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22 December 2017 OECD releases Italy peer review report on implementation of Action 14 Minimum Standards On 15 December 2017, the Organisation for Economic Co-operation and Development (OECD) released the second batch of peer review reports relating to the implementation of the Base Erosion and Profit Shifting (BEPS) Minimum Standards under Action 14 on improving tax dispute resolution mechanisms1 (the Report). Italy was among the assessed jurisdictions in the second batch.2 Overall, the Report concludes that Italy meets most of the elements of the Action 14 Minimum Standards. In the next stage of the peer review process, Italy's efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 on Making Dispute Resolution Mechanisms More Effective.3 The Terms of Reference translated the Action 14 Minimum Standards into 21 elements and the best practices into 12 items. The Assessment Methodology provided procedures for undertaking a peer review and monitoring in two stages. In Stage 1, a review is conducted of how a BEPS member implements the Minimum Standards based on its legal framework for Mutual Agreement Procedures (MAPs) and how it applies the framework in practice. In Stage 2, a review is conducted of the measures the BEPS member takes to address any shortcomings identified in Stage 1 of the peer review. Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration's (FTA) MAP Forum. In summary, Stage 1 consists of three steps or phases: (i) obtaining inputs for the Stage 1 peer review; (ii) drafting and approval of a Stage 1 peer review report; and (iii) publication of Stage 1 peer review reports. Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalized, it is sent for approval of the FTA MAP Forum and later to the OECD Committee on Fiscal Affairs' to adopt the report for publication. Finally, it is also worth mentioning that Italy signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument) on 7 June 2017. By this convention, Italy has committed itself to update/integrate its MAP discipline in order to facilitate compliance with Action 14 requirements. The report is divided into four parts, namely: (i) preventing disputes; (ii) availability and access to MAP; (iii) resolution of MAP cases; and (iv) implementation of MAP agreements. Each part addresses a different component of the minimum standard. The report includes a number of recommendations relating to the Minimum Standards. In general, the performance of Italy with regard to MAP has proven to be satisfactory in their respective reports. Overall, Italy meets most of the elements of the Action 14 Minimum Standards. Italy allows, including in the Advance Pricing Arrangement (APA), only the fiscal year in which the APA request was submitted in the original request. Therefore, a roll-back of a bilateral APA is not granted for those fiscal years preceding the fiscal year in which the APA request was submitted. In that regard, Italy noted that a similar effect to the roll-back can be achieved by means of the MAP discipline. As a matter of fact, Italy noted that previous fiscal years could fall within the scope of a MAP. Furthermore, Italy stressed that the Italian competent authority would be ready to apply the same methods and criteria as agreed with the other competent authority in a bilateral APA with regard to the resolution of a MAP case, under the same facts and circumstances. Nevertheless, the Report provides the recommendation for Italy to allow, and in practice provide, roll-back of bilateral APAs in appropriate cases. Out of Italy's 101 tax treaties, 97 contain a provision equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention requiring their competent authority to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the tax treaty. The remaining treaties include a slightly different wording that makes these treaties not fully equivalent to the above-mentioned provision. In that regard, Italy noted that, in practice, it endeavors to resolve with its treaty partners by mutual agreement any difficulties or doubts arising as to the interpretation or application of tax treaties, whether or not the applicable treaty contains a provision equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention. Furthermore, Italy reported that it recently signed the Multilateral Instrument (MLI) with a view to update automatically, or via bilateral negotiation, those tax treaties that do not contain a provision equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention. This topic addresses the possibility for a person to activate the MAP irrespective of the remedies provided by Italy's domestic law. The majority of the treaties entered into by Italy provide, in the relevant protocol, that MAP is not an alternative for national controversy proceedings, which shall be in any case preventively initiated. As a consequence, the majority of the tax treaties entered into by Italy are not in line with the recommendations of Action 14, for the topic at issue. Therefore, the Report includes a recommendation for Italy to request amending those treaties to no longer include such protocol provision, so as to ensure that taxpayers can both in theory and in practice request MAP assistance irrespective of the initiation of domestic remedies. With respect to the period of time for the filing of a MAP request, Italy additionally reported that it intends – pursuant to the MLI – to modify its tax treaties if these do not allow taxpayers to present a MAP request within a period of at least three years from the first notification of the action resulting in taxation not in accordance with the provisions of the tax treaty. Finally, Italy noted that it has implemented a notification process for when its competent authority considers that the objection