Executive summary

On December 18, 2014, the Organisation for Economic Co-operation and Development (OECD) released a discussion draft in connection with Action 14 on the effectiveness of dispute resolution mechanisms under its Action Plan on Base Erosion and Profit Shifting (BEPS). The document, BEPS Action 14: Make Dispute Resolution Mechanisms More Effective (the Discussion Draft or the Draft), anticipates that treaty-based disputes will increase as a result of the work on BEPS and reaffirms the OECD's commitment to ensure certainty and predictability for business by improving the effectiveness of the Mutual Agreement Procedure (MAP).

The Draft does not represent consensus views of the OECD's Committee on Fiscal Affairs or its subsidiary bodies. In particular, the Draft underscores the lack of consensus on the appropriateness of mandatory binding arbitration as a tool for increasing the effectiveness of the MAP.

The Draft identifies obstacles that are preventing countries from resolving treaty-related disputes through the MAP and proposes options for addressing those obstacles. The obstacles identified in the Draft vary widely, as do the suggested responsive options, which include amendments to the OECD Model Tax Convention and its Commentaries, recommendations for changes in domestic law, and adoption of administrative guidance at the domestic and international level. The Draft states that the work on Action 14 is intended to result in measures that will constitute a minimum standard to which participating countries will commit, but additional optional and more comprehensive measures will also be included (such as, for example, MAP arbitration).

The Discussion Draft invites interested parties to both comment on the obstacles and responsive measures identified in the Draft and raise other obstacles or suggest additional solutions. Comments should be submitted to the OECD by January 16, 2015. The OECD has indicated its intention to have a public consultation on January 23, 2015.

Detailed discussion

The Discussion Draft states the OEC intends "to introduce a three-pronged approach designed to represent a step change in the resolution of treaty-related disputes through the MAP," consisting of (i) political commitment to effectively eliminate taxation not in line with the OECD Model Convention, (ii) new measures to improve access to the MAP and improved procedures, and (iii) establishing a monitoring mechanism. The Draft addresses the second prong of this approach, the development of measures for improving the MAP.

The Discussion Draft identifies four principles that will guide the political commitment and implementing measures:

— Ensuring that treaty obligations related to the MAP are fully implemented in good faith

— Ensuring that administrative processes promote the prevention and resolution of treaty-related disputes

— Ensuring that taxpayers can access the MAP when eligible

— Ensuring that cases are resolved once they are in the MAP

Ensuring that treaty obligations related to the MAP are fully implemented in good faith

The Discussion Draft proposes measures to address obstacles to fully implementing MAP related treaty obligations — the absence of an obligation to resolve cases under MAP and the practice of denying access to the MAP or refusing to make corresponding adjustments for transfer pricing cases when a treaty does not expressly state such obligation.

An amendment to the Commentary to Article 25 (1) of the OECD Model Tax Convention is proposed in the Discussion Draft to emphasize that the MAP is an integral part of the obligations arising from conclusion of a treaty.

The Draft proposes that countries could commit to include a second paragraph to Article 9 in all their tax treaties (potentially using the multilateral instrument envisaged in Action 15) to expressly state the obligation for corresponding adjustments and access to the MAP in cases of economic double taxation.

Ensuring that administrative processes promote the prevention and resolution of treaty-related disputes

The Discussion Draft points out the importance of appropriate administrative practices in ensuring the effective application of the MAP. Work in this area will be complemented and reinforced by parallel work being undertaken by the Forum on Tax Administration's MAP Forum (FTA MAP Forum).

The administrative obstacles identified in the Discussion Draft include the lack of independence of the competent authorities from the audit, examination and treaty negotiating functions within the tax authorities, the lack of appropriate financial, personnel and knowledge resources, and the evaluation of the competent authority on the basis of criteria such as audit adjustments or tax revenue. Adoption by countries of the best practices currently included in the OECD Manual on Effective Mutual Agreement Procedure (MEMAP) on these issues is suggested as a measure to handle each of these obstacles.

