21 December 2017 Global Tax Alert OECD releases Germany peer review report on implementation of 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 15 December 2017, the Organisation for Economic Co-operation and Development (OECD) released the second batch of peer review reports relating to the implementation of the Base Erosion and Profit Shifting (BEPS) Minimum Standards under Action 14 on improving tax dispute resolution mechanisms. 1 Germany was among the assessed jurisdictions in the second batch. 2 Overall the report concludes that Germany meets most of the elements of the Action 14 Minimum Standards. In the next Stage of the peer review process, Germany s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Detailed discussion Background In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 on Making Dispute Resolution Mechanisms More Effective. 3 The Terms of Reference translated the Action 14 Minimum Standards into 21 elements and the best practices into 12 items. The Assessment Methodology provided procedures for undertaking a peer review and monitoring in two stages. In Stage 1, a review is conducted
2 Global Tax Alert of how a BEPS member implements the Minimum Standards based on its legal framework for Mutual Agreement Procedures (MAPs) and how it applies the framework in practice. In Stage 2, a review is conducted of the measures the BEPS member takes to address any shortcomings identified in Stage 1 of the peer review. Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration s (FTA) MAP Forum. In summary, Stage 1 consist of three steps or phases: (i) obtaining inputs for the Stage 1 peer review; (ii) drafting and approval of a Stage 1 peer review report; and (iii) publication of Stage 1 peer review reports. Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalized, it is sent for approval of the FTA MAP Forum and later to the OECD Committee on Fiscal Affairs to adopt the report for publication. Minimum Standards peer review reports The report is divided into four parts, namely: (i) preventing disputes; (ii) availability and access to MAP; (iii) resolution of MAP cases; and (iv) implementation of MAP agreements. Each part addresses a different component of the minimum standard. The report includes several recommendations relating to the Minimum Standards. In general, the performance of Germany with regard to MAP has proven to be satisfactory in the respective reports. Overall, Germany meets most of the elements of the Action 14 Minimum Standards. Preventing disputes The report notes that Germany meets the requirements of Action 14 Minimum Standards concerning the prevention of disputes. Germany has an extensive tax treaty network and has signed and ratified the European Union (EU) Arbitration Convention. All of Germany s tax treaties include a provision relating to MAP. Out of Germany s 93 tax treaties, 91 tax treaties contain a provision equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention (OECD MTC 2015) 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. Several peers reported that the provisions of their tax treaty with Germany meet some or all of the requirements of the relevant elements of the Action 14 Minimum Standards. Germany reported that it has recently signed the Multilateral Instrument (MLI) with a view to inter alia update the tax treaties slightly differing from Article 25(3), first sentence, OECD MTC 2015. Where tax treaties will not be modified by the MLI, Germany intends to update them via bilateral negotiations. In addition, Germany reported it will seek to include Article 25(3), first sentence, of the OECD MTC 2015 in all of its future treaties. The report recommends that Germany should maintain this stated intention. Since January 2006, Germany has had an Advance Pricing Agreement (APA) program. It is allowed to enter into bilateral and multilateral APAs, but only for those cases for which a tax treaty is applicable, as Germany considers the provision concerning the MAP in tax treaties as the legal basis for bilateral and multilateral APAs. The APA program also enables taxpayers to request roll-backs of bilateral APAs and such rollbacks are granted in practice. In 2015 and 2016, taxpayers requested the roll-back of an APA in 19 cases of which 15 have been granted until the end of 2016. Peers reported that they do negotiate and agree on bilateral APAs with Germany. With regard to roll-back, peers stated that Germany is open to provide for roll-back of existing bilateral APAs in appropriate cases. The report recommends that Germany continues its activities with regard to roll-backs. Availability and access to MAP The report notes that Germany meets the requirements regarding the availability and access to MAP. Germany provides access to MAP in all eligible cases (including transfer pricing cases, cases of audit settlements and in relation to the application of treaty and/or domestic anti-abuse provision). It further has in place a notification/consultation process for those situations in which its competent authority considers the objection raised by taxpayers in a MAP request as not justified. Peers have generally indicated not being aware of a limitation of access to MAP by Germany since 1 January 2015 in situations where taxpayers complied with information and documentation requirements set out in its MAP guidance. The report recommends that Germany should continue granting access in all eligible cases. Germany s rules, guidelines and procedures relating to the MAP function are included in the circular of the Federal Ministry of Finance (BStBl I 2006, 461) of 13 July 2006 (MAP guidance) which is publically available. 4 Within the framework
Global Tax Alert 3 of this circular, Germany offers a clear and comprehensive guidance on the availability of MAP and how it applies this procedure in practice, both under tax treaties and the EU Arbitration Convention. This guidance, however, does not include the contact details of Germany s competent authority. The report therefore recommends that Germany should update its MAP guidance to include the contact information of its competent authority. Germany indicated that it is in the process of updating its MAP guidance, which will take into account all developments in Germany s tax treaties, developments at the level of the OECD and developments at the level of the EU in the field of dispute resolution. This update is expected to be published during 2018. Resolution of MAP cases Germany s competent authority did not resolve MAP cases on average within a timeframe of 24 months (which is the pursued average for resolving MAP cases received on or after 1 January 2016), as the average time necessary was 26.34 months. This particularly concerns the resolution of attribution/allocation cases, as the average time to resolve these cases is thereby considerably longer (33.09 months) than the average time to resolve other cases (22.1 months). This indicates that additional resources specifically dedicated to handling attribution/allocation MAP cases may be necessary to accelerate the resolution of these cases. Therefore, Germany