The EU, now recognized as the accelerator of BEPS for its Member States, have issued a roadmap of priorities and objectives for the near future. A link to Deloitte’s World Tax Advisor is provided, and the attached article therein.
I have highlighted certain parts of the roadmap worth watching:
Country-by-Country reporting (will there be a consistent EU standard?)
Hybrid mismatch arrangements
Code of Conduct activities, including alignment of transfer pricing outcomes with value creation, an extension of BEPS Actions 8-10. (Note Sweden and UK are already using such Actions re: clarification of existing transfer pricing policy)
Payments from an EU to non-EU country
The EU Arbitration Convention is mentioned, although it’s practical effect on mitigating dispute resolution is limited
European Union: Dutch presidency issues EU-BEPS roadmap
The Netherlands, which currently holds the presidency of the council of the EU, issued an ambitious EU-BEPS “roadmap” on 19 February 2016 that sets out plans to move forward with previous EU proposals, as well as future efforts on areas relating to the OECD’s base erosion and profit shifting (BEPS) project. The roadmap includes the following:
Possibly including a minimum effective taxation clause in the EU interest and royalties directive, and also possibly including or referring to the OECD “modified nexus approach” (however, no mention is made of the previous proposals to reduce the shareholding requirement in the directive from 25% to 10%, add legal entities to the annex or remove the “direct” holding requirement);
Reaching agreement on the European Commission’s proposal to introduce the OECD BEPS minimum standard for country-by-country reporting in the EU;
Initiating discussions for reforming the EU Code of Conduct group (specifically, the group’s governance, transparency and working methods), followed by discussions on a revision to the mandate in relation to the concept that profits are subject, as appropriate, to an effective level of tax within the EU;
Reaching agreement on guidance and explanatory notes on hybrid permanent establishment mismatches in situations involving third countries;
Continuing to monitor the legislative process necessary to revise existing patent box regimes; and
Monitoring and exchanging views on the BEPS developments relating to tax treaties concluded by EU member states, the OECD multilateral instrument to modify tax treaties and the European Commission’s recent recommendations on the implementation of measures to combat tax treaty abuse.
The Code of Conduct group will start work on the following:
Preparing EU guidance on aligning transfer pricing outcomes with value creation, in accordance with BEPS actions 8-10;
Identifying potential issues that arise when payments are made from the EU to a non- EU country;
Assessing the opportunity for developing EU guidance for implementing the conclusions on BEPS action 12 (the disclosure of aggressive tax planning), notably, with a view to facilitating the exchange of information between tax authorities; and
Developing guidelines on the conditions and rules for the issuance of tax rulings by EU member states.Additionally, the High Level Working Party on Taxation may discuss the current situation regarding the EU arbitration convention that allows the settlement of transfer pricing disputes.
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 EU Joint Transfer Pricing Forum (JTPF) report on secondary adjustments was agreed in October 2012. With the OECD Base Erosion and Profit Shifting (BEPS) Action Plan currently under discussion, it is worthy to review the process of secondary adjustments and their various implications and complexities. The report discusses the adjustments under the EU Parent Subsidiary Directive, EU Arbitration Convention, and Mutual Agreement Procedure (MAP). For non-EU countries, it is imperative to review consequences of a secondary adjustment due to additional costs, complication and double taxation risks.
It is possible that a transfer pricing adjustment is accompanied by a so-called “secondary adjustment”.
Transfer pricing legislation in some States allows or requires “secondary transactions” in order to make the actual allocation of profits consistent with the primary adjustment. Double taxation may arise due to the fact that the secondary transaction itself may have tax consequences and results in an adjustment.
The OECD MTC does not prevent secondary adjustments from being made where they are permitted under domestic law.
Secondary adjustments may in some Member States be subject to specific penalties or result in penalties under the general penalty regime.
