Indian Tax litigation has always been in the limelight while talking about cross-border taxation due of numerous reasons. Sometimes it is because of the retrospective amendments and at other times because of special tax provisions like equalization levy.
Despite of the same, the Indian tax authorities have always tried reducing litigation in India through different measures like –
- Dispute Resolution Panel (DRP)
- Advance Pricing Agreement (APA)
- Authority for Advance Ruling (AAR)
- Safe Harbour Rules
- Mutual Agreement Procedure (MAP)
In the current scenario of Base Erosion and Profit Sharing (BEPS) framework, wherein countries have come together for the three pillars of Coherence, Substance and Transparency, the importance of MAP has increased substantially under the Dispute Resolution Mechanism advocated in the framework.
MAP enables the contracting States to consult, interpret, resolve likely cross border tax disputes, gives assurance of certainties in the application of Double Tax Avoidance Agreements (DTAA) and helps in elimination of double taxation on the same income as its one of the key objects. It is an alternative dispute resolution with confidentiality clause empowering the Competent Authorities of the two contracting States to resolve likely cross border tax disputes arising out of the application of DTAAs in amicable ways without resorting to a normal court route.
The BEPS Action Plan 14 Minimum Standard seeks to improve the resolution of tax-related disputes between jurisdictions. The final report on Action 14: Making Dispute Resolution Mechanisms More Effective, which contains a BEPS minimum standard, was adopted in October 2015. Action Plan 14’s key objectives are making dispute resolutions more effective with continuous review and progress. The Action 14 Minimum Standard consists of 21 elements and 12 best practices, which assess a jurisdiction’s legal and administrative framework in the following four key areas:
- preventing disputes;
- availability and access to MAP;
- resolution of MAP cases; and
- implementation of MAP agreements.
Along with the adoption of this minimum standard, the BEPS Inclusive Framework members agreed on:
- a peer review process to evaluate the implementation of this standard; and
- to report MAP statistics under a newly developed reporting framework (“MAP Statistics Reporting Framework”).
On 24th October 2019, the OECD released its ‘Sixth Round of Stage 1 of Peer Review Report on Base Erosion and Profit Shifting – Action 14 of India’. The report highlighted that where India’s treaty network is largely consistent with the requirements of the Action 14 Minimum Standards, to be fully compliant, India needs to amend and update certain provisions.
In light of the above-stated report, India has now amended its MAP Rules by substituting Rule 44G,omitting Rule 44 Hand amending Form 34F via Notification No. 23/2020/F.No. 370142/31/2019. The amended rules are summarized as under:
- A resident Assessee may file an application in Form 34F with the Competent Authority in India,if such Assessee believes that the action taken by the tax authorities of the other country is not in accordance with the agreement with such other country.
- Where the Competent Authority in India receives an application on a similar application filed by an Assessee with the Competent Authority of the other country, then the Competent Authority of India shall convey its acceptance or otherwise of the application received in accordance with the agreement with such other country.
- Competent Authority in India may call for the relevant records, additional documents, discussion from/with the income-tax authorities or the Assessee or his authorized representative in India to understand the actions taken by the respective authorities in India or outside, which are not in accordance with the terms of the agreement.
- Based on the above, Competent Authority in India shall endeavor to arrive at a mutually agreeable resolution of the dispute within an average time of twenty-four months.
- Where the MAP has been invoked because of action taken by Indian tax authorities, the resolution should ensure that it should not result in decreasing the income or increasing the loss of the Assessee in India.
- The resolution shall be communicated in writing to the Assessee.
- Assessee shall communicate his acceptance or non-acceptance of the resolution in writing to the Competent Authority in India within thirty days of receipt of the communication.
- Assessee’s acceptance shall be accompanied by proof of withdrawal of appeal, if any.
- On receipt of the above, the Competent Authority in India shall communicate the resolution along with proof of withdrawal of appeal, if any, to the Principal Chief Commissioner or the Chief Commissioner or the Principal Director General or Director General, as the case may be, who in turn shall forward it the concerned Assessing Officer.
- On receipt of the above, the Assessing Officer shall give effect to the resolution by an order in writing, within one month from the end of the month in which communication was received, and intimate the tax payable, if any to the Assessee.
- The Assessee will be under an obligation to pay the tax demanded within the time frame and manner provided therein in the above-stated intimation. Upon receipt of proof of payment of tax demand, the Assessing Officer to proceed to withdraw the pending appeal, if any filed by the Income tax department.
- A copy of the order giving effect shall be sent to the Competent Authority in India and to the concerned Assessee.
- The amount of tax, interest or penalty already determined shall be adjusted in accordance with the resolution.
In addition to regular details, Form 34F has been further amended, requesting the following additional information and documents:
- Details of remedy sought under MAP along-with documentary evidences.
- Detailed reasons pertaining to the order/action of the Tax Authority which is not in accordance with the agreement, along-with relevant documents.
As a result of the above, the Indian government has now provided definitive steps and timelines which needs to be abided by the respective authorities. Further, this represents the recognition and importance of the need to achieve tax certainty for cross-border transactions.Accordingly, this is a welcome step, however, the Indian Tax Administration would now need to strengthen the teams overseeing MAP cases by providing additional resources for overall effectiveness of the MAP program.
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