Mutual agreement procedure Answering queries

Transcription

1 Mutual agreement procedure Answering queries

2 What is a mutual agreement procedure (MAP)? MAP is an alternative available to taxpayers to resolve disputes giving rise to double taxation, whether juridical or economic in nature. An agreement for avoidance of double taxation between countries would give authorisation for assistance of Competent Authorities (CAs) in the respective jurisdiction under MAP. In the context of the Organisation for Economic Co-operation and Development s (OECD) Model Convention for the Avoidance of Double Taxation, Article 25 provides for the assistance of CAs under MAP. 2 PwC

3 The main benefit of pursuing MAP is the elimination of double taxation (either juridical or economic). The MAP resolution, once accepted, eliminates protracted litigation. For certain jurisdictions, India has also entered into agreements wherein there is no immediate collection of the disputed demand. For example, the CAs of India and the UK (also of the US and Denmark) have entered into a Memorandum of Understanding (MOU) regarding the suspension of collection of taxes during the pendency of MAP. The collection of outstanding taxes in the case of a taxpayer who is a resident of the UK and whose request under MAP is under consideration of the CAs shall be kept in abeyance subject to the furnishing of a bank guarantee of an amount equal to the amount of tax under dispute and interest accruing thereon as per the provisions of the Income-tax Act, 1961 (the Act). A similar MOU has also been signed between the CAs of India and Sweden, where the collection of outstanding taxes would be kept in abeyance for a period of two years (extendable to a maximum period of five years through a mutual agreement between the CAs of India and Sweden), subject to the furnishing of a bank guarantee of an amount equal to the amount of tax under dispute and interest accruing thereon, as per the provisions of the Act. What are the key benefits of pursuing MAP? Mutual agreement procedure 3

4 Generally, the issues giving rise to double taxation (either juridical or economic) are submitted by taxpayers for resolution under MAP. Some of the instances giving rise to double taxation are: 1. Adjustment arising from transfer pricing assessment 2. Issues relating to the existence of permanent establishments 3. Characterisation or classification of income 4. Attribution of profits to permanent establishments 5. Withholding tax is levied beyond the allowance limit within an applicable tax convention 6. When a taxpayer is considered to be a resident of two treaty countries What kind of issues can be taken for resolution under MAP? 4 PwC

5 Who can apply for the assistance of CAs under MAP? The taxpayer of the country having to bear the incidence of double taxation can apply for the assistance of CAs under MAP to resolve the issue of such double taxation. Example 1: ABC Co Ltd is an Indian subsidiary of ABC Inc. US. ABC Co Ltd provides contract software development services to ABC Inc. and is compensated on a cost plus basis for its contractual services. During a financial year, the international transactions of ABC Co Ltd were scrutinised by the transfer pricing officer in India and an upward adjustment to income was made. The upward adjustment to the income, due to higher transfer price, in the hands of ABC Co Ltd would give rise to double taxation in the hands of ABC Inc., US. In such cases, under the India-US treaty, ABC Inc., US, can apply for assistance from CAs under MAP to resolve such incidence of double taxation. Example 2: ABC Co Ltd is considered to be a resident of two treaty countries (India and the US) under each country s domestic law. Each country asserts that the taxpayer is a resident of its jurisdiction for purposes of the tax treaty. If unresolved, the taxpayer could be subject to taxation not in accordance with a treaty and, therefore, liable for tax on the same income in both countries (India and the US). A request to the CAs would initiate discussions between the CAs regarding the proper application of the tiebreaker rules contained in the residency article of the convention. The taxpayer should approach the CA of the country in which the taxpayer asserts residency, and in some cases, where it is incorporated. It may be noted that under the Multilateral Instrument (MLI) to which India is a signatory, India has selected the option where cases can be presented by taxpayers but only in the countries of their residence. Mutual agreement procedure 5

6 What is the time limit for filing of MAP? The time limit for filing an application for MAP is governed by the respective tax treaty entered into between the respective countries. Generally, the time limit for an application for assistance from CAs under MAP is within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty that is, three years from the date of the notice of adjustment, namely double taxation. However, this is not the case for all the treaties and time limits for application vary in many cases. Some treaties provide a time limit of three years from the first notification of the action giving rise to double taxation (e.g. treaties between India-Australia, India-China, India-Germany, India-Mauritius, India-South Africa, India-China). Few other treaties provide for two years from the first notification of the action giving rise to double taxation (e.g. treaties between India-Belgium, between India-Canada). There are treaties which also provide for five years from the first notification of the action giving rise to double taxation (e.g. the treaty between India-Brazil). In case where the treaty does not provide a time limit, the domestic tax provision on the time limit has to be looked into for filing an application for the assistance of CAs under MAP. However, the MLI provides that if an existing treaty has a provision which is shorter than three years, the time limit for the application of MAP will be modified to three years. Thus, in the case of Belgium and Canada, the time limit will be increased to three years. Brazil has not signed the MLI; therefore, the five-year limit will continue. Currently, India s treaty with the UK does not have a time limit. However, the threeyear limit will apply due to implementation of the MLI. 6 PwC

