[1] Mutual Agreement Procedure (MAP)

  • What is MAP?
  • Scope of MAP

[2] Analysis of Provisions and Reservations under Article 16 (MAP)

[3] How Some Selected Contracting Jurisdictions Apply Article 16 to the Provisions of their CTA's

  • From an Australian perspective [see below texts]
  • From a Japanese perspective [here]
  • From a United Kingdom perspective [here]

[4] Arbitration Article (in construction)

[5] MAP Profile by Jurisdictions

 


 

 

 

[1] What is a mutual agreement procedure (MAP)?

 

A Mutual Agreement Procedure (MAP) is the dispute resolution mechanism contained in the article of double tax treaties concluded between the tax authorities (the competent authorities). Action 14 contains a commitment by the jurisdictions to implement a minimum standard for improving dispute resolution.

 

Scope of MAP

 

The scope of the MAP tells us about what an MAP does in dispute resolution, which covers the following Articles in the OECD Model Tax Convention:

  • Determination of residence of a person (Article 4);
  • The existence of a permanent establishment (Article 5);
  • The attribution of profits to a permanent establishment (Article 7(2));
  • Inclusion of profits of associated enterprises and the corresponding adjustments to be made (Article 9)
  • Treatment of interest in case of thin capitalization (Article 11(6));
  • The taxation in the State of the payer – in case of a special relationship between the payer and the beneficial owner – of the excess part of interest and royalties (Article 9, Article 11(6), Article 12(4));
  • Temporary nature of the services performed by an employee (Article 15(2));
  • Non-discrimination (Article 24).

 


 

 

 

[2] Analysis of Provision and Reservations under Article 16

 

2.1.1. First sentence of Article 16(1)

 

a) Paragraph 1 of Article 16 (Improving Dispute Resolution) of the MLI provides that

“1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of either [emphasis added] contracting jurisdiction. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement.”

 

b) [Article 16(5)(a)] Reservation for the first sentence of paragraph 1 of Article 16 

Most tax treaties are concluded on the basis of the 2014 version of the OECD Model Tax Convention that does not provide for presenting the MAP case to either contracting jurisdiction. For the reason of practical administration, Article 16(5)(a) permits a Party to the MLI to make reservations not to apply the first sentence of Article 16(1) to its CTAs. It reads:

A Party can only opt out of the first sentence in Article 16(1) on the basis that

  1. it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS Package by ensuring that under each of its Covered Tax Agreements (other than a Covered Tax Agreement that permits a person to present a case to the competent authority of either Contracting Jurisdiction), where a person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, that person may present the case to the competent authority of the Contracting Jurisdiction of which the person is a resident or, if the case presented by that person comes under a provision of a Covered Tax Agreement relating to non-discrimination based on nationality, to that of the Contracting Jurisdiction of which that person is a national [emphasis added]; and
  2. the competent authority of that Contracting Jurisdiction will implement a bilateral notification or consultation process with the competent authority of the other Contracting Jurisdiction for cases in which the competent authority to which the mutual agreement procedure case was presented does not consider the taxpayer's objection to be justified.

 

c) Comments on the first sentence and the reservations:

  • Article 16(1) of the multilateral instrument (the MLI) replicates Article 25(1) of the OECD Model Tax Convention (2017 update), and it has made an improvement on the 2014 OECD Model Tax Convention by requiring the contracting states to provide taxpayers with wider access to the MAP.
  • Article 16(5)(a) provides that a Party to the MLI may reserve its right for the first sentence of Article 16(1) not to apply to all of its CTAs by adopting the alternative rule under Article 16(5)(a).

 

2.1.2. Second sentence of Article 16(1) of the MLI

 

[Article 16(5)(b)] Reservation for the second sentence of paragraph 1

 

A Party may reserve that right for the second sentence of paragraph 1 not to apply to its Covered Tax Agreements that do not provide that the case referred to in the first sentence of paragraph 1 must be presented within a specific time period on the basis that it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS package by ensuring that for the purposes of all such Covered Tax Agreements the taxpayer referred to in paragraph 1 is allowed to present the case within a period of at least three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement.

 

 

2.2.1. Paragraph 2 (the first and second sentences) of Article 16 provides that

 

"The competent authority shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting Jurisdiction, with a view to the avoidance of taxation which is not in accordance with the Covered Tax Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting Jurisdictions.”

 

(a) Comments on paragraph 2 of Article 16:

 

(i) The second sentence "any agreement reached shall be implemented notwithstanding any time limit in the domestic law of the contracting jurisdictions" is an open-ended commitment. In other words, however many years the contracting jurisdiction making the initial adjustment has gone back, the enterprise should be assured of an appropriate adjustment in the other contracting jurisdiction. Some contracting jurisdictions might consider that such an open-ended commitment is unreasonable a matter of practical administration.

