stock of the hits
and misses by the CBDT
on this important ADR called MAP.
What is MAP?
MAP is an ADR
mechanism, laid out in the Double Taxation Avoidance Agreements (DTAA) entered
into between countries. MAP cases involve cross-border double taxation that
could either be:
- juridical double taxation (same income taxed twice in the
hands of the same entity in two different countries) or
-
economic double
taxation (same income taxed in the hands of two separate entities, who are
Associated Enterprises, in two different countries).
MAP process
enables the Competent Authorities (CAs) of India and the overseas treaty
partner country to engage and facilitate discussion and negotiations to
endeavour to resolve the tax disputes which are not in accordance with the DTAA
and aim to provide a relief from double taxation, either fully or partially.
India with its
extensive network of treaties with over 90 countries which contain an article
in relation to allowing of MAP, has a well-established MAP programme and does
have a significant experience with resolving MAP cases. As many as 600 tax
disputes have been resolved under MAP between 1 April 2014 to 31 December 2018.
Brief about the guidance
This recently
released MAP guidance is aimed for the benefit of taxpayers, tax practitioners,
tax authorities and Competent Authorities (CAs) of India and treaty partners.
MAP process
The pictorial / flow-chart presentation of the MAP
process, as per the CBDT’s guidance is as follows:
* Some of the processes described above would flow similar
to the above, where the MAP application has been accepted by the overseas CAs
due to adjustment by IRA.
The guidance
also specifies that the CAs may either meet in person or negotiate remotely
through teleconference, video conference or email, which is a welcome move and
speaks volumes about the digital agenda and flexibility of the CBDT / IRA. For
multilateral MAPs, the guidance provides detailed conditions for its acceptance
and specifies that the case shall be executed in the form of series of parallel
bilateral MAP cases.
Summary of CBDT’s
While CBDT
has come up with a detailed guidance and addressed most of the issues raised in
the peer review report of OECD, there are still some unanswered questions
wherein there is indeed a need for more clarifications. Some of these are as follows:
. Instances that “will” result into double taxation – The typical MAP clause from DTAA specifies the circumstances under which MAP
application can be filed, which is action by one tax authority which (a) results or (b) will result in taxation not in accordance with the DTAA.
India’s
existing position for acceptance of cases in MAP generally necessitates the
existence of final assessment order, may be with an objective to avoid devotion
of time and resources on cases for which the underlying tax has not been
finalised, though, the OECD guidance and global interpretation does not mandate
existence of a final order.
However, the
current guidance seems to have acknowledged the fact that the MAP application
could be accepted even in following circumstances:
- For an order to enforce tax withholding under Section 201 of the Act and the
same is disputed by the non- resident entity - though the guidance specifies
that the MAP discussion will be taken up
only after the assessment order is passed in the case of the non-resident taxpayer,
- Foreign CAs of the treaty
partners may accept
MAP applications from their taxpayers in respect of signed / under
discussion Unilateral Advance
Pricing Agreements (UAPAs)
if any decision
of the tax authorities of such
other countries disturbs the income declared in the returns filed in pursuance
of the UAPAs. Again, the guidance
specifies that for the UAPA under
discussion, the MAP will be taken up
only after the UAPA is entered into.
While this is a welcome step by the CBDT, a facilitation of application
owing to an interpretation of possible
double
taxation instance may still help India to align itself with the OECD guidance. Following are some of the instances wherein
taxpayer should, ideally, be allowed to apply for MAP for cases which may
result in double taxation and are subject
to treaty interpretations leading to multiple/ contrasting views:
- Existence or non-existence of Place of Effective Management (PoEM),
- Confirmation in relation to the residency status,
- Taxation of dividends etc.
In addition
to the above, it would be worthwhile to evaluate granting MAP access at draft
assessment order/ Transfer Pricing
(TP) order stage itself, because at that moment also the proposed taxation that
is not in accordance with the treaty is more probable and no longer merely
possible. Same logic may also be extended to a show cause notice from which the proposition may lead to double taxation.
Thus, the
facilitation of early acceptance of MAP could in turn provide the taxpayers an
opportunity to achieve certainty and avoid double
taxation at an early stage.
· UAPA along with MAP – option for Bilateral APAs :
As per
guidance in case of UAPAs, AE/ related party of the Indian taxpayer can apply
for MAP with the CA with the treaty partner and corresponding relief can be
available to the AE/ related party of the Indian taxpayer.
