1.2. What is a Mutual Agreement Procedure (MAP)?
1.2.1. Taxation of enterprise and individuals "not in accordance with the Convention"
The MAP article (Article 25 (Mutual Agreement Procedure) of the OECD Model Tax Convention) usually sets out three general areas where two states endeavour to resolve their differences. The first area, covered by paragraphs 1 and 2 of the OECD Model Tax Convention’s MAP article, applies to situations where a taxpayer believes that the actions of one or both of the contracting states has resulted or will result for him in “taxation not in accordance with the provisions of the Convention”. This area is the most commonly used and most often referred to part of the MAP article since it deals with most international taxation disputes under tax treaties.
The taxpayer may request MAP assistance in these instances of taxation contrary to a convention, which in most cases involve double taxation. Historically the majority of these cases have been issues of transfer pricing where associated companies of a multinational enterprise group incurred economic double taxation due to an adjustment to their income from intra-group transactions by one or more tax administrations. Enterprises also request this kind of MAP assistance for non transfer pricing cases, including disputes over such issues as the existence of a permanent establishment, the amount of profits attributable to a permanent establishment, or the application of a tax convention’s withholding tax provisions to their income.
On occasion, individuals require MAP assistance for cases of taxation not in accordance with a tax convention, when specific articles of a convention do not resolve a situation clearly. The most common occurrences for individuals are cases of dual residency (i.e., where an individual is considered a resident for tax purposes of two countries, under their respective domestic laws). This can happen quite commonly, because the domestic laws of the two countries may apply different tests for when residency is gained or lost. As part of its object and purpose of avoiding double taxation, a tax treaty will only allow one of these countries to treat that person as a resident for purposes of the treaty, and it therefore sets forth criteria to determine which of the two countries the person has the greater connection with. That will then be treated as the only country of residence when applying the treaty.
Paragraph 2 of Article 4 (Resident) in the OECD Model Tax Convention seeks to solve this problem by a series of so-called “tiebreaker” tests, each serving to determine the single residence country for treaty purposes if the previous tests have not resolved the issue. In the application of those tests, there may be different views taken by the two countries, for example as to where the person’s “permanent home” or centre of vital interests is, and there might therefore be a need to resort to MAP to resolve differences between the treaty partner countries on this point.
Moreover, even if both countries agree on how the tiebreaker tests operate, these tests do not always give a result. The last of the tiebreaker tests tries to deal with this by providing that “the competent authorities of the Contracting States shall settle the question [that is - of individual residence for treaty purposes] by mutual agreement.” In other words if the issue is not solved by the other tiebreaker rules, it should be solved by mutual agreement to help avoid double taxation.