 

(ii)) To give flexibility to the application of the second sentence of Article 16(2) to the CTA, element 3.3 of the Action 14 minimum standard in the 2015 Final Report provides that "[c]ountries should include in their tax treaties the second sentence of paragraph 2 of Article 25 of the Model Tax Convention ("[a]ny agreement reached shall be implemented notwithstanding any time limit in the domestic law of the Contracting State"). Countries that cannot include the second sentence of paragraph 2 of Article 25 in their tax treaties should be willing to accept alternative treaty provisions that limit the time during which a Contracting State may make an adjustment pursuant to Article 9(1) – Associated Entity or Article 7(2) – Business Profits attributable to a permanent establishment, in order to avoid the late adjustments with respect to which MAP relief will not be available.”

 

(b) [Article 16(5)(c)] Reservation for the second sentence of paragraph 2

 

"A Party may reserve its right for the second sentence of paragraph 2 not to apply to its Covered Tax Agreements on the basis that for the purposes of all of its Covered Tax Agreements:

i) any agreement reached via the mutual agreement procedure shall be implemented notwithstanding any time limits in the domestic laws of the Contracting Jurisdictions; or

ii) it intends to meet the minimum standard for improving dispute resolution under the OECD/G20 BEPS package by accepting, in its bilateral treaty negotiations, a treaty provision providing that:

A) the Contracting Jurisdictions shall make no adjustment to the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting Jurisdictions after a period that is mutually agreed between both Contracting Jurisdictions from the end of the taxable year in which the profits would have been attributable to the permanent establishment (this provision shall not apply in the case of fraud, gross negligence or wilful default); and

B) the Contracting Jurisdictions shall not include in the profits of an enterprise, and tax accordingly, profits that would have accrued to the enterprise but that by reason of the conditions referred to in a provision in the Covered Tax Agreement relating to associated enterprises have not so accrued, after a period that is mutually agreed between both Contracting Jurisdictions from the end of the taxable year in which the profits would have accrued to the enterprise (this provision shall not apply in the case of fraud, gross negligence or wilful default)."

 

(c) Comment on reservation for second sentence of Article 16(2):

 

A Party that makes reservation for the second sentence of Article 16(2) may not permit a taxpayer to request a MAP on other articles - such as the non-discrimination based on nationality - other than that under Article 7 (busines profits of a permanent establishment) and Article 9 (associated entity).

 

2.3.1. Paragraph 3 of Article 16, for which no reservation is permitted, contains two sentences. It provides that

 

"The competent authorities of the Contracting Jurisdictions shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Covered Tax Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Covered Tax Agreement.”

 


 

 

[3] How contracting jurisdictions apply Article 16 to their CTA's 

 

Table 1 - Reservation made under Article 16(5)

 

The following table shows the reservations, denoted by the letter "R", on Aritcle 16 made under Article 16(5) by some selected Signatories and Parties as of 29th January 2019, using information from the MLI database's matrix of options and reservations, which is provided by the OECD Depositary. This section illustrates how Article 16 works in practice from an Australian perspective.

 

Jurisdiction

Status

16(5)

16(5)

16(5)

16(5)

 

 

(a)

(b)

(c)(i)

(c)(ii)

Australia

Definitive

 

 

 

 

Canada

Provisional

R

 

 

R

China (PRC)

Provisional

R

 

 

 

Hong Kong (China)

Provisional

 

 

 

 

Japan

Definitive

 

 

 

 

Singapore

Definitive

R

 

 

 

United Kingdom

Definitive

 

 

 

 

 

1) Article 16(5)(a): Reservation for the first sentence of Article 16(1) 

  • Reservation group (R): Canada, China, Singapore
  • No-reservation group (non-R): Australia, Hong Kong, Japan, and the U.K.

​2) Article 16(5)(b): No reservation is made for the second sentence of Article 16(1)

3) Article 16(5)(c)(i): No reservation is made for the first sentence of Article 16(2)

4) Article 16(5)(c)(ii): Only Canada reserves its right for the second sentence of Article 16(2)

 

Table 2 - Bilateral tax treaty relations with reference to the reservation made under Article 16(5)(a)

Reservation under Article 16(5)(a)            
                 
    Australia Canada China (PRC) Hong Kong Japan Singapore U.K.
      Reserve Reserve     Reserve  
Australia     Y Y X Y Y Y
Canada Reserve Y   Y Y Y Y Y
China (PRC) Reserve Y Y   X Y Y Y
Hong Kong   X Y X   Y X Y
Japan   Y Y Y Y   Y Y
Singapore Reserve Y Y Y X Y   Y
U.K.   Y Y Y Y Y Y  

"Y" denotes that there is a bilateral tax treaty between the two contracting jurisdictions. "X" denotes that no bilateral tax treaty has been signed between the two contracting jurisdictions.

