This paper will focus on Article 16 - mutual agreement procedure (the MAP) and will be organized in the following way:

[1] Mutual Agreement Procedure

  • What is MAP?
  • Scope of MAP

[2] Analysis of Provisions and Reservations under Article 16 (MAP)

[3] How Some Selected Contracting Jurisdictions Apply Article 16 to the Provisions of their CTA's

  • From an Australian perspective
  • From a Japanese perspective
  • From a United Kingdom perspective

[1] Mutual agreement procedure (MAP)

Definition and Scope

A Mutual Agreement Procedure (MAP) is the dispute resolution mechanism contained in the article of double tax treaties concluded between the tax authorities (the competent authorities). Action 14 contains a commitment by the jurisdictions to implement a minimum standard for improving dispute resolution.

The scope of the MAP tells us about what an MAP does in dispute resolution, which covers the following Articles in the OECD Model Tax Convention:

  • Determination of residence of a person (Article 4);
  • The existence of a permanent establishment (Article 5);
  • The attribution of profits to a permanent establishment (Article 7(2));
  • Inclusion of profits of associated enterprises and the corresponding adjustments to be made (Article 9)
  • Treatment of interest in case of thin capitalization (Article 11(6));
  • The taxation in the State of the payer – in case of a special relationship between the payer and the beneficial owner – of the excess part of interest and royalties (Article 9, Article 11(6), Article 12(4));
  • Temporary nature of the services performed by an employee (Article 15(2));
  • Non-discrimination (Article 24).

[2] Analysis of Provision and Reservations under Article 16 - Taxpayer's Access to MAP

2.1.1. First sentence of Article 16(1)

a) Paragraph 1 of Article 16 (Improving Dispute Resolution) of the MLI provides that

"1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of either [emphasis added] contracting jurisdiction. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement."

b) [Article 16(5)(a)] Reservation for the first sentence of paragraph 1 of Article 16

Most tax treaties are concluded on the basis of the 2014 version of the OECD Model Tax Convention that does not provide for presenting the MAP case to either contracting jurisdiction. For the reason of practical administration, Article 16(5)(a) permits a Party to the MLI to make reservations not to apply the first sentence of Article 16(1) to its CTAs by adopting the alternative rule, which reads:

A Party can only opt out of the first sentence in Article 16(1) on the basis that

  1. it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS Package by ensuring that under each of its Covered Tax Agreements (other than a Covered Tax Agreement that permits a person to present a case to the competent authority of either Contracting Jurisdiction), where a person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, that person may present the case to the competent authority of the Contracting Jurisdiction of which the person is a resident or, if the case presented by that person comes under a provision of a Covered Tax Agreement relating to non-discrimination based on nationality, to that of the Contracting Jurisdiction of which that person is a national [emphasis added]; and
  2. the competent authority of that Contracting Jurisdiction will implement a bilateral notification or consultation process with the competent authority of the other Contracting Jurisdiction for cases in which the competent authority to which the mutual agreement procedure case was presented does not consider the taxpayer's objection to be justified.

c) Comments on the first sentence and the reservations:

  • Article 16(1) of the multilateral instrument (the MLI) replicates Article 25(1) of the OECD Model Tax Convention (2017 update), and it has made an improvement on the 2014 OECD Model Tax Convention by requiring the contracting states to provide taxpayers with wider access to the MAP.
  • Article 16(5)(a) provides that a Party to the MLI may reserve its right for the first sentence of Article 16(1) not to apply to all of its CTAs by adopting the alternative rule under Article 16(5)(a).

2.1.2. Second sentence of Article 16(1) of the MLI

[Article 16(5)(b)] Reservation for the second sentence of paragraph 1

A Party may reserve that right for the second sentence of paragraph 1 not to apply to its Covered Tax Agreements that do not provide that the case referred to in the first sentence of paragraph 1 must be presented within a specific time period on the basis that it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS package by ensuring that for the purposes of all such Covered Tax Agreements the taxpayer referred to in paragraph 1 is allowed to present the case within a period of at least three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement.