The Discussion Draft notes that Article 25 (3) of the OECD Model Tax Convention allows the competent authorities to pre-emptively resolve general questions of treaty application and interpretation and to deal with cases of double taxation not provided for in the treaty. It is pointed out in the Draft that competent authorities, for different reasons, do not use this procedure widely. It is, therefore, suggested that countries commit to using this mechanism more effectively and to publish agreements relating to general matters in order to prevent future disputes. Best practices currently included in the MEMAP also could be adopted to clarify the power to relieve double taxation in cases not provided for in the treaty. In addition, it is suggested that the Commentary to Article 25 (3) could be amended to expand the guidance on the role of this provision in resolving disputes that arise regarding the meaning of treaty terms and to clarify the legal status of agreements reached under this provision.

Furthermore, according to the Discussion Draft, some countries may allow their auditors to conclude settlements on treaty-related disputes that require taxpayers not to access their rights to initiate the MAP. The Draft proposes that countries could commit to discontinue that practice or to implement procedures for spontaneous notification of both countries' competent authorities of the details of such settlements. In addition, the Draft states that Changes to the Commentary to Article 25 could address obstacles to an effective MAP that are created by audit settlements.

The Discussion Draft identifies as an obstacle the fact that not all countries have implemented bilateral Advance Pricing Agreement (APA) programs and proposes that countries could commit to such implementation. The Draft identifies as a further obstacle the fact that some countries do not have administrative processes for addressing multi-year issues in MAP and APA cases and proposes that countries could commit to implement procedures to permit taxpayers' requests for the MAP for recurring (multi-year) issues and roll-back of APAs.

Ensuring that taxpayers can access the MAP when eligible

Inconsistencies between competent authority approaches in allowing access to the MAP are, according to the Discussion Draft, substantially hindering its effectiveness in relieving double taxation. The Draft also observes that, in some countries, access to the MAP is highly complex and non-transparent or may entail unduly onerous documentation requirements. It is proposed that countries apply best practices currently included in the MEMAP on the transparency and simplicity of procedures and on the minimum contents of a request for MAP assistance.

The Draft points out that, in some countries, there is considerable uncertainty whether taxpayers have access to the MAP in cases involving the application of domestic or treaty-based anti-abuse provisions. The Draft also points out that there is no general rule denying MAP access in cases of perceived abuse, and proposes that countries could explicitly commit to provide access to the MAP when there is disagreement between the taxpayer and the competent authority regarding application of an anti-abuse rule. In addition, if countries would seek to limit or deny access to the MAP in these cases, they could commit to specifically and expressly agree on such limitations with their treaty partners. Finally, when a country would deny MAP access based on an anti-abuse provision, it could commit to notify its treaty partner about the case.

The Discussion Draft states that further impediments could arise if a competent authority, although allowing access to the MAP, decides unilaterally that a taxpayer's objection is not justifiable and does not consider itself obliged to notify the other competent authority of its decision. The Draft notes that this obstacle could be solved by the development of a mechanism for bilateral notification, the clarification of the meaning of "justified objection" in the Commentary, or the amendment of Article 25 (1) of the OECD Model Tax Convention to permit a request for MAP assistance to be made to either competent authority.

The Discussion Draft identifies as an obstacle uncertainty that can exist in countries regarding the interaction of domestic law remedies and the MAP. The Draft further notes that the MAP will typically provide a comprehensive bilateral solution while a domestic law recourse procedure may fail to relieve international double taxation. The Draft proposes that countries could commit to clarify in their domestic laws the relationship between the MAP and domestic law remedies, including committing to facilitate recourse to the MAP as the first option to resolve a treaty-related dispute.

The Discussion Draft suggests that countries could commit to work with their treaty partners in determining the approach to collection of taxes pending the resolution of MAP cases.

