Executive summary

On October 5, 2015, the Organization for Economic Co-operation and Development (OECD) released its Final Report on improvingthe effectiveness of dispute resolution mechanisms(Action 14) under its Action Plan on Base Erosion and Profit Shifting (BEPS). This report was released in a package that included Final Reports on all 15 BEPS Actions.

The Action 14 report, Making Dispute Resolution Mechanisms More Effective (the Final Report), presents a commitment by countries to implement a so-called Minimum Standard on dispute resolution, according to the OECD.

The Final Report clarifies that its publication means that the G20 and OECD countries participating in the BEPS project have agreed to implement three overarching principles that represent a Minimum Standard for the mutual agreement procedure (MAP) process by incorporating these principles into domestic law and/or their treaty interpretation/application. The Minimum Standard principles include:

(1) Allowing taxpayers access to the MAP process when the requirements for taxpayers to access the MAP process are met

(2) Assuring that domestic administrative procedures do not block access to the MAP process

(3) Implementation by countries of Article 25 of the OECD Model Tax Convention in good faith

In addition, the Final Report introduces 11 so-called Best Practices that complement the respective Minimum Standard principles. While the Minimum Standards reflect consensus by the participating countries to take specific measures that are aimed at resolving treaty-based disputes in a timely manner, the Best Practices have not been approved by all G20 and OECD countries. The Best Practices generally have a more subjective and qualitative character, but reflect the OECD's concern that these issues ought to be addressed in order to improve the functioning of the MAP process.

Finally, the Final Report lists a group of 20 countries that have declared their commitment to provide for mandatory binding MAP arbitration.

EY is hosting a series of webcasts that will provide a comprehensive review of the final BEPS reports and outlook for country action. The Final Report on Action 14 will be addressed in a webcast on Dispute Resolution and BEPS Action 14 on December10, at 10 AM, EST.

Detailed discussion

In contrast to the OECD discussion draft on Action 14 issued on December 18, 2014,¹ which presented a series of options, questions and suggestions as to how to improve dispute resolution mechanisms, the Final Report presents tangible and agreed-to proposals to improve dispute resolution.

Minimum Dispute Resolution Standard

Implementing Article 25 of the OECD Model Tax Convention in good faith

The Minimum Standard requires Article 25 to be implemented and applied in such a way that it allows competent authorities to discuss and resolve differences or difficulties regarding the interpretation or application of the OECD Model Tax Convention. That means that participating countries must implement paragraphs 1-3 of the OECD Model entirely in the MAP article of their treaties and that countries should allow for MAP filings addressing the elimination of double taxation in cases not (explicitly) provided in the OECD Model. It also means that transfer-pricing issues leading to economic double taxation should qualify for MAP relief.

Good faith implementation of Article 25 furthermore means that, unless the treaty specifically lists certain limitations, one competent authority cannot unilaterally cite perceived abuse by a taxpayer as reason to block taxpayer access to MAP. Such a decision must be reviewed by the other country's competent authority. This does not mean, however, that filing a MAP request will eventually result in avoidance of double taxation. That still remains to be decided by the respective competent authorities during the MAP process.

In addition, good faith implementation entails the following:

(i) A commitment to resolve a MAP case within 24-months

(ii) Improving MAP effectiveness by becoming member of the Forum of Tax Administration MAP Forum (FTA MAP Forum)

(iii) Timely reporting of a country's MAP statistics

(iv) Allowing the FTA MAP Forum to review of the minimum MAP standards

(v) Explicitly providing or clarifying whether the country allows for MAP arbitration or not

Related best practice

Best Practice #1: Countries should include paragraph 2 of Article 9 in their tax treaties. This regards the obligation of the Other Contracting State to make appropriate adjustments if a transfer-pricing adjustment is made in a Contracting State to reflect the arm's-length standard. Some countries are of the opinion that, without paragraph 2, they cannot make a corresponding adjustment, and this Best Practice is intended to resolve this issue.