Accordingly,
it would be worth to explore whether to opt for Bilateral APAs or whether to go for Indian UAPA and
then opt for a MAP with the overseas CA. Decision in this regard
would depend on various factors
such as follows:
- Comfort of taxpayer with higher margins/ mark up (as
generally Bilateral APAs have better
scope for negotiation);
- Additional time taken by Bilateral
APAs vis-à-vis MAP resolution;
- Higher cost in case of Bilateral APAs vis-à-vis MAP resolution.
It would be
important to gauge the willingness of treaty partner to accede to request of
Indian CA and provide such relief
(especially without any negotiation in terms). It would be interesting to see whether
the similar relief would be provided by India CAs in case of reverse
scenario, i.e. UAPA entered into by
the overseas AE / related party
and MAP sought
with the Indian
CA, as ideally it should
be a two-way exchange,
though, the current guidance doesn’t
provide any views for such a scenario.
· Limited scope of MAP for cases where the Income Tax Appellate Tribunal (ITAT) has
pronounced the order:
While it is
understandable to deny the access to MAP for settlement by Income-tax
Settlement Commission (ITSC), or an order from Authority for Advance Rulings (AAR) being voluntary and separate
/independent processes under the domestic law and also to grant an access to
purely facilitate a correlative adjustment for cases of ADR mechanisms such as UAPA / Safe Harbour (SH), the position of
the Indian CA not being allowed to negotiate / deviate from the ITAT orders may somehow appear to be
against the spirit of MAP, which aims at avoiding double taxation through the
mutual consultation and negotiation process through an ADR. The current guidance somehow appears to put the ITAT proceedings at the same pedestal of APA / SH / settlement commission / AAR,
though, these are voluntary procedures initiated by the Indian taxpayer,
whereas, the ITAT is an appellate
authority under the domestic litigation process, to which, typically, an ADR like MAP should be available to achieve
double taxation relief. The current
guidance seems to facilitate access to
MAP for overseas CA for ITAT pronounced
cases only to facilitate a correlative adjustment, which may not be acceptable to the overseas
CA in all cases.
Moreover,
while there have been practical instances, where the Indian taxpayers approach
the ITAT and request for keeping the case in abeyance, wherever its AE has
initiated a MAP and in many such cases the ITAT has also honoured such a
request, however, the guidance doesn’t mandate the abeyance to the ITAT
proceedings nor does it suggest to initiate any such outcome through some other
mechanism either through Ministry of finance or Ministry of Law and Justice, which
could keep up the spirit and objective of ADR like MAP intact.
This is also
in line with the MOUs signed by India with certain Treaty partners like USA and
UK wherein collection of taxes could be kept in abeyance and accordingly, it is
somewhere acknowledged that payment
of taxes is
not required due to ongoing MAP resolution process. However, if ITAT proceeds
to decide such cases based on merits, the option for negotiating the case in
MAP would therefore get lapsed for the taxpayer.
Thus, to
strengthen the MAP mechanism, it is imperative that the Government of India
comes up with necessary circulars/ internal guidance to keep the ITAT proceedings
in abeyance in case the taxpayer has an ongoing negotiation in relation
to MAP, which
could save the efforts of Indian judiciary and also the taxpayers
till the MAP process either
concludes or fails.
· Timelines for MAP application in case of orders set aside
by the ITAT for fresh adjudication
The guidance in
relation to orders set aside by the ITAT for
fresh adjudication by IRA provides
that access to MAP would be provided again after the fresh adjudication by the IRA. It is important
to note that with such an
instruction, the ITAT sets aside the
original order and requisitions the IRA to
conduct a fresh adjudication, meaning thereby, that the order by IRA pursuant the fresh adjudication may
replace the original order and may, practically, be considered to be “the first
instance of action
not in accordance with the DTAA”, if such order results in double taxation.
The guidance in this regard may be further elaborated specifically in
relation to following:
- Whether the time limit of three years (or otherwise as per
the DTAA) would counted from the new
order pursuant to fresh adjudication by the IRA, as mandated
by the ITAT?
- If the AE of the taxpayer had not applied for MAP within
the timelines prescribed under the DTAA against
the original order, but intends to now proceed with the MAP route post the
passing of the new order by the IRA pursuant
to the fresh adjudication mandated by the ITAT,
whether such application would be acceptable to Indian CA for negotiation under the MAP process?
While the
logical answers to the above questions could be affirmative, it would be
important to get a specific guidance from the CBDT on such issues.
