Stakeholders weigh-in on BEPS Action 14 standards for cross-border tax dispute resolution

By Parwin Dina, Lead Client Service Partner and Global Tax Leader, GTS (Global Tax Services) UAE

Under Action 14 of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS), countries have committed to implement a minimum standard to strengthen the mutual agreement procedure’s (MAP) effectiveness and efficiency.

The OECD published a Public Consultation document 2020 Review of BEPS Action 14 to allow stakeholders – principally competent authorities and taxpayers – the opportunity to re-examine what is working well with the MAP and what could be further improved.

A virtual meeting was held on 1 February to discuss key questions identified in the Public Consultation document and comments received as part of the consultation process. This meeting included amongst others, representatives of OECD Secretariat, law and accounting firms, multinationals groups, trade associations, tax officials from Canada, the US, Egypt, Singapore, Brazil, Indonesia, Sweden, Malaysia, and Argentina.

Proposals for enhancing the effectiveness of MAP

Generally, international double taxation may result where two jurisdictions seek to tax the same transactions or activities.

While tax treaties directly resolve most of such cases, international double taxation may remain where two jurisdictions disagree on the interpretation or application of a treaty provision. The MAP article of a tax treaty (Article 25 of the OECD Model Tax Convention) accordingly provides a mechanism to resolve these cross-border tax disputes.

The Public Consultation on the 2020 Review of BEPS Action 14 considered a series of new proposals to improve MAP.

These proposals included increasing the use of advance pricing agreements (APAs), expanding access to training on international tax issues for auditors; defining criteria to ensure that access to MAP is granted in eligible cases; introducing standardized documentation requirements for MAP requests; suspending tax collection for the duration of the MAP process; aligning interest charges/penalties in proportion to the outcome of the MAP process; introducing a proper legal framework to ensure the implementation of all MAP agreements; allowing multi-year resolution through MAP of recurring issues with respect to filed tax years; and implementing MAP arbitration or other dispute resolution mechanisms as a way to guarantee the timely and effective resolution and improving the MAP statistics framework.

Increase the use of APAs

The OECD Secretariat’s proposal to increase the use of APAs (bilateral or multilateral) is based on the idea that the use of APAs can be a means to prevent disputes and can provide certainty to taxpayers.

There was strong support among practitioners attending the consultation meeting for requiring countries to offer bilateral APAs because of the certainty they provide to taxpayers, particularly in transfer pricing cases. However, the timeline for securing bilateral APAs is long, and therefore, unilateral APAs should not be disregarded.

Many argued that a mere recommendation for APAs is not sufficient; there needs to be common guidance for both taxpayers and the competent authorities.

In addition, stakeholders expressed the view that, since there are constraints on budgets in this pandemic, countries should first be required to offer APAs only where a certain value threshold exists (e.g., for complex cases) rather than applying such APAs just to an existing inventory number of MAP cases.

Stakeholders representing developing countries raised concerns about a mandate requiring the introduction of bilateral APAs as a BEPS Action 14 minimum standard because there are insufficient resources to implement such programs in these countries.

A few countries are currently working towards APAs in the African region. Botswana and Nigeria are working towards the introduction of APAs, while South Africa is conducting a public consultation.

Expand access to training of auditors

There was a general view at the Action 14 consultation meeting that tax authorities sometimes make inappropriate adjustments, which are later withdrawn when the case is taken to MAP.

Generally, the examination process is the beginning of the MAP process; there is no MAP case without an auditor.

Substantial training is needed to raise the understanding and awareness of an adjustment’s impact, not just for multinationals in the MAP process but also for the revenue authorities who must respond to it.

Stakeholders also suggested that it may be necessary for auditors to have a pre-consultation, namely, a robust dialogue with competent authorities in advance of finalizing an assessment. Such a procedure seems to exist in the US.

Bringing the auditors to meet with competent authorities to talk through adjustments may reveal whether the MAP path is appropriate. Enhanced co-operation between auditors and competent authorities may lead to a better outcome of a MAP case, though both parties need to be independent in the whole process, stakeholders noted.

Training of auditors may help to address the practice where agents may offer taxpayers an audit settlement as a condition for them not to proceed to MAP.  It was widely noted that MAP should be made available and that countries should not engage in such a practice.

The view was also expressed that training will improve the penalty aspects of MAP. Many treaties do not address penalties, and taxpayers may find that after proceeding to MAP, interest and penalties need to be resolved unilaterally. With better training of the auditors, there will be few instances where such inappropriate penalties are raised.

Criteria to access MAP

Under Article 25(1) of the OECD Model Tax Convention, taxpayers have a right to submit a MAP request when they consider that actions of one or both contracting States result, or will result, in taxation not in accordance with the provisions of the convention.

