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India: Proposal to make arbitration mandatory under MAP dropped

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Aug 21, 2015.

New Delhi: An international proposal to make arbitration mandatory and binding under mutual agreement procedures (MAP) in tax treaties has been dropped after India strongly opposed it.

Last year, the Organisation for Economic Co-operation and Development (OECD) released its recommendations to effectively tackle so-called base erosion and profit shifting (BEPS) to ensure multinational companies do not evade taxes in the countries they are operating in.

They are aimed at creating international tax rules to end the practice of companies artificially shifting profits to low-tax jurisdictions, in the process hurting countries such as India that are considered to be lucrative but relatively high-tax markets.

India was of the view that the proposal, if implemented, will not only impinge on the sovereign rights of developing countries in taxation but will also limit their ability to apply their domestic laws for taxing non-residents and foreign firms.

India, which has been actively participating in the working group discussions, has managed to prevail over other countries and get this proposal dropped, said Akhilesh Ranjan, joint secretary in the foreign tax and tax research division in the income-tax department.

“India had made it clear that we will not accept mandatory and binding arbitration. So that proposal has been dropped,” he said at an international tax conference organized by the PHD Chamber of Commerce and Industry, a lobby group.

The revised recommendations will be tabled in a meeting of G-20 countries later this year. Once endorsed, they will be binding on most of the nations.

Ranjan added that the government will bring in the necessary amendments to the income-tax Act in the next budget for implementing BEPS.

Speaking at the same event earlier, revenue secretary Shaktikanta Das said, “Developing countries including India feel that arbitration is not the desired method for resolving disputes. Taxation is a sovereign matter and we feel that both countries should be able to sit together and resolve the issues rather than involve a third party. If we can resolve issues using MAP with US, why do we need arbitration?”

MAP enables elimination of double taxation and is intended to minimize disputes relating to transfer pricing. It provides a framework for tax authorities of two countries to come together and arrive at an agreement that is acceptable to both sides.

Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

Das said that 120 cases related to US companies are being currently decided under MAP.

Analysts pointed out that the flip side of such an arrangement could be that disputes could drag on for years without reaching any finality if both countries are unable to reach an agreement.

“Typically, if a dispute under MAP is not decided in 24 months, it goes into compulsory arbitration. So governments have to decide within this time frame if they do not want to go into arbitration. India does not favour this. There is no time limit in the US India MAP also,” said Vijay Iyer, partner and transfer pricing leader, at EY. “But this could lead to the dispute being dragged for many years.”