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.
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.
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:
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.
IRAS will adjust profits upwards for understated profits, although no mention is made of downward adjustments.
IRAS welcomes discussions to discuss difficulties in applying the arm’s length principle.
Contemporaneous TP documentation = on or before the tax return due date.
Group level TP documentation includes an organization chart of all related parties transacting with the Singapore taxpayer, the group’s business models and strategies, profit drivers including a list of intangibles and legal owners, business activities and functions of each group member with relevant supply chains, business relationships among related parties and group financial statements for the lines of business involving the Singapore taxpayer.
Entity level documentation includes a list of related parties to whom the local management reports for its operations, number of employees in each department, business models and strategies, contracts/agreements apart from detailed functional and benchmark analyses.
TP documentation exceptions include in-country related party transactions, routine services charged at cost + 5%, APA agreements or de-minimis stated thresholds for transactions and services between related parties.
Collaborative engagement methodologies are outlined for the Transfer Pricing Consultation program, by which TP methods and documentation of selected taxpayers will be reviewed. Examples of high risk transactions are included in Section 7.5
Unilateral APAs are not accepted.
APA rollback years are acceptable, generally limited to 2 years.
MAP and APA methodologies are stated, including factors when IRAS will discontinue the MAP or APA process.
Section 16 summarizes updates and amendments of the TP Guidelines.
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 UK Diverted Profits Tax proposal (refer to 12 December 2014 post) will become effective in April, 2015. The Parliament debate sheds light on the intentions for such tax, as well as the assumptions (true or false) underlying this initiative.
The debate clarifies that such “tax” is not meant to be a tax that meets the definition of a tax for double tax treaty purposes, therefore it is subject to domestic legislation and not overridden by its treaty network. This rationale therefore leads to the premise that it may not qualify as a tax subject to a US Foreign Tax Credit, resulting in a double “tax” situation regardless of the nomenclature. Additionally, the Mutual Agreement Procedure (MAP) provided for in a double tax treaty would not be available for recourse.
The tax is aggressive in its timing, ahead of the final OECD proposals and in contrast to other initiatives for which the UK is awaiting final BEPS guidance. The debate highlights the cynicism about the OECD process, thus providing a rationale for unilateral legislation sooner vs. later. Additionally, this proposal was discussed as a Targeted Anti-Avoidance Rule (TAAR), which is in addition to the EU and UK General Anti-Avoidance Rules (GAAR).
Most importantly, a diverted profit tax situation involves an initial recharacterization assessment by HMRC, requiring payment by the taxpayer, with appeals to follow later – a “Pay Now, Talk Later” approach.
The clock is ticking and time is winding down with alot of questions remaining unanswered. The debate is provided for reference:
It is very useful to review the Intent of new laws to form a better understanding for the formation of such initiatives, as well as comprehension into the foresight of drafters re: possible appeals by the European Commission and/or European Court of Justice.
China’s State Administration of Taxation (SAT) has established rules for implementing its General Anti-Avoidance Rule (GAAR), effective 1 February 2015. A PwC summary and details of the rule, as translated into English, are attached for reference:
Note, as in most GAAR provisions, the definition is subjective in nature. Additionally, these rules would be applied after the Specific Anti-Avoidance Rules (SAAR) are applied, resulting in a tiering of potential disallowance avenues. However, the MAP rules could be employed to minimize double taxation consequences.
As the GAAR provisions are being enacted into domestic law, as well as treaties, in addition to existing rules for SAAR, these rules are critical for new arrangements / transactions, as well as preparing relevant documentation for future reference and defense.
The OECD has released new statistics for the Mutual Agreement Procedure (MAP) cases for 2013, including new cases and the inventory of cases by OECD countries and Partner Economies (Argentina, China, Latvia and South Africa). A link to the MAP summary is included for reference:
The summary is a valuable reference tool, although the MAP procedure has been acknowledged by many as an inefficient, costly and timely process. Accordingly, it will be interesting to watch the OECD BEPS Action items progress in this area to minimize double taxation in an efficient and timely process.
Tax Executives Institute, Inc. (TEI) has provided excellent comments to the transfer pricing documentation paper by the Inland Revenue Authority of Singapore (IRAS). TEI responds to five questions of the Consultation Paper. A link to their comments, and the Singapore Consultation Paper, are included for reference:
The proposed rules for documentation by December elevate Singapore’s transfer pricing documentation requirements to a higher level than the current OECD guidelines, prior to its final recommendations, including how the Master File should be filed and transition thereto.