 

Article 16(5)(a): Reservation for first sentence of Article 16(1) - Access to MAP

 

Reservation positions

 

It is noted that Canada, China and Singapore have made a reservation under Article 16(5)(a) on the application of the first sentence of Article 16(1) to their CTAs, meaning that a person requesting an MAP must present his case to the CA of the contracting jurisdiction of which he is a resident, or if the case comes under the provision relating to non-discrimination based on nationality, to that of the contracting jurisdiction of which he is a national (the alternative rule).

 

On the other hand, Australia, Hong Kong, Japan and the U.K. have not made such a reservation. In respect of the application of the first sentence of Article 16(1) to the Australia-Japan CTA, a person who requests an MAP can present his case to the CA of either contracting jurisdiction. The same holds for the bilateral CTAs for Australia-UK with respect to the first sentence of Article 16(1), but not for Australia and Hong Kong as they have not signed any double tax treaty.

 

It appears that in respect of the application of the first sentence of Article 16(1) to the CTAs, Australia and Singapore have adopted different positions. The same holds for the application of the first sentence of Article 16(1) to the Australia-Canada CTA and the Australia-China CTA; and similarly to the Japan-Canada CTA, the Japan-China CTA, and Japan-Singapore CAT, to the UK-Canada CTA, the UK-China CTA, the UK-Singapore CTA, and to the Hong Kong-Canada CTAs. 

 

Hong Kong and Singapore have not signed any double tax treaty, except for a tax treaty for airline and shipping income. Hong Kong and China (PRC) have signed an arrangement for the avoidance of double taxation, but it is not a CTA. Politically Hong Kong is part of China. China includes Hong Kong as a signatory of the Multilateral Convention on 7th June 2017, pursuant to Articles 28(4), 28(7) and 29(4). China is the responsible party for Hong Kong extending its list of CTAs, entering a new reservation if the extension is first to fall into the scope of such a reservation, and giving notifications to the Depositary pursuant to Article 29(5), Article 28(4) and Article 29(2) respectively. Before we proceed, it is useful to take a look at paragraph 3 of Article 28 (Reservations) of the MLI. It reads:

 

“3. Unless explicitly provided otherwise in the relevant provisions of this Convention, a reservation made in accordance with paragraph 1 or 2 (of Article 28 - Reservations) shall:

  1. Modify for the reserving party in its relations with another party the provisions of this Convention to which the reservation relates and to the extent of such reservation; and
  2. Modify those provisions to the same extent for the other Party in its relations with the reserving Party.”

 

Here Article 28(3) contains two important principles. First, a reservation is made on a unilateral basis. [1] Unless explicitly provided otherwise, the reservation entered by a contracting jurisdiction will take effect on all Parties to the MLI. Second, unless explicitly provided otherwise, a reservation is reciprocal between the Parties to the MLI with respect to the application of the MLI to existing CTAs. That is, it does not work only one way, but works both ways. In general, a reservation shall apply symmetrically.

 

Relation between a reserving contracting jurisdiction and non-reserving contracting jurisdiction

 

Since one of the Parties to the bilateral CTAs between the Australia and Canada reserves its right not to apply the first sentence of Article 16(1) to all of its CTAs, including the Australia-Canada CTA, a person who requests a MAP does not have access to the CA of either contracting jurisdiction. Instead, he can only choose the alternative rule Canada has adopted. However, the same person can present his MAP request to the CA of either [emphasis added] contracting jurisdiction if Canada is later to withdraw its 5(a) reservation pursuant to Article 28(9), which reads that "[a]ny Party which has made a reservation in accordance with paragraph 1 or 2 (of Article 28) may at any time withdraw it or replace it with a more limited reservation by means of a notification addressed to the Depositary". Note that Australia is not permitted to make additional reservation to bring it in line with Canada, except for the situation described under paragraph 5 of Article 29 - Notifications. Article 28 of the MLI only works in one direction in making changes to the scope of the reservation. The reason why a Party is not permitted to expand the scope of its reservation but is allowed to drop its reservation or replace a reservation with a more limited one is that by withdrawing its reservation, the Party will be moving closer to the full adoption of the MLI, and not moving away from it.

