Mutual Agreement Procedure vs. Mandatory Binding Arbitration: India’s Stance on Non-Judicial Remedies in DTAAs

Introduction

It is quite clear that only when both the parties or countries to a bilateral tax treaty. i.e., DTAAs, notify the treaty as a Covered Tax Agreements (CTA), then the Multilateral Instrument will be applicable on such treaty. Now after considering as a CTA, various prescribed minimum standards are to be met by the tax treaties, like the minimum standards for impeding treaty abuse through BEPS Action Plan 6, and the minimum standards for the enhancement of dispute resolution mechanisms under BEPS Action Plan 14 by introducing a new dispute resolution mechanism of Mandatory Binding Arbitration.

In last few decades, India has signed over 100 DTAAs with other countries. Almost all of these tax treaties have a Mutual Agreement Procedure (MAP) clause that outlines how India and its treaty partners would address disputes that result in “taxation not in conformity with the treaty” at the taxpayer’s request. International tax dispute resolution through MAP is not a novel concept, and it is included in many tax treaties, though there are some differences in the timelines for submitting MAP requests and other details. However, the goal has always been to settle tax treaty disputes as quickly as possible.

Further, the Report on Action Plan 14 on base erosion and profit shifting (BEPS) by the Organisation for Economic Co-operation and Development (OECD), clearly focuses on improving dispute resolution processes, aims to achieve this goal by proposing a mandatory, binding arbitration to resolve MAP cases. The suggestion to adopt obligatory, binding arbitration as a means of successfully resolving MAP disputes has mostly been met with opposition, with a number of nations, including India, voicing reservations about adding such a provision in their tax treaties.

Mutual Agreement Procedure

In 2015, the OECD had issued Action Plan 14 on the BEPS, which deals with improving the dispute resolution mechanisms for more effectiveness and efficiency. Action 14 clearly states: – “Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under mutual agreement procedure (MAP), including the absence of arbitration provisions in most treaties and the fact that access to MAP and Arbitration may be denied in certain cases.”^[1]

This Mutual Agreement Procedure (MAP) is embedded under Article 16 of the MLI and deemed as a minimum standard for enhancing dispute resolutions. As per Article 16(1)^[2], the MAP intends to establish a system for resolving disputes in circumstances where a taxpayer believes he has been taxed in a way that is contrary to the provisions of the relevant tax treaty/CTA. With the help of this tool, the Competent Authorities (CA) or designated representatives of the governments of the contracting parties participate in this system with the intention to resolve international tax disputes, regardless of any remedy provided under domestic law. This provision is applicable even in the absence of any other provision on dispute resolution under the respective tax treaty, only when the parties to the treaty exercise their right to reserve this provision with the intention to follow the minimum standards, elucidated under BEPS Action Plan 14.

Whenever a taxpayer believes that he has been taxed in a manner that is not in compliance with the provision of the tax treaty, then primarily, he will approach the CA of the Contracting Jurisdiction of which he is a national/resident. Further, if such CA does not rely on the objections made by the taxpayer to be appropriate and justified, then the taxpayer has to execute a consultation process or bilateral notification with the CA of the other Contracting Jurisdiction. Action Plan 14 distinct that the purpose of such a consultation process or notification is to allow other competent authorities to express their opinions on whether the MAP request should be allowed or refused for review, rather than to resolve the situation.^[3]

Article 16(1) also covers that within three years of the initial notification of the action alleged to be inconsistent with the tax treaty, the case must be brought into the notice of the CA, by the taxpayer. This part is also applicable even in the absence of any other provision in the tax treaty pertaining to dispute resolution or if the provision exists and having a limitation period of less than three years. Additionally, if the relevant tax treaty allows the taxpayer to approach the CA after the expiration of three years, then also the provision remains unchanged.

