OECD Mrs Marlies de Ruiter 2, rue André Pascal Paris Cedex 16 Frankreich. Düsseldorf, 16 th January 2015

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1 only via OECD Mrs Marlies de Ruiter 2, rue André Pascal Paris Cedex 16 Frankreich Düsseldorf, 16 th January Invitation for Comments on BEPS Action 14: Make Dispute Resolution Mechanisms More Effective Dear Mrs de Ruiter, We welcome the opportunity to comment on the OECD s Public Discussion Draft on BEPS Action 14: Make dispute resolution mechanisms more effective and the efforts undertaken by the Committee on Fiscal Affairs to seek external consultation. An effective Mutual Agreement Procedure ( MAP ) process is a key element in providing legal certainty and reliability in the objective application of tax treaties to taxpayers. Many tax authorities are increasingly focusing on international tax and transfer pricing issues in their tax inspections and tax audits. It has to be assumed that any resultant corrections relating to these issues in one country will lead to double taxation, unless corresponding adjustments are made in the other country. In practice, the other country will very often only accept such corresponding adjustments after a successful MAP. If the MAP fails, the double taxation issue will currently remain unresolved, in contravention of the basic aim of the tax treaty. Moreover, the qualitative criteria pursuant to the drafts of the LOB rule, the PPT rule and the other anti-abuse rules in conjunction with the leeway competent tax authorities may exercise regarding the application of treaty benefits introduced by the discretionary relief rule will significantly increase the practical importance of effective, short and successful MAPs. This in turn, will require an additional arbitration mechanism. Such arbitration mechanism could serve as a means of

2 Seite 2/6 of the letter dated 16 th January 2015 to the OECD legal remedy for taxpayers and should apply when the competent tax authorities cannot come to a mutual agreement on the application of the tax treaty. The discussion draft describes most of the obstacles to successful MAPs in practice and proposes options to improve the situation. We agree with the presentation of the obstacles and confirm that the options suggested seem adequate in addressing the obstacles, with the exception of those we discuss below. However, should individual obstacles fail to be addressed this would itself be an obstacle to an effective MAP. Therefore, we emphasize that it is important to implement measures to address all obstacles. Accordingly, the options proposed should not be optional but mandatory. Comment regarding item 1.B.: Absence of paragraph 2 of Article 9 in some tax treaties (public discussion draft, option 2, paragraph 11) The rationale behind the argument in option 2 that it is not intended to create any negative inference with respect to treaties that do not currently contain a provision based on paragraph 2 of Article 9 is unclear. If a Contracting State is ready to introduce LOB clauses and a PPT rule into all its existing tax treaties by a multilateral instrument, it is logical to introduce an effective MAP into all its tax treaties at the same time to mitigate the obvious downsides of these rules for taxpayers. Comment regarding item 2.D.: Lack of resources of a competent authority (public discussion draft, option 4, paragraph 16) According to the latest OECD-MAP-statistics the total number of open MAP cases reported by OECD member countries was 4566, a 12.1 % increase as compared to the 2012 reporting period and a 94.1 % increase as compared to the 2006 reporting period. Thus, the number of open cases is steadily increasing. Even if the average time for completion of MAP cases of months in 2013 has decreased compared to the year 2012, it has to be assumed that the competent authorities will encounter capacity issues once BEPS-induced applications for MAPs are filed. In Germany, the competent tax authority currently lacks the necessary staff resources to negotiate MAP cases. It seems that the number of successfully completed MAP cases is significantly smaller than the number of new applications. Thus, the processing time is continuously increasing. MAP resources would have to be increased significantly to keep up with the expected growing demand for MAPs. Therefore, MAP processes should at the same time become more efficient. This could e.g. be supported as follows:

3 Seite 3/6 of the letter dated 16 th January 2015 to the OECD Classification of MAPs in terms monetary amounts of double taxation to be mitigated and complexity of the case: MAPs in which low double taxation amounts and/or limited complexity might enter into an accelerated MAP process where competent authority negotiation is reduced to a minimum and potentially a supervisory board is used to come to a solution in a short period of time. This would free competent authority resources that could then be used to discuss more complex cases in a level of detail necessary to come to a reasonable solution. Enhance the mutual understanding of what the outcome of an MAP shall be: MAPs are supposed to resolve double taxation. This means that competent authorities should focus their efforts on the arm s length allocation of actual profits in the case at hand. Discussions on principles, formalities, methods and other aspects of transfer pricing should only support the main goal of the negotiation and not become the main focus of the discussion itself. Political issues beyond the case at hand should not be content of MAPs (see also option 20). Make MAPs more transparent: Regular updates of the taxpayer on the status of negotiations are desirable. This might help taxpayers to provide information to speed up the process (see also proposed option 21). Comment regarding item 2.E.: Performance indicators for the competent authority function and staff (public discussion draft, option 5, paragraph 17) This obstacle needs to be described more precisely. There is a natural incentive for tax authorities to maximize the tax revenue in their country. Thus, it is reasonable to expect that tax officers of a Contracting State will negotiate a number of MAP cases under a tax treaty with the same Other Contracting State at the same meeting with tax officers of this Other Contracting State. Further, it is reasonable to assume that the same officers for each pair of Contracting States meet regularly and know one another well. Consequently, tax officers might be more ready to bargain tax revenue gains in one case against tax revenue losses in another case, instead of considering each case individually. Finally, in the absence of external supervision or control, it is logical to assume that tax authorities will actually base their decisions on performance indicators that are tax revenue oriented. Therefore, we propose that anonymized facts, decision and the reasons for the decision of all MAPs be published in a public database. Further, an arbitration body comprised of tax officers from neutral countries or other competent persons should serve as a body of legal remedy. Such body of appeal should base