Generally, a MAP request under paragraph 1 of Article 25 must be presented within the timeframe stipulated in the tax treaty, which is generally three years from the first notification of the action that gives rise to taxation not in accordance with the tax treaty.

There are, however, no commonly agreed criteria specifying when exactly a case would be eligible for the MAP process, as well as what information and documentation taxpayers should include in their MAP request.  

Therefore, the OECD Secretariat proposal is twofold: ensure access to MAP and have standardized information requirements in MAP request.

Access to MAP that is currently granted under the current minimum standard includes transfer pricing and anti-abuse cases, audit settlements, and where the minimum information requirement is satisfied.

This proposal is unclear whether access will only be for these cases or for other types of cases.

During the Inclusive Framework peer reviews, it was revealed that some countries deny access to MAP when there was no double taxation, or a final court decision was reached, or where adjustments were no longer required, or where there was a unilateral ruling. Businesses are of the view that it is not conceptually right to deny access to MAP.

The question is how to achieve clarity in determining access to MAP. Two possibilities were suggested at the consultation meeting, namely, requiring that countries provide access to MAP in the circumstances mentioned above or providing a general principle that governments must provide access to MAP if para 1 of Article 25 is met.

Another issue concerns the minimum information that must be submitted in a MAP request.  While all countries may have their own requirements, it can become confusing for taxpayers, especially if they are filing in two jurisdictions where both ask for different information. Therefore, the question is whether a standardized set of information would ease taxpayer burdens.

Furthermore, the view was expressed that there needs to be a distinction between the information required to access MAP and information needed to resolve a case. The latter information can be required at a later stage and is therefore not needed when determining whether access to MAP can be granted, and an objection is justified.

At the consultation meeting, stakeholders also expressed concerns regarding requiring standardized documents in developing countries as there are constraints of resources in dealing with MAP cases.

Suspending tax collection during MAP

Typically, income taxes are due and payable when a tax assessment is imposed. Generally, where an adjustment to taxable income is made in one jurisdiction, the income item has already been taxed in another jurisdiction. This creates double taxation and imposes significant liquidity /financial burdens on taxpayers.

There are other concerns that need to be addressed, such as the frequent long delays in arriving at a MAP outcome, which may cause additional hardship to taxpayers.

Therefore, the OECD Secretariat proposes to grant a suspension of tax collection when competent authorities are trying to reach a MAP agreement, which will help reduce the financial hardship imposed on the taxpayer.

Currently, the OECD Action 14 report provides that it is a best practice to suspend tax collection under the same conditions as those available to taxpayers in domestic law/disputes. The issue is whether to move this rule from best practice to minimum standard.

There was strong support at the consultation meeting to elevate tax collection suspension to a minimum standard. However, it was also noted that this would also require postponing the statute of limitation for tax collection.

It was suggested that if there is suspension of tax collection while MAP is pending became a minimum standard, taxpayers could be asked to provide a statement that a binding MAP outcome will be honoured or provide security, such as an escrow account or letter of guarantee, e.g., from the parent company or financial institution.

Another concern is that jurisdictions may not have provisions in their domestic law regarding the suspension of tax collection in MAP cases, potentially leading to an increase in the volume of cases.  Modifications to domestic tax legislation may address this issue.

There also needs to be sufficient countermeasures to avoid the abuse of a suspension of tax collection mechanism, as it could be used as a tax deferral measure by taxpayers. A countermeasure is to link suspension of tax collection to cases where there is double taxation.

Aligning interest charges/penalties with the outcome of MAP    

Another very important issue is the non-alignment of penalties and interest levied on the adjustments with MAP outcomes.

Generally, interest and penalties are levied on an audit adjustment by a competent authority, then at a later stage, are reversed when such adjustment is canceled. The question that arises is whether there needs to be some restrictions on the fines and interests related to the outcome of the case.

Some treaties contain provisions in the MAP process to deal with interest and penalties, and where such provisions are not available, competent authorities would normally deal with them in domestic law.

Non-alignment of interest and penalties with the outcome of the case can sometimes create de facto double taxation.

For example, if one jurisdiction will not pay interest to taxpayers when the tax is refunded to them, and the other jurisdiction requires interest on an underpayment, this could lead to an unfair result.

The OECD Secretariat proposes that if an adjustment is later canceled, such interest and penalties should be decreased in proportion to the outcome of the case.

There was strong support at the consultation meeting for the alignment of interest and penalties to the outcome of the case, perhaps through amending the existing treaties or domestic law.

In some cases, the amount of interest and penalties may exceed the tax payable. Therefore, there was strong support for the alignment to be automatic through a protocol or specific language in a tax treaty (e.g., Article 26 para 3 of US and UK tax treaty).