Further, Article 16(2)^[4] deals with the situation when the CA of the Contracting Jurisdiction (where the taxpayer is a resident) relies on objections made by the taxpayer to be appropriate but does not able to provide any satisfactory solution to the said dispute. In such scenarios, the taxpayer can approach the CA of the other contracting jurisdiction for resolving the dispute through mutual agreements to forbid the taxes which he believed to be charged in non-compliance with the provisions of the tax treaty/CTA. It also covers a non-obstante clause as per which, once the mutual agreement is reached, it should be executed notwithstanding any time limits under the domestic laws of the Contracting Jurisdictions.

Article 16(3)^[5] provides that whenever any difficulty arises pertaining to the interpretation or application of the provision of the Tax treaty/CTA then such difficulties shall try to be resolved by the CAs of both the Contracting Jurisdictions through mutual agreements. Moreover, it also empowers the CAs to also consult each other for the elimination of double taxation in cases, which are not provided for under the CTA.

India’s Stance on Mutual Agreement Procedure (MAP)

India has made its partial reservation against the Article 16(1) of the MLI, i.e., it intends to comply with the minimum standard required under the BEPS Action Plan 14 by allowing MAP access in the resident state, and implementation of bilateral notification or consultation process where the CAs of India does not rely on the objections of the taxpayer to be appropriate or justified. The part of Article 16(1) which does not reserved by India, was the part which deals with the limitation period of three years, within which the taxpayer has to file the dispute to the CAs of the contracting jurisdiction.^[6]

The MAP is elucidated under the India’s DTAAs based on Article 25^[7] of the OECD Model Tax Convention (MTC). Further, India is committed to endeavour to resolve MAP cases within 24 months. However, the said timeframe is not to resolve the MAP disputes but for endeavour to resolve such disputes.^[8] As per the OECD’s MAP Peer Review Report -India^[9], MAP cases in India were not closed within 24 months and the average time took by the CAs was 34.31 to 35.66 months for attribution/allocation cases and 68.70 months for other cases. The peers noted that sometimes the CAs of India became rigid in the matters of allocation/attribution, due to preferring domestic TP rules over OECD TP guidelines.

Moreover, it is also stated by the Indian tax authorities that if both the CAs are unable to resolve the dispute through MAP, then they would close such MAP dispute as unresolved. Consequently, the CAs of India having jurisdiction over the case shall inform the Indian taxpayer about the non-resolution of the dispute.

Cases when Access was provided to MAP^[10]

India provides access to MAP, when the following situations create double taxation, which is not in conformity with the DTAAs:

• Transfer Pricing adjustments;
• Existence of a Permanent Establishment (PEs);
• Attribution of profits to PEs, whether admitted or not by the taxpayer;
• Characterization or re-characterization of income or expense such as royalty, fees for technical services or interest.

Additionally, there are various other scenarios^[11] when the access is granted to MAP Applications such as:

• If the Indian taxpayers has signed Unilateral Advance Pricing Agreement (UAPA) and the tax authorities of a DTAA partner challenges the income of such taxpayer, present under the UAPA entered with India, then the access to MAP is granted for such taxpayer.
• MAP access is also granted to such Indian/Foreign taxpayers, who opts for the Indian TP safe harbor rate on its international transactions and the CA of India should be notified about the same.
• If the Indian taxpayer receives any order from the ITAT w.r.t. the disputed matter in the MAP application then such taxpayer has access to MAP and further India will only seek correlative relief at the level of the treaty partner and not be able to diverge from the ITAT’s order.
• MAP access would also be provided to a non-resident, when the withholding tax order is passed against a resident payor for enforcing obligation to withhold tax on payment to a non-resident, in the event of avoiding double taxation which is not in conformity with the DTAAs.
• MAP access is also provided in India, where cases concerning the application of the domestic anti-abuse provision exist, however, the MAP’s discourse will only focus on the issue of double taxation arising from such application and no other issues will be dealt by the CAs through MAP.