· Safe Harbour Rules (SHR) vis-à-vis MAP guidance:
Rule 10TG of the Rules specifies
that the assessee shall not be entitled to invoke
MAP under DTAA if the transfer price
is accepted by the IRA under
the SHR, whereas, the MAP guidance mentions that overseas CAs may accept a MAP application if its tax authorities disturb
the income reported pursuant to the SHR application in India and that the Indian CA will allow access to MAP, though won’t change
the arm’s length price determined under the SHR.
While the MAP
guidance may appear to be contradictory to the Rule 10TG of the Rules, a
harmonious interpretation may lead to a conclusion that Indian CA will only
allow access to the MAP, so that the overseas CA can facilitate a correlative
adjustment to the AE of the Indian taxpayer, which, otherwise may not be
available to the overseas CA/ tax authorities in the absence of access to MAP.
Nonetheless, it would be advisable to incorporate an appropriate amendment to
Rule 10TG to facilitate the above interpretation/ inference.
It would be
interesting to track whether the overseas CAs accept the India SHR norms and
provide a full correlative relief to the AEs of the Indian taxpayers and if no,
whether such access to MAP remains theoretical and inoperative, unless, the
domestic rules of such an overseas CA allow a partial and unilateral
correlative relief.
· Corresponding relief in case of Vivad Se Vishwas Scheme (VSVS)
The guidance
has broadly covered all the ADR / domestic dispute settlement mechanisms
pursuant to which there could be an instance of double taxation. However, the
recent amnesty scheme brought by the income- tax department this year, i.e.
VSVS has been left untouched. It is important to watch whether the adjustments
accepted by the taxpayers under VSVS would indeed be eligible for MAP at least
from a correlative relief perspective if not a detailed negotiation. If yes,
the combination of VSVS with MAP could provide taxpayers a significant cover
from instances of double taxation.
· Penal implication on the MAP outcomes:
While the
Indian taxpayers have taken arguments
for waiver of penalties pursuant to a tax payment arising out of a MAP
negotiation, especially since the outcome is a negotiation between the CAs to
provide relief from double taxation and not necessarily an understatement /
misreporting of income by the Indian taxpayer,
the current guidance
seems to prescribes that the CAs of India do not have the mandate to
consider
consequential issues such as interest and penalties and they cannot negotiate
disputes that arise from such issues.
However,
considering the spirit of the MAP process, i.e. to facilitate a negotiation
between CAs wherein detailed deliberation is undertaken to arrive a common
agreeable taxability position, penal exposure on such negotiations could
certainly be a deterrent against the success of a MAP process. Similar to the
other ADR mechanisms like APAs, wherein penal exposure is mitigated, similar
position could be adopted for MAP outcomes in case adequate documentation is
maintained by the taxpayer.
·
Multilateral MAPs –
inferred guidance for Multilateral APAs as well?
The guidance
prescribes that the CAs of India can participate in multilateral MAP
discussions with more than one treaty partner. Multilateral MAP cases shall
involve all the prescribed processes (like exchange
of position papers, negotiations,
finalization of mutual agreements, etc.) on a multilateral basis amongst the CAs
concerned. However, the guidance suggests that a multilateral MAP case shall be
executed in the form of a series of parallel bilateral MAP cases. The CAs of
India can agree to accept a multilateral MAP request if certain conditions are
fulfilled. This could be considered as an inferred guidance for multilateral APAs as well (being ultimately the CA
proceedings) and thus it could be inferred that even for the multilateral APAs, the discussions may happen jointly
– but agreements will happen
bilaterally.
Concluding thoughts
Despite the
above-mentioned issues which need to be appropriately addressed, the guidance
released by the CBDT is a welcome move
and it does strengthen the intent of the Indian Government to reduce the tax
controversy and thereby providing more cohesive tax regime aligned with the
global tax framework. It further .
Following are certain concluding thoughts:
·
To make regimes like MAP more
attractive, the government should provide more emphasis on the ADR mechanisms
as against domestic remedies. This would inter alia include strengthening the
tax infrastructure and allocation of more resources to handle cases
involving MAP/ APA negotiations.
·
Since MAP is
required to be opted for each assessment year separately, a block processing/
bullet application for MAPs could be introduced for taxpayers having similar
issues on a year on year basis. While this would expedite the overall process,
it would definitely help in reducing the administrative hassles for the
taxpayers as well as the tax authorities, especially since the guidance refers
to resolution of recurring tax disputes on the basis of prior MAP negotiations.
This guidance
will certainly give a much-needed push to resurrect the less explored MAP
mechanism and also assist
in improving the ‘ease of doing business’ index for India.