 Proper legal framework

Another major concern is that domestic time limits may jeopardize the implementation of MAP agreements in cases where the applicable tax treaty does not contain the equivalent of Article 25(2), second sentence, of the OECD Model Tax Convention.

This provision ensures that MAP agreements can be implemented notwithstanding domestic time limits.

The current Action 14 minimum standard does not fully address this issue because there are still instances where a MAP agreement cannot be implemented, where no agreement is reached, or the agreement could no longer be implemented.

The minimum standard allows jurisdictions that did not, or do not, wish to include this second sentence in their tax treaties to choose an alternative.

This alternative is an additional provision for Articles 7 and 9, limiting the time during which transfer pricing adjustments can be made. These provisions aim to avoid late adjustments for which relief of double taxation would no longer be available via the MAP process due to domestic time limits running out.

One of the suggested options is to address the risk of non-implementation, by introducing the obligation for jurisdictions’ tax treaties to contain the equivalent of Article 25(2), second sentence.

Allowing multi-year resolution of MAP cases

In some instances, a request for competent authority assistance regarding a specific adjustment to income may concern recurring issues relevant in previous or subsequent tax years.  An example would be a case where MAP has decided on the existence of a permanent establishment in a particular year. The question that arises is whether the same issues pertaining to other years could be dealt with under the same MAP procedure.

After an audit and where MAP has been decided, taxpayers sometimes change their position for subsequent years in line with the outcome of the audit.

Normally, there would be no action from the competent authority as it would be a matter of self-adjustment by the taxpayer. Therefore, the OECD Secretariat recommends that self- adjustments should also be granted access to MAP.

Accordingly, jurisdictions should seek to implement procedures allowing taxpayer requests for multi-year resolution through the MAP of recurring issues with respect to filed tax years.

Implementing MAP arbitration or other dispute resolution mechanisms

Statistics show a small number of unresolved MAP cases, but many cases are not resolved within the 24 months.

Therefore, there is generally strong support for mandatory binding MAP arbitration to ensure that taxpayers receive the final and full resolution of their cases in line with the treaty within a set timeframe. Alternatively, countries should adopt other dispute resolution mechanisms to give taxpayers assurance and certainty.

The questions that arise are whether the proposal for arbitration will guarantee an outcome within a specific time frame and whether there are benefits to having arbitration provisions in a tax treaty. 

To alleviate the concerns of jurisdictions opposed to MAP arbitration, two suggestions are proposed: capacity-building measures and more global dialogue, particularly with those with arbitration experience.

Non-binding dispute mechanisms, such as mediation, can be another solution but does not offer the same advantages as binding arbitration and may take away resources and time.

Some argued that mediation may not necessarily be an improvement because of the special relationship that competent authorities have with each other coupled with the fact that they will have a portfolio of cases, and it would be difficult to separate one case and give it a special treatment.

Another possibility is to have pre-MAP solutions, like pre-filing APAs, where there is a discussion with competent authorities to avoid the case being put forward into MAP. This would also enhance MAP timeliness.

A further example of a pre-MAP process is the supplementary dispute resolution mechanism. This is a multi-tiered process and includes facilitating structured discussions (e.g., transfer pricing cases) and advisory opinion on arbitration. Taxpayers can choose what is appropriate for them. 

Supplementary dispute resolution has a role to play in MAP, assisting with the resolution of disputes.  The best time to engage in such a process is when MAP is still a shared issue and before it develops into a dispute.

Paragraph 3 of Article 25 of the OECD Model already contains provisions that allow countries to engage before the taxpayer makes a formal MAP request. Guidance is provided in para 4 of Article 25 of the Model treaty on engaging in such a supplementary dispute resolution process.

Stakeholders also suggested adopting an accelerated competent authority procedure (ACAP). This is a commonsense way to conserve competent authority examination and taxpayers’ resources and provide the information that taxpayers need to be compliant once the case is resolved.

 MAP statistics reporting framework

The current OECD MAP statistics provide a picture of each jurisdiction’s MAP caseload, the evolution of its inventory, the time taken to close cases, and the outcomes of these cases.  

It was suggested at the consultation meeting that providing additional information would allow a fuller assessment of how competent authorities are performing. Such information could include the age of cases remaining in inventory and average resolution time per category of outcome.

The reporting framework for MAP statistics could include additional data relating to pending or closed MAP cases.

Information could also be provided on other practices related to MAP and APA statistics, such as relevant treaty disputes, details where access is denied, implementation of MAP assistance, and monitoring the implementation of the MAP.

However, it was noted that the additional reporting could give rise to cost concerns for tax administrations with limited resources.

—Parwin Dina is Lead Client Service Partner and Global Tax Leader, GTS (Global Tax Services) UAE.