 

In respect of the Australia-Canada CTA, Canada reserves its right for the first sentence of Article 16(1) of the MLI not to apply to its Article 24(1) of its CTA. Pursuant to Article 16(5)(a) of the MLI, the alternative rule shall apply to the first sentence of paragraph 1 of the Australia-Canada CTA.

 

The synthesised text of the first sentence of paragraph 1 of Article 16 and that of Article 24(1) of the Australia-Canada CTA will be read as follows:

 

Article 24 Mutual Agreement Procedure

 

1. Where a resident of a Contracting State considers that the actions of the competent authority of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, without prejudice to the remedies provided by the national laws of those States, present his case in writing to the competent authority of the Contracting State of which he is a resident.

 

1. Where a person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, that person may present the case to the competent authority of the Contracting Jurisdiction of which the person is a resident or, if the case presented by that person comes under a provision of a Covered Tax Agreement relating to nondiscrimination based on nationality, to that of the Contracting Jurisdiction of which that person is a national; and the competent authority of that Contracting Jurisdiction will implement a bilateral notification or consultation process with the competent authority of the other Contracting Jurisdiction for cases in which the competent authority to which the mutual agreement procedure case was presented does not consider the taxpayer's objection to be justified.

 

In respect of the Australia-China CTA, the alternative rule shall apply in the same manner as described above because China has reserved its right for the first sentence of Article 16(1) not to apply to the provision of its CTAs. The same holds for the Australia-Singapore CTA. as Singapore also reserves its right for the first sentence of Article 16(1) not to apply to its CTAs under Article 16(5)(a)

 

Article 16(5)(b): Reservation for second sentence of Article 16(1) - time limit to present MAP request

 

It is observed that no contracting jurisdictions in table 1 above have made reservation for the second sentence of Article 16(1).

 

In respect of a CTA that contains a provision that provides that a case referred in the first sentence of Article 16(1) must be presented within a specific time period that is shorter than three years, the second sentence of Article 16(1) shall apply to replace it. However, it is observed that all of the selected contracting jurisdictions in table 1 do not have a CTA that contains such a provision. 

 

CTA containing a provision to present a case within a time period of at least 3 years

 

In respect of the CTAs that contain a provision that provides that a case referred in the first sentence of Article 16(1) must be presented within a specific time period that is at least three years from the first notification that the person affected is not taxed in accordance with the provisions of the CTA, the second sentence of Article 16(1) shall not apply accordingly.

 

Australia, China and Japan do not reserve their right under Article 16(5)(b). Pursuant to Article 16(6)(b)(ii) of the MLI, Australia has notified the OECD Depositary that the Australia-China CTA (Article 24(1), second sentence) and the Australia-Japan CTA (Article 27(1), second sentence) contain such a provision. 

 

CTA not containing a provision to present a case within a time period of at least 3 years

 

In contrast, Australia-Canada CTA, Australia-Singapore CTA, and Australia-UK CTA do not contain a provision that "the case referred to in the first sentence of Article 16 must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement”

 

In respect of the Australia-Canada CTA, the second sentence of Article 16(1) of the MLI shall apply in the absence of such a provision.

 

The synthesised text of the second sentence of Article 16(1) of the MLI and Article 24(1) of the Australia-Canada CTA will be read as follows:

 

1. Where a person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, that person may present the case to the competent authority of the Contracting Jurisdiction of which the person is a resident or, if the case presented by that person comes under a provision of a Covered Tax Agreement relating to nondiscrimination based on nationality, to that of the Contracting Jurisdiction of which that person is a national; and the competent authority of that Contracting Jurisdiction will implement a bilateral notification or consultation process with the competent authority of the other Contracting Jurisdiction for cases in which the competent authority to which the mutual agreement procedure case was presented does not consider the taxpayer's objection to be justified. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement.

 

The above synthesised text is produced by (i) the alternative rule that Canada has opted in for pursuant to Article 16(5)(a); (ii) the second sentence of Article 16(1) that has been added to the end of the alternative rule, pursuant to Article 16(4)(a)(ii) in the absence of a provision of a CTA describing the time period within which such a case must be presented.

 

In respect of the Australia-Singapore CTA, Article 20 does not contain a provision that provides that a case referred to in the first sentence of Article 16(1) must be presented within a specified time period that is at least three years from the first notification that he is not taxed in accordance with the terms of the CTA. In the absence of such provision, Article 16(4)(a)(ii) of the MLI provides that the sentence "the case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement”shall be added to the end of the first sentence of Article 20 of the Australia-Singapore CTA. The second sentence of Article 16(1) shall apply to the CTA where both Parties make a matched notification. 

