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Double Taxation Avoidance Agreement – Article 25 Mutual Agreement Procedure.

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June 13, 2022 |

40 mins read

Double Taxation Avoidance Agreement – Article 25 Mutual Agreement Procedure

There may be a situation wherein a tax payer may believe that the taxation treatment by the source country is not in accordance with the provisions of tax Treaty. In such a case, he may request his country of resident to initiate mutual agreement procedure to arrive at a consensus with the source country on the interpretation of the tax Treaty.

Article 25 – Mutual Agreement Procedure – Alternative A of UN Model

MUTUAL AGREEMENT PROECDURE MUTUAL AGREEMENT PROECDURE
  (alternative A)
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 Convention, he may, irrespective of the remedies provided by the domestic law of those States,  present  his  case  to  the competent authority of either Contracting State. 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 Convention. 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 Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 24, to that of the Contracting State of which he 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 Convention.
The competent authority shall endeavour, 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 State, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States. The competent authority shall endeavour, 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 State, with a view to the avoidance of taxation which is not in accordance with this Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States.
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Article 25(2) of the US Model provides for suspension of assessment and collection procedures during the pendency of the MAP proceedings.

Article 25(2) provides that if the competent authority of the Contracting State, to which the case is presented, finds the case as justified , and which it is unable to solve unilateraly with the presenter, shall seek an agreement with the competent authority of the other Contracting State.  If they arrive at a agreement, such agreement is to be implemented even if such implementation is barred by the statute of limitations of the domestic laws.

The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention. 3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.
Like Article 25(3) of the OECD Model, Article 25(3) of the US Model also provides that the competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. However, Article 25(3) along with Article 25(4) of the US Model also specifically elaborates on the areas on which Competent Authorities may agree, through a non exhaustive list of examples,
The competent authorities of the Contracting States may communicate with each other directly, including through a joint commission consisting of themselves or their representatives, for the purpose of reaching an agreement in the sense of the preceding paragraphs. 4. The competent authorities of the Contracting States may communicate with each other directly, including through a joint commission consisting of themselves or their representatives, for the purpose of reaching an agreement in the sense of the preceding paragraphs. The competent authorities, through consultations, may develop appropriate bilateral procedures, conditions, methods and techniques for the implementation of the mutual agreement procedure provided for in this article.
Article 25(4) of the UN Model consists of two sentences, the first of which reproduces the first sentence of the Article 25(4) of the OECD Model.

Article 25(4) of the OECD/UN Model and Article 25(5) of the US Model provides that the competent authorities may communicate with each other for the purpose of reaching an agreement through a joint commission, or interacting with each other by letter, facsimile transmission, telephone, direct meetings, etc.

Paragraph 4 of the UN Model relates to development of procedures and other matters relating to smooth implementation of MAP by the Competent authorities.

Where,

a) under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of this Convention, and

b) the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the date when all the information required by that competent authorities in order to address the case has been provided to both competent authorities,

any unresolved issues arising from the case shall be submitted to arbitration if the person so requests in writing. These unresolved issues shall not, however, be submitted to arbitration if a decision on these issues has already been rendered by a court or administrative tribunal of either State. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph.

Comments on UN Model – Article 25 – Alternative A and alternative B

These alternatives were introduced in 2011 in the UN Model.

Article 25A of the UN Model reproduces Article 25 of the OECD Model, with the addition of a second sentence in paragraph (4) relating to development of appropriate bilateral procedures, conditions, methods and techniques but excludes arbitration as provided in Article 25(5) of the OECD Model.

Article 25B of the UN Model reproduces Article 25 of the OECD Model with the addition of the aforementioned second sentence in paragraph (4) and also includes arbitration as provided in Article 25(5) of the OECD Model albeit with certain differences. However, paragraphs 1 to 4 of the both the alternative versions of Article 25 of the UN Model are identical.

ARTICLE 25 – MUTUAL AGREEMENT PROCEDURE ALTERNATIVE B UNDER THE UN MODEL

Since paragraphs 1 to 4 of the both the alternative versions of Article 25 of the UN Model are identical, we need to compare paragraph 5 with the OECD Model Convention : –

  • Arbitration may be initiated under UN Model,  if the competent authorities are unable to reach an agreement on a case within three years from the presentation of that case as against within two years in the OECD Model Convention.
  • Arbitration must be requested by the competent authority of one of the Contracting States under UN Model, as against the person who initiated the case in the OECD Model
  • Competent authorities can depart from the arbitration decision if they agree on a different solution within six months after the decision has been communicated to them.
  • Arbitration matter, under the US Model are contained in Article 25(7) to Article 25(10).

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MUTUAL AGREEMENT PROCEDURE – DEFINITION

MAP is a special facilitative procedure
set out in various tax treaties
that allows designated government representatives of Treaty partners (”referred to as Competent Authorities”)
to work together, and resolve
international tax disputes, including cases of double taxation
arising out of application of the Convention.

