Cross-border transactions are now more prevalent than ever. Though difficult to measure, the economic interdependence of countries is so deeply entrenched that an event on the other side of the globe may certainly have an impact on our prices and supplies in a few days’ time.
Persons undertaking transactions across multiple locations may easily be subjected to rounds of taxes imposed by various jurisdictions. To address this, most countries have adopted Double Tax Agreements (DTAs), more commonly known as tax treaties, with the goal of avoiding double taxation of income.
As of writing, the Philippines has DTAs with 43 countries, including Japan, the US, and China. These DTAs are vital in facilitating international transactions and the Philippines is obligated to follow its provisions. However, with transactions becoming increasingly complex, there are instances where the application of the DTA could result in varying interpretations even by the tax authorities themselves.
A taxpayer directly affected by a flawed or inaccurate interpretation of a DTA by a taxing authority such as our Bureau of Internal Revenue (BIR) may invoke the Mutual Agreement Procedure (MAP) as a remedy. The MAP is a remedial tool available in almost all DTAs. It is a set of procedures that allows the Competent Authorities of the contracting countries to a DTA to resolve by mutual agreement any difficulties or doubts on a tax treaty’s interpretation or application. Stated another way, it is a conflict resolution tool for international tax — a mechanism by which the parties to the treaty may confer with each other to potentially resolve disputes.
Earlier this year, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 10-2022 which sets out the guidelines and procedures for taxpayers seeking MAP assistance in the Philippines. Although the MAP provisions have been in place in Philippine DTAs as early as the 1970s, this is the first time implementing guidelines for the MAP have been issued by the BIR.
The RR designates the Commissioner of Internal Revenue as the Philippine Competent Authority to implement the MAP provisions. The Commissioner is supported by the BIR’s International Tax Affairs Division (ITAD), the Assistant Commissioner for Legal Service, and the Deputy Commissioner for the Legal Group.
Taxpayers seeking to avail of the MAP are allowed to consult with the ITAD prior to making a formal request to determine whether the issue may be resolved through MAP. If so, the MAP request and supporting documents must be submitted to the BIR within the time limit prescribed in the DTA, which is often two to three years from the first notification of the contentious action to the taxpayer (e.g., negative BIR ruling, Final Assessment Notice).
The MAP may cover, but is not limited to, the following issues:
• The withholding tax imposed on income earned by a resident citizen or domestic corporation exceeds the maximum amount under the DTA;
• The taxpayer is considered a resident under both jurisdictions’ domestic tax laws;
• The applicability of the DTA to cross-border income or the characterization thereof is uncertain; or
• The attribution of profits to a permanent establishment is inconsistent with the DTA.
It should be noted that a MAP request is different from a tax treaty relief application (TTRA). In a MAP, there is a perceived conflict in the interpretation or application of the provisions of the DTA as a result of an unfavorable action to a taxpayer (such as a tax assessment or a tax ruling), whereas a TTRA generally involves the application of an established rule or principle thereunder.
A MAP request may be pursued even where there is a pending judicial or administrative appeal, or where a decision or final assessment has been issued by the BIR. It is only until the issue has been decided by the courts with finality that a MAP request is no longer allowed.
RR No. 10-2022 makes it clear that the resolution of a MAP request takes time — it provides an average of 24 months’ processing time, depending on the complexity of the issue and cooperation of the parties involved.
The discussions between the Competent Authorities are confidential until such time that a resolution is reached. The taxpayer’s visibility into the process is limited — participation is only to the extent of providing the needed information and its position thereon. It is generally only at the time that an outcome is reached that a taxpayer is notified. At this point, the MAP rules mention several possible outcomes which include: an agreement to remove the double taxation, a grant of unilateral relief to the taxpayer, or a finding that there is no double taxation contrary to the DTA. The Competent Authorities may also end up agreeing to disagree, perhaps in deadlocked cases.
Interestingly, RR No. 10-2022 points out that a MAP case cannot simultaneously proceed with judicial or administrative appeals. It appears then that a taxpayer has the option of suspending either the MAP process or the relevant judicial or administrative proceedings. In case the MAP is chosen, the taxpayer must submit proof of the judicial or administrative suspension to the Competent Authority. This may be a duly issued BIR order or court resolution. For tax assessments, a taxpayer may also seek the suspension of tax collection until the MAP request is resolved. It is not yet clear, however, how documentation of such suspension can be secured and how the suspension will affect the prescribed statutory deadlines at the administrative and judicial level.
While it is still in its early stages, the MAP Guidelines are a welcome development. At a time where cross-border transactions continually become more sophisticated, they give taxpayers a clearer way of settling issues which may not have been squarely covered in the tax treaties. It demonstrates our commitment to our obligations with regard to international tax agreements and our intention to resolve any conflicts which may arise therefrom. True to its acronym, the MAP might just show us the way to go.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Olivia Erika Susa is a manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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