raised in the MAP is not justified and, therefore, this results in the Italian procedure being in line with the minimum requirements provided by Action 14. Only one tax treaty, out of 101 tax treaties, contains a provision equivalent to Article 9(2) of the OECD Model Tax Convention requiring one Contracting State to make an (autonomous) correlative adjustment, if a transfer pricing adjustment is made by the other Contracting State. As a matter of fact, due to the reservation made by Italy in the OECD Commentary, Italy will make correlative adjustments only as a consequence of a MAP. In the Report, Italy noted that it recently implemented a new procedure, in force since 24 June 2017, according to which the Italian tax authorities or the Italian competent authority are allowed to make corresponding adjustments, without having recourse to the MAP. In cases where taxpayers have entered into an audit settlement with the Italian Revenue Agency, Italy provides access to MAP requests submitted under a tax treaty. In such a case, however, the Italian competent authority will only present such a case to the other Contracting State to seek correlative relief in the other country. Contrarily, Italian competent authorities will not agree to enter into a MAP under the European Union (EU) Arbitration convention if the taxpayers entered into an audit settlement with the Revenue Agency. On this point, the Report provides a recommendation for Italy to grant access to MAP also for cases submitted under the EU Arbitration Convention, even if the tax authority and the taxpayer entered into an audit settlement in the case under review. This sentence provides that competent authorities may also consult together for the elimination of double taxation in cases not provided for in the Convention. Italy reported it recently signed the MLI with the objective to update automatically, or via bilateral negotiation, those tax treaties that do not contain a provision equivalent to Article 25(3), second sentence, of the OECD Model Tax Convention. With respect to the timing to conclude the MAP, according to the Action 14's prescriptions, tax authorities are supposed to resolve MAP cases within an average time frame of 24 months. As of 31 December 2016, Italy has an inventory covering 437 MAP requests with an average time of 27.5 months to resolve the cases. In that regard, several peers expressed concerns about the timeliness of response by Italy's competent authorities in MAP procedures. Therefore, improvements are expected in that regard and Italy highlighted that it has recently reorganized its competent authority function to improve the resolution of MAP cases in a timely, effective and efficient manner. Regarding the commitment of Italy in resolving MAP cases, the Report noted that 100 of Italy's treaties, out of 101, contain a provision equivalent to that of the OECD Model Tax Convention requiring its competent authority to endeavor to resolve the case by mutual agreement with the other treaty partner. For the remaining treaty, Italy reported it recently signed the MLI with a view to inter alia update the tax treaty that does not contain such a provision. Most of the tax treaties entered into by Italy do not include the provision according to which the agreement with the foreign competent authorities shall be implemented notwithstanding any time limits in the domestic law. As a consequence, Italy reported it will implement all agreements reached in MAP, to the extent that they are allowed under the domestic statute of limitations. This statute of limitations does not apply insofar as it is overridden by the applicable tax treaty that includes the equivalent to Article 25(2), second sentence, of the OECD Model Tax Convention. The above discipline may turn out to be a limitation to the Minimum Standards provided by the Action 14. In that regard, Italy indicated that it will update its domestic legislation to ensure that MAP agreements can be implemented notwithstanding domestic time limits and where the relevant treaties do not have the equivalent of Article 25(2), second sentence, of the OECD Model Tax Convention. Italy is already working to address deficiencies identified in its peer review and will now move on to Stage 2 of the process, where Italy's efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Under the peer review program methodology, Italy shall submit an update report to the Forum on Tax Administration's MAP Forum within one year of the OECD Committee on Fiscal Affairs' adoption of the Stage 1 peer review report. In a post-BEPS world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Italy's peer review report represents the continued recognition and importance of the need to achieve tax certainty for MNEs on cross-border transactions. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely MAP process. Furthermore, the peer review for Italy provides insights to taxpayers on the availability and efficacy of MAP. With additional countries continuing to be reviewed, the OECD has made it known that taxpayer input continues to be welcomed on an ongoing basis. With stakeholder feedback in mind, businesses are encouraged to share their views with the OECD on the peer review for Italy and any other jurisdictions, and to comment on whether the next iteration of the OECD's assessment of tax administration's MAP performance warrants greater feedback from taxpayers as the primary source. Feedback from the international tax community is the logical next step after peer review, which may help to further validate the current favorable result. 1 See EY Global Tax Alert, OECD releases second batch of peer review reports on Action 14, dated 15 December 2017. 3 See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October 2016.
Document ID: 2017-5073 |