Because time limits for filing MAP requests depend on terms not defined in treaties, the Discussion Draft suggests measures to alleviate the uncertainty when interpreting the meaning of "first notification of the action arising not in accordance with the provisions of the Convention" in different jurisdictions. In addition, the Draft suggests other measures to protect taxpayers from being denied MAP relief when their requests are filed within the time provided in the treaty, but long after the tax years in issue.

The Discussion Draft also suggests that changes to the Commentaries could be made to clarify the circumstances where the MAP could address cases involving self-initiated foreign adjustments.

Ensuring that cases are resolved once they are in the MAP

The Discussion Draft states that cases reaching the MAP can still remain unresolved due to procedural and other blockages impeding the timely and effective conclusion of a case. The Draft identifies obstacles such as the lack of cooperation, transparency or good competent authority working relations. As a solution, it is proposed that participating countries adopt best practices currently included in the MEMAP concerning fair and objective MAP negotiations and committing to a fully transparent MAP process in which competent authorities exchange documentation and information in a timely manner and communicate regularly, including in face-to-face meeting, as well as make use of the preemptive interpretative authority provided under Article 25(3) of the OECD Model Tax Convention.

The Discussion Draft states that the absence of mandatory and binding MAP arbitration has been recognized as an obstacle to effectively resolving cases. The Draft notes that this issue has been addressed with the addition in Article 25(5) of the OECD Model Tax Convention of mandatory binding arbitration in 2008. The Draft also reiterates that the adoption of mandatory arbitration in tax treaties has not been as broad as expected and discusses a number of policy and practical issues related to the use of mandatory binding arbitration.

The Discussion Draft highlights the policy concern that MAP arbitration may be considered to interfere with national sovereignty and suggests that some countries may prefer to limit the scope of MAP arbitration to specific treaty articles or cases. The Draft also highlights that a decision of an arbitration board may conflict with a domestic court decision and may not be implemented for this reason. To address those concerns, several measures are suggested in the Draft, such as amending the Commentary to Article 25 (5) of the OECD Model Convention to allow countries to limit the scope of arbitration. The Draft suggests that countries could also commit to develop guidance on the interaction between MAP implementation of the decision of an arbitration panel and pending domestic litigation.

Practical issues identified in the Discussion Draft on arbitration are the lack of guidance on the appointment of arbitrators, the confidentiality of the information shared in the course of the arbitration process, the form of the decision-making process (conventional or last best offer approach), the manner of providing evidence, the role of the taxpayer in the process, the approach to multiple, contingent and integrated issues, and the costs for administering the process. The Draft suggests several measures to address these issues.

The Discussion Draft also points out the need for implementation of effective mechanisms to resolve multi-jurisdictional international tax disputes. Examples of multilateral situations that raise issues for MAP are: "triangular cases" (an entity delivers goods or services in another country through a permanent establishment based in a third country and an adjustment is made in that third country); cascading adjustments (adjustments leading to decrease in sales, which also affects payments to other parties based on sales), and situations when an entity is providing services to several associated enterprises and different transfer pricing adjustments are made to the resulting charges in various countries. The Draft suggests that this issue could be addressed through a change in Article 25 and its Commentary addressing its application to multilateral MAPs and APAs.

Finally, the Discussion Draft addresses issues related to interest and penalties in the context of the MAP. It recommends that the Commentary to Article 25 be amended to explain that interest and penalties should in principle be treated in the same way as the taxes to which they are directly related.

Implications

The Discussion Draft is the first draft of the output to be produced under Action 14 of the OECD BEPS project. Even though the report does not propose adoption of universal mandatory and binding arbitration, the proposed practical measures could help improve the access of taxpayers to the MAP and ensure better protection against double taxation if they are implemented consistently.

Companies should evaluate how the proposed options may affect them, stay informed about developments in the OECD and in the countries where they operate or invest, and consider participating in the dialogue regarding the BEPS project and the underlying international tax policy issues.

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