4 Seite 4/6 of the letter dated 16 th January 2015 to the OECD its decisions on the afore-mentioned published reference decisions as this would minimize any incentive to trade tax revenue. Comment regarding item 2.G.: Audit settlements as an obstacle to MAP access (public discussion draft, option 7, paragraph 19) Our members tell us that in their experience German tax authorities in charge of tax inspections/ audits try to avoid MAP s wherever possible. They have also experienced cases of trading fines against waiving an MAP, as described in the discussion draft. Sometimes it seems that tax authorities have used the perceived ineffectiveness of MAPs (i.e. long time until the case is decided while the taxes have been collected by both countries, low likelihood of a successful MAP, etc.) as an argument to persuade taxpayers to waive their right to apply for a MAP. Comment regarding item 3.M.: Cases where a competent authority considers unilaterally that a taxpayer s objection is not justified (public discussion draft, option 13-15, paragraph 30-31) A unilateral decision must be made transparent and thus must be published in anonymous form in a public database. Further, taxpayers must be guaranteed the right to a legal remedy against any unilateral decision. Ideally, such legal remedy will include the right to involve the tax authorities of the other Contracting State and grant access to a neutral arbitration panel. Comment regarding item 3.O.: Issues connected to the collection of taxes (public discussion draft, option 17, paragraph 33) In most cases the situation governing any decision made in the MAP will be that a loss of tax revenue in the one Contracting State is linked to a gain of tax revenue in the Other Contracting State, because both States will ultimately have to accept i.e. the same transfer price or other value. In such cases the a priori assessments before the MAP form a price or value interval within which the final value would generally be determined. The a priori taxes of both Contracting States taken in total are likely to constitute the highest tax outcome, because at that point in time double taxation issues have not been resolved. Double taxation resolution should be mandatory. Thus, not coming to an agreement should not be a possible result of the MAP. To provide an incentive for every Contracting State to reach a mutual agreement quickly, each Contracting State should have the right to collect the tax that it would collect if the other Contracting State realized its preferred end of the interval. The maximum total tax that would become due regardless of its allocation between the Contracting States, assuming the double taxation were resolved less taxes collected should be paid to a

5 Seite 5/6 of the letter dated 16 th January 2015 to the OECD neutral trustee, e.g. an arbitration panel, as an advance payment by the taxpayer. Following a decision, the trustee would forward the share as mutually agreed in the decision and would further forward the actual interest earned on the advance payment to each of the Contracting States. The rest would be refunded to the taxpayer plus the proportionate share of the actual interest earned. In cases where there is no such link, the taxpayer should be permitted to apply for the two Contracting States to decide on a monetary deposit to be made with the trustee, in the amount of the likely total tax revenue that will ultimately be allocated between them. Effective legal remedy is needed for such decisions. We propose that a neutral arbitration panel decide on such appeals within a very short period of time. Comment regarding item 3.P.: Time limits to access the MAP (public discussion draft, option 18, paragraph 34) If tax inspections/ audits take place in a Contracting State several years after the end of the fiscal year, procedural law could preclude adjustments being made in the Other Contracting State. Therefore, the Contracting States should either engage in coordinated bi- or multilateral tax inspections/ audits and/or should align their respective laws or procedural standards such that in both of the Contracting States changes to tax assessments are either possible in or are precluded at any given point in time. Comment regarding item U.: Issues related to multilateral MAPs and advance pricing arrangements (APAs) (public discussion draft, paragraphs 58-59) A triangular case that often occurs in practice especially in the consumer goods or automotive sector is that e.g. an Asian enterprise of State A exports goods to Europe via a European hub (enterprise of State B) which subsequently sells the goods to a distribution company of State C. If the European hub enterprise receives an arm s length remuneration any adjustment to the transfer price between the distribution enterprise of State C and the European hub enterprise of State B by the tax administration of State C could where necessary be passed through to the enterprise of State A.

6 Seite 6/6 of the letter dated 16 th January 2015 to the OECD Should you have any questions regarding our comments please do not hesitate to contact Jörg Peter Müller from the IDW Team on +49 (0) or via at Yours sincerely, Manfred Hamannt Marita Rindermann Technical Director Taxes and Law