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.
Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, has published revised guidance on the Mutual Agreement Procedure (MAP) in its International Manual (INTM). DLA Piper’s detailed publication is referenced herein.
The revised guidance, together with the supplementary Statement of Practice, provides detailed information on the following:
Eligibility for MAP
Access to MAP
Submitting a MAP request
Protective MAP requests
MAP and domestic relief
Methods of relief and
Multinationals ought to consider more proactive use of the improved MAP, taken together with similar developments in other countries around the BEPS minimum standards, as a viable compliance risk management tool. Although double taxation is often a precondition in transfer pricing cases that end up in MAP, it is important to note that all issues concerning taxation not in accordance with tax treaties are eligible for MAP.
As the MAP process is acknowledged to be inefficient, ineffective and time-consuming, the OECD will establish a peer review process to monitor performance of countries’ in resolving Mutual Agreement Procedure (MAP) cases. The reviews should be ready in 2017.
Paascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, has stated: “I don’t know how successful the (BEPS) project will be in the long term, but what is for sure is that we have fed the political beast – the G-20 leaders and finance ministers – and they still have a lot of appetite. They are asking us for more. They need some more blood.”
The OECD’s Working Party 1 and the Forum on Tax Administration have started the peer review process under BEPS Action 14. Reviews will consist of checking number of cases, time needed to resolve, etc.
OECD believes this is a game-changer due to new accountability. However, without full transparency into what countries are doing, or not doing, how effective will the new peer review process be? The level of transparency should be commensurate with the transparency demanded from multinationals. It is hopeful this process will be a revolution for MAP, although many practitioners will be adopting a wait-and-see attitude.
As the OECD renews its efforts to improve the process of dispute resolution, many practitioners, tax authorities and advisors have concluded that the current Mutual Agreement Procedure (MAP) process is slow, inefficient and not effective in resolving tax disputes and avoiding double taxation.
However, it is worthwhile to start with a suggested timeline and Best Practices from OECD’s Manual on Effective Mutual Agreement Procedures (MEMAP) published in 2007. Annex 1 and 2 provide a suggested timeline and 25 Best Practices (summarized below) that are each discussed in MEMAP.
To the extent these Best Practices and recommendations have not been implemented by countries around the world, one questions what will be the difference this time around? It seems that the OECD has tried to provide remedies, although many countries do not view these recommendations as a priority or transparency objective to resolve disputes effectively.
While the effectiveness of dispute resolution mechanisms continue, it would be prudent to provide the tax authorities, including competent authorities, this Manual as a reinforcement of Best Practices and timelines that should be proactively followed.
A link to the Manual is provided for reference:
Appendix 2: Best Practices:
Resolving and publishing issues of interpretation or application
Robust use of Article 25(3) power to relieve double taxation
Principled approach to resolution of cases
Transparency and simplicity of procedures for accessing and using the MAP
Providing complete, accurate, and timely information to the competent authorities
Allowing electronic submissions
Allowing early resolution of cases
Earlier notification of a potential case
Liberal interpretation of time limits and advising of treaty rights
Avoiding exclusion from MAP relief due to late adjustments or late notification
Consideration of MAP assistance for cases described as “tax avoidance”
Countries eliminate or minimize “exceptions” to MAP
Taxpayer presentations to competent authorities
Cooperation and transparency
Face-to-face meetings between competent authorities
Bilateral process improvements
Recommendation for MAP cases beyond two years
Avoid blocking MAP access via audit settlements or unilateral APAs
Suspension of collections during MAP
Readily available access to a competent authority
Independence and resources of a competent authority
Performance indicators for the competent authority function and staff
Implementing and promoting ACAP and bilateral APA programs
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 UN Committee of Experts on International Cooperation in Tax Matters concluded their October meeting with several important milestones discussed. A summary of the meeting is provided, and a reference to the Handbook on Selected Issues in Protecting the Tax Base of Developing Countries are provided for reference:
A new Article was adopted re: fees for technical services that will become a part of the new UN Model Double Tax Convention (DTC).
A new practical Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries was adopted.
Subcommittee on Exchange of Information presented a draft “Code of Conduct” that will be updated in the October 2016 session.
The Committee also welcomed the work of UN DESA’s Financing for Development Office in the area of capacity-building, including the production of a “Handbook on Selected Issues in Protecting the Tax Base of Developing Countries.”
Two new subcommittees were formed:
Royalties re: updated Article 12 UN Model and commentary
Mutual Agreement Procedure (MAP) to review and propose updates to UN Model
On the heels of the OECD BEPS Guidelines, the UN developments will pave the way for many developing countries that lack the time and/or resources for implementation. Accordingly, additional withholding taxes for services and withholding sources will be revealed to extract monies at source. As a result, the UN initiatives are paramount to monitor and review accordingly.
These initiatives will also provide greater capacity for global disparity, with the BEPS Guidelines and UN changes in periods of transition re: domestic legislative actions around the world.
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.