Proposed Regulations were issued for cloud computing and digital transactions; this is an especially important area re: sourcing of income, definitions, etc. especially in light of France and others looking to implement a digital services tax.
Publication 5188 was revised re: FATCA data reporting.
OECD released Peer 2 review reports re: re: BEPS Action 14 (dispute resolution). Interestingly, some US treaties include a MAP provision, although not all are consistent with the minimum standard.
The OECD is considering starting two new projects to revise the guidance in Chapter IV (administrative approaches) and Chapter VII (intra-group services) of the Transfer Pricing Guidelines.
OECD has issued scoping papers for public comments addressing transfer pricing disputes and intra-group services, provided for reference herein in addition to Deloitte’s Global TP Alert with insightful comments.
Comments on both subjects are due by June 20, 2018. Both topics are significant, thus a review of the scoping paper focus is recommended, with an opportunity to provide comments.
The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States. A summary of the Draft Directive is provided, as well as referenced herein.
This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.
3 years, from first notification, to file a complaint by the taxpayer
Each competent authority (CA) acknowledges receipt within 2 months
Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
Taxpayer may appeal per national rules a rejection of the complaint
CA’s try to resolve issue within 2 years, which may be extended by 1 year
Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement. This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
Advisory Commission to adopt a decisions within 6 months
CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
Professional secrecy standards are prescribed
Advisory or Alternative Commission opines in 3-6 months
CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
Final decision does not constitute a precedent
(Redacted) decision is published and maintained in an online central repository
Evaluation of process by June 30, 2024 and issue a report
As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s. The Directive can be reviewed via the attached link:
After a long waiting period, with many discussions as to its predicted content, the OECD’s Multilateral Convention pursuant to BEPS Action 15 is ready for prime time. Links to EY’s Global Tax Alert, and OECD’s Explanatory Statement and Multilateral Convention are provided for reference.
The Multilateral Convention is very flexible as to what a country wants, or does not want, within its treaty related provisions to signify its alliance with BEPS Actions.
EY’s Global Tax Alert states: “The tax treaty related BEPS measures covered by the multilateral instrument include (elements of): (i) Action 2 on hybrid mismatch arrangements, (ii) Action 6 on treaty abuse, (iii) Action 7 on the artificial avoidance of the PE status; and (iv) Action 14 on dispute resolution. The substance of the tax treaty provisions relating to these actions was agreed under the final BEPS package released in October 2015. The multilateral instrument does not modify or add to the substance of these provisions. The instrument is solely focused on how to modify the provisions in bilateral or regional tax treaties in order to align these treaties with the BEPS measures.”
Due to the flexibility of the new Convention, this unilateral based process poses many questions as to the consistency of intent for the related BEPS Actions around the world. It is certain that, in the short term, there will be considerable complexity and varying interpretations of what the Convention means. Accordingly, the Explanatory Statement and Multilateral Convention are to be reviewed carefully to understand short and long-term trends in this new era of international tax.
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.
The European Commission has recently released a public consultation on improving double taxation dispute resolution mechanisms, with comments accepted through 10 May 2016. It is a process / Best Practices approach to enact future efficiencies. A summary story and consultation links are provided for reference:
Double or multiple taxation by EU Member States is recognized as a barrier to operate freely across borders.
A legislative proposal is expected by the end of 2016, following the comment period.
The Mutual Agreement Process (MAP) currently is not bound to reach a solution.
The EU Arbitration Convention (re: transfer pricing cases and permanent establishment profit attribution) is acknowledged as a current process, but limited in scope.
The last such public consultation (2010) resulted in an arbitration provision, although it has not been mandated in double tax conventions.
Stakeholders’ views are requested on the relevance of removing double taxation, EU objectives and proposed solutions.
This document is pivotal in establishing practical and efficient EU dispute resolution mechanisms ongoing, and all interested parties should submit thoughtful input.
The proposal, as noted, would only be effective between EU Member States, not between one Member State and another non-EU jurisdiction or between non-EU jurisdictions. The EU has been a strong proponent in leading global best practices in the post-BEPS environment. Therefore, global consistency of the EU approach is also encouraged, especially by countries having no such dispute mechanism.
Additionally, other countries’ need to rethink sovereignty arguments in trying to evade / negate the effect that such transparent measures would have on their ability to address local tax practices.
The Indonesian Ministry of Finance has issued updated MAP guidelines, evidencing focus by the Indonesian Tax Office (ITO) on multilateral dispute resolution. This regulation is the third MAP related guidance, with the inclusion of additional restrictions. A link to KPMG’s Tax News Flash is provided for reference:
The MAP process will be terminated when the Indonesian tax court “deems” that it has conducted sufficient hearings.
A tax audit for the MAP years may be conducted, without clarity if such audit is restricted to the MAP issues.
A concurrent Indonesian MAP request is required for a MAP request by another country’s tax authority.
MAP does not postpone the obligation to pay the tax, unlike domestic legislation.
Indonesia is uniquely interpreting the tax treaty to limit the opportunity for MAP appeals, while introducing additional subjectivity in the rules via vagaries of the Indonesian tax court’s hearing process. Most importantly, it will be important to consider the MAP process upon the commencement of an Indonesian audit due to ongoing uncertainties.
Notably, this guidance is being issued prior to the finalization of the OECD dispute resolution guidelines that will most likely result in inconsistent guidelines for MAP.
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:
Published MAP guidelines and procedures are welcome, although redacted settlements would also reveal legal basis for outcomes, and may be used as precedent for taxpayers.
KPI’s should be established.
Monitoring the MAP process is an excellent proposal suggested in the report.
A global dispute resolution mechanism and mandatory binding arbitration should be developed, with arbitration available as a pre-MAP appeal avenue.
Deadlines for Competent Authority (CA) requests should be in place, along with penalties for CA if they do not respond timely.
Maintaining confidentiality is critical and should be a primary focus, especially for countries initially adopting this process.
Transparency of independency for Competent Authorities would improve confidence in the process.
Taxpayers should participate in face-to-face meetings to facilitate the process, and a simplified process should initiate MAP assistance.
Precluding taxpayers from using MAP, directly or indirectly giving up their rights, is not acceptable.
Binding arbitration provisions and/or use of a domestic or treaty-based anti-abuse rule should not preclude MAP.
Tax, interest and penalties should be suspended during the MAP process.
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.