As featured on PhilStar: Mutual Agreement Procedures: Uncertainty and opportunity for individuals
When interpreting tax rules, unresolved issues due to opposing views between two parties are a common occurrence, particularly with respect to Double Taxation Agreements (DTA) or commonly known as Tax Treaties. As such, the presence of a clear dispute resolution process like the Mutual Agreement Procedure (MAP) is relevant.
The Bureau of Internal Revenue issued Revenue Regulations No. 10-2022 on June 30, 2022, prescribing the guidelines and procedures to be followed by taxpayers who would like to request MAP assistance from the Competent Authority for the Philippines (Philippine CA). The Regulations outline the procedures for initiating a MAP request and specific information and documentation that a taxpayer is required to submit, including steps involved, associated cost and timeline. It also provides guidance on how to initiate a MAP request.
The Regulations provide that the Commissioner of Internal Revenue (CIR) is designated as the Philippine CA. Where it is not possible for the CIR to deal directly with MAP cases, he/she shall delegate his/her functions and powers to other competent officials of the BIR via a Revenue Delegated Authority Order (RDAO). Concurrently, the Rulings and MAP Section of the International Tax Affairs Division (ITAD) or MAP Office shall commence the analysis and resolution of MAP cases. Consistent with the issuance of rulings involving the application and interpretation of tax treaties such as the Tax Residency Application (TRC) and Tax Treaty Relief Application (TTRA), it should originate from the ITAD Division of the BIR.
The Regulations also enumerate sample scenarios that would necessitate MAP assistance. It typically relates to the attribution of profits and transfer pricing adjustments. However, it could also ease the burden of potential double taxation for individual taxpayers. Most likely, the occurrence of double taxation of individuals is usually resolved in DTAs through determination of taxing rights, tax credits and exemptions; individuals may need MAP support in situations where the taxation is not clear. For example, a taxpayer who is considered a resident of two treaty countries under each country’s domestic law, with each country asserting that the taxpayer is a resident of its jurisdiction for purposes of the DTA could lead to the taxpayer being liable to tax on the same income in both countries. Therefore, it is important to identify which country has worldwide taxing rights and which country can only tax income sourced from that country. Tax authorities may conclude an agreement under the MAP in the country where the individual is a resident for treaty purposes to determine which country is entitled to impose taxes on the individual as the country of residence and to require the resident country to grant relief from double taxation.
Another instance is when a taxpayer is uncertain whether the DTA covers a specific item of income or is unsure of the classification of the item related to a cross-border issue. To the extent that there is double taxation that cannot be resolved by the provisions of the DTA, taxpayers can resort to MAP.
A total of forty-three (43) DTAs have been concluded by the Philippines, most of which have the MAP provision. Considering recent developments in the tax laws and the current and future trends of remote working arrangements, disputes between taxpayers and tax authorities are likely to increase. Therefore, MAPs offer an interesting alternative to taxpayers to avoid double taxation. By utilizing the provisions of the DTA and relief measures provided in our tax laws, individuals earning income from other countries can avoid the burden of double taxation. The question now arises, is it possible to request a MAP in anticipation of a potential double tax residency and cross-border income disputes which are the most common issues for individuals?
Since the MAP guidelines are relatively new, there has been limited enforcement and experience in their use. The timeliness and effectiveness of MAP, as well as the cost and extent of the process are still in question. MAP is still underutilized, mainly because of a lack of understanding and perceived practical and legal obstacles to it. Every effort should be made by the CA and taxpayers to advance the MAP process and achieve a satisfactory resolution of the issues involved. With the implementation of MAP, it is indicative of how the BIR would like to resolve double taxation issues and make assistance accessible to taxpayers. Hopefully, this will bring more clarity on how MAP issues are dealt with and what other cases are eligible for MAP consideration.
Mary Rose De Leon-Isleta
KPMG in the Philippines