APPLICABILITY OF MAP TO VARIOUS ARTICLE

All Articles of the Convention, including specifically

  • Business Profits  and PE – Article 7 & 5
  • Associated Enterprises – Article 9
  • Dividends – Article 10
  • Interest – Article 11
  • Royalties and Fee for technical Services – Article 12
  • Elimination of Double taxation – Article 23

Implementation of MAP is vested with Competent authorities of Treaty countries.

IMPLEMENTATION OF MAP UNDER INDIAN DOMESTIC LAWS

Implementation of MAP under Indian domestic laws

RULE 44G – APPLICATION FOR GIVING EFFECT TO THE TERMS OF ANY AGREEMENT

  • Aggrieved resident assesse, for an action of tax authorities of  foreign country
  • Taxation is bonafide believed to be not in accordance with terms of Treaty
  • File application in Form No 34 F to Indian Competent Authority to invoke MAP.

RULE 44H – ACTION BY INDIAN COMPETENT AUTHORITY ON REFERENCE FROM FOREIGN COMPETENT AUTHORITY

Rule 44H – Action by Indian Competent Authority on reference from Foreign Competent Authority

If assesse accepts MAP resolution between two CA’s and withdraws relevant pending appeals, AO shall give effect to MAP resolution.

ARTICLE 27(1) OF INDIA US TREATY

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 Convention,
he may,
irrespective of the remedies provided by the domestic law of those States,
present his case to the competent authority of the Contracting State of which he is a resident or national.
This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention.

ARTICLE 25(1) – KEY CHARACTERISTICS

What is covered under “Person” ?
Reference may be made to Article 3 / IT Act (if not defined)

Whose Action can result in MAP ?
Actions of one or both of the Contracting States

What Action are covered ?
Past and Future

What is the belief of the taxpayer ?
Taxation is not in accordance with the provisions of Treaty.

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ACTIONS OF CONTRACTING STATE

Actions of contracting state

Actions should give rise to double taxation of same income, which is contrary to the provisions of the Convention.

IF TAXATION NOT AS PER CONVETION, REMEDIES TO TAXPAYER IN INDIA

IF TAXATION NOT AS PER CONVETION, Remedies TO TAXPAYER IN INDIA

ARTICLE 27(2) OF INDIA US TREATY

The competent authority shall endeavour,
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 State,
with a view to the avoidance of
taxation which is not in accordance with the Convention.
Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States.

WHEN SHALL COMPETENT AUTHORITY ENDEAVOUR

When shall competent authority endeavour

FCA may endeavour to resolve case by mutual agreement with an objective of  avoiding taxation which is not in accordance with Treaty

ARTICLE 27(3) OF INDIA US TREATY

The competent authorities of the Contracting States shall endeavour
to resolve by mutual agreement
any difficulties or doubts arising as to the interpretation or application of the Convention.
They may also consult together for the elimination of double taxation in cases not provided for in the Convention.

SCOPE OF ARTICLE 27(3)

Scope of article 27(3)

ARTICLE 27(4) OF INDIA US TREATY

The competent authorities of the Contracting States
may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.
The competent authorities, through consultations,
shall develop appropriate bilateral procedures, conditions, methods and techniques for the implementation of the mutual agreement procedure provided for in this Article.
In addition, a competent authority may devise appropriate unilateral procedures, conditions, methods and techniques to facilitate the above-mentioned bilateral actions and the implementation of the mutual agreement procedure.

BILATERAL PROCEDURES – PAYMENT OF DISPUTED TAX DEMAND PENDING MAP FINALISATION

Bilateral Procedures - Payment of disputed tax demand pending MAP finalisation

MoUs with UK, US and Denmark deal with disputed tax collection

INDIA – USA TREATY – MOU FOR STAY OF DEMAND – APPLICABILITY

India - USA Treaty – MOU for stay of Demand – Applicability

FACTS CONSIDERED BY AO BEFORE GRANT OF STAY

FACTS CONSIDERED BY AO BEFORE GRANT OF STAY

ARBITRATION CLAUSE IN TREATY

ARBITRATION CLAUSE IN TREATY

Some Treaties give flexibility to CA’s to arrive at alternate solution within specified time

KEY ISSUES / CHALLENGES

  1. Court decision before MAP is resolved ?
  2. Court decision after MAP is resolved ?
  3. No time limit for concluding MAP
  4. Duty to resolve  MAP cases on Individual case merits Vs group resolution

APPLICATION OF MAP FOR SUBSEQUENT YEARS

Application of MAP for subsequent years

ARTICLE 24 – NON DISCRIMINATION

WHAT IS NON DISCRIMINATION?

Differences in tax treatment of two taxpayers
who are placed in identical/comparable situations
which result in Double taxation for the taxpayer
is Discrimination for tax purpose.

However, where the Treaty itself provides for different treatment
it is not covered under Article 24.

