Executive summary

On January 23, 2015, the Organisation for Economic Cooperation and Development (OECD) held a public consultation in connection with the Base Erosion and Profit Shifting (BEPS) project that was focused on Action 14 on improving the effectiveness of dispute resolution mechanisms. The consultation was an opportunity for stakeholders to engage directly with the OECD secretariat and the country delegates who are responsible for the work on this Action.

Detailed discussion

On December 18, 2014, the OECD issued a discussion draft on Action 14 on making dispute resolution mechanisms more effective (the Discussion Draft) (see Tax Alert 2014-2301). The Discussion Draft identifies obstacles that are preventing countries from resolving treaty-related disputes through the mutual agreement procedure (MAP) and proposes a series of options for addressing those obstacles. The Discussion Draft states that "there is no consensus on moving towards universal mandatory binding MAP arbitration." The OECD received over 400 pages of comments on the Discussion Draft, which are posted on its website.

The January 23, 2015 consultation was a dialogue among stakeholders, country tax officials, and the OECD secretariat on key issues and concerns raised in the comments. The consultation was hosted by OECD Working Party 1, which has responsibility for the OECD's work on tax treaty matters. This working group also has responsibility for other BEPS Actions, including the work on preventing treaty abuse (Action 6) and on preventing the artificial avoidance of PE status (Action 7), which were the subject of public consultations during the same week.

Delegates from 13 countries participated in the consultation. Also participating were business representatives from around the world, including EY representatives, and representatives of non-governmental organizations (NGOs). The session was live-streamed by the OECD and a recording will be available on the OECD website.

Opening remarks

The consultation began with opening remarks from the Belgian delegate chairing the subgroup on Action 14. She stated that the recommendations from the BEPS project may result in increased uncertainty. She observed that dispute resolution mechanisms are not always functioning as effectively as they should, as evidenced by the increase in pending MAP cases and MAP cases that are not effectively resolved or are withdrawn. She also described the three elements of the mandate the subgroup expects to deliver: (i) political commitment to effectively eliminate double taxation; (ii) new measures to improve access to the MAP and improved MAP processes; and (iii) a mechanism to monitor the proper implementation of the political commitment. She noted that the Discussion Draft focuses mainly on element (ii). With respect to arbitration, she stated that mandatory arbitration is considered to be an efficient tool, but has not been advanced further by the subgroup in the Discussion Draft because some countries oppose it.

The representative of the OECD's Business and Industry Advisory Committee stressed that a "political commitment" alone is not sufficient. He further expressed the view that the Forum on Tax Administration's (FTA) MAP Forum should be involved in the work on Action 14. He stated that binding arbitration must be included in the general standard for countries that are fully committed to avoiding double taxation, despite concerns about arbitration expressed by some countries. He further noted that sufficient resources and proper authority must be provided so that the MAP can be used to effectively and efficiently resolve cases.

General discussion

Commentators described progress on Action 14 as crucial for the success of the BEPS project. They further stated that the success of the BEPS project will require countries to be willing to fully support the BEPS project and businesses to be willing to fully accept its outcomes. Commentators suggested that a country may not be willing to adopt certain BEPS recommendations if they are viewed as giving a strategic advantage to another country, either in terms of enhanced revenue viewed as taken from the first country or in terms of favoring local taxpayers. Therefore, commentators reasoned that a robust and widely supported dispute resolution mechanism aimed at ensuring a fair and predictable application of the newly agreed standards could give countries confidence that their tax base can be protected from the unilateral actions of other countries, and, in turn, the confidence to adopt recommendations produced by the BEPS project. Commentators further suggested that the BEPS recommendations will likely raise taxes on many businesses and impose significant new reporting and compliance burdens. If the recommendations also significantly increase cases of double taxation that cannot be effectively resolved, businesses may not feel they are being treated fairly in the BEPS project and "cooperative compliance" may break down due to loss of trust between businesses and governments. Therefore, an improved dispute resolution mechanism is essential from the perspective of business.

The bulk of the comments focused on the urgent need for agreement on mandatory binding arbitration. Commentators noted that BEPS-driven disputes are happening already. They viewed the Discussion Draft as not going far enough, noting that minor changes will not make the difference needed and encouraging the working group to be more ambitious. Several commentators noted how successful the arbitration provision in the treaty between Canada and the United States has been in improving the resolution of MAP cases.

