India is still a maturing tax jurisdiction especially on the international taxation front. The Indian tax landscape has been fraught with multifarious and protracted litigation especially in International Tax and Transfer Pricing (‘TP').
A Mutual Agreement Procedure (‘MAP') is a key mechanism provided under Double Tax Avoidance Agreements (‘DTAAs') to resolve long standing tax disputes amongst countries including India when it comes to double taxation of the same income.
While there were certain guidelines provided under DTAAs as well as Indian Income-tax Rules, guidance on granular aspects was missing. This led to procedural delays in the dispute resolution process as well as on several occasions' termination of the MAP discussions.
Further, Base Erosion and Profit Shifting (‘BEPS') guidelines on MAP also emphasis on providing guidance to strengthen the effectiveness and efficiency of MAP.
In the above backdrop, the Central Board of Direct Taxes (‘CBDT') has issued a comprehensive guidance on MAP for the benefit of the stakeholders [i.e. taxpayers, tax practitioners, tax authorities, and Competent Authorities(‘CA') of India and of treaty partners].
The salient features and our key comments on guidelines are provided in the ensuing paragraphs:
Part A – Introduction and Basic Information
Part A provides procedural guidelines and conditions for a MAP application. Key guidelines in this part includes:
- Application to be filed within 3 years from the first notification (no clarity on definition of “fist notification of action”) of the action giving rise to such taxation;
- Comprehensive list of documentation / information to be filed upfront provided to obviate multiple subsequent requests in the interest of time
- Commitment of endeavouring to complete the MAP case within 24 months.
Part B – Access and Denial of MAP
Part B provides guidance on access and denial of access to MAP:
Access to MAP
- For Indian taxpayer:
- Aggrieved by an orders/actions of tax authorities of other countries or specified territories (‘treaty partner'); and
- Such orders / actions in the opinion of the taxpayer results / will result in taxation not in accordance with the relevant DTAAs.
- For overseas taxpayers:
- When CAs of treaty partners accepts a MAP application from their taxpayers; and
- Notify the CAs of India about their acceptance.
- Key examples provided for tax issues
to be covered:
- TP Adjustments;
- Determination of existence of a Permanent Establishment (‘PE');
- Attribution of profits to PEs, whether admitted or not admitted by the taxpayers;
- Characterisation or re-characterisation of an income or expenses (like royalty or fees for technical services or interest)
- Specific clarification provided - Access to MAP granted even where domestic anti-abuse provisions invoked by Indian tax authorities.
- Where order is passed towards default in tax withholding (under section 201 of the Income-tax Act) - MAP application could be filed but discussion will be taken up only if the regular tax assessment order is passed against the non-taxpayer.
- Where Unilateral Advance Pricing Agreement (‘UAPA') is filed - MAP application could be filed but the discussions will be taken up only if the UAPA is withdrawn.
- If Indian safe harbour for TP availed and tax return filed accordingly – While a MAP application will be accepted, Indian ALP as per safe harbour will remain unchanged. Indian CAs will only emphasise on correlative relief to be given in overseas countries.
- In case an order is passed by Income-tax Appellate Tribunal (‘ITAT') - While a MAP application will be accepted, in relation to the tax year for which ITAT order is passed, the order of the ITAT will be unchanged and the Indian CAs will only emphasise on correlative relief to be given in overseas countries. However, in case the ITAT merely sets aside the matter for fresh adjudication by tax officers, normal MAP discussion could ensue amongst CAs post issue of order by the tax officers.
Denial of Access to MAP
- If 3 years from the date of notification of action exceeded.
- If the CAs of India come to a conclusion that the objection raised by the taxpayer on the action taken by tax authorities is not justified.
- If the MAP application is incomplete.
- If the Income-tax Settlement Commission has passed a settlement order on the same issues under a MAP application.
- If the Authority of Advance Ruling has ruled on the same issues under a MAP application.
- In addition to the above situations, no MAP access shall be provided in respect of issues that are purely governed by India's domestic law and arises due to the implementation of India's domestic legal provisions.
Part C – Guidelines on Procedural Technicalities
- MAP resolution cannot go below the returned income and in transfer pricing cases, below the transaction value.
- MAP resolution applies only to a particular financial year – MAP application needs to be filed for each year separately.
- MAP application cover only tax to be paid and do not cover disputes on interest and penalties.
- Where TP adjustment made under MAP – MAP resolution to mandatorily provide for secondary adjustments in case additional amounts as per primary adjustment is not remitted to India within the prescribed timeframe.
- If bilateral / multilateral APA is filed – MAP application not admissible under bilateral / multilateral APA is left unresolved.
- Collection of tax demand relating to disputes under MAP to be suspended where India has a specific Memorandum of Understanding (‘MoU') with counter party countries. In case no such MoU is signed by India with the country under MAP, regular procedure for stay of demand is to be followed as per domestic law.
Part D – Guidelines on Implementation of MAP
- Intimation of acceptance of MAP resolution by taxpayer to be made in 30 days.
- Tax office to give effect to resolution with in one month from the end of the moth in which he receives the letter of the CAs of India having jurisdiction over the case providing the details of the resolution
The MAP is an effective tool in tax dispute resolution, if utilised appropriately. Specific clarity in relation to admissibility, timeline and procedural aspects was the need of the hour in enhancing the efficacy of the mechanism. The CBDT has attempted to provide clarity on various aspects through this guideline which will be useful for taxpayers. However, clarity could also be provided on certain additional aspects which seem to be missing from the above guidelines which include:
- Specific meaning on “notification of action triggering MAP”. E.g., whether a “show cause notice” qualifies as “notification of action triggering MAP”, etc.; and
- Whether a MAP for subsequent year could be pre-empted based on assessment order or show cause notice of the previous year.
The global focus on tax dispute resolution coupled with the above guideline are useful steps in achieving tax certainty for organisations globally. The extent of intent and focus of CAs in effectively resolving such disputes ultimately holds the key.
Originally published by BDO India LLP, August 2020
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