Mutual Agreement Procedures (MAPs) for resolving double tax agreement disputes

As featured on PhilStar:  Mutual Agreement Procedures for resolving double tax agreement disputes

In an increasingly interconnected world, countries must deal with the bulk of cross-border exchanges of goods, services, and everything in between. Foreign jurisdictions must now find ways to effectively manage the tax implications of these exchanges while balancing the need for a stable investment climate to entice more foreign investors. One way to handle transnational taxation on income is through tax treaties, which provide rules on the treatment of income and other tax benefits available to participating countries. Taxpayers can rely on these tax treaties and enjoy a competitive tax approach for income earned from these international transactions.

But what happens when a taxpayer’s income is subjected to taxation not in accordance with a tax convention? Perhaps a domestic taxpayer is charged on business profits or income earned in a foreign country despite absence of a permanent establishment therein; or whether a tax convention covers a specific item of income is unclear. In such cases, the taxpayer may be assessed improper taxes or may face double taxation. How then, can a taxpayer seek assistance to resolve disputes in the interpretation and application of an international double taxation agreement?

To address this concern, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 10-2022 which contains the guidelines to enforce the provision on mutual agreement procedure (MAP) in double taxation agreements (DTA) between the Philippines and foreign jurisdictions.

Before the issuance of RR No. 10-2022, a taxpayer whose income is subjected to taxation or double taxation inconsistent with the provisions of the relevant DTA could only challenge the imposition through an administrative appeal or litigation in court. Most taxpayers would agree that neither option is appealing, as both would entail time, effort, and resources better directed at other profitable endeavors. Under the new regulations, an aggrieved taxpayer has the option to request for Mutual Agreement Procedure (MAP) assistance from the Philippine Competent Authority, which is the Commissioner of Internal Revenue, to resolve disputes arising from taxation inconsistent with the relevant DTA.

However, prior to making a formal MAP request, a taxpayer must request for a Pre-Filing Consultation (PFC) with the International Tax Affairs Division (ITAD). This allows the taxpayer to widen the issues for resolution as the ITAD will review the supporting documents that may be attached to the PFC request. If the Chief of the ITAD believes the issues may be resolved through MAP, the taxpayer will then be requested to submit a Formal Request for MAP assistance containing the required minimum information and documentation. When a tax assessment is involved, the affected taxpayer may also indicate in the Formal Request the suspension of collection of taxes.

Depending on the provision of the relevant DTA, a MAP request typically should be presented to the Competent Authority within 2 to 3 years from first notification of the action inconsistent with the DTA. Where a period is not provided, the request must be submitted within 3 years from the first notification. If the MAP request is determined to have been presented beyond the prescribed period, the request shall be closed, and the taxpayer notified thereof in writing within 30 days from such closure.

Once the ITAD establishes that the taxpayer’s objection is justified, it shall determine whether the taxation is inconsistent with the provisions of the DTA is due to a measure taken in the Philippines. If approved, the Philippine Competent Authority may resolve the matter unilaterally. Otherwise, the MAP case will proceed to the bilateral stage where both the Philippine and foreign Competent Authorities will endeavor to resolve the case by mutual agreement. However, it is important to note that the Competent Authorities are not mandated to enter into an agreement for every MAP case.

Where the taxpayer’s claim warrants a bilateral resolution, discussions leading to the disposition of the MAP case shall strictly be between the Competent Authorities of the concerned contracting states. The taxpayer shall be involved only to the extent required to present its claim and other pertinent information to ensure that the Competent Authorities have a common understanding of the facts of the case.

Once the Competent Authorities have reached an agreement, the taxpayer will be notified thereof within 30 days from the meeting. The Philippine Competent Authority shall then give the taxpayer an additional 30 days to convey his acceptance or disapproval of the mutual agreement. If a disapproval of the agreement has been timely conveyed, the taxpayer has the option to proceed with filing an appeal or to litigation. On the other hand, if the taxpayer accepts the agreement, the Philippine Competent Authority shall give effect to the same and ensure its immediate implementation. In the worst-case scenario where the Competent Authorities are unable to reach an agreement, the taxpayer will be notified in writing within 30 days and may then pursue the available domestic remedies after receipt of such notice.

RR No. 10-2022 further prescribes that MAP cases be resolved within 24 months from the receipt of a valid request. However, the actual timeframe may depend on the complexity of the case and the cooperation of the taxpayer and the Competent Authorities.

A MAP assistance may be requested even in situations where a judicial or administrative appeal is pending or a decision, ruling, or final assessment has been rendered by the BIR. However, RR No. 10-2022 emphasizes that a MAP case cannot proceed simultaneously with other remedies availed. If a judicial or administrative proceeding is ongoing, the taxpayer must inform the Competent Authority and decide which remedy will be suspended in favor of concluding the other. Further, in consonance with our Civil Code, once a court has determined with finality the tax liability of the taxpayer, the Philippine Competent Authority shall no longer provide relief through MAP.

The complexity and costs of complying with the provisions of tax treaties often invalidate the good; these conventions can provide, leaving many of the tax benefits unused. Hence, the effectivity of RR No. 10-2022 is a welcome development as taxpayers dealing with instances of improper taxation or double taxation  which would seem a more straightforward and cost-effective remedy in their favor.