Why dispute resolution between Germany and India is a lost cause

The worldwide transfer pricing landscape is in a state of flux and the need for sound and reliable dispute resolution mechanisms has never been more important for multinational enterprises.

In particular, where aggressive tax administrations such as India are concerned, double taxation is a key concern for businesses.

Mutual agreement procedure between Germany and India

In the event that a taxpayer suffers double taxation in India and Germany, Article 25 of the Double Taxation Agreement (DTA) between the two countries theoretically provides for MAP.

However, since Article 9(2) regarding corresponding adjustments in the DTA is missing, in practice, successful conclusions of MAPs between India and Germany are a farfetched goal.

Based on experience, the Indian Competent Authority does not entertain or process MAP requests where Article 9(2) is missing in the DTA. Additionally, the advance pricing agreement (APA) guidance with FAQs released by the Income Tax Department of India clearly states that the practice followed by India in MAP proceedings is that without Article 9(2), the cases of economic double taxation are not admitted under MAP and that a similar position would also apply to APAs. (See: Question 19 of the FAQs on the Indian APA Scheme published by the Income Tax Department of the government of India in 2013.)

Article 9(2) as understood in the spirit of the OECD Model Tax Convention stipulates that, if it is established through MAP or otherwise that the profits of an enterprise/taxpayer which has been taxed in one of the contracting states, and the profits included would have accrued to an associated enterprise/taxpayer of the other contracting state, then the first contracting state shall undertake an appropriate adjustment to the amount of tax charged therein on the aforementioned (incorrectly accrued) profits. In determining such an adjustment, due regard shall be made to the other provisions of the DTA and the competent authorities of the contracting states. (See Article 9(2) of the OECD Model Convention.).

Thus, Article 9(2) is of paramount importance to ensure that the results of the MAP can be implemented in practice.

However, it is also worth noting that the absence of Article 9(2) is not entirely uncommon in DTAs.

For instance, India has 124 DTAs in total, of which only 61 include Article 9(2) dealing with corresponding adjustments. In comparison, Germany has 107 DTAs of which only 46 include Article 9(2) dealing with corresponding adjustments.

After the introduction of its APA programme in 2012, the Indian tax administration acknowledged the need for updating its DTAs with countries where Article 9(2) was missing. Similarly, the German tax administration has also acknowledged that the DTA with India needs to be updated and that such discussions have in fact taken place in the past between the representatives of the two tax jurisdictions.

However, for the time being multinational enterprises in Germany and India must work with the assumption that no foreseeable relief from double taxation between India and Germany is possible.

Unilateral possibilities

There are unilateral measures that taxpayers may wish to resort to, however these are often time consuming and offer no guarantee of relief.

Section 2.4 (1) of the German Administrative Bulletin on Mutual Agreement and Arbitration Procedures (2006) (Procedures) stipulates that, before initiating the MAP, it has to be examined whether the substance of the request made by the party entitled to treaty benefits (it is questionable though, if in the case of India a treaty benefit is available given that Article 9(2) is missing) may be remedied using German national measures).

Where necessary, the German Competent Authorities will take the necessary measures ex officio.

In practice, in the event of a unilateral action, the German Competent Authority would generally consider the agreement reached with the local tax authorities during an audit proceeding as being determinant.

Thus, unilateral action by the German Competent Authority (if any) would depend on how the local tax authorities regard the case at hand, which may have led to the double taxation in the first place.

India provides for a fairly robust multi-level procedure for resolution of tax disputes but the time and effort involved can reach magnanimous proportions.

Moreover, with each passing year the number of disputes going to the tax tribunals and courts is increasing.

High profile cases such as that of Vodafone provide a glimpse of how cumbersome the process can be. Having said that, it is also important to note that a fair number of cases in India have indeed been decided in favour of the taxpayer.

Thus, although there is strong reason to hope for relief through unilateral measures in India, the taxpayer must be prepared for years of litigation.

Thus, based on experience, dispute resolution cases between Germany and India are unfortunately a lost cause and are most certainly to the detriment of the taxpayer.

In such cases the approach needs to be proactive rather than reactive since not much can be done (if anything at all) on a bilateral level after the incidence of the double taxation.

For instance the fact that double taxation relief is not possible should be borne in mind at the very latest during tax audit proceedings and negotiations if not at the time of planning and implementation.