Assuring that domestic procedures don't block access to the MAP process

The discussions on Action 14 identified a number of different obstacles to dispute resolution through the MAP process. Those countries that have accepted the Minimum Standard are required to take steps to counter those obstacles and allow for efficient dispute resolution through the use of MAP that include the following:

(i) Publish rules, guidelines and procedures on how to access and use the MAP process and take appropriate measures to ensure this information is available to taxpayers

(ii) Publish MAP guidance on a shared platform using a dedicated country MAP profile format that will be developed by the FTA MAP Forum

(iii) Assure that the staff in charge of the MAP process has the authority to resolve cases timely and does not depend on the approval or direction of the tax administration personnel who made the adjustments

(iv) Assure that performance indicators for competent authority staff do not include sustained audit adjustments or the maintaining of tax revenue, but rather include the number of MAP cases resolved, consistency in treaty application and the time to resolve MAP cases

(v) Assure that adequate resources are provided to the MAP function

(vi) Clarify that audit settlements between tax authorities and taxpayers do not preclude access to MAP (this may be different when a taxpayer voluntarily requests a final audit settlement and it is clear that the settlement is handled by an independent body, but countries should notify treaty partners of such processes)

(vii) Allowing for rollback of Advance Pricing Agreements (APAs) in appropriate cases, if there is an APA program in place

Related best practices

Best Practice #2: Countries should have appropriate procedures in place to publish, on an anonymous basis, agreements reached under paragraph 3 of Article 25 in order to encourage consistent bilateral application of tax treaties and to provide guidance for future disputes.

Best Practice #3: Countries should develop global awareness of the audit/examination functions involved in international matters through the delivery of the FTA's "Global Awareness Training Module" to appropriate personnel. The FTA encourages global awareness of audit functions, which includes awareness of: (i) the potential for creating double taxation; (ii) the effect of proposed adjustments on the tax base of one or more tax jurisdictions and (iii) the processes and principles that competent authorities consider to reconcile competing jurisdictional claims. This best practice encourages countries to participate in the FTA's activities in this respect.

Best Practice #4: Countries should implement bilateral APA programs. Bilateral agreements present an increased level of certainty for both governments and taxpayers and can prevent transfer pricing disputes.

Best Practice #5: Countries should implement appropriate procedures to permit taxpayer requests for multi-year resolution of recurring issues for filed tax years through MAP, if the relevant facts and circumstances are the same and subject to verification of such facts and circumstances.

Allowing taxpayers access to the MAP process when the requirements for access to MAP are met

To allow taxpayers to make use of Article 25, and in particular paragraph 1 (presenting a case within three years to the competent authority of the State of which the taxpayer is resident), this component of the Minimum Standard requires countries to make sure that both competent authorities are aware of MAP requests that are filed. This means that a taxpayer should be able to file a request in either of the Contracting States (which would require an amendment to the current wording of Article 25 paragraph 1) or, alternatively, that a bilateral notification or consultation process should be implemented to allow the other competent authority to be informed in case one competent authority considers the taxpayer's objection not justified.

Furthermore, participating countries must publish MAP guidance that clearly identifies the specific information and documentation that is needed to submit a request for MAP assistance. This serves to avoid countries limiting access to MAP based on the argument that there is insufficient information provided by the taxpayer, once the taxpayer has complied with the published guidance.

Finally, the Minimum Standard requires countries to allow for implementation of MAP agreements regardless of the applicable time limits in domestic law of the Contracting States. Countries not willing to do so should, alternatively, limit the time in which they may make an adjustment under Article 9(1) (Associated Enterprises) or Article 7(2) (Business Profits) to avoid the potential for taxpayers to be subject to late adjustments for which no MAP relief is available.

Related Best Practices

Best Practice #6: Countries should ensure that appropriate measures are taken to suspend collection procedures while a case is pending in MAP. At a minimum, the same suspension of collection procedures should apply to MAP that apply to domestic administrative procedures or judicial remedies.

