Analysis of MAP & Arbitration as Forms of Tax Dispute Resolution

Sameer Samal – [2022] 138 taxmann.com 488 (Article)

Introduction

The international taxation arena is undergoing substantial changes that will have a lasting impact on tax planning, tax administration, and tax dispute settlement. Consequently, in an era where the view of the relationship between taxpayers and tax administrators is changing, it is essential to examine the Mutual Agreement Procedure and other areas of tax dispute resolution. This article chronicles the growth of Mutual Agreement Procedure from its inception in the OECD Model Tax Convention, the work of the OECD in the BEPS Inclusive Framework Action Plan, and India’s stance on such changes. The study also examines instances in which Mutual Agreement Procedure fails, and Arbitration is employed. Certain principles of tax administration that favor arbitration for India are examined in conclusion.

Mutual Agreement Procedure – A Brief Overview

Mutual Agreement Procedure (MAP) is an alternative dispute resolution mechanism available to taxpayers under Double Taxation Avoidance Agreements (DTAAs), in addition to domestic remedies, for the resolution of disputes arising from double taxation or taxation not in accordance with the respective DTAA. Generally speaking, the instances addressed by MAP involve cross-border double taxes, including both juridical and economic double taxation.

Article 25 of the Model Tax Convention on Income and on Capital 2017 (the “Model Tax Convention”) by the Organisation for Economic Co-operation and Development (OECD) mandates MAP in tax treaties, including DTAAs. The Model Tax Convention is a guide for international tax treaties that formalizes and standardizes fundamental aspects in an effort to enhance administrative cooperation in tax affairs.

The OECD has regarded the Mutual Agreement Procedure as a fundamental element for the resolution of tax treaty-related disputes between nations. In light of this, the OECD has incorporated MAP into its Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) as one of the Actions. Action 14 of the BEPS Action Plan indicates that the existence of MAP provisions in tax treaties is not sufficient but further scrutiny is required into their accessibility and execution. In support of its Action Plan, the OECD has developed the Action 14 Minimum Standard, which comprises 21 criteria and 12 best practices used to evaluate a jurisdiction’s framework in support of MAP. In a subsequent section, this article will cover the guidelines and suggestions offered by the Peer Review Reports.

Certain elements of the Mutual Agreement Procedure that may be advantageous to both taxpayers and tax administrators include:

(i) In many jurisdictions, taxpayers can utilize the Mutual Agreement Procedure in conjunction with the usual remedies provided by their domestic laws.
(ii) In circumstances where one Contracting State supports a taxpayer’s position, it may be advantageous for the taxpayer’s case.
(iii) When both Contracting States are jointly addressing a dispute under MAP, the taxpayer may benefit from cross-jurisdictional tax authorities’ fresh perspective on the dispute’s subject matter.
(iv) MAP relieves the traditional judicial system of the burden of resolving tax disputes, which benefits the tax administration.
(v) It is more efficient for both taxpayers and tax administrators, as the tax officials involved in MAP are frequently experts in the field of international taxation, although this is not always the case in a jurisdiction’s regular legal dispute resolution system.

The benefits of Mutual Agreement Procedure, non-exclusive of the above-mentioned factors, have also had an effect on the success rate of this mechanism of dispute resolution under international tax treaties. Beginning on 1 January 2016 and ending on 31 December 2019, the graph below depicts the caseload statistics for India’s Mutual Agreement Procedure4.

Article 25 of the OECD Model Tax Convention on Income and on Capital 2017

The Mutual Agreement Procedure provision has been inserted into Article 255 of the Model Tax Convention. The first paragraph of the Article describes the circumstances in which a person may contact the Competent Authority, regardless of the domestic remedies available. The second paragraph adds that if the Competent Authority deems the person’s arguments to be valid, it will attempt to decide the case on its own. Nevertheless, if the Competent Authority is unable to settle the issue on its own, it must reach an agreement with the Competent Authority of the other Contracting State to do so. In the third and fourth clauses, the Competent Authorities are given several options for resolving double taxation disputes.

This provision serves as a guide and is merely a proposal or advice to jurisdictions that implement the Model Tax Convention. Article 25 of the Model Tax Convention addresses the major components of the MAP framework and seeks to answer problems such as:

(i) What types of situations are covered by MAP?
(ii) Who is permitted to initiate dispute resolution?
(iii) In what circumstances can the Competent Authority of both Contracting States resolve the issue jointly?
(iv) What are the time constraints for completing the procedure?

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