Mutual Agreement Procedure (MAP) for navigating the tax tangle

If statistics are anything to go by, today India is the world’s fastest growing economy at 7.3% in 2015, outstripping the global average of 3.1%. With a new government in the centre, we do seem to be riding high on the growth trajectory. The Modi government has certainly done its bit to turn the wheels with promising policies and economic reforms including the land acquisition bill; the national goods and service tax, and revamped labour laws. While While Digital India has already made headlines across the globe, the Make in India campaign has attracted a spate of investments at the core, placing India in a highly favourable economic position.

While all this is reassuring, it is equally important to create an investor friendly environment for progress. Taxation, for instance, can affect the rate of economic growth of a country. In India, tax revenues are nearly 10% of India’s GDP, contributing to the overall growth and development. However, burgeoning tax litigations, retrospective tax and policy changes, high regulatory payouts and levies have the potential of plaguing the economy and dampening investor confidence.

Burgeoning tax litigations are a dampner

A closer look at India’s tax landscape in the last ten years might lead to the conclusion that some of the current policies need an overhaul. The unprecedented increase in litigation which is compounded by the backlog of impending tax disputes calls for an immediate amendment to the dispute resolution mechanism. Global giants such as Vodafone, Shell, Cairns and Nokia have long struggled to reach consensus with the government resulting in lengthy, tedious and costly tax litigations. In fact, there has been a significant rise in other disputes in areas of international tax, such as existence of permanent establishment and attribution of profits, arm’s length pricing of related party transactions, characterization of income and taxation of capital gains, etc.

The current law mechanisms such as the Settlement Commission, Authority for Advance Rulings (AAR), Dispute Resolution Panel (DRP) and Advance Pricing Agreement, are in the broader sense, forums for avoiding protracted litigation. However, most of these methods have not proved to be fully effective in expediting resolution of tax litigation for various reasons. On this note, the most immediate imperative on the agenda of the new Government should be to find a faster and alternative way to resolve disputes.

Exploring dispute resolution under bilateral tax agreements

Faced by increased scrutiny from tax authorities, the ongoing tax disputes with Vodafone, Nokia, IBM, Shell, etc has increased uncertainties over doing business. The recent instance where the Government considered the possibility of conciliation with tax payers and exploring options such as international arbitration and Mutual Agreement Procedure (MAP), is a potentially very big step in the right direction and an effective alternative dispute resolution mechanism for resolving tax disputes.

To put things in perspective, MAP is a bilateral negotiation process between the tax authorities of two countries that mitigates the problem of double taxation when a stream of income has been not taxed in accordance with the provisions of the Double Taxation Avoidance Agreement agreed between the two countries. India currently has strong tax treaty network and has signed bilateral Double Tax Agreements (DTA) with over 90 countries.

While there are various means of resolving tax disputes by the way of domestic litigation processes, Settlement Commission, AAR, APA, arbitration and MAP, global giants such as Cairn, Nokia and Vodafone have resorted to international arbitration to resolve so called tax issues. Some other companies like Nokia have also initiated MAP as an alternative to resolve tax disputes in India. In order to reinstate the investor confidence in the Indian government and make India a more predictable tax jurisdiction, it becomes increasingly imperative for the Government to resolve these large tax disputes in India.

Exploring MAP as an alternative dispute resolution

Most of the tax treaties that India has entered with various countries, contain special provisions relating to MAP for eliminating double taxation and resolving conflicts of interpretation of the provisions of the tax treaty.

The MAP article within the tax treaty allows the competent authority (CA) in governments of the contracting states to interact with the intent to resolve tax disputes between the government of one country and the government of the other country. This happens most commonly when one government imposes tax on additional profits in its country, but those profits have already been subjected to tax in the other country. Under this scheme, the taxpayer is entitled to approach the CA of their country of residence to invoke a MAP. Thereafter, CAs of both the jurisdictions convene a meeting (without the taxpayer’s presence) and try to resolve the dispute through mutual agreement. Based on the MAP resolution, the taxpayer has an option to accept the agreement reached by the CAs, or decline it, and continue litigating as per the remedies available under the domestic law.

Interestingly, provisions under MAP in most tax treaties do not compel CAs to reach an agreement and only oblige them to use their best endeavours to resolve the disputes. This route can be pursued by taxpayers simultaneously with the domestic dispute resolution process. Further, the details of resolutions reached are not available within the public domain and cannot be used as a precedent by other taxpayers. Within the Indian scenario, most MAP cases are with the US, the UK, Japan and a few other European countries.

It is welcoming to see that even the Indian Government is advocating the use of MAP for solving impending disputes. Most recently, the CBDT Chairperson stressed arbitration as not to be the best way to resolve tax disputes and that if MAP works, there is no need for arbitration. There is, it seems, a strong desire in Indian government circles, to make MAP work.

The way forward

As an economy, we are one of the best proponents for executing MAP claims as compared to other OECD nations. The Government claims on having 60 MAP closures in the last year. With these right credentials in place, successful and timely closure of some of these large tax disputes under MAP will be a key trigger for making dispute resolution more effective. Delays will not only hamper global investments, but also force existing investors to reassess their market strategy in the country.

On that note, while India remains locked in major back-tax disputes, there is a need to strengthen the MAP process in context to the recent OECD recommendations on BEPS for making dispute resolution more effective, which includes 17 minimum standards and 11 best practices prescribed. This requires resolution on three broad issues around access, speed and independence.

While Government is committed to implement the minimum standards and wishes to ensure that every taxpayer has full access to MAP, what needs to be seen is a number of concrete examples of the effectiveness of this process to solve complex tax disputes involves issues on income characterization, withholding tax, PE and attribution of profits to the PE and arm-length pricing, etc. Moreover, this needs to be seen in a timely manner. Some of the areas where changes may be considered by the Government to make the MAP framework more effective, could include inter-alia the following:

> India should provide access to MAP for all transfer pricing disputes and ensure economic double taxation is relieved in all cases involving tax treaty countries.

> Flexibility should be allowed for invoking MAP where the taxpayer is subject to double taxation as a result of applying safe harbour rules.

> Roll back provisions should be introduced for MAP settlements to resolve tax treaty disputes more effectively and save time and resources both for taxpayer and tax authorities.

> Benefit of suspension of taxes provided in case of MAP with US, UK, etc. should be extended to MAP with other countries, till settlement is reached in MAP.

> Outcome of MAP process should be binding on taxpayer upon acceptance and the time limits or the procedures laid down under the domestic tax laws of India should not restrict the application of tax treaty provisions or the implementation of the MAP agreement arrived at by the Competent Authorities.

India has the potential of being one of the most promising investment destinations. If we are to steer ahead, adoption of a sustainable tax resolution mechanism will be important. Where applicable, MAP can be an effective route for settling impending disputes and give positive signals to the global investors. Government’s action of settling some of these large tax disputes timely and effectively, in the long run, will help in improving the country’s reputation and will promote investments resulting into generating of employment and taxes as well.

All things considered, Rome was not built in a day. We require a dramatic rethink on the current structure and implement forward-looking, progressive and business-friendly reforms for ease of doing business in India.