OECD releases Switzerland s peer review report on implementation of BEPS Action 14 minimum standards

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1 19 October 2017 Global Tax Alert OECD releases Switzerland s peer review report on implementation of BEPS Action 14 minimum standards EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 26 September 2017, the Organisation for Economic Co-operation and Development (OECD) released the first batch of peer review reports relating to the implementation by Belgium, Canada, the Netherlands, Switzerland, the United Kingdom and the United States of the Base Erosion and Profit Shifting (BEPS) minimum standards on Action 14 on improving tax dispute resolution mechanisms. 1 These jurisdictions requested that the OECD also provide feedback concerning their adoption of the Action 14 best practices, and therefore, the OECD has released six accompanying best practices reports. In the next stage of the peer review process, each jurisdiction s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Switzerland s peer review report contains an evaluation of its implementation of the Action 14 minimum standard, through an analysis of its legal framework and administrative practice relating to the mutual agreement procedure (MAP), as governed by its tax treaties, domestic legislation and regulations, as well as its MAP program guidance and the practical application of that framework. The report concludes that Switzerland meets most of the elements of the Action 14 minimum standard; more specifically, the prevention of disputes by allowing taxpayers to request bilateral Advance Pricing Agreement (APAs), granting access to MAP in all eligible cases, and using a pragmatic approach to resolve MAP cases in an efficient manner with sufficient resources for an effective MAP function. Where it has deficiencies, it is working to address them.

2 2 Global Tax Alert Detailed discussion Under Action 14, countries have committed to implement three overarching principles that represent a minimum standard with respect to the MAP process by incorporating these principles into domestic law and/or their treaty interpretation and application. These minimum standard principles include: Allowing taxpayers access to the MAP process when the requirements for access are met Assuring that domestic administrative procedures do not block access to the MAP process Implementation by countries of Article 25 of the OECD Model Tax Convention (OECD MTC) in good faith The Swiss peer review report addresses the current state and expected developments around four topics, as follows: Preventing disputes Availability and access to MAP Resolution of MAP cases Implementation of MAP agreements The report notes that Switzerland has a large tax treaty network (90 tax treaties). All treaties include a provision relating to MAP, which generally follows the paragraphs 1 through 3 of Article 25 of the OECD MTC. Switzerland s treaty network is largely consistent with the requirements of the Action 14 minimum standard, with only a limited number of exceptions. The report further notes that Switzerland has an established MAP program and extensive experience with resolving MAP cases. A considerable number of cases are submitted each year, and there were almost 350 MAP cases pending as of 31 December Switzerland s competent authority was found to use a pragmatic approach to resolve MAP cases in an effective and efficient manner. Preventing disputes minimum standard concerning the prevention of disputes. Out of Switzerland s 90 tax treaties, 88 contain a provision requiring their competent authority to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the tax treaty. Generally, the inclusion of this provision may avoid submission of MAP requests and/or future disputes from arising. Switzerland also has extensive experience with bilateral APAs and allows taxpayers to request roll-backs of these bilateral APAs. However, the peer report recommends that a mechanism should be implemented to track the number of APAs with a roll-back request and for which a roll-back was granted. Availability and access to MAP minimum standard regarding the availability and access to MAP but it needs more comprehensive MAP guidance. Out of Switzerland s 90 tax treaties, 73 contain a provision equivalent to Article 25(1) OECD MTC, first sentence, as it read prior to the adoption of the BEPS Action 14 final report, allowing taxpayers to apply for a MAP. None, however, reflect the changes by the BEPS Action 14 final report allowing taxpayers to submit a MAP request to either treaty partner. As a matter of practice, Switzerland notifies the other competent authority concerned when it considers that the objection raised by the taxpayer in a MAP request is not justified. The OECD recommends that tax treaties include a provision that allows taxpayers to submit a MAP request within a period no less than three years from the first notification of the action resulting in taxation not in accordance with the tax treaty. Out of Switzerland s 90 tax treaties, 75 contain a provision allowing taxpayers to submit a MAP request within a period of no less than three years. With respect to treaties that do not include a filing period of a MAP request, Switzerland applies its domestic 10 years limit for the filing of requests. Resolution of MAP cases minimum standard regarding the resolution of MAP cases. The OECD recommends that jurisdictions seek to resolve MAP cases within an average timeframe of 24 months. Switzerland s competent authority was found to use a pragmatic approach to resolve MAP cases in an effective and efficient manner. On average Switzerland s competent authority resolved MAP cases within a timeframe of 22 months. The average time necessary to resolve transfer pricing cases was just over 27 months. The current resources for the MAP function in Switzerland are considered adequate, but more resources may be necessary to accelerate the resolution of attribution/allocation cases and to achieve a net reduction of its MAP inventory.

