The European Commission issued a significantly important proposal for a Double Taxation Dispute Resolution; it hopes to remain a leader in this ever-changing international tax arena with a mandate for binding arbitration, as applicable, as one of the leading initiatives. This proposal would require a unanimous adoption by all EU Member States (although UK’s vote may be considered to be of less significance as time moves on, it still counts).
Other proposals of the three-prong package include a renewed focus on the Common Consolidated Corporate Tax Base (CCCTB) and hybrid mismatches with third countries. The last initiative is interesting, as the EU now seeks to expand its reach with those countries outside the EU.
Although each proposal is significant as a stand-alone initiative, the Dispute Resolution would provide the most benefit at a critical time for a win-win relationship going forward.
EY’s Global Tax Alert provides further details on this initiative for reference.
OECD’s latest draft on Action 6 of the BEPS Action Plan (Prevent Treaty Abuse) addresses previous questions raised and comments received, in addition to some new proposals. Part I of the draft presents the alternative “Simplified” Limitation on Benefits (LOB) Rule, while Part II outlines the previous 20 questions for follow-up work, including changes to domestic law made after the conclusion of a treaty.
Succinct comments are to be submitted by 17 June 2015. A link to the draft is provided:
The discussion draft is very comprehensive and principle based, including additional examples from its previous draft.
However, it is worth noting that the OECD would not require an approval process for application of the subjective principal purposes test (PPT) (i.e. the state may “wish” to apply such process) and that the PPT would be included in the arbitration mechanism of paragraph 5 of Article 25, although this issue should also be discussed as part of the work on Action 14 (Make dispute resolution mechanisms more effective). This latter point would seem to be area for additional confirmation in providing comments to avoid double taxation on issues that are inherently subjective.
The draft will provide important precedent in obtaining treaty relief in a post-BEPS era, thus the proposals should be reviewed in detail, with consideration to provide succinct comments.
The OECD has released comments received in response to BEPS Action Item 14: Make Dispute Resolutions More Effective. These comments are valuable in understanding these important mechanisms that could minimize potential double taxation and increase certainty in a timely manner, as well as comprehend its significant impact on other current BEPS Guidelines that are being drafted such as Action Item 6: Treaty Abuse re: subjective tests being proposed such as the Principal Purpose Test (PPT).
Unfortunately, mandatory arbitration, as well as consistent consideration and application of the MAP procedure, are ideals that will not be realized, due in part to countries not wanting to give up their control and concept of sovereignty. As the BEPS guidelines, and unilateral country legislative actions, become more complex and subjective, the dispute resolution process increases its vital importance exponentially. Therefore, it is in everyone’s interest to make these mechanisms work efficiently and consistently in a transparent environment.
The link to the respective comments are included for reference:
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:
Access to Mutual Agreement Procedure (MAP)
Multilateral MAPs & APAs
Adjustment issues, including timing for corresponding adjustments, self-initiated adjustments, and secondary adjustments
Interest & Penalties
Legal status of a mutual agreement
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:
Using MAP as a roll-forward mechanism to an APA to cover additional years beyond the MAP request
Using simultaneous appeals and Competent Authority relief provisions
These developments merit additional attention to self-initiated adjustments, Best Practices to address secondary / corresponding adjustments and creative thinking to resolve bilateral / multilateral disputes.