Mutual Agreement Procedure - United Nations · Mutual Agreement Procedure ... and domestic remedies is a question of domestic law ... UN Guide to Mutual Agreement Under Tax Treaties

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MutualAgreementProcedure(MAP)

Article25oftheUNModel

1http://www.un.org/esa/ffd/

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Introduction to Article 25

• Article 25 establishes a “mutual agreement procedure” (MAP) which enables the parties to a bilateral treaty to better carry out the interpretation and application of the substantive treaty provisions.

• The MAP is administered by the “competent authorities”, the persons (Ministry or Tax Authority) designated in Article 3(e) to administer the treaty

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Introduction to Article 25

• The principal function of the Mutual Agreement provision in Article 25 is to resolve situations of double taxation caused by differences in interpretation and application of the treaty

• Double taxation issues may arise from disagreements concerning the facts of a particular case or the interpretation of particular Article of the treaty

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Introduction to Article 25

• Article 25 covers 3 different situations:1. Cases where a taxpayer resident in one

of the States contends that he is not being taxed in accordance with the rules of the treaty

2. Cases where the competent authorities on their own initiative resolve questions of interpretation or application of the treaty

3. Cases involving double taxation which are not provided for in the substantive articles of the treaty (rarely used)

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Introduction to Article 25

• Outcomes of Article 25 proceduresTaxpayer-initiated MAP results in an

agreement between the CAs as to how the treaty applies in the taxpayer’s (“TP”) caseCA-initiated procedures typically result in a

publication or other form of advice indicating how the States will interpret or apply the treaty Other double tax cases (rarely occurring) can

either be for a specific TP or general guidance5

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Typical MAP cases

• Taxpayer-initiated casesTransfer pricing disputesArticle 7 allocation of profit disputesExistence of PEDual residence

• CA initiated casesCommon interpretation of treaty term

• Other double tax casesThird country resident with PE in both States

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How MAP operates

• Article 25(4) authorizes the CAs to deal with each other directly, either in writing or orally, without the usual restrictions on intergovernmental communicationsArticle 26 rules on confidentially apply

• The CAs may also develop procedures to implement the MAP, e.g., the Mutual Agreement on how treaty arbitration under Article 25(5) is to be carried out. (see Commentary, paragraph 24 for details)

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MAP and Transfer Pricing Cases Under Article 9

• In transfer pricing cases, there is “economic” as opposed to “jurdical” double taxation; the same income is being taxed in the hands to two different juridical persons.

• Nonetheless, the UN Model and Commentary make it clear that Art. 25 applies so such cases.

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Requirements for Taxpayer Initiated MAP

• “Resident” of a State believes that he is not being taxed “in accordance with” the treatyResidence determined under Article 4 rulesTax need not be already assessed (“will

result”)• Must present case establishing

inappropriate taxation to the CA of state of residence within three years of “notification” 9

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Time limits for TP-initiated MAP

• TP must present case within 3 years of “notification” of inappropriate taxationNotification is usually notice of assessment or

charge• Note that TP may be able to bring case prior to

notification if he believes there will be taxation not in accordance with treaty

In case of withholding tax, notification is when the income is paid3 year period is minimum and States can

agree to longer period 10

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TP Participation in MAP

• While the TP has the right to initiate a MAP, the proceeding for resolving the MAP issue is a government-to-government process

• The TP’s role in MAP is determined by domestic procedural law and is typically limited to providing the information necessary for the CAs to reach a resolution of the case.

• In some situations, the TPs may present briefs or presentations but are not directly involved in the MAP negotiations.

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Government obligations under TP-initiated MAP

• Under Article 25, paragraph 2 in the case of a TP-initiated MAP, the CAs “shall endeavour” to reach a satisfactory solution to the case presented. There is no obligation to reach a solution

• Nonetheless, the CAs are under the general international law obligation to carry out the treaty in good faith (“pacta sunt servanda”) and to use every effort to arrive at a solution

• As discussed below, the inclusion of a mandatory arbitration clause in the treaty will help to ensure a resolution of the case

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Relation between MAP and Domestic legal remedies

• MAP is available to the TP in addition to his normal legal rights under domestic law. The relation between MAP and domestic remedies is a question of domestic law

• Some countries require that the TP waive his rights in domestic courts before he can begin a MAP proceeding but this practice is not usual

• If a domestic court has already reached a binding decision in the case, that may limit the extent of MAP relief

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Relation between MAP and Domestic legal remedies (cont.)

• Most countries simply require the TP to suspend any domestic litigation while the MAP case is proceeding. The TP should not be allowed to undertake two parallel proceedings at the same time

• If a MAP reaches a successful conclusion, the taxpayer typically then has the right to accept or reject the conclusions of the MAP.