7 The language generally used in tax conventions allows taxpayers to apply for MAP even in anticipation of a dispute giving rise to double taxation. Technically, one can file a MAP application upon receipt of the draft assessment order. However, from a practical perspective, the competent authority might not begin the negotiation process until the final assessment order has been issued as the tax demand would only crystallise upon the issuance of the final assessment order. Considering that, pursuant to the Finance (No. 2) Act, 2009, the assessing officer would first issue the draft assessment order in cases involving transfer pricing adjustment and foreign companies, can an application for the assistance of CAs under MAP be made? Mutual agreement procedure 7

8 Does a taxpayer have to exhaust the appeal options available under the domestic litigation route to apply for assistance under MAP? The option of resolution under MAP is an additional dispute resolution option available to a taxpayer. It can be pursued simultaneously with the dispute resolution options available under domestic regulation. Can a taxpayer participate in the negotiation process between the CAs of countries? The negotiation process between the CAs of countries under MAP is generally a closed door event. Thus, taxpayers would not have access to and cannot participate in the negotiation process between the CAs. Taxpayers work with the CAs to explain their own case and positions prior to the negotiation meetings between the CAs. 8 PwC

9 How soon can a taxpayer expect an outcome under MAP? Under the Indian tax treaties (entered into with other countries), there is no timeline for the disposal of applications for the assistance of CAs under MAP. Based on our experience, the resolution under MAP can be expected within a period of two to three years from the filing of an application. It is important to note that Article 19 of the MLI provides for mandatory binding arbitration in the event that CAs are unable to reach a decision under MAP within two years. However, India has not accepted such a provision, taking a position that such binding arbitration would adversely impact its sovereignty. Accordingly, the fact that no timeline has been provided for how long CAs may take to resolve a MAP-related dispute, coupled with the fact that India s covered tax agreements (CTAs) will not contain an arbitration clause, poses an additional burden on taxpayers. Mutual agreement procedure 9

10 While taxpayers have the option of either accepting or rejecting the resolution arrived at under MAP, should a taxpayer opt to accept the MAP resolution, it will be binding on the Revenue for that international transaction and for that assessment year. Rule 44H (4) of the Indian Income-tax Rules, 1962, provides that the assessing officer shall, within 90 days of receipt of the resolution by the Chief Commissioner or Director General of Income Tax, give effect to the resolution arrived at under MAP if the taxpayer: Gives his acceptance to the resolution arrived at under MAP; and Withdraws the appeal filed under the domestic litigation provisions which was the subject matter for adjudication under MAP. Is the outcome under MAP binding on the taxpayer and the Revenue? 10 PwC

11 Can an outcome under MAP for a year be applied even for subsequent years? The resolutions under MAP are for the particular issues and the assessment years covered in the application for the assistance of CAs under MAP. Thus, strictly speaking, the resolution under MAP for one year cannot be applied for the subsequent year. That said, the principle agreed upon for one year may be followed in MAP proceedings for the subsequent years, subject to the similarities of facts. However, since the MAP resolution is in the nature of settlement between two CAs, it generally cannot be used as a basis for supporting the arm s length principle under the domestic litigation process. Mutual agreement procedure 11

12 Can a resolution under MAP be treated as an arm s length price? The resolution arrived at by CAs under MAP is based on negotiations with the objective of settlement of issues. The negotiated settlement cannot be considered as an arm s length price, which needs to be based on the principles of transfer pricing. What is the procedure for the withdrawal of a domestic appeal in case the settlement under MAP is accepted? In arriving at a MAP resolution, the CAs of both the parties should communicate with letters and also communicate the terms of the resolution to the taxpayer. If a taxpayer does not accept the resolution arrived at under MAP, the taxpayer may be entitled to withdraw from the MAP process and pursue other domestic redress mechanisms still available. If a taxpayer accepts the resolution arrived at under MAP, a letter indicating the acceptance of resolution under MAP and a withdrawal of appeal (to the extent of the issues covered under the MAP resolution) need to be made to the assessing officer and the appellate authorities before whom an appeal is filed under domestic litigation provisions. 12 PwC

13 What are the advantages of entering into MAP over domestic appeal proceedings (DAPs)? MAP is generally resolved within two to three years, whereas DAP can take much longer (seven to twelve years) to resolve, depending on the level at which the cases are pending. DAP is a legal approach, whereas MAP is a negotiated approach wherein CAs negotiate and resolve a dispute. MAP is binding on the Revenue, and a taxpayer has the option to reject the MAP outcome. On the other hand, DAP is binding on the taxpayer, subject to sequential appeals at higher levels. The decisions of CAs are binding on the Revenue, whereas in DAPs, the Revenue can file appeals at a higher level if they are not satisfied. In MAP, a taxpayer may have the option of avoiding double tax impact through correlative relief, whereas in DAPs, correlative relief has to be pursued separately in separate legal proceedings. Mutual agreement procedure 13