added during the last few years, additional personnel to staff in charge of MAP and a further addition is scheduled for 2017. Whether additional resources may actually be necessary, is dependent on whether the additional staff hired contributes to a more effective and efficient resolution of MAP cases. In that regard, the report recommends that Germany should closely monitor whether the additional resources recently provided to the MAP function, as well as the additional resources already envisaged to be provided in the near future, will contribute to the resolution of MAP cases in a timely, efficient and effective manner. Furthermore, the report indicates that Germany in essence meets the other requirements under the Action 14 Minimum Standards in relation to the resolution of MAP cases. However, personnel of tax administrations of the Länder directly involved in the adjustment at issue can participate in competent authority meetings during which MAP cases are resolved. This bears the risk that the competent authority function is not performed entirely independent from the approval or direction of the tax administration personnel directly involved in the adjustment at issue concerning the resolution of MAP cases during such meetings. The report recommends that Germany should ensure that its competent authority has the authority, and uses that authority in practice, to resolve MAP cases without being dependent of approval or direction from the personnel of the tax administrations of the Länder directly involved in the adjustments at issue when they attend competent authority meetings. Apart from that, the performance indicators used to evaluate the performance of the MAP office in Germany are considered to be appropriate to perform the MAP function. Implementation of MAP agreements The report notes that Germany meets the Action 14 Minimum Standards for the implementation of MAP agreements. Although Germany does not monitor the implementation of MAP agreements, no issues have surfaced regarding the implementation throughout the peer review process. All MAP agreements that were reached on or after 1 January 2015, once accepted by the taxpayers, have been implemented in a timely manner. Furthermore, peers reported that they did not experience any problems in Germany regarding the implementation of MAP agreements. The OECD recommends that, in addition, to keeping a record of whether all future MAP agreements are implemented, Germany should introduce a tracking system. Out of Germany s 93 tax treaties, 67 contain a provision that is equivalent to Article 25(2), second sentence, of the OECD MTC 2015 that any mutual agreement reached through MAP shall be implemented notwithstanding any time limits in their domestic law. Two tax treaties are considered not having the full equivalent of Article 25(2), second sentence, of the OECD MTC 2015. In the remaining 24 tax treaties no equivalent provision is included. Further, none of these 24 tax treaties include the equivalent to Article 9(1) and Article 7(2), setting a time limit for making adjustments. With respect to tax treaties that do not include the equivalent to Article 25(2), second sentence, of the OECD MTC 2015, or include the alternatives provided in Article 9(1) and Article 7(2), and will not be modified by the MLI, Germany intends to update them via bilateral negotiations. In addition, Germany reported it will seek to include Article 25(2), second sentence, of the OECD MTC 2015 in all of its future treaties.
4 Global Tax Alert 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 second 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 Germany. However, for most of the best practices, the peers provided only limited input. The comments provided by the peers generally confirm that they have a good working relationship with Germany s competent authority. Peers reported that contacts with the competent authority of Germany are generally easy, solution-oriented, straight-forward and without unnecessary delays. Peers further indicated that MAP cases are generally resolved within a reasonable period, although not all cases are resolved within the targeted 24-month period, particularly due to the involvement of the tax administrations of the Federal States in the preparation and resolution of cases. Several peers criticized the long time it takes in Germany, from their perspective and in some cases, to issue position papers. However, peers generally provided positive input on Germany s approach to resolving MAP cases. With regard to the provision for roll-backs of existing bilateral APAs, peers further reported positive working experiences with Germany in the process of effectively providing for roll-back of APAs. Next steps Germany is already working to address deficiencies identified in its peer review and will now move on to Stage 2 of the process, where Germany s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Under the peer review program methodology, Germany shall submit an update report to the Forum on Tax Administration s MAP Forum within one year of the OECD Committee on Fiscal Affairs adoption of the Stage 1 peer review report. Implications In a post-beps world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Germany s peer review report represents the continued recognition and importance of the need to achieve tax certainty for cross-border transactions for MNEs. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely mutual agreement process. Furthermore, the peer review for Germany provides insights to taxpayers on the availability and efficacy of MAP. With additional countries continuing to be reviewed, the OECD has made it known that taxpayer input continues to be welcomed on an ongoing basis. With stakeholder feedback in mind, businesses are encouraged to share their views with the OECD on the peer review for Germany and any other jurisdictions, and to perhaps comment on whether the next iteration of the OECD s assessment of tax administration s MAP performance warrants greater feedback from taxpayers as the primary source. Feedback from the international tax community is the logical next step after peer review, which may help to further validate the current favorable result. Endnotes 1. See EY Global Tax Alert, OECD releases second batch of peer review reports on Action 14, dated 15 December 2017. 2. http://www.oecd-ilibrary.org/docserver/download/2317431e.pdf?expires=1513501697&id=id&accname=guest&checks um=2a12646fb7653d70f98191106c626394. 3. See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October 2016. 4. http://www.bzst.de/de/steuern_international/verstaendigungsverfahren/merkblaetter/merkblaetter_node.html.
Global Tax Alert 5 For additional information with respect to this Alert, please contact the following: Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Düsseldorf Juliane Sassmann juliane.sassmann@de.ey.com Ernst & Young LLP, Global Tax Desk Network, New York Jose A. (Jano) Bustos joseantonio.bustos@ey.com David Corredor-Velásquez david.corredorvelasquez@ey.com
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