So let's say I have a Mega Absol vs Xatu or something. Both have Magic Bounce. What would happen if Mega Absol used Will-o-wisp?
Mega Absol would be affected by it and receive a burn. If both pokemon have Magic Bounce, it will only reflect the move once- causing the user to be hit.
Source: Bulbapedia- If two opposing Pokémon have this Ability only the target's Magic Bounce will reflect the move (i.e. the move will only be reflected once).