Cases when access to MAP is denied^[12]

There are situations, when the Indian CAs denied the access to MAP, made by the taxpayers, such as:

• If the taxpayer filed the MAP Application to the Indian CAs or CAs of other contracting jurisdiction after the elapsing of the time period specified in the relevant DTAA, then the access to MAP application is denied by the Indian tax authorities.
• MAP access would be denied by the CAs of India, once the Income Tax Settlement Commission (ITSC) has passed the settlement order or the Authority for Advance Rulings (AAR) issues an advance ruling because such order or ruling will be binding on both the tax authorities and the taxpayer.
• Whenever the issue or dispute is of such nature that are purely governed by domestic taxation law of India and arise due to the implementation of domestic legal provisions, then the MAP access is denied.
• No MAP access is provided if the taxpayers are the fiscally transparent entities OR single member partnerships.
• If the dispute does not carry the issue of double taxation, then MAP cannot be accessed.

OECD’s Recommendations on India’s Position on MAP

There are certain OECD recommendations and key peer inputs^[13] on the India’s position on MAP for advance and smoot working of MAP mechanism in India. It states that India shall:

• Publish comprehensive MAP guidance.
• Provide MAP access to disputes involving the issue of domestic anti-abuse in absence of double taxation.
• Consider adherence to OECD TP guidelines instead of domestic TP Rules.
• Increase resources for handling of MAP or bilateral APA cases.

Mandatory Binding Arbitration 

The major conundrum arises when the CAs of both the contracting jurisdiction does not reach to a satisfactory and appropriate solution of the taxpayer’s dispute where a taxpayer believes he has been taxed in a way that is contrary to the provisions of relevant tax treaty/CTA. Most of the tax treaties simply provide that the CAs must ‘endeavour’ to resolve the disputes by MAP. There may be no further provisions present in the treaty which deals with the procedure to be followed in the event that they are unable to agree. This ‘endeavour’ obligation is a relatively low standard and imposes no binding duty on the CAs to resolve the dispute, which consequently leads to delays in many MAP cases. Such unresolved disputes create hurdles for the taxpayers. Therefore, OECD has introduced a new mechanism under Part VI of the MLI^[14], for the enhancement of dispute resolutions. This new mechanism is Mandatory Binding Arbitration. This address cases where the parties have gone through the MAP but still haven’t been able to resolve their dispute.

Article 19^[15] under Part VI of the MLI covers the clause of Mandatory Binding Arbitration. This new mechanism for dispute resolution requires the parties to put in their disagreement to arbitration, where an arbitral tribunal will render a decision that is final and binding on the treaty parties. As a result, parties benefit from an additional level of support, as unresolved issues can be presented to an unbiased and autonomous body such as arbitral tribunal.

Mandatory binding arbitration is offered in situations where CAs of both the jurisdiction fail to establish an agreement to resolve a dispute under the MAP. Part VI stipulates that a party may decide to apply this Part to its CTAs, but the said Part only applies between jurisdictions that expressly opt to do so. It’s worth noting that some nations have declined to ratify this new mechanism under Action 14, implying that such countries would not carry out arbitration to settle their tax issues. Developing countries like India and Nigeria have not adopted Part VI of the MLI, which has shown their resistance to include mandatory arbitration clause in any tax treaty.

In an era of rising intricacies in international trade and advanced & complex business models such as the digital economy, the best practice to resolve double taxation disputes can be the presence of mandatory binding arbitration clause in the tax treaties. This is especially significant because, if the parties to the relevant tax treaties do not opt for mandatory arbitration, then it would foster fear in the investor’s mind as he/she would hesitate to approach domestic courts of the contracting jurisdiction.

