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| CBDT releases Updated Guidance on Mutual Agreement Procedure |
India has an extensive tax treaty network with almost 100 tax treaties, all containing a provision relating to MAP. Until May 2020, Rule1 44G and 44H dealt with Mutual Agreement Procedure (MAP) process in India. Though erstwhile Rules were in existence for many years, detailed information regarding MAP processes and guidance on issues related to such processes were not available in a comprehensive and consolidated manner.
The Action 14 final report on ‘Making Dispute Resolution More Effective' of the BEPS2 project recommended that all countries implementing the BEPS package of measures must publish comprehensive MAP guidance. In the MAP Peer Review by OECD3 for India, several deficiencies were identified in the Stage 1 report4. India solved almost all of the identified deficiencies, but several new deficiencies were identified in the Stage 2 report5. Also, the average time frame to close MAP cases was 34.4 months from the target timeframe of 24 months. Accordingly, Stage 2 report stated that India meets all of the other requirements under the Action 14 Minimum Standard in relation to the resolution of MAP cases.
With a view to aligning with best practices, the Central Board of Direct Taxes (CBDT) amended its existing regulations on MAP by notifying new Rule 44G of the Rules vide General Statutory Rule 282(E) dated 6 May 2020 (substituting the erstwhile Rules 44G and 44H) with specific procedures for filing MAPs, and notification to the Foreign Competent Authority (CA).
Furthermore, on 7 August 2020, a detailed MAP guidance6 was released by CBDT around procedural and technical aspects, acceptance/denial of MAPs, and the implementation of MAPs. The guidance comprises of four parts:
Part A: Introduction and Basic Information
Part B: Access and Denial of Access to MAP
Part C: Technical Issues
Part D: Implementation of MAP Outcomes
This guidance emphasized India's commitment to resolving MAP cases within an average timeframe of 24 months. The guidance also strengthens India's endeavor to comply with key recommendations of the Action 14 final report by making the Indian MAP regime an effective and efficient dispute resolution process.
Subsequently, queries were raised on certain related aspects of MAP, which were not covered by existing guidance. Considering all these inputs and suggestions for clarity, the CBDT has updated the existing guidance 7 on 10 June 2022.
Fig: Journey of how the Indian MAP regime aligned with BEPS Action 14 requirements.
The updated guidance covers the following key aspects:
- MAP and Vivad se Vishwas
The CBDT had launched a new dispute resolution scheme called the ‘Vivad se Vishwas Act, 2020' (VsV Scheme) to reduce the pending tax litigation for the taxpayers and to generate timely tax revenues for the government.
The MAP Peer Review - Stage 2 for India suggested that India shall ensure that the taxpayers have access to MAP in the case wherein the taxpayer and tax administration enter into audit settlement through VsV Scheme. The Partner jurisdictions and stakeholders sought clarification on the interplay between MAP and VsV Scheme.
In this regard, the updated guidance states that for settlement of a case that involves the resolution of transfer pricing adjustments on international transactions with its Associated Enterprises (AEs), and the same is accepted by the tax authorities of India:
- In case the resident taxpayer opts for VsV Scheme:
The CA of the other countries or specified territories may accept MAP applications from their taxpayers (which are AEs of the Indian taxpayer) and notify the CAs of India. For settlement of it, it is pertinent to note that they would request the CAs of the treaty partners to provide correlative relief and not deviate from the result arrived under the VsV Scheme.
- In case a Non-resident taxpayer opts for VsV Scheme:
The CAs of India shall not provide access to MAP to a non-resident taxpayer who has opted for the VsV Scheme on the same issue because the applicant has given up its legal right to access MAP in accordance with sub-section (3) of Section 5 of the VsV Scheme.
- Responsibility of MAP applicant to make True and Complete Disclosure
India has distinguished itself from treaty partners who do not allow appeal and MAP proceedings to be pursued simultaneously. Considering that India follows a liberal regime where the taxpayer can choose to pursue both appeal and MAP proceedings simultaneously, it is pertinent for taxpayers to notify the CA in case of Tribunal orders so that MAP proceedings are closed forthwith to avoid any unwarranted efforts on the same.
Furthermore, the Indian CAs observed that in certain recent cases, the taxpayers have either suppressed information (invoking MAP in respect of adjustments made by one treaty partner without mentioning the fact that adjustment has also been made by the other treaty partner on the same transaction) or not giving the same set of comparable to the CAs, particularly in cases where both Bilateral Advanced Pricing Agreements (BAPA) and MAP are involved.
Accordingly, since MAP operates on bonafide grounds among CAs and taxpayers, the CBDT added a fifth section, 'Part E - Applicant's Responsibilities,' to the existing four sections of the MAP guidance to highlight MAP applicants' responsibilities as under:
- Responsibility for making true disclosure:
All the facts of the case that can materially affect the negotiation process shall be provided in item (k) of Form 34F in accordance with Rule 44G of the Rules while making the MAP application. For instance, details of adjustments for an international transaction made by Indian tax authorities as well as its treaty partner's tax authorities (if any).
- Responsibility to provide up-to-date information:
The applicant must keep the CAs up-to-date on all material changes and make all relevant documentation and information accessible that will assist in the smooth and efficient operation of the MAP process.
Furthermore, the CBDT has also clarified that if any element of the MAP guidance comes in conflict with the domestic legislation, rules, instructions, and circulars in India or with the tax treaties entered into by India, the provisions of such domestic legislation, rules, instructions, and circulars or the tax treaties, as the case may be, shall prevail.
- Income Tax Rules, 1962
- Base Erosion and Profit Shifting
- Organisation for Economic Co-operation and Development
- OECD (2019), 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, OECD Publishing, Paris, https://doi.org/10.1787/c66636e8-en
- OECD (2021), Making Dispute Resolution More Effective - MAP Peer Review Report, India (Stage 2): Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/cc6e7579-en
- https://www.incometaxindia.gov.in/Documents/MAP-GUIDANCE-7th-August-2020.pdf
- https://incometaxindia.gov.in/Documents/MAP-Guidance-2022.pdf
- https://www.oecd.org/tax/making-dispute-resolution-mechanisms-more-effective-action-14-2015-final-report-9789264241633-en.htm
- https://www.oecd-ilibrary.org/taxation/making-dispute-resolution-more-effective-map-peer-review-report-india-stage-1_c66636e8-en
- https://www.incometaxindia.gov.in/Documents/MAP-GUIDANCE-7th-August-2020.pdf
- https://www.oecd.org/tax/dispute/India-Dispute-Resolution-Profile.pdf
- https://read.oecd-ilibrary.org/taxation/making-dispute-resolution-more-effective-map-peer-review-report-india-stage-2_cc6e7579-en
- https://incometaxindia.gov.in/Documents/MAP-Guidance-2022.pdf
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Our Comments
It is pertinent to note that Indian CAs work independently from the audit function of tax authorities and their performances. The clarifications provided in the updated guidance are positive steps in restoring the taxpayers' faith in the dispute resolution mechanisms by enhancing clarity on the previously unaddressed issues. With increased information sharing among tax authorities, it would be critical for MNCs to align their transfer pricing models in line with substance/value creation activities to avoid tax disputes. We may see more and more taxpayers opting for MAP for the resolution of the tax disputes, given the nature of transfer pricing disputes.
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