2.2.1. Paragraph 2 (the first and second sentences) of Article 16 provides that

"The competent authority shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting Jurisdiction, with a view to the avoidance of taxation which is not in accordance with the Covered Tax Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting Jurisdictions."

(a) Comments on paragraph 2 of Article 16:

(i) The second sentence "any agreement reached shall be implemented notwithstanding any time limit in the domestic law of the contracting jurisdictions" is an open-ended commitment. In other words, however many years the contracting jurisdiction making the initial adjustment has gone back, the enterprise should be assured of an appropriate adjustment in the other contracting jurisdiction. Some contracting jurisdictions might consider that such an open-ended commitment is unreasonable a matter of practical administration.

(ii)) To give flexibility to the application of the second sentence of Article 16(2) to the CTA, element 3.3 of the Action 14 minimum standard in the 2015 Final Report provides that "[c]ountries should include in their tax treaties the second sentence of paragraph 2 of Article 25 of the Model Tax Convention ("[a]ny agreement reached shall be implemented notwithstanding any time limit in the domestic law of the Contracting State"). Countries that cannot include the second sentence of paragraph 2 of Article 25 in their tax treaties should be willing to accept alternative treaty provisions that limit the time during which a Contracting State may make an adjustment pursuant to Article 9(1) – Associated Entity or Article 7(2) – Business Profits attributable to a permanent establishment, in order to avoid the late adjustments with respect to which MAP relief will not be available."

(b) [Article 16(5)(c)] Reservation for the second sentence of paragraph 2 of Article 16

"A Party may reserve its right for the second sentence of paragraph 2 not to apply to its Covered Tax Agreements on the basis that for the purposes of all of its Covered Tax Agreements:

i) any agreement reached via the mutual agreement procedure shall be implemented notwithstanding any time limits in the domestic laws of the Contracting Jurisdictions; or

ii) it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS package by accepting, in its bilateral treaty negotiations, a treaty provision providing that:

A) the Contracting Jurisdictions shall make no adjustment to the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting Jurisdictions after a period that is mutually agreed between both Contracting Jurisdictions from the end of the taxable year in which the profits would have been attributable to the permanent establishment (this provision shall not apply in the case of fraud, gross negligence or wilful default); and

B) the Contracting Jurisdictions shall not include in the profits of an enterprise, and tax accordingly, profits that would have accrued to the enterprise but that by reason of the conditions referred to in a provision in the Covered Tax Agreement relating to associated enterprises have not so accrued, after a period that is mutually agreed between both Contracting Jurisdictions from the end of the taxable year in which the profits would have accrued to the enterprise (this provision shall not apply in the case of fraud, gross negligence or wilful default)."

(c) Comment on reservation for second sentence of Article 16(2):

A Party that makes reservation for the second sentence of Article 16(2) may not permit a taxpayer to request a MAP on other articles - such as the non-discrimination based on nationality - other than that falling under busines profits of a permanent establishment and associated entity, which are modelled after Aritcle 7 and Article 9 of the Model Tax Convention.

2.3.1. Paragraph 3 of Article 16, for which no reservation is permitted under Article 28(1), contains two sentences. It provides that

"The competent authorities of the Contracting Jurisdictions shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Covered Tax Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Covered Tax Agreement."

The reason for resolving by mutual agreements difficulties or doubts as to the interpretation or application for the CTS is as follows:

First, the contracting jurisdictions may have concluded the CTAs using different versions of the Model Tax Convention. Most of them may have been modelled on the 2014 version or earlier, depending on the date on which the CTAs were signed. Second, some of the CTAs were concluded using the UN Model convention, while the CTAs with the U.S. were on the U.S. version of the Model treaties. Therefore, Article 16(3) must be in place in order to cope with the MAP request on matters relating to interpretations and applications of the MLI.

Application of the mutual agreement procedure (MAP) article to covered tax agreements

The application of the MAP articles to the CTAs will be covered in Part 2 of this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.