• However, to accept the MAP the TP typically must at that point waive all domestic law remedies.

• The legal status of the MAP depends on domestic law

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“Best Practices” for MAP

• Both the OECD and the UN give guidance as to “best practices” in structuring MA UN Guide to Mutual Agreement Under Tax Treaties (“UN”),

http://www.un.org/esa/ffd/tax/seventhsession/index.htm OECD Manual on Effective Mutual Agreement

Procedures(“MEMAP”),http://www.oecd.org/tax/disputeresolution/manualoneffectivemutualagreementproceduresmemap.htm

• CAs should make every effort to resolve cases on a principled basis, UN para. 49

• Audit settlements which involve the waiver of MAP access should be avoided, UN para. 80

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“Best Practices”• Competent Authority function should be independent of

Audit function, UN para. 62• Guidelines and procedures should be developed and

publicized for taxpayer presentation of MAP cases, UN para. 92 and UN Commentary, paragraph 42

• Use of position papers and response papers to clarify area of disagreement, UN para. 169

• Resolving and publishing issues of interpretation under Article 25(3), MEMAP BP 1

• Liberal interpretation of time limits and advising of treaty rights, MEMAP BP 9

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Background to Arbitration of MAP cases

• OECD Model, Article 25(5), added in 2010, provides for mandatory arbitration of MAP cases which have not been resolved within two years of submission Arbitration is not available if there has been a decision on the

issue in a court or administrative tribunal in either State

• Purpose is to give certainty for both TP and governments that MAP cases will be resolved in timely fashion

• Arbitration is limited to issues which are preventing the CAs from reaching an agreement and the result of the arbitration is a MAP which the TP can accept or reject

• Treaty arbitration is not a free-standing alternative procedure but a supplement to MAP

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Background to Arbitration of MAP cases

• UN Model presents two versions of Article 25 which are essentially identical except that Alternative A does not include a paragraph dealing with arbitration and Alternative B contains an arbitration provision which follows the OECD Model with some important differences. (see Slide 32)

• UN Commentary, Article 25, paragraph 4, sets forth the pros and cons of arbitration from the perspective of developing countries

• The decision of each country as to whether or not to include an arbitration provision in its treaties should be based on policy and administrative considerations and its actual experience with MAP 18

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“Voluntary” versus “Mandatory”Arbitration

• For countries who do not wish to include mandatory arbitration in their treaties, UN Commentary, paragraph 14 provides a “voluntary” arbitration provision

• Under voluntary arbitration, a case can go to arbitration if BOTH CAs and the TP agree to submit the case Since both CAs must agree to submit the case, this approach

gives less assurance than mandatory arbitration that a MAP will be produced

• In addition, it would be possible to provide for arbitration on a case-by-case basis through a special MAP

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Differences between OECD and UN Arbitration Articles

• Under the OECD provision, arbitration can be begun if the case has not been resolved within two years of the presentation of the case; the UN provision foresees a three year period

• Under the OECD provision, it is the taxpayer who can require that the case be submitted to arbitration. Under the UN provision, one competent authority can require that the case be submitted but if both CAs do not agree to arbitration, the case not be submitted Under the UN provision, arbitration is not truly mandatory.

However in a long and complicated case, it is to be expected that one CA and the TP will agree that arbitration is appropriate.

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Differences between OECD and UN Arbitration Articles

• Under the OECD Model Article 25(5), once the arbitration decision has been reached and communicated, the CAs are required to follow the decision in reaching a MAP. Under the UN provision, the CAs can deviate from the decision of the arbitrators if they can reach an agreement within 6 months of the arbitration decision. This provision follows EU Arbitration Convention

• In general, the UN differences from the OECD approach are intended to keep more authority in the hands for the CAs but this is at the expense of insuring that a MAP will ultimately be achieved.

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Basic Features of the UN Arbitration Provision

• As authorized in Article 25(4), the UN Commentary provides a “Sample Mutual Agreement on Arbitration”which sets up the procedural rules and principles for arbitration

• Additional Commentary discusses the provisions of the Sample Mutual Agreement

• In most aspects, the UN Commentary on arbitration basically follows the OECD Commentary with the exception of the form of arbitration procedure.

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Developments with respect to Arbitration

• Currently, a number of bilateral treaties have some form of mandatory arbitration provision

• Some treaties have no current arbitration provision but require that if the treaty partner enters into a treaty with an arbitration provision, it must reopen the issue with the country

• As both developed and developing countries have more experience, great recourse to arbitration is to be expected.

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