India’s Stand On Mandatory Binding Arbitration

India doesn’t embrace the Part VI of the MLI, which distinctly reveals the India’s reluctance over accepting the mandatory binding arbitration mechanism. India bases its concern on the argument of national sovereignty, i.e., if tax matters are made mandatory arbitrable, then this would directly hamper the government’s sovereign right to levy tax on a non-resident and foreign company.^[16] Moreover, the Finance Minister Nirmala Sitaraman has expressed that – “In the revised model BIT, taxation matters have been excluded keeping in view of the fact that taxation is an integral function of the state’s sovereignty and hence such matters need not be escalated under treaty dispute settlement mechanism.” ^[17]

Further, Mr. G.C. Shrivastava, former Director General of International Taxation, “India has never accepted binding arbitration – it believes it has enough appellate mechanisms and courts to handle disputes effectively.” He also added that “India is already strengthening the effectiveness and efficiency of its MAP process under tax treaties – and does not think mandatory arbitration is warranted in its case.”^[18] Ms. Anita Kapur, Former Chairperson of the CBDT, has also stated her views that if MAP functions effectively and efficiently, then we don’t need arbitration as it would create an additional complication rather than an additional solution to the tax dispute and it would be erroneous to believe that MAP only works when there is a threat of arbitration.^[19] As per the Indian Tax authorities, India may take measures like elimination of collection of tax when the MAP proceedings are pending facilitate effective implementation of MAP. Even such measures are already included in India’s tax treaties with the US, the UK, Denmark and Korea.

Conclusion

A closer look on Part VI of the MLI exhibits that the India’s argument on hinderance to national sovereignty has got mislaid. The said argument is certainly not plausible as OECD has implemented numerous layers of protection in order to safeguard the interest of a nation and ensure that the sovereignty of the nation is not compromised unnecessarily. Among other layers of protection, it is proposed that ONLY when the parties are not able to resolve their dispute through MAP within the prescribed two years from the date of initiation of the MAP proceedings, then the parties can opt for arbitration. Another safeguard, provided by OECD, is that parties are empowered to decide the appointment of Chair of an arbitral tribunal, where the respective nation can certainly exercise its right to choose an arbitrator and ensure that the Chair of an arbitral tribunal is not a nation or residence of either of the parties. The said Nation may also terminate the arbitration proceedings in certain cases.^[20]

Further, the Inclusive Framework on Two-Pillar Statement^[21] for solving the tax issues arise from digitalisation of the economy, introduced by the OECD/G20 on 1^st July 2021, has distinctly stated the significance of Mandatory Binding MAP Arbitration. The Pillar One Statement provides mandatory binding dispute resolution mechanisms for in-scope Multi-national Enterprises (MNEs), i.e., MNEs that have more than 20 billion euros as a global revenue and profitability of above 10% of the revenue. It related to the issues of new taxing right to market jurisdictions, allocating a portion of residual profit. However, the Statement affirms that the mandatory dispute resolution mechanisms will be elective for certain developing countries which has less or no MAP cases pending. It creates a great ambiguity as how a process that is binding on most countries, but not all, would function and thus result in double taxation.

Even a lot of experts has observed that India might have to revisit its position on mandatory arbitration. While all members have agreed on the need for an innovative solution to deliver early certainty and effective dispute prevention and resolution for Amount A, there continue to be differences of view on the scope of mandatory binding dispute resolution beyond Amount A. A decision on this issue will need to be part of a comprehensive agreement also covering the other two open political issues on quantum and scope. While India has historically not been in favour of resolving tax disputes through binding arbitration, however, considering the overarching objective of providing tax certainty, it may consider revisiting its historical position. It is critical for India to follow in the footsteps of other nations that have included arbitration in tax treaties, since this would go a long way toward advancing investor interests and would demonstrate India’s true willingness and determination towards eradicating double taxation.