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TYPES OF NON – DISCRIMINATION COVERED

TYPES OF Non – Discrimination COVERED

ARTICLE 26 (1) – INDIA USA TREATY NON-DISCRIMINATION BASED ON NATIONALITY

Nationals of a Contracting State
shall not be subjected in the other Contracting State
to any taxation or any requirement connected therewith
which is other or more burdensome
than the taxation and connected requirements to which nationals that other State
in the same circumstances are or may be subjected.
This provision shall apply to persons who are not residents of one or both of the
Contracting States.

ARTICLE 24(1) – KEY CHARACTERISTICS

Who are covered?
Nationals of a Contracting State (Stateless person)

What is the ground of discrimination ?
Taxation or any requirement connected therewith

Taxation or any requirement should not be ?
Other or more burdensome than what is applicable to nationals that other State in the same circumstances

Does it apply to NR of both States ?
Yes

Who are Nationals ?

  • Individual – Having nationality of a Treaty Partners
  • Others – Deriving nationality under laws in force in a Contracting State.

SAME CIRCUMSTANCES ?

“Are the circumstances same between A, B and C ?

Person Tax Resident National
Mr. A India German
Mr. B India India
Mr. C Germany French

“Are the entities under same circumstances ?

Entity 1 Entity 2
Company Individual
Nationalised Bank Foreign Bank
Domestic Company Foreign company

ARTICLE 26 (2) – INDIA USA TREATY DISCRIMINATION FOR PE TAXATION

Except where the provisions of paragraph 3 of Article 7 (Business Profits) apply,
the taxation on a permanent establishment which an enterprise of a Contracting State has in the other
Contracting State
shall not be less favorably levied in that other State than the taxation levied on enterprises of that other State
carrying on the same activities.
This provision shall not be construed as obliging a Contracting State to grant to residents of the other
Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil
status or family responsibilities which it grants to its own residents.

ARTICLE 26 (2) – INDIA USA TREATY PE TAXATION

Article 26 (2) – India USA TREATY PE taxation

For PE and ICO 1 taxation of PE (business profits) in India shall not be less favorably levied than ICO 1

PE – STAND ON THE FOLLOWING ASPECTS ?

  • Deduction of expenses from Royalty and Section 44D restriction ?
  • Claim of Tax incentives ?
  • Deduction of expenses to compute business profits ?
  • WHT on royalty to PE vs a domestic company ?
  • Deduction of HO expenses ?
  • Applicability of Transfer Pricing provision vis a vis Domestic TP ?
  • Carry forward of losses ?
  • Group consolidations, tax free transfer of assets between group companies etc ?

ARTICLE 26 (3) – INDIA USA TREATY NON-DISCRIMINATION DEDUCTION OF EXPENSES

Except where the provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or
paragraph 8 of article 12 (Royalties and Fees for Included Services) apply,
interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting
State shall,
for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same
conditions as if they had been paid to a resident of the first-mentioned State.

ARTICLE 26 (3) – INDIA USA TREATY DEDUCTION OF EXPENSES

What  is  covered?
Interest, royalties, and other disbursements

Whether Paid or accrued ?
Paid

Exceptions

  • Paragraph 1 of article 9 (Associated Enterprises),
  • Paragraph 7 of article 11 (Interest), or
  • Paragraph 8 of article 12 (Royalties and Fees for Included Services) apply

Conditions of deduction
Should be the same

ARTICLE 26 (3) – INDIA USA TREATY DEDUCTION OF EXPENSES

Article 26 (3) – India USA TREATY deduction of expenses

ARTICLE 26 (4) – INDIA USA TREATY OWNERSHIP OF FOREIGN COMPANY

Enterprises of a Contracting State,
the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more
residents of the other Contracting State,
shall not be subjected in the first-mentioned State to
any taxation or any requirement connected therewith
which is other or more burdensome
than the taxation connected requirements to which other similar enterprises of the first-mentioned State are
or may be subjected.

NON APPLICABILITY OF ARTICLE 26(4)

  • Transfer pricing Applicability
  • Deduction of interest only at the time of payment
  • Claim for carry forward of losses due to change in shareholding

INDIA GERMANY TREATY – DAIMLER CHRYSLER CASE

India Germany Treaty – Daimler Chrysler case

ARTICLE 26 (5) – INDIA USA TREATY

Nothing in this article shall be construed as preventing either Contracting State
from imposing the taxes described in Article 14 (Permanent Establishment Tax) or
the limitations described in paragraph 3 of Article 7 (Business profits).

NON DISCRIMINATION – SPECIFIC EXAMPLES

Issue Treaty
Chapter VI deduction/ Transfer Pricing provision, based on residential status Since they are not based on nationality, they are not covered for purpose of Article 24(1)
Benefit of indexation on sale of shares and debentures of Indian company Not allowed to non-residents, and does not amount to discrimination
Charge of higher tax rate on a Foreign Company is  not a less favorable Explanation to section 90

Learn More about  “Double Taxation Avoidance Agreement  (DTAA)” 

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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