OECD set to release 2017 transfer pricing guidelines, clarify MLI effect on tax treaties, officials say

by Julie Martin

The OECD expects to soon release an important update to its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, tax officials said during a June 26 webinar.

Officials also discussed the OECD’s coming release of a discussion draft designed to curtail multinational tax avoidance from branch mismatches, the next steps for the multilateral instrument to implement the tax treaty measures in the OECD/G20 base erosion profit shifting (BEPS) plan (MLI), the status of peer review of the BEPS minimum standards, and other international tax projects.

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said the 2017 consolidated edition of the OECD transfer pricing guidelines is ready for release next week. This is a very important update, Saint-Amans said, because it will incorporate the transfer pricing work done in the BEPS plan.

Significant changes were made during the BEPS project to Chapter 1 of the OECD transfer pricing guidelines concerning fundamental issues, such as how to delineate a transaction and allocate risk.

MLI

The OECD is also working on making the MLI more user-friendly.

Maikel Evers, OECD Advisor, Tax Treaties, said the OECD expects to add an online database to its website sometime in July to facilitate the matching of countries’ reservations in the MLI. Evers said the OECD is now consulting with countries to check over 150,000 data points to ensure the accuracy of the database.

Saint-Amans commented that, in his view, the fact that the US did not sign the MLI is not a big issue. The US does not enter into tax treaties with tax havens and also uses a stringent limitation on benefits provision in its tax treaties, so the US probably meets the BEPS action 6 minimum standards, he said.

Moreover, Saint-Amans said that while he would have preferred that the US sign-on to the MLI’s stricter BEPS action 7 permanent establishment definitions, he also acknowledged that many countries signed the MLI but reserved on the permanent establishment standard. Adoption of the PE provisions is not yet widespread, he said.

The US did miss a good opportunity to sign up for mandatory binding arbitration with 25 other countries, though, said Saint-Amans, noting that the decision to not sign the MLI was made by the previous US administration.

Digital economy taxation

Saint Amans said the OECD will hold a consultation on the tax consequences of digitization in fall 2017 in San Francisco after publishing papers for comment.

The OECD had been tasked with preparing an interim report on the topic for the G20 by April 2018.

“A number countries want to take actions, another set of countries think that we shouldn’t move too fast to take action because business models have not stabilized,” said Saint Amans.

Branch mismatches

Achim Pross, OECD Head of International Co-operation and Tax Administration, said that a revised OECD discussion draft on branch mismatches will be released in July. The guidance will treat branch mismatches consistently with hybrid entities and instruments, he said. The guidance is also consistent with the EU anti-tax avoidance directive and amendments thereto (ATAD 1 & II), he said.

Branch mismatch structures can create the same undesired outcomes as hybrid entity or hybrid instrument mismatches, Pross said. He also noted that the new draft is much shorter than the previous draft, released about one year ago; it is only 99 pages, as compared to the 450-page earlier version.

G20 leaders meeting

Saint-Amans said that the Inclusive Framework on BEPS, which met in the Netherlands last week, has produced a report that will be presented to the G20 leaders at their meeting in Germany next week. The report will assess the impact of BEPS work on the behavior of tax administrations and companies, Saint-Amans said.

Saint-Amans said the OECD will also discuss plans to monitor countries’ implementation of “tax certainty” at the G20 meeting,

Further, Saint Amans said the OECD will discuss the outcome of Global Forum on Transparency and Exchange of Information for Tax Purpose’s “fast track” procedure to improve tax information exchange.

Monica Bhatia, Head of the Secretariat of the Global Forum in the Centre for Tax Policy and Administration, explained that the fast track process was designed to allow jurisdictions with a bad peer review rating on tax transparency to show their recent progress in this area through a provisional rating in time for the July G20 summit.

Bhatia said that of the 15 countries reviewed under the fast track process, 14 received an improved rating. The Mashall Islands moved from non-compliant to partially compliant and 13 other countries moved to largely compliant. Only Trinadad & Tobago was rated as non-compliant after the review.

BEPS minimum standards

Pross said that peer reviews of countries’ implementation of the BEPS minimum standards on preferential tax regimes under BEPS action 5 are underway. The OECD’s Forum on Harmful Tax Practices (FHTP) will scrutinize the tax regimes of about 125 countries that are BEPS Inclusive Framework members.

Pross said examinations will be conducted of 31 countries’ intellectual property regimes; 22 countries’ service and distribution centers; 15 banking insurance regimes; 13 ‘other’ regimes, such as shipping and holding; 11 financing and leasing regimes; and 6 headquarters regimes.

Pross said that 27 tax regimes will be examined in the ‘dual’ category, where features of different types of regimes are combined in one regime. Pross said that the framework will produce a report on some of its findings this summer. There will be regular updates to this work, he said.

He also said that OECD and G20 countries’ compliance with spontaneous exchange of tax rulings will be assessed in peer review this year and reports will be produced next year. After that, non-OECD/G20 countries that are members of the BEPS Inclusive Framework will be peer reviewed, he said. Developing countries can defer because of capacity constraints, he said.

Pross said that information on thousands of tax rulings has already been exchanged between tax administrations.

Pross said that peer review of the mutual agreement procedures in Belgium, Canada, Netherlands, Switzerland, United Kingdom, and United States is complete. The peer review report is now winding its way through the approval process, he said.

Pross said that about 55 countries have taken steps to implement country-by-country reporting and 30 jurisdictions have a full legal framework in place. He said that 38 countries are putting in place master file and local file requirements.