The Consultation sets forth guidelines for non-related Singapore entities including the provision of a functional analysis for contributions to value creation by each related group member, consolidated financial statements of the group, and transfer pricing policies re: all types of transactions between group members.
Confidentiality concerns arise with respect to the proposed rules, accordingly appeals for exemption should be appropriately provided.
Adverse consequences for not providing “adequate documentation” (term not defined), including withdrawal of MAP support set forth in the relevant treaty.
TEI has proposed de minims thresholds to exclude immaterial transactions and excluding documentation for intra-country transactions.
TEI has suggested an approach to implementing new documentation guidance tracking OECD BEPS developments, with lead time to adjust processes accordingly.
TEI has provided a valuable contribution in their well-written and thoughtful comments to significant issues posed by countries unilaterally adopting new transfer pricing documentation rules prior to finalization of the OECD BEPS initiatives.
Most importantly, Singapore has suggested using domestic legislation to override the MAP process in treaties as well as introducing overly comprehensive documentation that has no relevance to the domestic entity and its intercompany transactions or transfer pricing methodologies.
This initiative by IRAS is indicative of a parade with an OECD banner, although each member has a different drummer and leader with distinct initiatives and its concept for application of the “arm’s-length principle” to determine its fiscal fair share of tax to be collected from multinationals that will be determined prior to official OECD guidelines. It is imperative that all interested parties follow this initiative by Singapore, in addition to correlative initiatives by other countries.
The Forum on Tax Administration (FTA), representing heads of tax administrations from 38 countries, concluded their 9th meeting on 24 October, 2014. The meeting represented attendance by over 130 delegations, including representatives from the African Tax Administration Forum (ATAF), Inter-American Center of Tax Administrations (CIAR), Centre de Rencontre des Administrations Fiscales (CREDAF), International Monetary Fund (IMF) and the Intra-European Organisation of Tax Administrations (IOTA). The meeting included strategic visions for the Mutual Agreement Procedure (MAP) and Co-operative Compliance programs.
Links to the meeting summary and MAP vision are included for reference:
The following actions were agreed:
Enhanced cooperation strategy, based on existing legal instruments.
Created a new international tax platform, Joint International Tax Shelter Information and Collaboration (JITSIC Network) to focus on tax avoidance.
Implement the new standard on automatic exchange of information while protecting taxpayer confidentiality.
Improve practical operation of Mutual Agreement Procedure (MAP) to address double tax issues more quickly and efficiently, integrated with the OECD BEPS action item. Competent authorities of all member countries are “encouraged” to actively participate in this initiative.
Promote a voluntary compliance structure.
Develop principles on Co-operative Compliance arrangements that form an integral part of effective tax control frameworks.
MAP Strategic Plan summary – “Statement of Vision and Commitment”
Collaboration of the FTA MAP Forum with other multilateral bodies, including OECD’s Working Party 1’s Focus Group, to further its goals.
Participating Competent Authorities (CAs) commit to the stated goals and be accountable thereto.
Allocation of adequate staffing levels and resources to meet CAs working demands.
Adequate training programs and personnel practices.
FTA MAP Forum’s engagement to address resource challenges.
Empowerment of CAs to effect agreements in accordance with principles in the respective tax conventions.
Absence of undue influence by administrative policies, practices or goals.
Support resolution of MAP cases in accordance with multilateral principles, avoiding efforts such as maximizing revenue collection.
Adoption of principle based and mutual trust principles.
Adopt Best Practices in the pursuit of new initiatives to streamline and enhance processes to expedite MAP resolution.
Sharing MAP Best Practices among FTA MAP participants.
New MAP processes to elevate difficult cases.
Enhance taxpayer’s involvement in case resolution, including bilateral/multilateral meetings and sharing case developments.
Seek ways to avoid MAP cases, including APAs, joint audits, “roll-forward” adjustments and other techniques.
Use multilateral MAP procedures.
Adopt agreements for issue consistency.
Avoidance of MAP manipulation by auditors.
Deliver training on double taxation and CA processes via a “Global Awareness Training Module.”
The above meeting commitments and objectives are welcome as tax controversies increase and MAP procedures have seeming lost the elements of timeliness, cost-effective resolution, avoidance of double taxation, transparency and efficiency.
It is hopeful that most tax administrations endorse, and commit to, the above MAP framework in an effort to achieve Best Practices for a win–win opportunity.