Cross-border tax disputes: CBDT issues detailed guidance on Mutual Agreement Procedure (MAP) – an alternate dispute resolution mechanism

The Central Board of Direct Taxes has issued guidelines for an alternative dispute resolution mechanism with regards to tax disputes called Mutual Agreement Procedure (MAP) by which cross-border tax disputes over transfer pricing adjustments, permanent establishment between assessees and tax authorities of countries with which India has tax treaties can be resolved.

The guidelines – which would be used by tax authorities, taxpayers, tax practitioners and chartered accountants (CAs) of India and treaty partners — provide timelines for various steps under MAP procedure and give clarity on situations where MAP applications can be filed. Two central government officials of joint secretary rank in the department of revenue have been assigned to deal with MAP cases as competent authorities by India. These tax officials would be independent of tax authorities who would audit taxpayers and take their own decisions, CBDT said. They are only administratively governed by the internal governance mechanism of CBDT, it said.

The guidance was issued after the action plan following direction by action plan on the Base Erosion and Profit Shifting (BEPS) of the Organisation for Economic Co-operation and Development (OECD).

MAP is a bilateral negotiation process between the tax authorities of India and of the countries with which it has a double taxation avoidance agreement (DTAA) to resolve cross-border tax disputes. After an amendment was brought about in rule 44 in May this year, India has eased the process of dispute resolution under MAP within tax treaties. Earlier there was no time frame for resolution, but now, the authorities would endeavour to complete the MAP proceedings within 24 months in accordance with the BEPS action plan of the Organisation for Economic Co-operation and Development (OECD). The guidance clarified and emphasized that it is not a commitment to close the proceedings in 24 months in all cases but merely an endeavour.

The guidance says that the prior ruling of the income tax appellate tribunal (ITAT) would prevail even if MAP has resolved the disputes. However, in cases where ITAT does not resolve the disputes but only set them aside to be adjudicated afresh, then access to MAP would be provided again by CAs after the fresh adjudication, if asked by the assessees.

MAP route is mostly used for resolution of tax disputes of cross-border transactions, related to existence of Permanent Establishment or PE of a foreign company in another country, attribution of profits to a PE, transfer pricing adjustments or characterization or re-characterization of an income or expense.

In cases where ITAT does not resolve the disputes but only set them aside to be adjudicated afresh, the assessees can ask for fresh adjudication and then access to MAP would be provided again by CAs after the fresh adjudication. The guidance says that CAs of India and DTAA countries can withdraw all adjustments made by the tax officials in the former. However, those in India cannot go below the income filed in the returns by the assessee as domestic laws do not provide for that.

On the other hand, in MAP cases where adjustments were made by the tax authorities in DTAA countries, CAs in India can go below the income filed in returns in accordance with the provisions in the treaty. It is also stated that the CAs of India are not authorized to consider issues of interest and penalties and negotiate disputes arising from such issues.

India has entered into a memorandum of understanding under the ambit of MAP with some countries. These MoUS will guide the issue of suspending collection of taxes during the pendency of MAP cases. However, Indian laws will govern these issues where there are no MoUs inked.

According to experts the guidelines were in accordance with the Organisation for Economic Co-operation and Development recommendation under BEPS Action Plan 14.