By Nour Ali, regional tax consultant at DNV, Dubai
On 1 July, the United Arab Emirates officially issued the mutual agreement procedure (MAP) guidance through the Department of International Financial Relation of the Ministry of Finance.
The purpose of the MAP guidance is to set out the process through which taxpayers can request assistance from the Ministry of Finance in its capacity as a competent authority to resolve disputes arising from taxation not in accordance with the provisions of the relevant double tax treaty, as well as to provide relevant information before requesting MAP.
The guidance discusses various topics, including MAP as an alternate tax resolution mechanism, MAP application procedures, the MAP process, timelines for MAP requests, legal basis, and the timeframe for resolving and implementing MAP cases. It also includes a list of the relevant United Arab Emirates double tax treaties.
The main model tax conventions promote specific forms of administrative cooperation between tax authorities involved in a double tax treaty. Such models provide for a dispute resolution mechanism that arises with respect to the interaction of the domestic tax systems of countries or from the application of the double tax treaty itself.
The mutual agreement procedure sets out a mutual obligation upon the countries to exchange information that is relevant for the enforcement of their domestic tax laws or for the application of the double tax treaty between them, as well as mutual assistance in promoting the collection of revenue claims.
The OECD established certain action points in the context of the base erosion and profit shifting (BEPS) project to equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where the economic activities generating profits are performed and where value is created. This includes action point 14 on mutual agreement procedure.
Action point 14 seeks to improve the resolution of tax-related disputes between countries. Countries participating in the Inclusive Framework on BEPS have committed to comply with the minimum standard, which is reviewed and monitored through a robust peer review process that seeks to improve the efficiency and timeliness of the resolution of double taxation disputes.
On 16 May 2018, the United Arab Emirates became the 116th jurisdiction to join the Inclusive Framework on BEPS, and since then it has taken several actions to implement the minimum standards action points (i.e., action point 5 on harmful tax practices, action point 6 on prevention of tax treaty abuse, action point 13 on country-by-country reporting and action point 14 on mutual agreement procedure).
Description of MAP as an alternate tax resolution mechanism
In general terms, the mutual agreement procedure is intended to relieve double taxation arising from transfer pricing cases and to resolve double tax treaty disputes and issues surrounding the interpretation/application of a double tax treaty, as well as to allow for a bilateral mechanism for the Ministry of Finance to engage with other tax authorities.
According to the mutual agreement procedure guidance, taxpayers may request MAP if they are being taxed, or will be taxed, not in accordance with the provision of the double tax treaty or if they believe that the action of one tax authority results or will result in taxation not in accordance with the provisions of the double tax treaty. In this respect, the taxpayer – irrespective of the remedy provided by the domestic tax laws of both countries (i.e., the United Arab Emirates and/or the other country) – may request MAP assistance.
Further, the MAP guidance provides a non-exhaustive list of cases where mutual agreement can be initiated. Examples include when a taxpayer has dual residency in both countries of the double tax treaty or there is no agreement on the country of residence, when a taxpayer disagrees with the tax authority on the existence of a permanent establishment, when a taxpayer disagrees on the characterization of certain items of income for the application of double tax treaty, and when a taxpayer disagrees with the tax authority regarding the interpretation and application of provisions/principles of double tax treaty.
In addition, MAP may be initiated in cases where there are transfer pricing adjustments between related parties in different countries and in cases where there are adjustments of profits attributable to a permanent establishment situated in a country.
The mutual agreement procedure guidance stipulates that in cases of an assessment, taxpayers can submit an objection to the Ministry of Finance to initiate an internal review process. The internal review process will result in either full acceptance of the objection, partial acceptance of the objection or full rejection of the objection.
In cases when the internal review process results in partial acceptance or full rejection of the objection, taxpayers can either seek an administrative appeal by requesting the involvement of the settlement committee to resolve the dispute or submit a judicial appeal to the preliminary objection committee.