3 Global Tax Alert 3 Switzerland will continue to provide for mandatory and binding MAP arbitration in its bilateral tax treaties as a mechanism to ensure that treaty-related disputes will be resolved within a specified timeframe. Implementation of MAP agreements Finally, the report notes that Switzerland meets the Action 14 minimum standard regarding the implementation of MAP agreements. The OECD recommends any agreement reached in MAP discussions should be implemented, including by making appropriate adjustments to the tax assessed in transfer pricing cases. Such agreements should be implemented on a timely basis. Under Swiss domestic law, a final assessment can be amended on the basis of a MAP agreement. A change of assessment in favor of the taxpayer has to be requested within 90 days after having knowledge of the ground for revision but no longer than 10 years after the assessment was rendered. This 10 year deadline is deemed to be met if the MAP request is filed before the end of that deadline. Hence, the length of the MAP will not negatively impact the taxpayer. In order to ensure that the implementation of MAP agreements is not obstructed by any time limits under domestic law, Switzerland should include the second sentence of Article 25(2) OECD MTC in its tax treaties or be willing to accept both alternative provisions in Article 9(1) and Article 7(2). Switzerland has indicated that it would opt for the latter option. The comments provided by the peers confirm that Switzerland provides access to MAP in double taxation cases resulting from bona fide taxpayer initiated foreign adjustments covered within the scope of MAP. Also, it was noted that Switzerland has an informal APA program. There is not a specific timeline for the filing of an APA request. Rules, guidelines and procedures on how taxpayers can access and use bilateral APAs, including the specific information and documentation that should be submitted in a taxpayer s request for bilateral APA assistance are publically available. Implications The peer review report shows that Switzerland has an extensive treaty network, all of which include a provision relating to MAP, and an effective and practical MAP process in place. Switzerland meets most of the elements of the BEPS Action 14 minimum standard. The report also recommends some improvements, including amendments of some of Switzerland s tax treaties with regard to certain elements of Action 14 as described above. Such amendments will be made through the Multilateral Instrument or bilateral treaty negotiations. Multinationals that are confronted with taxation not in accordance with the treaty, including double taxation, should consider making use of the efficient MAP process in Switzerland. Best practices review Each assessed jurisdiction can provide information and request feedback from peers on how it has adopted the 12 best practices contained in the BEPS Action 14 final report. All of the jurisdictions in the first batch of the peer review requested that the OECD provide feedback concerning their adoption of the best practices contained in Action 14 final report, including Switzerland. However, for most of the best practices, the peers provided only limited input. Endnote 1. See EY Global Tax Alert, OECD releases first batch of peer review reports on Action 14, dated 27 September 2017.

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young SA, Geneva Xavier Eggspuhler Ernst & Young AG, Zurich Stephan Marx Katja Fleischer Hubert Stadler Christopher Whitehouse Ernst & Young LLP, Swiss Tax Desk, New York Conradin Mosimann Marco Stoffel Ernst & Young LLP, Global Tax Desk Network, New York Jose Bustos David Corredor-Velásquez

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