The OECD recently issued a consultation document, with comments due by Dec. 18th, addressing dispute resolution mechanisms which arose from BEPS Action 14.
There are 27 questions for comment, including APAs, statistical categories, penalties/interest, timelines, training, etc.
The document is comprehensive and a valuable reference for review, and most importantly an opportunity for stakeholders to submit comments.
The Organisation for Economic Co-operation and Development (OECD) on 30 August released a fourth round of stage 1 Base Erosion and Profit Shifting (BEPS) Action 14 peer reports on improving tax dispute resolution mechanisms. The reports assess each country’s efforts to implement the Action 14 minimum standard.
Valuable insights from these reports can be gained, especially if a taxpayer is under audit where some of these questions/uncertainties may arise. The peer reports are performed on a desk audit basis, with other parties comments considered by OECD.
Some insights are APA rollbacks, granting of MAP in all/certain transfer pricing cases, etc. Reference links are provided.
Reports covering Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand and Portugalwere published.
China’s State Administration of Taxation (SAT) has issued its 2016 Advance Pricing Agreement (APA) update, noting that 14 APA’s were entered into for 2016.
Value chain quality and location specific advantages are positive factors leading to an efficient APA process.
It is noteworthy that China has increased scrutiny re: intercompany service agreements, and formal documentation thereto, thus an APA may prove to be advantageous provided that the relevant documentation can be timely provided.
The report, which is referenced herein as well as EY’s analysis, commences with the following summary: “This is the eighth APA annual report released by the State Administration of Taxation (“SAT”) to describe the latest mechanisms, procedures, and implementation of the APA program in China. This report is intended to provide guidance to enterprises interested in entering into APAs with the Chinese tax authority, and to serve as a reference for competent authorities of other countries (regions) and the general public to better understand China’s APA program. It does not have legal validity, and therefore should not be regarded as a legal basis for enterprises or the Chinese tax authority to negotiate or conclude an APA.”
With the ongoing BEPS complexity, and country dissimilarities / double taxation issues being compounded, the attached documents are a valuable reference in deciding on an APA decision (unilateral or bilateral) with China.
India has released its APA annual report, providing valuable insight into recently filed APAs and the process.
As India is recognized as very creative and aggressive in its transfer pricing practices, this report should be reviewed to test whether an APA should be filed, as well as in other countries for additional certainty.
EY’s Global Tax Alert provides additional details, included for reference.
The IRS has indicated its willingness to share unilateral Advance Pricing Agreement (APA) information to align with BEPS Action 5 re: transparency and substance.
As other jurisdictions have provided taxpayers to submit summary information that will be shared in such exchange, the IRS has not yet indicated such procedures. Thus, it is advised that any multinational with such rulings attempt to obtain a copy of the information to be shared, prior to the automatic sharing process, to ensure its accuracy.
The EY Global Alert provides additional details of this new development.
Most importantly, any taxpayer with tax rulings should already be looking at the information that could be shared to address potential questions/issues by other tax authorities, especially if there are different transfer pricing arrangements in place.
The new EU Directive for the automatic exchange of tax rulings now moves forward for approval, with an effective date of 1/1/2017. A copy of the press release is provided:
Key observations:
This development is now moving forward with a transparency focus, although what information will practically be exchanged may be different dependent on the respective Member State.
Multinationals should review prior rulings subject to this exchange to avoid potential surprises.
China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015. The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.
Key observations:
Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation. Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.
All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.
The Indonesian Minister of Finance has released recent Regulations addressing the methodical approach for which taxpayers and the tax administration are to be aligned in seeking an APA. Most importantly, the approach outlines the advance timing and necessary information by which tax authorities will utilize in considering APA requests.
A link to KPMG’s Tax News Flash is provided for reference:
As countries continue to enact unilateral legislation, with or without BEPS Actions, it may be prudent to consider a proactive transfer pricing approach to enter into APA’s for significant intercompany transactions. As the Mutual Agreement Procedure (MAP) procedures are still being refreshed, the transition period would be an excellent time to prepare for additional certainty via APA’s. The Indonesian approach provides an excellent example to better appreciate the timing, information and exchanges that will become part of this process.
Armed with the foresight that such APA’s may be included in transfer pricing documentation and exchanged between tax authorities around the world, it may be a worthwhile roadmap demonstrating consistency for significant transactions.
The European Commission published a package of tax transparency measures on 18 March 2015. The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:
Tax Transparency proposal:
Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:
Q and A’s:
The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items. These actions are also intended to be a standard for global setting in the new era of international tax transparency. As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings. Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.