 

The synthesized text of the Article 16(1) of MLI and the Article 20 of the Australia-Singapore CTA will be read as follows:-

 

1.     Where a taxpayer considers that the action of the competent authority in one of the Contracting States has resulted, or is likely to result, in double taxation contrary to the provisions of this Agreement, he shall be entitled to present the facts to the competent authority in the Contracting State of which he is a resident and,

 

1.    Where a person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement, irrespective of the remedies provided by the domestic law of those Contracting Jurisdictions, he may present the case to the competent authority of the Contracting Jurisdiction of which the person is a resident or, if the case presented by that person comes under a provision of a Covered Tax Agreement relating to nondiscrimination based on nationality, to that of the Contracting Jurisdiction of which he is a national; and the competent authority of that Contracting Jurisdiction will implement a bilateral notification or consultation process with the competent authority of the other Contracting Jurisdiction for cases in which the competent authority to which the mutual agreement procedure case was presented does not consider the taxpayer's objection to be justified. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement.

 

[note that the second sentence of Article 16(1), as underlined above, is added to the end of the first sentence of paragraph 1 of Article 20, which has been replaced by the alternative rule.]”

 

The same holds for the Australia-UK CTA, under which both Parties do not make reservation for the first sentence of Article 16(1).

 

The synthesized text of the paragraph 1 of Article 16 (MLI) and the Australia-UK CTA will be read as follows:-

 

1. Where a person who is a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for that person in taxation not in accordance with this Convention, that person may, irrespective of the remedies provided by the domestic law of those States concerning taxes to which this Convention applies, present a case to the competent authority of the either Contracting State of which that person is a resident or, if the case comes under paragraph 1 of Article 25 of this Convention, to that of the Contracting State of which that person is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Covered Tax Agreement [added to the end of the first sentence]”

 

Article 16(5)(c): Reservation for second sentence of Article 16(2) - disregarding time limit when implementing a resulting mutual agreement

 

The Australia-China CTA and the Australia-Japan CTA all contain a provision that disregards any time limit when implementing a resulting mutual agreement in the same manner as the second sentence of Article 16(2).

 

In contrast, the Australia-Canada CTA, the Australia-Singapore CTA and the Australia-UK CTA do not contain a provision that provides that any agreement reached by the CAs shall be implemented notwithstanding any time limits in the domestic law of the contracting jurisdictions. In this regard, the compatibility clause Article 16(4)(b)(ii) provides that the second sentence of Article 16(2) shall be added to the aforesaid CTAs in the absence of such a provision.

 

However, it is noted that Canada has unilaterally opted out of the second sentence of Article 16(2) of the MLI, pursuant to Article 16(5)(c)(ii). Therefore Australia has included Singapore and the UK, both of them making no reservation under Article 16(5)(c)(ii), in the list of notification to the Depositary that the respective CTAs do not contain the second sentence of Article 16(2), pursuant to Article 16(6)(c)(ii). The second sentence of Article 16(2) shall apply to the Australia –Singapore CTA and the Australia-UK CTA respectively where the other Party to the CTA makes a matched notification.

 

[The End]

 

For the analysis on the application of Article 16 to the CTAs from the United Kingdom perspective, see [here].

 


[1] Reservation does not require acceptance, but reservation for the arbitration Articles under Part VI of the Convention require acceptance under paragraph 2 of Article 28 of the MLI.

 

 


 

 

 

 

MAP Profile by jurisdictions

 

China  

  • Public Notice of the State Administration of Taxation on Issuing the "Administrative Measures on the Implementation of Mutual Agreement Procedure under Tax Treaties" [SAT Public Notice [2013] No. 56] (Chinese only)
  • Public Notice of the State Administration of Taxation on Issuing the "Administrative Measures of Special Tax Investigation and Adjustment and Mutual Agreement Procedure" [SAT Public Notice [2017] No. 6] (English version)

Hong Kong

  • Information from the Inland Revenue Department [here]
  • Department Interpretation and Practices Notes
    • No. 45 - Relief from Double Taxation due to Transfer Pricing or Profit Allocation Adjustments  [here]
    • No. 46 - Transfer pricing Guidelines - Methodologies and Related Issues [here
    • No. 48 - Advance pricing arrangement [here]

Singapore

  • Information from the Inland Revenue Authority of Singapore (IRAS) [here]
  • IRAS Guideline on MAP relating to transfer pricing [here]
  • IRAS Guideline on MAP relating to non-transfer pricing matters [here]

 

Other countries

  • MAP Profiles of OECD and non-OECD countries under the Inclusive Framework on BEPS [here]