Some commentators expressed the view that there is no proven alternative to arbitration in improving dispute resolution. Some indicated that mediation could be a second best option for countries with sovereignty concerns about arbitration; others viewed mediation as not likely to contribute much to dispute resolution. A member of the OECD secretariat agreed that mediation may not be a productive step.

Some statements were made regarding the lack of a common understanding about what type of arbitration would be appropriate. Some commentators noted that the design of the arbitration approach is key. Support was expressed for use of the "last best offer" approach. There was some discussion about commercial arbitration approaches, but commentators noted that such approaches raise concerns among governments. The OECD secretariat member expressed the view that the "last best offer" approach is favored, as it is faster and less expensive.

An NGO representative stated that dispute resolution can only address a small percentage of matters and that therefore there is a need for rules that are clearer and easy to administer. In this regard, he described the transfer pricing rules as part of the problem. The NGO representative expressed the view that publication of MAP results is central to fairness and a principled tax system, objecting to what he described as a closed community deciding things behind closed doors. He cautioned that the discussion should not jump straight to arbitration with no basis for confidence in the outcome.

In addition to the substantial focus on the need for arbitration as a dispute resolution mechanism, there also was some discussion of other ways to improve the operation of the MAP. Commentators called for the competent authority function to be independent and to be adequately funded. The suggestion was made that the recommendations reflected in the OECD Manual on Effective Mutual Agreement Procedures (MEMAP), which are viewed as valuable, should be made part of the commentary to the OECD model tax convention. Several commentators also noted that the tone of the Discussion Draft should be elevated by replacing language stating that "countries could consider" the various MAP improvement options with language stating that countries "should" or "must" adopt the options. Some commentators stated that all countries should publish MAP statistics in order to better inform their treaty partners and businesses.

In addition, commentators stressed the importance of taxpayer involvement in resolving MAP cases, especially in MAP cases dealing with transfer pricing. It was explained that this is because the most time-consuming aspect of a MAP case is getting a full understanding the facts. Because the taxpayer is the party with the best knowledge, the involvement of the taxpayer in, for example, face-to-face meetings to answer questions on facts would be beneficial. Furthermore, commentators noted that the option of multilateral MAP cases was considered a useful tool for global operating companies that adopt global allocation models (e.g., for head office expenses).

The OECD secretariat member noted that many of the issues raised in the consultation were previously considered by the OECD and that the guidance reflected in the MEMAP is relevant. the actual implementation of this guidance, however, could be improved. The aim of the Discussion Draft was to identify areas in which these improvements could be made.

Some country delegates stated that current dispute resolution mechanisms are not as effective as they should be and recognized that the BEPS project will put more pressure on those mechanisms. In this regard, however, it was suggested by some that the resources needed to make improvements to the MAP may not be available as the other recommendations from the BEPS project are being implemented.

Closing remarks

Another member of the OECD secretariat concluded the consultation with some high-level points. She noted that it became clear in the consultation that the business community believes the BEPS project will lead to a tsunami of new MAP cases and she stated that the OECD must address this perception. She also noted that real political commitments are required to improve the MAP. In this regard, mandatory binding arbitration is viewed by the business community not as a "silver bullet," but the "gold standard," as it will not solve all the issues but will have a positive effect. She referenced the discussion about types of arbitration approaches and also the question whether arbitration decisions should be published in some form.

The OECD secretariat member indicated that it is clear that the business community views Action 14 as critical to the success of the BEPS project and stressed that the OECD will treat it as such. In addition, she stated that the OECD should not look at dispute resolution in isolation. The OECD should focus on both the technical aspects of BEPS and the clarity and administrability of its recommendations. Finally, she noted that MAP statistics are useful, but cautioned that not all countries provide statistics and that the information that is provided can be difficult to understand.

In terms of next steps, the working group will meet in March and will discuss modifications to be made to the Discussion Draft.

Implications

The discussion at the consultation underscored the business community's deep disappointment that the Discussion Draft on Action 14 did not include agreement on arbitration, which is viewed as a necessary mechanism for resolving disputes. This is particularly concerning in light of the expectation that recommendations under other BEPS Actions will increase disputes and the associated risk of double taxation. It is important for companies to keep informed of developments in this area in the OECD and in the countries in which they operate, to assess the implications of these developments for their business models and to consider actively engaging with policymakers in this international tax debate.

———————————————