Best Practice #7: MAP should be available to taxpayers as an option regardless of the judicial or administrative remedies provided under domestic law, and countries should facilitate recourse to MAP for taxpayers. This means that taxpayers should be able to choose whether they go to MAP or another dispute resolution forum.

Best Practice #8: A country's published MAP guidance should include an explanation of the relationship between MAP and domestic law administrative and judicial remedies. In particular, it should be clarified whether the competent authority considers itself legally bound by a domestic court decision when handling a MAP case or the competent authority may deviate from a domestic court decision.

Best Practice #9: A country's published MAP guidance should provide that taxpayers can file for MAP relief in the case of bona fide, taxpayer-initiated adjustments that are permitted under the domestic law of a treaty partner. To the extent there is a good-faith effort by a taxpayer to ensure compliance in one country and, for example, adjust a previously reported attribution of profits to a permanent establishment, taxpayers should be able to file for MAP relief in the other country in order to avoid resulting double taxation.

Best Practice #10: Countries' MAP guidance should also provide guidance on the consideration of interest and penalties in the MAP.

Best Practice #11: Countries' MAP guidance should provide guidance on multilateral MAPs and APAs.

The Final Report does not deliver on certain specific dispute resolution solutions that were requested in comments on the December 2014 discussion draft. Namely, the request for some form of mediation as part of the MAP process to allow competent authorities to resolve disputes and the request for the outsourcing of certain competent authority functions related to the MAP process to another international body are not addressed. It appears that the OECD views these proposals as best addressed by the FTA's MAP Forum or the FTA's "Global Awareness Training Module." This may also have been an area where no further consensus of the participating countries was possible.

In addition, the Final Report does not prescribe arbitration as the preferred dispute resolution solution. For arbitration, it only requires countries to explicitly provide or clarify whether the country allows for MAP arbitration or not. The Final Report, however, lists a group of 20 countries (Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States) that have declared their commitment to provide for mandatory binding MAP arbitration. To this end, a mandatory binding arbitration provision will be developed as part of the negotiation of the multilateral instrument envisaged by Action 15 of the BEPS Action Plan.

Implications

The Minimum Standards reflected in the Final Report are to be implemented through updated Commentary to the relevant OECD Model Tax Convention treaty articles. In some cases the principles that make up the Minimum Standard are to be included as changes to the text of the OECD Model.

The countries that have accepted the Minimum Standard also agreed that this Minimum Standard will be evaluated through a peer review monitoring mechanism. All OECD and G20 countries will undergo reviews regarding the implementation of the Minimum Standard, which will be memorialized in the form of a report that will identify and describe strengths and shortcomings that may exist and will provide recommendations as to how to address the shortcomings. This monitoring process is expected to be developed during the first quarter of 2016.

Webcasts on BEPS outcomes

EY is hosting a series of eight tax webcasts that will provide a comprehensive review of the final BEPS reports and the outlook for country action:

— OECD BEPS Project Outcomes: Highlights and Next Steps — October15, 10 AM, EDT
— New Reporting under BEPS Action 13 — October 20, 10 AM, EDT
— Digital Economy Developments and BEPS Action 1 — October 27, 12 noon, EDT
— Permanent Establishment Developments and BEPS Action 7 — November 5, 10 AM, EST
— Transfer Pricing and BEPS Actions 8-10 — November 12, 10 AM, EST
— Anti-abuse Measures under BEPS Actions 3, 5, 6 and 12 -November 19, 10 AM, EST
— Financial Payments and BEPS Actions 2 and 4 — December 3, 10 AM, EST
— Dispute Resolution and BEPS Action 14 — December10, 10 AM, EST

For more information and to register for the webcast series, click here.

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ENDNOTES

¹ See EY Global Tax Alert, OECD releases discussion draft on more effective dispute resolution mechanisms under BEPS Action 14, dated 22 December 2014.