BEPS action plan 14: Making dispute resolution mechanisms more effective

SUITS THE C-SUITE By Deonah L. Marco-Go

Business World (02/01/2016 – p.S1/2)

(First of two parts)

In our previous columns, we discussed the final reports of the Organisation for Economic Co-operation and Development (OECD) on the different action plans to address Base Erosion and Profit Shifting (BEPS). We will now focus on Action 14, which reflects the commitment of participating countries to implement substantial changes in their approach to dispute resolution.

The measures developed under Action 14 seek to minimize the risks of uncertainty and unintended double taxation by ensuring the consistent and proper implementation of tax treaties, including the effective and timely resolution of disputes on their interpretation or application through a mutual agreement procedure (MAP). One of the measures adopted in the report is the development of a minimum standard on treaty-based dispute resolution to which all OECD BEPS and G20 countries have agreed to adhere. Compliance with this standard will be subject to peer-based monitoring that will be executed through the Forum on Tax Administration’s MAP Forum (FTA MAP Forum), which is a subsidiary body of the OECD Committee on Fiscal Affairs that brings together Commissioners from different countries to develop a collaborative global response to tax administration issues.

The minimum standard is complemented by best practices to which only some of the OECD BEPS and G20 countries were willing to commit. Finally, the report lists 20 countries that have agreed to implement mandatory, binding MAP arbitration in their bilateral tax treaties. According to the OECD, the countries that have made that commitment were involved in more than 90% of the outstanding MAP cases at the end of 2013.

MINIMUM STANDARD

The minimum standard is composed of specific measures that countries will take to ensure that treaty-related disputes are resolved in a timely, effective and efficient manner. The elements of the minimum standard have the following objectives: (i) the full implementation in good faith of treaty obligations related to the MAP and timely resolution of MAP cases; (ii) the implementation of administrative processes that promote the prevention and timely resolution of treaty-related disputes; and (iii) the access of eligible taxpayers to MAP.

FULL IMPLEMENTATION IN GOOD FAITH AND TIMELY RESOLUTION OF MAP CASES

To ensure full implementation in good faith of treaty obligations (related to MAP), countries should apply paragraphs 1 through 3 of Article 25 of the Model Tax Convention on Income and on Capital (Model Tax Convention). These paragraphs allow a taxpayer to resort to MAP in cases where the actions of a taxing authority will result in a violation of the provisions of a tax treaty. The same access should be provided in transfer pricing cases and should implement the resulting mutual agreements (e.g. by making appropriate adjustments to the tax assessed).

It is important to note, though, that access to MAP will not automatically result in the taxing authority acting upon the request of the taxpayer. A taxing authority has no obligation to endeavor to resolve the case or to submit an issue to arbitration. It is up to the taxing authority to determine whether the taxpayer’s objection is justified, in which case, the taxing authority may act unilaterally (if possible) or may proceed to the bilateral stage.

Countries should also commit to a timely resolution of MAP cases within an average of 24 months and to have their compliance with the minimum standard reviewed by their peers in the context of the FTA MAP Forum. Countries are also encouraged to become members of the FTA MAP forum.

Administrative processes should promote the prevention and timely resolution of treaty-related disputes

Countries should disseminate the rules, guidelines and procedures for taxpayers to access and use the MAP. Countries are also required to publish MAP profiles on a shared public platform. The country MAP profile is a document providing competent authority contact details, links to domestic MAP guidelines and other useful country-specific information regarding the MAP process.

Countries must likewise ensure that the staff in charge of MAP processes have the authority to act on MAP cases and are independent. The performance of these staff should be assessed based on: (i) the number of MAP cases resolved; (ii) consistency; and (iii) time taken to resolve a MAP case.

In addition, countries should clarify in their MAP guidance that audit settlements between tax authorities and taxpayers do not preclude access to MAP. If countries have an administrative or statutory dispute settlement/resolution process independent from the audit and examination functions, one that can only be accessed through a request by the taxpayer, countries may limit access to the MAP with respect to the matters resolved through that process. Countries should notify their treaty partners of such administrative or statutory processes and should expressly address the effects of those processes with respect to their MAP program guidance materials.

The report also touched upon bilateral advance pricing arrangements (APA), specifically on the roll-back of APAs in appropriate cases. Countries should provide for the roll-back of arrangements subject to applicable time limits (such as the statutes of limitation for assessment) and where the relevant facts and circumstances in the earlier tax years are the same and subject to the verification of these facts and circumstances on audit.

ACCESS TO MAP BY ELIGIBLE TAXPAYERS

The third element provides that the competent authorities of both Contracting States should be made aware of the MAP requests that are submitted pursuant to paragraph 1 of Article 25 and have the opportunity to provide their views on whether the MAP request should be accepted or rejected, and on whether the taxpayer’s objection is considered to be justified. In order to achieve this, countries should take one of two alternative approaches: (i) amend paragraph 1 of Article 25 to permit a request for MAP assistance to be made from the competent authority of either Contracting State; or (ii) where a treaty does not permit a MAP request to be made from either Contracting State, implement a bilateral notification or consultation process for cases where the competent authority to which the case is presented does not consider the taxpayer’s objection to be justified (making clear that such notification or consultation should not be interpreted as a consultation as to how to resolve the case).

In cases where a request for MAP may be made, it is important to note that taxpayers have the option to file a request for MAP assistance with one or both competent authorities at the same time. However, in this case, the taxpayer should appropriately inform both authorities in order to facilitate a coordinated approach to the case.

On the other hand, Contracting States may consider that taxpayers should, in the first instance, be required to present their case to the competent authority of the State of which they are resident. If this approach is adopted, the report provides that Contracting States should take appropriate measures to ensure broad access to the MAP and that the decision as to whether a case should proceed to the second stage is appropriately considered by both competent authorities.

The report requires that the published MAP guidance of each country should identify the specific information and documentation that a taxpayer is required to submit with a request for MAP assistance. Countries should not limit MAP access based on the argument that insufficient information was provided if the taxpayer has provided the required information.

The report also provides that tax treaties should include the second sentence of paragraph 2 of Article 25 (“Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States”). However, if countries cannot include this sentence in their tax treaties, they should be willing to accept alternative treaty provisions that limit the time during which a Contracting State may make an adjustment in order to avoid late adjustments where MAP relief will not be available.

In the next part of this article, we will talk about the recommended best practices that are expected to complement the minimum standard.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Deonah L. Marco-Go is a Tax Senior Director of SGV & Co.