Double trouble: Double taxation issues and MAP

Did you know that the sentence “I never said he stole my money.” can have seven different meanings depending on which word is emphasized when read out loud? When “I” is accentuated, you’re implying that someone else must have said it.  Emphasizing “never” suggests you never said the sentence. Putting the stress on “said” implies that you might have never spoken it out loud, but you might have hinted it. Highlighting “he” means you’re actually referring to a different person. When emphasizing “stole”, then perhaps the money was merely borrowed and not stolen. Accentuating “my” suggests the stolen money isn’t actually yours, and by giving distinction to “money”, a different object must have been stolen.

Such is just an example of how a simple sentence can be interpreted in different ways, especially when only viewed in writing. As a matter of fact, misunderstandings have sparked multiple conflicts in the world, from conflicts as simple as a lovers’ quarrel to those as gigantic as the bombing of Hiroshima, which is believed to have stemmed from a mistranslation of a Japanese message received by the Allied forces. Such unresolved issues due to different interpretations between two parties are also a common occurrence when interpreting tax rules. This is especially prominent in cases involving cross border taxation laid out in Double Taxation Agreements (DTAs), more commonly known as tax treaties.

A tax treaty is a bilateral agreement entered into by two countries to resolve issues when the same income is taxed by two or more different jurisdictions. This scenario is called “double taxation”. To resolve disputes arising from differences or difficulties in the interpretation or application of the tax treaty, a Mutual Agreement Procedure (MAP) can be resorted to.

The Bureau of Internal Revenue (BIR) recently issued Revenue Regulations (RR) No. 10-2022, which lays out the guidelines and procedures for requesting MAP assistance in the Philippines. This opens an alternative remedy for taxpayers facing double taxation, whose current available courses of actions are only to litigate such case in court or to file an administrative appeal.

Below are the salient provisions of the regulations.

Typical scenarios requiring MAP

The following are some typical examples of taxation not in accordance with a tax convention that would necessitate a MAP assistance:

1. The withholding tax rate imposed on an item of income earned by a domestic corporation is beyond the maximum rate fixed under the tax treaty.
2. A taxpayer deemed resident of the Philippines is also deemed a resident of another contracting country based on their domestic laws.
3. A resident citizen or domestic corporation is taxed in the other country on business profits or income from independent services despite not having a permanent establishment in that country under the tax treaty.
4. A resident citizen or domestic corporation has been or will be subject to taxation not in accordance with the provisions of the applicable tax treaty regarding the amount of profit attributable to the permanent establishment or fixed base.
5. A taxpayer is uncertain whether the convention covers a specific item of income or is unsure of the characterization or classification of the item related to a cross-border issue.
6. A taxpayer is subject to additional tax in one country because of a transfer pricing adjustment to the price of goods or services transferred to or from a related party in the other country.

Composition of the MAP Team

The Commissioner of Internal Revenue (CIR) is designated as the Competent Authority for the Philippines (Philippine CA).  Meanwhile, the Rulings and MAP section of the International Tax Affairs Division (ITAD) shall be considered the MAP Office undertaking the analysis and resolution of MAP cases.

Initiating a MAP Request

A taxpayer may, prior to making a formal request for MAP assistance, request for a pre-filing consultation. If the Chief of ITAD believes that the issues may be resolved through MAP, he shall advise the taxpayer to submit a formal request for MAP assistance.

The taxpayer must submit a written MAP request to the MAP Office manually or electronically via an encrypted mail. The request must contain the minimum information and documentation specified in the Regulations in order to become valid. Such information and documents include the tax treaty articles not being correctly applied, the taxpayer’s interpretation thereof, analysis of the issues involved, and the Final Assessment Notice (FAN), rulings or any equivalent document issued by the Philippine or Foreign tax authority which contains the action that results in double taxation, among others.

The receipt of a valid MAP request determines the commencement date of the MAP process. The taxpayers must ensure that they submit the MAP request within the time frame specified in the applicable DTA. In cases where the DTA does not provide a time limit, the MAP request must be submitted within three (3) years from the first notification of the action resulting to taxation not in accordance with the provisions of the DTA, such as from the date of the FAN or a ruling denying the claim for treaty benefit.

Resolution of a MAP Case

The following are the possible outcomes of the MAP process:

a. Access to MAP is denied (i.e., not an admissible request or denied for any other reasons);

b. Objection is not justified;

c. Objection is resolved via domestic remedy;

d. Unilateral relief will be granted;

e. Competent authority agreement for full or partial elimination of double taxation;

f. Competent authority agreement stating that there is no taxation not in accordance with the tax treaty;

g. No competent authority agreement is reached including agreement to disagree; and

h. Any other outcome.

The MAP cases are estimated to be resolved within a period of 24 months from the receipt of the request.

Implementation of MAP Agreements

If the taxpayer confirms in writing the acceptance of the mutual agreement, the Philippine CA shall give effect to such mutual agreement and ensure its implementation without delay.

In cases where a refund is due to the taxpayer, the taxpayer should begin the process of obtaining the refund following the procedures prescribed under existing revenue issuances.

Interaction with Domestic Remedies

MAP assistance may be requested irrespective of the remedies provided by the domestic laws of the Philippines. Thus, a taxpayer can request MAP assistance from the Philippine CA even in situations where there are pending judicial or administrative appeals and even where a decision, ruling or final assessment has already been rendered by the competent officials of the BIR.

However, court decisions cannot be overruled through MAP. Hence, once a taxpayer’s liability has been finally determined by the court, the BIR shall be bound by the said decision and shall no longer provide further relief through MAP.

The question now arises — is the newly implemented MAP enough to quell the woes of double taxation? Navigating through the jungles of taxation rules is indeed a challenging task. Disputes regarding the interpretation of such laws are inevitable, but just like any other conflict outside the world of taxation, it will all boil down to the eagerness of both parties to collaborate and reach a mutual agreement. Hopefully, taxpayers and the BIR will be able to achieve such compromise.

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

As published in BusinessWorld, dated 19 July 2022