Annexure A:
Summary of CBDT’s MAP guidance
Sr |
Particulars |
Comments |
1 |
Cases/
situations for MAP access |
a)
Transfer Pricing (TP) adjustments; b) Determination
of existence of a Permanent Establishment (PE); c)
Attribution of profits to PE (whether
admitted or not); d)
Characterisation or
re-characterisation of expense/ income; e) Even
in a situation where the IRA apply domestic anti-abuse provision; f) Where
obligation to withhold taxes from non-resident is enforced under Section 201
of the Income-tax Act, 1961 (the Act), though, the discussions will be only
taken up after an order on non-resident by the IRA. |
2 |
Timeframe
for conclusion |
India has
given its commitment to endeavour to resolve cases within 24 months (domestic
appeal process which might take upto 5 to 10 years). |
3 |
Time limit for filing |
Within three
years from the first notification of the order/action of tax authorities that
results or will result in taxation not in accordance with the relevant DTAAs
(DTAAs specifying lesser period to be modified through bilateral negotiations
or Multilateral Instrument (‘MLI’). |
4 |
Circumstances
where Indian CA would provide access to MAP but would not negotiate any other
outcome than what has already been achieved and will request the overseas CA
to provide a correlative relief |
a) Unilateral APA (UAPA) · In
case of already signed Indian UAPAs, Foreign CA may accept MAP from their
taxpayers if their tax authorities disturb the income declared in the return
filed in pursuance of UAPA, or ·
In case of ongoing UAPA, if action of
IRA / overseas tax authorities during such pendency of UAPA gives rise to
double taxation, though Indian CA would not process such MAP cases till UAPA
is entered into. b) Safe
Harbour (SH) For a SH
application by the Indian taxpayer, Foreign CA may accept MAP from their
taxpayers if their tax authorities disturb the income declared in the return
filed in pursuance of such safe harbour. c) Income
Tax Appellate Tribunal (ITAT) order In case order
from ITAT is received before resolution of the MAP, then the Indian CA shall
not deviate from order of tribunal (being independent statutory appellate
body, outside the administrative jurisdiction of IRA and highest fact finding
body on tax matters): will apply even wherein order of ITAT came to knowledge
of Indian CA even after MAP has been resolved but not yet implemented. |
Sr |
Particulars |
Comments |
5 |
Denial of MAP
application in certain cases |
Indian CAs can deny access to MAP in
some situations such as ·
Delayed MAP applications · Taxpayer
objection not justified (but still mandated to undergo notification and
bilateral consultation process between the CAs, though, such consultation
shouldn’t be interpreted as consultation to resolve the case) · Incomplete
MAP applications/ documents/information and errors are not remedied within
prescribed time limits (may include extensions) · Settlement
order from Income-tax Settlement Commission (ITSC), being an independent
statutory dispute resolution body (access possible if ITSC refuses to issue a
settlement order or issues order without settlement or where the proceedings
before ITSC abate and IRA take action resulting in double taxation) · An
order from Authority for Advance Rulings (AAR), which is an independent
statutory dispute prevention body. · MAP
access shall also not be provided in respect of issues that are purely
governed by India’s domestic law/ legal provisions. |
6 |
Technical
issues |
· Downward
adjustment: not possible under MAP below the returned
income, owing to the specific provision of Section 92(3) of the Act. However,
for MAP cases involving adjustment by overseas tax authorities, Indian CA may
go below the returned income to implement the MAP in full measure in
accordance with treaty obligations. · Resolution
of recurring issues: can be on the same basis as prior
MAP resolution, however, cannot accept application in advance, i.e. before
any order by the IRA. · Interest
and penalties: since not connected with the quantum of income
and being consequential in nature, cannot be negotiated, being out of mandate
of Indian CAs. · Secondary
adjustments: Indian CAs obliged to make secondary adjustment
under a MAP resolution in respect of cases pertaining to Financial Year
2016-17 or thereafter. · Bilateral
/ Multilateral APAs: MAP application for same issue and
same year cannot be accepted if covered under bilateral / multilateral APA,
unless the APA fails to result into an agreement. · Suspension
of collection of taxes during pendency of MAP: subject to
compliance with MoU with specific treaty partners. But where no MoU exists,
domestic law shall prevail. · Adjustment
of taxes paid in pursuance of order under Section
201 of the Act: allowable for the non-resident in the event of
resolution of MAP for relevant issue for relevant year. |
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