BEPS Action 14: Making dispute resolution mechanisms more effective

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2 BEPS Action 14: Making dispute resolution mechanisms more effective

3 The Panel Achim Pross, Head, International Cooperation and Tax Administration Division, OECD Doug O Donnell, LB&I Commissioner, IRS Martin Kreienbaum, Director General, International Taxation, Federal Ministry of Finance, Germany Tim McDonald, Vice President - Finance & Accounting, Global Taxes, Procter & Gamble Craig Sharon, Principal, EY

4 Achim Pross Head, International Cooperation and Tax Administration Division, OECD

5 Overview BEPS Actions Coherence Substance Transparency Action 2 Action 6 Action 11 Action 1 Neutralise the effects of hybrid mismatch arrangements Action 3 Strengthen CFC rules Action 4 Limit interest deductibility Action 5 Counter harmful tax practices Prevent treaty abuse Action 7 Prevent the artificial avoidance of PE status Actions 8-10 Aligning transfer pricing outcomes with value creation: Intangibles; Risk and capital; and Other high-risk transactions Data analysis Action 12 Mandatory disclosure rules Action 13 Re-examine transfer pricing documentation Action 14 Dispute resolution Digital economy Action 15 Develop a multilateral instrument

6 Overview BEPS Actions Minimum standards Reinforced international standards Common approaches & best practices Analytical reports & measuring BEPS Action 5 Action 7 Action 2 Action 1 Counter harmful tax practices Action 6 Prevent treaty abuse Action 13 Re-examine transfer pricing documentation Action 14 Dispute resolution Prevent the artificial avoidance of PE status Actions 8-10 Aligning transfer pricing outcomes with value creation: Intangibles; Risk and capital; and Other high-risk transactions Neutralise the effects of hybrid mismatch arrangements Action 3 Strengthen CFC rules Action 4 Limit interest deductibility Action 12 Mandatory disclosure rules Digital economy Action 11 Data analysis Action 15 Develop a multilateral instrument

7 Action 14 Dispute resolution Inventory of MAP cases Houston, we have a problem today! Number of MAP cases in OECD countries at the end of +130%

8 Action 14 Dispute resolution The new approach Minimum Standard 20 countries Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States. Supplementary commitment Mandatory binding MAP arbitration Peer review >90% of MAP cases

9 Elements Elements Elements Action 14 Dispute resolution The minimum standard Jurisdictions should ensure that treaty obligations related to the MAP are fully implemented in good faith and that MAP cases are resolved in a timely manner Jurisdictions should ensure that administrative processes promote the prevention and timely resolution of treaty-related disputes Jurisdictions should ensure that taxpayers that meet the requirements of paragraph 1 of Article 25 can access the MAP

10 Action 14 Dispute resolution Terms of reference Preventing disputes Availability and access to MAP Key features of an efficient & effective MAP process Implementation of MAP agreements Resolution of MAP cases

11 Action 14 Dispute resolution Preventing disputes Part A Article 25(3) 1st sentence Tax treaties should contain a provision which requires CAs to endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of their tax treaties roll-back of BAPAs Bilateral APA programmes should provide for the roll-back of APAs in appropriate cases

12 Action 14 Dispute resolution Availability of access to MAP Part B Ensuring awareness of MAP requests by both CAs Article 25(3) 2 nd sentence Tax treaties should contain Article 25(1) of the OECD MTC If the tax treaty does not permit a MAP request to be made to either Contracting Party and the CA who received the MAP request from the taxpayer does not consider the taxpayer s objection to be justified, the CA should implement a bilateral consultation or notification process which allows the other CA to provide its views on the case (such consultation shall not be interpreted as consultation as to how to resolve the case) Tax treaties should contain a provision under which CAs may consult together for the elimination of double taxation in cases not provided for in their tax treaties

13 Action 14 Dispute resolution Availability of access to MAP Part B Access to MAP In transfer pricing cases In cases in which there is a disagreement between the taxpayer and the tax authorities on the application of treaty / domestic law anti-abuse provision In cases where there is an audit settlement between tax authorities and taxpayers (MAP access may be limited with respect matters resolved through an administrative or statutory dispute settlement/resolution process independent from the audit and examination functions and that can only be accessed through a request by the taxpayer) If the taxpayer has provided the required information based on the rules, guidelines and procedures made available to taxpayers on access to and the use of MAP