(This post has been authored by Jaskaran Singh Saluja and Yash Jain. Both Jaskaran and Yash are final year students at Institute of Law, Nirma University)

References

1. Making Dispute Resolution Mechanisms More Effective, Action 14 – Final Report, OECD/G20 Base Erosion and Profit Shifting Project, Organisation for Economic Co-operation and Development (2015), at https://www.oecd-ilibrary.org/docserver/9789264241633-en.pdf?expires=1626303607&id=id&accname=guest&checksum=4F41D747276D80F78747BF932F991639. ↑
2. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Organisation for Economic Co-operation and Development, Art. 16(1), at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf. ↑
3. Making Dispute Resolution Mechanisms More Effective, Action 14 – Final Report, OECD/G20 Base Erosion and Profit Shifting Project, Organisation for Economic Co-operation and Development (2015), at https://www.oecd-ilibrary.org/docserver/9789264241633-en.pdf?expires=1626303607&id=id&accname=guest&checksum=4F41D747276D80F78747BF932F991639. ↑
4. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Organisation for Economic Co-operation and Development, Art. 16(2), at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf. ↑
5. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Organisation for Economic Co-operation and Development, Art. 16(3), at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf. ↑
6. Mutual Agreement Procedure (MAP) Guidance – Regarding, Ministry of Finance – Government of India (August 7, 2020), at https://www.incometaxindia.gov.in/news/map_guidance_7_8_2020.pdf. ↑
7. Articles of the Model Convention with respect to Taxes on Income and on Capital, Organisation for Economic Co-operation and Development (November 21, 2017), Art. 25, at https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf. ↑
8. Mutual Agreement Procedure (MAP) Guidance – Regarding, Ministry of Finance – Government of India (August 7, 2020), at https://www.incometaxindia.gov.in/news/map_guidance_7_8_2020.pdf. ↑
9. Making Dispute Resolution More Effective – MAP Peer Review Report, India (Stage 1): Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, Organisation for Economic Co-operation and Development (2019), at https://www.oecd-ilibrary.org/docserver/c66636e8-en.pdf?expires=1626217695&id=id&accname=guest&checksum=A30E010A26B4493AF90DA55DB62A140A. ↑
10. Mutual Agreement Procedure (MAP) Guidance – Regarding, Ministry of Finance – Government of India (August 7, 2020), at https://www.incometaxindia.gov.in/news/map_guidance_7_8_2020.pdf. ↑
11. Id.; Making Dispute Resolution More Effective – MAP Peer Review Report, India (Stage 1): Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, Organisation for Economic Co-operation and Development (2019), at https://www.oecd-ilibrary.org/docserver/c66636e8-en.pdf?expires=1626217695&id=id&accname=guest&checksum=A30E010A26B4493AF90DA55DB62A140A. ↑
12. Id. ↑
13. Making Dispute Resolution More Effective – MAP Peer Review Report, India (Stage 1): Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, Organisation for Economic Co-operation and Development (2019), at https://www.oecd-ilibrary.org/docserver/c66636e8-en.pdf?expires=1626217695&id=id&accname=guest&checksum=A30E010A26B4493AF90DA55DB62A140A. ↑
14. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Organisation for Economic Co-operation and Development, Part VI, at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf. ↑
15. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Organisation for Economic Co-operation and Development, Art. 19, at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf. ↑
16. https://finmin.nic.in/press_room/2014/MOSFinance_speechG20_Cairns_Australia.pdf; Ashish Goel, Modi Government Shifts India’s Corporate Tax Landscape Amidst Grim Dispute Resolution Climate, The Wire (April 19, 2017), at https://thewire.in/business/modi-government-shifts-indias-corporate-tax-landscape. ↑
17. Framed model BIT to minimise Cairn Energy type dispute : Nirmala, The Times of India (August 8, 2016), at http://timesofindia.indiatimes.com/articleshow/53596754.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst. ↑
18. India Still Unwilling to Accept Arbitration in Treaties, Bloomberg Tax (December 2015). ↑
19. Id. ↑
20. Ashish Goel, Modi Government Shifts India’s Corporate Tax Landscape Amidst Grim Dispute Resolution Climate, The Wire (April 19, 2017), at https://thewire.in/business/modi-government-shifts-indias-corporate-tax-landscape. ↑

21. Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, Organisation for Economic Co-operation and Development (July 1, 2021), at https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf ↑