The OECD will provide effective mechanisms to resolve cross-border double taxation disputes in guidance under the OECD/G20 base erosion profit shifting (BEPS) plan, including mandatory and binding arbitration for those countries willing to adopt it, an OECD official said June 8 during an update of the OECD’s progress on the BEPS plan.

Marlies de Ruiter, OECD Head of Tax Treaty, Transfer Pricing, and Financial Transactions, said that OECD work under action 14 of the BEPS plan, dealing with ways to improve cross-border tax dispute resolution, is now proceeding on two tracks: one track for countries that are interested in pursuing mandatory binding arbitration, and a second track for countries that are not willing to adopt the procedure.

At least twenty countries have expressed a willingness to adopt mandatory binding arbitration, De Ruiter said.

De Ruiter comments followed a joint statement issued by G7 leaders from their summit in Bavaria, Germany, committing to establish mandatory binding arbitration and expressing support for work being done on mandatory binding arbitration in the BEPS project.

De Ruiter said that standards being drafted for countries in the second track, namely, those not willing to commit to binding arbitration, have been elevated to a set of minimum standards for all countries involved in the BEPS project.

These minimum standards will include many elements from the OECD’s December 2014 discussion draft on dispute resolution, which have been translated into concrete commitments, she said. The commitments will make it certain that there is a timely resolution of all mutual agreement procedure cases, that the resolution is principled, and that all cases eligible for treaty protection will be resolved, de Ruiter said.

She added that the OECD Committee on Fiscal Affairs has agreed to set up a strong monitoring mechanism soon after the BEPS project is finalized to ensure that these resolutions are implemented.

Interest deductibility update

Officials working on the BEPS project on interest deductiblity have decided to adopt a fixed ratio rule based on EBITDA, combined with an optional group ratio rule, Achim Pross, OECD Head of International Cooperation and Tax Administration reported.

Pross said that the OECD guidance, under action 4 of the BEPS plan, will not include a “benchmark ratio for the whole world” for the fixed ratio rule. Rather, the guidance will offer a range, as well principles to help countries select a ratio within that range, Pross said. The OECD issued a discussion draft on interest deductibility December 18, 2014.

The group ratio rule is a “taxpayer-friendly rule that allows you to get up to the external gearing that the group has as a whole,” Pross explained. He said that the rule will be optional because some countries may seek to avoid a bias in favor of debt over equity.

An optional deminimis threshold is also being developed to kick out low risk entities and reduce compliance costs, Pross said.

Moreover, optional rules for carryforward of disallowed interest or unused capacity are included. The rules recognize that EBITDA can be somewhat volatile, he said.

IP Regimes

The OECD has made progress on its project to determine when preferential intellectual property (IP) regimes are harmful. Pross said.

Countries are settling on an approach to tracking and tracing issues associated with the nexus approach that account for government’s need for reliable rules, and businesses’ need for something that can be implemented, he said.

Progress has also been made defining “qualifying intellectual property,” he said. “It is clear that trademarks are out. and and patent are in, but things that are substantially similar to patents – technology IP – may also be be in,” Pross noted.

He also said that countries agree that rules must written to stop companies from moving to an IP regime country just to get the benefit of grandathering.

CFCs

Pross also reported that the final BEPS guidance on controlled foreign corporations (CFCs) will be significantly different from the OECD’s April 3 discussion draft with respect to the definition of income.

The OECD is now looking at including different approaches and combinations of approachs that can be used, as follows: a categorical analysis typical of most CFC regimes today; a substance analysis where different proxies can be used, such as people, premises, assets, and risk; and an excess profits analysis, Pross said.

Related MNE Tax articles:

• G7 leaders agree to arbitration of tax disputes, say countries should monitor BEPS implementation

• OECD releases discussion drafts on VAT rules for B2C services and intangibles, interest deductions, and dispute resolution

• Tax officials at BEPS hearing reject business reps’ interest deduction proposal

• Business reps critical of BEPS proposal to limit interest deductions through a group-wide test

• Officials preview OECD draft on interest deduction limits, say more BEPS guidance out this week

• OECD releases BEPS draft on CFC taxation