2 October 2017 Global Tax Alert OECD releases the United States 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: www.ey.com/taxalerts 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 of the Base Erosion and Profit Shifting Project (BEPS) minimum standards on Action 14 on improving tax dispute resolution mechanisms by Belgium, Canada, the Netherlands, Switzerland, the United Kingdom and the United States. 1 The reports are divided into four parts: namely (i) preventing disputes; (ii) availability and access to Mutual Agreement Procedure (MAP); (iii) resolution of MAP cases; and (iv) implementation of MAP agreements. Each of these parts addresses a different component of the OECD s minimum standard. Overall the reports conclude that these jurisdictions meet most of the elements of the Action 14 Minimum Standard. 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. Twenty peers provided input to the United States (US) peer review report, consisting of countries that represent 100% of MAP cases in process by the US at the end of 2016. Input was also received from taxpayers. This Alert summarizes highlights from the US report.
2 Global Tax Alert Detailed discussion Preventing disputes In the US Advance Pricing Agreement (APA), rollbacks are generally available and may be required as a condition of obtaining an APA. The US Competent Authority generally provides for APA roll-backs upon request. For the years 2014-2016, the United States received 107 requests for bilateral APAs with rollbacks. As of 31 December 2016, 89 of those requests were still pending. Availability and access to MAP The US reported, and peers and taxpayers agreed, that since 1 January 2014 it has not denied access to MAP in transfer pricing cases or cases involving the application of a treaty and/or domestic anti-abuse provision. The report noted that the US does not preclude access to MAP where the taxpayer has reached an audit settlement with the Internal Revenue Service (IRS), but in cases where the taxpayer enters into a closing agreement with the IRS examination function, the US will only endeavor to obtain a correlative adjustment with the treaty partner. It will not undertake any actions that would change the determination of taxable income reflected in the audit settlement. Peers generally indicated not being aware that audit settlements may preclude access to MAP in the US. MAP cases submitted that required additional information were not denied access but taxpayers were afforded opportunities to provide the missing information. Resolution of MAP cases The US failed to meet the OECD MAP resolution timeframe of 24 months from start to finish for a case and reported an average resolution time of 31 months. 2 Transfer pricing cases were reported generally to take slightly more time to resolve than non-transfer pricing cases. All peers that provided input reported a good working relationship with the US competent authority. One peer particularly noted that the US competent authority is very responsive to communication, that there is a constructive and positive cooperation to resolve MAP cases and that it is willing to discuss and conduct negotiations via teleconferencing. Apart from the positive experiences, one peer noted that it experienced miscommunication, as the peer s competent authority was not promptly notified of changes in the team handling MAP cases with them. One element of procedural delay noted by a peer was due to confidentiality requirements in place in the US requiring that taxpayer identification data can only be exchanged by mail or fax. In addition another peer mentioned that in some cases it experienced delays in receiving communication from the US competent authority that a MAP case was submitted. This peer suggested enhancing the response and communication time to prevent delays in solving MAP cases within the average of 24 months. On the material side of handling MAP cases, all peers reported that the US is cooperative, constructive and solution-oriented and has the intent to resolve MAP cases in a timely, effective and principled manner. The US reported that there are a variety of reasons why cases were not resolved within the 24 month timeframe. It indicated that although resources for the competent authority function might partly explain the overstep of the 24-month average, other reasons such as delays in correspondence, communication difficulties and fundamental differences with treaty partners on points of law or there application to facts are also responsible for lengthy resolution times. Implementation of MAP Agreements The US reported that all MAP agreements, once accepted by taxpayers, have been implemented and that it is not aware of any MAP agreements that were not implemented since 1 January 2014. It, however, has not implemented a mechanism to keep track on whether all MAP agreements reached are actually implemented. Two peers specifically mentioned that the US competent authority is very efficient in implementing MAP agreements. The US does not have in place a timeframe for implementation of mutual agreements reached. This regards both the situation in which the MAP agreement leads to additional tax or a refund of tax in the US. Best practice peer review reports Each assessed jurisdiction can provide information and request feedback from peers on how it has adopted the 12 best practices contained in the Action 14 final report. All of the jurisdictions in the first batch of the peer review reports requested that the OECD provide feedback concerning their adoption of the best practices contained in the Action 14 final report, including the US. However, for most of the best practices, the peers provided only limited input.
Global Tax Alert 3 The comments provided by the peers confirm they have a good working relationship with the US in discussing and negotiating APAs. One peer noted that the US allows taxpayers to request, in certain cases for the multi-year resolution of recurring issues through MAP, if the relevant facts and circumstances of the case under review are the same. Peers did not provide any input relating to other best practices. Next steps The six jurisdictions assessed in the first batch of the peer review are already working to address deficiencies identified in their respective reports and are moving to Stage 2. In Stage 2 of the peer review process, a jurisdiction s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Assessed jurisdictions shall submit an update report to the Forum on Tax Administration MAP Forum within one year of the OECD Committee on Fiscal Affairs adoption of the Stage 1 Peer Review report. Implications The peer review process is a welcome development to improve global consistency and efficiency in resolving tax disputes through the MAP. Notwithstanding the sources like-minded tax administrations with mature MAP programs - the peer review process has indicated that the US competent authority overall is performing well in its administration of the MAP. Nonetheless, it has identified several areas where improved guidance and process could be implemented. We look forward to implementation of these improvements in the US. Endnotes 1. For a detailed background, please see EY Global Alert, OECD releases first batch of peer review reports on Action 14, dated 27 September 2017. 2. Case completion statistics were reported for two separate measurement periods pre-2016 and post-2015. In the latter period an anomalous result was reported of an average time to resolution of 4.4 months for 8 MAP cases submitted and completed in 2016. We presume this anomaly likely resulted from a unique situation such as group of related cases submitted to MAP for an audit period subsequent to a preceding audit cycle that had previously been resolved in MAP, and the resolution of these cases was made on the same basis as for the prior cycle.
4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young LLP, US Transfer Pricing Controversy Services David Canale, Washington DC +1 202 327 7653 david.canale@ey.com Richard McAlonan, Washington DC +1 202 327 7209 richard.mcalonan@ey.com Craig Sharon, Washington DC +1 202 327 7095 craig.sharon@ey.com Miller Williams, Washington DC +1 202 495 4809 miller.williams@ey.com Fred C. Johnson, San Francisco +1 415 894 8194 fred.johnson@ey.com Ameet Kapoor, San Jose +1 510 205 3725 ameet.kapoor1@ey.com Carlos Mallo, Washington DC +1 202 327 5689 carlos.mallo@ey.com Ernst & Young LLP, Global Tax Desk Network, New York Jose Bustos +1 212 773 9584 joseantonio.bustos@ey.com David Corredor-Velásquez +1 212 773 6259 david.corredorvelasquez@ey.com
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2017 EYGM Limited. All Rights Reserved. EYG no. 05592-171Gbl 1508-1600216 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com