A year older, a year wiser? More than a year has passed since the BIR issued Revenue Regulations No. 10-2022 (RR No. 10-2022 or the MAP Guidelines), which prescribed the guidelines and procedures for requesting Mutual Agreement Procedure (MAP) assistance in the Philippines. As with any new process, overcoming the learning curve on either side — the government or the taxpayer — is inevitable in the early stages of implementation. With a handful of guinea pigs having gone through or currently undergoing the infancy of implementation, some taxpayers may still be wondering if there is truly any value in pursuing the MAP process vis-à-vis ordinary remedies. One may ask, how is MAP relevant to taxpayers and how does it work?
As of this writing, all 43 tax treaties executed by the Philippine government contain a MAP provision. In a nutshell, the MAP Guidelines bring to life the process agreed in tax treaties allowing for the resolution through mutual agreement of disputes arising from the interpretation or application of tax treaties. This is a particular concern to taxpayers since issues with tax treaty interpretation often lead to double taxation — wherein the taxpayer suffers income taxes imposed by two or more states on the same income — the scenario that all tax treaties seek to avoid. While admittedly domestic MAP experience is still limited, experience in other jurisdictions has proven MAP to be one of the most highly utilized means of eliminating double taxation.
As MAP is a predominantly diplomatic process, the issues are resolved on a state-to-state level, with the taxpayer’s active participation mainly limited to lodging the MAP request and laying down the basis to show how the taxation imposed is not in accordance with the tax treaty. Thus, the taxpayer is typically not privy to the negotiations and exchanges between the states concerned. Nevertheless, there is no restriction on the taxpayer-initiator to request status updates from the handling MAP team.
Prior to the availability of MAP, aggrieved taxpayers ordinarily pursued administrative or judicial remedies in one or more countries where the double taxation occurred. With the MAP process, there is now an opportunity to address double taxation efficiently, with MAP functioning as a forum to simultaneously address issues that would otherwise be subjected to potentially piecemeal resolution in two or more countries. Moreover, availing of the MAP process ensures that the issues are heard by highly specialized government personnel attuned to the technicalities and peculiarities of tax treaties. In addition, there are generally no fees involved in initiating a MAP request. Needless to say, this can lead to overall cost-effectiveness and time saving on the part of the taxpayer.
When one avails of MAP, it is presupposed that an earlier administrative measure has been taken by the taxpayer where government action results in double taxation. In initiating the MAP process, the taxpayer must observe the time limit of 2-3 years from first notification of the government action within which to institute the MAP process. This first notification could be in the form of a Final Assessment Notice arising from a tax audit or a ruling denying the claim for treaty benefit.
The MAP Guidelines specify that it could take up to 24 months to process a MAP request. However, the 2021 OECD MAP statistics gives us a glimpse of concrete experience that may be closer to reality. Based on reporting from 127 countries, it took an average of 32.5 months to resolve MAP cases that dealt with transfer pricing issues, while “other” cases took an average of 20.7 months. On this basis, we can expect that it could take the authorities a significantly longer time to resolve cases especially where transfer pricing issues abound.
Likewise, taxpayers should be mindful that the MAP process normally consists of a unilateral and a bilateral stage. If the Philippine competent authority (CA) finds that the taxpayer’s request is justified, it will initially attempt to resolve the matter unilaterally without consulting the foreign CA. At this unilateral stage, the importance of adopting a principled approach to resolving the MAP case is amplified; otherwise it runs the risk of losing taxpayer confidence in the process. That is, once the Philippine CA adopts a position on an issue, such a position should be maintained consistently and should not vary depending on which side makes the most revenue for the government. Notably, the MAP Guidelines direct the MAP team to resolve the case independently and objectively, without being influenced in any manner by objectives of the tax auditor or examiner who made the tax adjustments. To this end, it would be beneficial for the Philippine CA to adopt the OECD best practice of publishing issues of interpretation that apply generally to taxpayers in order to safeguard this purpose and further promote transparency in the process.
The case will move to the bilateral stage only when the Philippine CA cannot arrive at a unilateral solution. Note though that, while the MAP provision in tax treaties calls for CAs to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the application or interpretation thereof, the respective CAs are not obliged to enter into an agreement for each individual MAP case presented by a taxpayer. This is especially true given the absence of a mandatory arbitration clause in the prevailing tax treaties of the Philippines. For this reason, even when the CAs have endeavored to resolve a case, there is a danger that the double taxation will persist should the CAs fail to agree for any number of reasons (i.e., impediments imposed by domestic law, stalemates on economic issues, and so on.)
While there may be plenty of room for improvement and refinement with the current MAP process, it cannot be denied that this avenue brings vital assistance for eliminating double taxation. In due time and with more maturity in dealing with MAP, it is inevitable that MAP assistance will be recognized as a principal tool in addressing cross-border issues, leading to greater confidence from taxpayers.
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.
Karen Pascual is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.