14 Steps for MAP Process of resolution Invoke MAP under tax treaty Move application with overseas competent authority (CA) Admission by overseas CA Sharing of invocation letter Filing copy with Indian CA India transfer pricing adjustment Domestic appeal process CIT (appeals)/ DRP hearing on merit and legal matters Is the decision acceptable? No Income-tax Appellate Tribunal (ITAT) Final fact finding authority Yes 14 PwC

15 Iterative process Accept settlement and withdraw domestic appeal Time-to-time discussions with Indian and overseas CA Strategise and evaluate settlement options Meetings between CAs to reach settlement Is the settlement acceptable? No Continue domestic appeal process No No Is the decision acceptable? High Court primarily on questions of law Is the decision acceptable? Supreme Court Yes Yes Closure Mutual agreement procedure 15

16 Effects of the MLI on tax treaties The MLI has two main aims first, to transpose a series of tax treaty measures from the OECD/G20 Base Erosion and Profit Shifting (BEPS) into existing bilateral and multilateral treaties, and second, to set a new standard for mandatory binding arbitration in relation to resolving double tax disputes. The MLI is expected to enable the signatory parties to make a large number of the changes to their existing treaties, whether based on the OECD or United Nations (UN) Model Convention. Signing of the MLI by India is not final, since this is the first step in the process and India has only provided a provisional list of reservations and notifications. Along with its ratification of the MLI, it will need to submit a list of its final positions. The MLI will either change or not change a notified treaty, based on a combination of reservations and notifications submitted by the treaty partners. It is expected that once the entire process is complete, the MLI will open up doors for more opportunities to resolve disputes. How will MAP be impacted after the MLI that India has entered into? Some tax treaties lack a specific article (Article 9(2) of the OECD and UN Model Convention for corresponding adjustments between jurisdictions on transfer pricing matters), which resulted in India taking a position that the resolution of such disputes through MAP was not possible. Article 17 of the MLI is supposed to apply in the absence of provisions in CTAs that require a corresponding adjustment if the other treaty party makes a transfer pricing adjustment. India has chosen to apply this provision, except where a similar provision already exists that is, this provision will be added to its treaties with signatories that do not have such a provision. This will open up access to transfer pricing related disputes in MAP for several treaties. 16 PwC

17 Effect of renegotiated treaties on MAP Recently, a few tax treaties were amended to resolve transfer pricing disputes between the treaty countries. Two examples are the tax treaties of South Korea and Singapore, where a corresponding adjustment article has been introduced. This will allow both the treaty countries to resolve disputes through the MAP mechanism. Mutual agreement procedure 17

18 Transfer pricing has been the most litigated tax issue in India. It takes a significant amount of time to resolve disputes on transfer pricing in India through traditional appellate proceedings. Keeping that in mind, the Government of India introduced the Advance Pricing Agreement (APA) policy a few years ago, which has attracted many takers. MAP has been functioning as an alternative approach to settle disputes; however, the same has not been that popular amongst taxpayers due to the non-uniformity of tax treaties between countries (such as the absence of a corresponding adjustments clause), as well as the lack of obligation to find a resolution and no timeline for CAs to find a resolution. With India adopting the BEPS guidelines and becoming a signatory to the MLI, one can expect MAP and bilateral APAs to become an attractive option for taxpayers. The tax authority has clearly indicated its intention to settle disputes with the help of alternative dispute resolution mechanisms such as MAP/bilateral APAs. The said position was further sanctioned recently when India clarified the acceptance of MAP and Bilateral Advance Pricing Agreements (BAPAs) requests, regardless of the presence of Article 9(2) in the Double Taxation Avoidance Agreements (DTAAs). Even in the recently signed Multilateral Instrument (MLI) pursuant to OECD s BEPS Action Plan 15, India did not express any reservations on Article 17 which is on Corresponding Adjustments, thereby making its stand evident on this matter. As a result, even before the MLI is put into action and even without amending the existing DTAAs, India will now accept applications in respect of BAPAs and MAPs for TP-related disputes involving those countries where Article 9(2) is absent in the DTAAs, which is clearly a big positive for MNEs having inter-company transactions with France, Germany and Italy. Going forward, one can also hope that arbitration, as provided for in Action 14 of BEPS, will become a possibility for future dispute resolutions in India once it accepts the arbitration provision in the MLI. Future of dispute resolution 18 PwC

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20 About PwC At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 158 countries with more than 2,36,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India s service offerings, visit PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity. Please see www. pwc.com/structure for further details PwC. All rights reserved Contact Kunj Vaidya National Leader, Transfer Pricing PricewaterhouseCoopers Private Limited kunj.vaidya@in.pwc.com I would like to thank Sabine Wahl, Principal, Transfer Pricing, and Puskar Gupta, Manager, Transfer Pricing, at Price Waterhouse & Co LLP for providing their technical inputs on this white paper, which will help companies proactively address their issues related to transfer pricing and MAP-related matters. pwc.in Data Classification: DC0 This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. AW/December