14 Action 14 Dispute resolution Availability of access to MAP Part B Publication of clear rules, guidelines and procedures Clear rules, guidelines and procedures on access to and use of the MAP including the following should be published and be easily accessible to taxpayers: - Specific information and documentation that should be submitted in a taxpayer s request for MAP assistance - MAP profiles - Relationship between audit settlements and access to MAP

15 Action 14 Dispute resolution Resolution of MAP Part C Article 25(2) 1 st sentence Timely resolution Principled resolution Arbitration Tax treaties should contain a provision which requires that the CA who receives a MAP request from the taxpayer shall endeavour, if the objection from the taxpayer appears to be justified and the CA is not itself able to arrive at a satisfactory solution, to resolve the MAP case by mutual agreement with the other CA, with a view to the avoidance of taxation which is not in accordance with the tax treaty Seek to resolve MAP cases within an average timeframe of 24 months Adequate resources should be provided to the MAP function Staff in charge of MAP processes should have the authority to resolve MAP cases in accordance with the terms of the applicable tax treaty Performance indicators for CA functions and staff in charge of MAP processes should not be based on the amount of sustained audit adjustments or maintaining tax revenue Transparency with respect to positions on MAP arbitration

16 Action 14 Dispute resolution Implementation of MAP agreements Part D Timely implementation Any agreement reached in MAP discussions should be implemented on a timely basis Ensuring implementation of all MAP agreements Tax treaty should contain a provision which require any mutual agreement reached through MAP be implemented notwithstanding any time limits in domestic law, or the time during which an adjustment pursuant to Article 9(1) or Article 7(2) can be made should be limited in order to avoid late adjustments to which MAP relief will not be available

17 Action 14 Dispute resolution Mandatory binding arbitration Mandatory binding MAP arbitration provision is being developed: as part of the multilateral instrument (MLI) - BEPS Action 15 by sub-group on mandatory binding arbitration (over 20 countries, including developing countries) issues being examined includes: time for presentation of MAP case for arbitration; appointment of arbitrators; type of arbitration process; scope of MAP issues for arbitration Ad Hoc Group (96 countries) aims to conclude the MLI and open it for signature by end 2016

18 Action 14 Dispute resolution Timing, process and next steps Reviews begin in 2016 Evaluation of: Legal framework - tax treaties, domestic law & regulation MAP programme guidance & implementation of the minimum standard in practice Jurisdiction specific report: Identify & describe the strengths and any shortcomings Recommendations to address shortcomings First reports published by 2017

19 Doug O Donnell LB&I Commissioner, IRS

20 Current State of Play: Implementation of Action 14 Observations from the Internal Revenue Service MAP Inventory APA Inventory

21 Martin Kreienbaum Director General, International Taxation, Federal Ministry of Finance, Germany

22 Outline Goals of Germany s G20-Presidency in Taxation Role of bilateral / multilateral APAs Relevance of MAP in Germany

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25 Germany issued first guidance on bilateral/multilateral APAs in 2006 Number of requests increased significantly Average time for negotiation: 33 months with EU members and 41 months with non EU members Number of new APA requests is currently higher than number of closed cases

26 All German tax treaties and moreover the EU Arbitration Convention contain MAP provisions Nearly all German DTTs have Art. 9 (1) OECD-MTC Germany reported the highest number of new MAPs in 2014 Half of German MAPs now concern transfer pricing or attribution on profits to permanent establishments

27 203 closed cases in 2014 In less than 3 % it was determined that an agreement could not be found Likely link between high success rate and increasing number of new cases Also possible link between existence of arbitration clause and trust in success of MAP

28 Target of the OECD/G20: Closing MAPs within an average time of 24 month Needed: Additional human resources Other elements of minimum standard less challenging for Germany Comprehensive review of German MAP guidance expected to start this year

29 Practical role: Finding a binding agreement in MAP 9 German bilateral tax treaties with arbitration clause currently in force Additionally, EU Arbitration Convention covers transfer pricing and allocation of profits to PE in relation to all other 27 EU members

30 An overwhelming part of current MAP requests already covered by an arbitration clause or the EU Arbitration Convention German treaty policy is trying to include the arbitration clause Germany - among 20 countries - committed to arbitration in BEPS Action 14 Final Report

31 Tim McDonald Vice President - Finance & Accounting, Global Taxes, Procter & Gamble

32 Taxpayer concerns: 1. Government Resources Dispute resolution: Given the pre-beps spike in MAP case loads globally, what will the case loads look like for post-beps tax years? It will not shock me to see 500% increase in MAP/APA case loads given; Potential misuse of country by country (apportionment) data the politicalization of cross-border income taxation, lowering of the PE threshold and apparent lack of consensus on determining income attributable to a PE (OECD AOA)

