Mutual Agreement Procedure (MAP)

  • What is MAP?
  • Scope of MAP
  • MAP by jurisdictions

Analysis of Provisions and Reservations under Article 16

How Contracting Jurisdictions Apply Article 16 to the relevant CTA's

MAP and Arbitraion (under construction)

Arbitration Article - Part VI of Multilateral Instrument (in construction)

 


 

 

 

What is a mutual agreement procedure (MAP)?

 

A Mutual Agreement Procedure (MAP) is the dispute resolution mechanisam contained in the article of double tax treaties concluded between the tax authorities (the competent authorities). The 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(2));
  • 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(1) and Article 9(2))
  • 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).

 

 

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

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]


 

Analysis on Provision and Reservations

 

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 improvement on the 2014 OECD Model Tax Convention by requiring the contracting states to provide taxpayers with a 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).

 

1.2. Second sentence of Article 16(1)

 

[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.

 

 

2.1. Paragraph 2 of Article 16 of the MLI provides that

 

2.1.1. "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.”

 

2.1.2. Comments on paragraph 2 of Article 16

 

a) The 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.

 

b) 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 "Countries should include in their tax treaties the second sentence of paragraph 2 of Article 25 of the Model Tax Convention (“Any 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.”

 

 

2.1.3. [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).

 

 

3.1. Paragraph 3 of Article 16, for which no reservation is permitted, provides that

 

3.1.1“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.”

 


 

 

How contracting jurisdictions apply Article 16 to the CTA's 

 

The following table shows the reservations on Article 16 made 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.

 

 

 

16(5)

16(5)

16(5)

16(5)

Jurisdiction

Status

(a)

(b)

(c)(i)

(c)(ii)

Australia

Definitive

 

 

 

 

Canada

Provisional

Y

 

 

Y

China (PRC)

Provisional

Y

 

 

 

Hong Kong (China)

Provisional

 

 

 

 

Japan

Definitive

 

 

 

 

Singapore

Definitive

Y

 

 

 

United Kingdom

Definitive

 

 

 

 

 

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

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

It appears that in respect of the application of 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 UK-Canada CTA, the UK-China CTA and UK-Singapore CTA, to the Japan-Canada CTA, the Japan-China CTA, and Japan-Singapore CAT, and to the Hong Kong-Canada CTAs.