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Mutual Agreement Procedure under DTAAs: Time to Embrace Arbitration?

Double Taxation Avoidance Agreements (DTAA) are entered into between countries ‘for avoidance of double taxation’ and to relieve the tax-payer of being doubly taxed in respect of the same income in the two countries. The DTAA distributes the taxation rights between the countries so as to allow a particular income be taxed only in one country. Even for the instances where both countries retain the right to tax the income, the DTAA provides mechanism for elimination of double taxation by way of exemption from local tax or granting credit of taxes paid in the other country. In order to ensure that despite these allocation and relief mechanism double taxation does not occur, the DTAA further provides for ‘mutual agreement procedure’ (MAP) which can invoked by an aggrieved tax-payer. Such procedure is generally in addition to the legal remedies available to the aggrieved tax-payer under the domestic legislation. The resolution of grievances by way of MAP, however, is undertaken at an administrative level between the competent authorities of the two countries with neither any right to the aggrieved tax-payer to formally address the authorities on the point of grievances nor any certainty of resolution of such grievances. In the wake of such inherent limitations to MAP, the recent developments in international tax arena have propped MAP to be supplemented by a mandatory arbitration mechanism whereby disputes which cannot be resolved between the competent authorities of the two countries within a specified time-frame are referred to third-party tax-experts for resolution by way of arbitration. This paper examines the nuances of this development in the context of dispute resolution by way of MAP.