33 Taxpayer concerns: 1. Government Resources Recommendation for OECD/ G-20 countries: Nationalize the practice of TP by creating a national office administration of transfer pricing where all case selection and development can be standardized and expertise developed. This effort should be integrated into the MAP/APA functionality so that the international context and consequences of local auditor theories are better understood. Staff up, secure more funding and consider APA user fees

34 Taxpayer concerns: 2. Efficiency Dispute resolution: Are the correct cases being selected? Should ask: Was the result unreasonable? More efficient to more carefully select cases more difficult to get to reasonable agreement after both sides have spent years

35 Taxpayer concerns: 2. Efficiency Dispute resolution: In the absence of an effective arbitration mechanism, it is reasonable to expect the duration of APA and MAP cases will take much longer and require greater internal and external resources. APA s may not be a much better solution. Unwillingness to roll back APA results on similar prior audit cycle years

36 Taxpayer concerns: 3. Double Taxation Dispute resolution: Ultimately, the greatest concern for corporate taxpayers is unresolved double or multiple taxation of the same economic transaction and income. Unrelieved double taxation is a real and economic barrier to economic growth and trade. Concept driving countries work at OECS should be: Increasing global growth and trade is an important enough objective to all interested countries such that all countries agree to avoid actual multiple taxation of the same income.

37 Craig Sharon Principal, EY

38 Final report on Action 14 lacks far-reaching commitment to dispute resolution MAP system already under stress, with more controversy expected as a result of BEPS project Other than peer review/monitoring process, hard to identify other important changes in final report vs. earlier OECD work on issue Minimum standards are evolutionary: affirmations of existing treaty MAP commitments; limited adoption of recommended best practices in MEMAP; and partly duplicative Many taxpayer-friendly best practices in MEMAP omitted from minimum standards and accompanying best practices

39 Biggest problem: No mandatory arbitration Access to MAP does not include a commitment to reach a mutual agreement Among the 20 countries committed to arbitration, how many are new? 11 G20 countries are unwilling to accept arbitration 12 OECD countries are unwilling to accept arbitration Among the 20 countries committed to arbitration, how often has it been used (e.g., EU and US)? Concerns about sovereignty can be managed and controlled

40 Peer review and monitoring a fine idea, but does it go far enough? Significant responsibility shifted to FTA MAP Forum Delayed implementation vs. immediate applicability of substantive rules Will reports be objective? Will reports be made public? Will potential reputation risk be enough?

41 Besides arbitration, other suggested improvements to dispute resolution: Safe harbor TPMs for routine functions Clarify BEPS effective date, especially for Actions 7-10 Additional minimum standards for: APA programs and ACAP MAP relief Acceptance of bona fide taxpayer-initiated adjustments Guarantee of correlative TP adjustments under Article 9(2) MAP coverage for interest and penalties Suspension of collections during MAP process More effective domestic dispute resolution processes (at a minimum, should be peer reviewed, along with MAP) Stronger commitment to resolving cases not just endeavor Real consequences for poor peer reports

42 Managing controversy: Because many of the BEPS rules are untested and subjective, the rules have created increased uncertainty for global businesses This uncertainty creates controversy and risk of double taxation, which in itself will lead to increased pressure on dispute resolution mechanisms It remains to be seen whether countries will have the will, the resources, and the experience to resolve the increasing number of cases through MAP It is, therefore, critical that companies think strategically about alternative ways to deal with the expected increased controversy

43 Managing controversy (cont d): Increased taxpayer transparency and information sharing among tax authorities will require multinationals to better coordinate their tax and business strategies, communicate more frequently internally, and be more consistent in their approaches and representations to tax authorities In many cases, it will be better and safer to tackle controversy in advance through formal engagement, e.g. collaborative compliance or APA, rather than during a tax audit after filing The strength and depth of an APA/MAP program might become a factor in tax planning

44 Taxpayer participation in MAP: Even though MAP is a state-to-state process, taxpayers can do a lot to help competent authorities deliver the best outcome in the shortest timeframe: Know the competent authorities Know and follow the rules Communicate in advance where possible Recognize the process is bilateral and stay balanced Focus on quality, clarity, and equality of communication Provide commercial background Stay connected