Tax Executives Institute, Inc. (TEI) recently published comments re: OECD BEPS Action 10, addressing Low Value-Adding Intra-Group Services, and Action 14 re: Dispute Resolution Mechanisms. The comments elicit practical considerations, including worldwide consistency, in their well written and reasoned responses. Although many individuals/organizations have provided comments, TEI’s submissions merit required reading and thoughtful consideration. Links to TEI’s comments are included for reference:
Key comments re: Action 10, Low Value-Adding Services
Key comments re: Action 14, Dispute Resolution Mechanisms
The comments on Action 14 are especially critical, as dispute resolution will be a critical factor in ensuring that the BEPS guidelines legislated into law will have consistent, fair and transparent processes to resolve disputes timely and effectively.
The Inland Revenue Authority of Singapore (IRAS) has published an expanded Transfer Pricing (TP) e-Tax Guide (linked herein for reference) that consolidates the four previous TP guides. The Guidance adheres to the TP arm’s length principle, while expanding required disclosures in alignment with the OECD BEPS objectives.
Key observations:
These guidelines should be reviewed, especially the new TP documentation guidelines as other countries in the APAC region and elsewhere will monitor and possibly adopt similar guidelines.
The EU Joint Transfer Pricing Forum has published a valuable update highlighting local country perspectives on a common criteria. The link is attached for reference:
The common criteria provided by each country is as follows:
Countries included in the update consist of:
The information is highly relevant and should be used as a primary resource re: the respective country’s views on transfer pricing, OECD alignment and dispute resolution methodologies.
For Best Practices, the information should be compared with the transfer pricing documentation prepared re: the arm’s-length principle and consistency of audit principles by tax authorities.
Portugal has introduced new transfer pricing rules, including the ability to request a unilateral APA, absent a tax treaty between Portugal and the other jurisdiction. KPMG has provided a concise summary for these changes:
Multinationals should consider this new provision to obtain additional certainty re: Portugal’s application of transfer pricing rules. Recognizing that a unilateral APA does not eliminate the risk of double taxation, this opportunity should be reviewed within the context of the global tax risk framework.
KPMG has published an informative and timely publication reviewing strategies for the use of unilateral, bilateral and multilateral Advance Pricing Agreements (APA’s), with a detailed focus on recent APA developments in Turkey. The KPMG publication cites the OECD’s June 2013 report “A Step Change in Tax Transparency” prepared for the G8 Summit. The KPMG and OECD reports are referenced herein for review.
The KPMG report is a valuable reference, providing strategic insight into using unilateral, bilateral and / or multilateral APA’s globally with a specific focus on Turkey. The report includes chapters on Transfer Pricing in Turkey, Global APA Trend, Opportunities that APA Offers, When Should You Pursue an APA and the APA Process in Turkey. The OECD report provides additional input on the exchange of information which is especially valuable against the backdrop of OECD’s recent request for guidance.
The transfer pricing landscape is changing, from a OECD perspective and also separate country initiatives that may, or may not, correlate with guidelines to be established this year and next by the OECD. Accordingly, the use of APA’s should be reconsidered for developed and developing countries to achieve further certainty and avoidance of double taxation in these changing and challenging times.
OECD Working Party 1 has formed a Dispute Resolution Focus Group to address BEPS Action Plan item 14, copied herein for reference.
Focus areas of WP 1:
In the US, IRS has also issued Notice 2013-78 detailing a proposed Rev. Procedure on US Competent Authority procedures, including an emphasis on informal consultation for US Foreign Tax Credit determinations.
OECD BEPS ACTION 14
Make dispute resolution mechanisms more effective
Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.
(iv) From agreed policies to tax rules: the need for a swift implementation of the measures
There is a need to consider innovative ways to implement the measures resulting from the work on the BEPS Action Plan. The delivery of the actions included in the Action Plan on BEPS will result in a number of outputs.
Some actions will likely result in recommendations regarding domestic law provisions, as well as in changes to the Commentary to the OECD Model Tax Convention and the Transfer Pricing Guidelines. Other actions will likely result in changes to the OECD Model Tax Convention. This is for example the case for the introduction of an anti-treaty abuse provision, changes to the definition of permanent establishment, changes to transfer pricing provisions and the introduction of treaty provisions in relation to hybrid mismatch arrangements.
Changes to the OECD Model Tax Convention are not directly effective without amendments to bilateral tax treaties. If undertaken on a purely treaty-by-treaty basis, the sheer number of treaties in effect may make such a process very lengthy, the more so where countries embark on comprehensive renegotiations of their bilateral tax treaties. A multilateral instrument to amend bilateral treaties is a promising way forward in this respect.
This new initiative highlights innovative and forward thinking by the OECD.
Best Practice thoughts include:
These developments merit additional attention to self-initiated adjustments, Best Practices to address secondary / corresponding adjustments and creative thinking to resolve bilateral / multilateral disputes.