Procedure for removing double taxation: In their responses to the questionnaire on secondary adjustments most Member States which apply secondary adjustments stated that they do not consider double taxation issues resulting from secondary adjustments as being covered by the Arbitration Convention (AC), only a few consider them covered by the AC Convention, and some other MS indicated that the applicability of the AC to secondary adjustments remains an open question for them. However, most Member States applying secondary adjustments would be willing to address them in the course of a MAP. Therefore, in cases where it is not possible to avoid double taxation at the outset, e.g. by way of applying the Parent Subsidiary Directive (PSD), a taxpayer would – in a case of (potential) double taxation resulting from a secondary adjustment – have to file two requests, i.e. a request under the Arbitration Convention and a request for a MAP. The latter would require in each case a treaty being concluded between Member States that includes a MAP provision comparable to Article 25 of the OECD MTC (preferably including an arbitration clause as per Article 25 (5) OECD MTC).
A review of secondary adjustments, and their application for transfer pricing adjustments, should be reviewed in advance of final audit settlements to ensure additional complexities do not arise.
The EU Joint Transfer Pricing Forum has released statistics for pending Mutual Agreement Procedures (MAPs) and APAs under the Arbitration Convention.
The MAP comparables provide interesting observations for countries in which there is no activity in contrast to active case developments in France, Germany, and the UK. The average cycle time noted in several countries ranges from 9 to 47 months, which presents additional challenges in timely case resolution. Reasons provided for cycle time variations included 24% being waived for the time limit with taxpayer’s agreement, 16% pending before court and 15% settled in principle, waiting exchange of closing letters for MAP.
The APA statistics reflect 222 EU and 168 Non-EU APAs in force at the end of 2012, 561 EU and 119 Non-EU APA requests in 2012, while 353 EU and 85 Non-EU APAs were granted in 2012.
The statistics for seeking resolution via the EU Arbitration Convention provide additional insight for evaluation of issues that are not being settled effectively at the local country level.
The links provide reference to the OECD Country MAP Profiles and MAP Statistics 2006-2011. The OECD MAP content provides valuable information that should be included as an integral component of audit risk strategies.
The Country MAP Profiles provide the following content for OECD member countries, in addition to Argentina, People’s Republic of China, Russia, and South Africa:
Competent Authority contact information
Organisation of the Competent Authority
Scope of MAP & MAP Advance Pricing Arrangements (APAs)
References to domestic guidelines and administrative arrangements
MAP request content, timelines, fees and documentation requirements
Provisions on tax collection, penalties and interest pending outcome of the MAP process
Other dispute resolution mechanisms, and
Links to websites for the relevant jurisdiction.
The MAP Statistics include information on MAP inventories, cases initiated, completed, withdrawn, and average cycle time. These statistics are provided for the OECD member countries and some non-OECD economies. This information is very helpful in reviewing the trend of MAP filings in relevant jurisdictions. There were 3,838 open MAP cases by OECD member countries at the end of 2011, with an average completion time of 25 months.
The OECD Forum on Tax Administration (FTA) convenes later this year to discuss Best Practices for improving MAP: refer to prior post 27 June 2013.
With the increase of transfer pricing controversies that are inherently complex and subjective in nature, MAP is a tool that is being used more frequently worldwide. Examples of Best Practices to strategize MAP are provided for insight:
Document domestic and bilateral/multilateral avenues of appeal upon commencement of an audit to facilitate advance planning.
Review Double Tax Treaties for relevant Arbitration provisions that are providing an impetus for some jurisdictions to finalize negotiations.
Determine the interplay of domestic appeals (informal settlement, formal Appeals, Court filings, etc.) with MAP early in the audit process.
Outline deadlines for domestic appeals, MAP and other bilateral/multilateral tools (i.e. EU Arbitration Convention)
Develop a pro-forma multilateral calculation to strategize solutions minimizing double taxation.
Ensure MAP and other appeal strategies are integrated in the Tax Risk Framework.
OECD Map with accession (green) and discussion (pink) countries added (Photo credit: Wikipedia the relevant jurisdictions)