Making a MAP application in the United Arab Emirates
The mutual agreement procedure guidance provides cases where mutual agreement procedure will be acceptable. Generally, the issue/transaction must relate to a country with which the United Arab Emirates has a double tax treaty, it should be apparent that the actions of one or both countries resulted in or will result in taxation not in accordance with the provisions of the double tax treaty, and the taxpayer must notify the Ministry of Finance within the time limits specified in the applicable double tax treaties (i.e., usually double tax treaties specify three years from the first notification of the action).
In this sense, any person (natural/legal) that is resident in the United Arab Emirates or in another country (depending on the wording of the mutual agreement procedure article of the double tax treaty) may present a case to the Ministry of Finance. In the case of a transfer pricing adjustment cases that affect related parties, each related party shall submit a request for initiating the mutual agreement procedure to the respective tax authority in the country where they are resident.
The mutual agreement procedure process
Under the mutual agreement procedure guidance, five steps are needed to initiate the MAP process. The first step only requires the taxpayers’ submission of a MAP request. After that, the Ministry of Finance will consider the request and ask the taxpayer for further information in writing. It will then initiate a mutual agreement procedure consultation between the United Arab Emirates and the other treaty country. After reaching an agreement with the other treaty country, the last step is implementing the mutual agreement reached.
To have a successful mutual agreement procedure request, there are minimum information requirements to process the request. Necessary information includes the identity of the taxpayer(s) covered in the MAP request, the legal/factual basis for the request, the facts of the case in hand, and an analysis of the issue(s) requested to be resolved. Other relevant information relates to whether the request was also submitted to the other country’s tax authority, whether the request was submitted to another authority under another instrument to resolve treaty-related disputes, and whether the issue(s) involved were dealt with previously.
The request must also include a statement confirming that all information and documentation provided in the request is accurate.
Timelines for MAP requests
According to the guidance, the Ministry of Finance shall notify the taxpayer of its receipt of the request and notify the corresponding tax authority of the other country about the request within 30 days of the taxpayer initiating the request.
Furthermore, the taxpayer will be given 30 days to provide any additional information or documentation if requested from the Ministry of Finance.
In addition, the Ministry of Finance shall determine the eligibility of the request and notify the taxpayer with reasons of acceptance or rejection within 30 days after providing any additional information or documentation. If the reasons are acceptable to the taxpayer, a notification letter shall be communicated with the tax authority of the other country.
Moreover, the Ministry of Finance will keep the mutual agreement procedure going and shall regularly update the taxpayer on the progress. The Ministry of Finance aims to resolve requests within two years after receiving the request.
Upon receiving a mutual agreement, the Ministry of Finance will write to the taxpayer within 30 days from reaching the agreement and advise the taxpayer on the next action. Taxpayers have only 30 days to submit their approval on results of the request.
Finally, after receiving approval from taxpayer, the Ministry of Finance and the tax authority of the other country will exchange closing letters and implementation of the mutual agreement shall apply no later than 90 days after the exchange of closing letters.
Timeframe for resolving and implementing MAP cases
The guidance stipulates that most of the United Arab Emirates double tax treaties require taxpayers to request MAP within three years of receiving the first notification of the action that is considered to be not in accordance with the double tax treaty.
If the taxpayer makes a delayed request (i.e., after the expiry of the time period specified above), the Ministry of Finance will not provide access to MAP.
The United Arab Emirates is taking a positive step towards the implementation of the Inclusive Framework minimum standards by publishing the mutual agreement procedure guidance, which will allow taxpayers to request mutual assistance in cases where taxation is considered to be not in accordance with the provisions of the double tax treaty.
Taxpayers seeking to apply the mutual agreement procedures are required to be proactive with respect to the maintenance of minimum information requirements, as well as with the initiation of the mutual agreement procedure request to the Ministry of Finance.
Taxpayers conducting business in the United Arab Emirates can access the more than 130 double tax treaties of which the United Arab Emirates are a part.
All mutual agreement procedure request can be sent in English or Arabic to the Director of International Organizations and Financial Relation.