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16 May 2018 OECD releases Korea's peer review report on implementation of Action 14 minimum standard On 12 March 2018, the Organisation for Economic Co-operation and Development (OECD) released the third batch of peer review reports relating to the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard under Action 14 on improving tax dispute resolution mechanisms.1 Korea was among the assessed jurisdictions in the third batch. Overall the report concludes that Korea meets almost all of the elements of the Action 14 minimum standard. In the next stage of the peer review process, Korea'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.2 The Terms of Reference translated the Action 14 minimum standard 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 standard based on its legal framework for Mutual Agreement Procedure (MAP) 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 consist of three steps or phases:
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.
The report includes 19 recommendations relating to the minimum standard. In general, the performance of Korea with regard to MAP has proven to be satisfactory in their respective reports. Overall, Korea meets almost all of the elements of the Action 14 minimum standard. Korea generally meets the Action 14 minimum standard concerning the prevention of disputes. It has an extensive tax treaty network with 95 tax treaties in place and has an established MAP program. Out of Korea's 95 tax treaties, 3 do not contain a provision that is equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention (The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention). It is recommended that Korea should as quickly as possible ratify the Multilateral Instrument (MLI) to incorporate the equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention in the two treaties that currently do not contain such equivalent and that will be modified by the MLI upon its entry into force. For the remaining treaty that will not be modified by the MLI to include the equivalent of Article 25(3), first sentence, of the OECD Model Tax Convention following its entry into force, Korea should request the inclusion of the required provision via bilateral negotiations. To this end, Korea should, following the outcome of its analysis on which treaties need modification in light of the Action 14 minimum standard, put a plan in place on how it envisages updating this treaty to include such equivalent. In addition, Korea should maintain its stated intention to include the required provision in all future treaties. Finally, it was recommended that Korea should continue to provide for roll-back of bilateral APAs in appropriate cases, as it has done thus far. Korea generally meets the requirements concerning availability and access to MAP in light of the Action 14 minimum standard. Out of Korea's 95 tax treaties, 7 do not contain a provision that is equivalent to Article 25(1) of the OECD Model Tax Convention. Of those 7 tax treaties:
It is recommended that Korea should as quickly as possible ratify the MLI to incorporate the equivalent to Article 25(1) of the OECD Model Tax Convention in those treaties that currently do not contain such equivalent. This concerns both:
For the remaining treaties that will not be modified by the MLI following its entry into force to include such equivalent, Korea should request the inclusion of the required provision via bilateral negotiations. To this end, Korea should, following the outcome of its analysis on which treaties need modification in light of the Action 14 minimum standard, put a plan in place on how it envisages updating these treaties to include such equivalent. In addition, Korea should maintain its stated intention to include the required provision in all future treaties. With respect to areas for improvement and recommendations, Korea has in place a formal process to notify the other competent authority in cases where the Korean competent authority considered the objection raised in the MAP request as not justified. However, it was not possible to assess whether the notification process is applied in practice because no such cases have occurred since 1 January 2014. As Korea has thus far granted access to MAP in eligible transfer pricing cases, it should continue granting access for these cases. With respect to access to MAP in relation to the application of anti-abuse provisions, Korean domestic law allows the competent authority not to initiate a MAP where it is recognized that MAP is utilized for purposes of tax avoidance, which bears the risk that in cases where anti-abuse provisions are being applied, access to MAP will not be granted. Consequently, relating to the provision included in Article 22(2) Adjustment of International Taxes Act (AITA), Korea should follow-up its stated intention to take appropriate action to ensure that the article would not limit access to MAP in cases concerning the application of anti-abuse provisions. Nevertheless, as Korea has thus far granted access to MAP in eligible cases concerning whether the conditions for the application of a treaty anti-abuse provision have been met or whether the application of a domestic law anti-abuse provision is in conflict with the provisions of a treaty, it should continue granting access for these cases. As Korea has thus far not limited access to MAP in eligible cases when taxpayers have complied with Korea's information and documentation requirements for MAP requests, it should continue this practice. Out of Korea's 95 tax treaties, 9 do not contain a provision that is equivalent to Article 25(3), second sentence, of the OECD Model Tax Convention. Korea should as quickly as possible ratify the MLI to incorporate the equivalent to Article 25(3), second sentence, of the OECD Model Tax Convention in those six treaties that currently do not contain such equivalent and that will be modified by the MLI upon its entry into force. For the three remaining treaties that will not be modified by the MLI to include the equivalent of Article 25(3), second sentence, of the OECD Model Tax Convention following its entry into force, Korea should request the inclusion of the required provision via bilateral negotiations. To this end, Korea should, following the outcome of its analysis on which treaties need modification in light of the Action 14 minimum standard, put a plan in place on how it will update these treaties to include such equivalent. In addition, Korea should maintain its stated intention to include the required provision in all future treaties. Moreover, although not part of the Action 14 minimum standard, in order to further improve the level of clarity, Korea could consider including in its MAP guidance information on:
Korea also should ensure that future updates of the information on MAPs are made publicly available and easily accessible. Its MAP profile, published on the shared public platform, should be updated if needed. In addition, although its MAP profile is almost complete, Korea could consider, as suggested by a peer, including information on the unilateral allowance in its domestic law to close MAP cases if after five years no agreement has been reached. To this end, it could also refer to the relevant sections of its domestic law and could attach an excerpt of such sections to its MAP profile, like Korea did for the other relevant sections of its domestic law. Furthermore, Korea could also consider adding an e-mail address of its competent authority in the general information section of its MAP profile. Out of Korea's 95 tax treaties, 2 do not contain a provision that is equivalent to Article 25(2), first sentence, of the OECD Model Tax Convention. Korea should as quickly as possible ratify the MLI to incorporate the equivalent to Article 25(2), first sentence, of the OECD Model Tax Convention in the one treaty that currently does not contain such equivalent and that will be modified by the MLI upon its entry into force. For the remaining treaty that will not be modified by the MLI to include the equivalent of Article 25(2), first sentence, of the OECD Model Tax Convention following its entry into force, Korea should request the inclusion of the required provision via bilateral negotiations. To this end, Korea should, following the outcome of its analysis on which treaties need modification in light of the Action 14 minimum standard, put a plan in place on how it envisages updating this treaty to include such equivalent. In addition, Korea should maintain its stated intention to include the required provision in all future treaties. As part of the peer review, Korea submitted comprehensive MAP statistics regarding the time of the MAP process on the basis of the MAP Statistics Reporting Framework. Based on the information provided by Korea's MAP partners, its post-2015 MAP statistics actually match those of its treaty partners as reported by the latter. Korea's MAP statistics reflect that during the Statistics Reporting Period, it closed 4.55% (1 out of 22 cases) of its post-2015 cases in 4.18 months on average. In that regard, it is recommended that Korea seek to resolve the remaining 95.45% of the post-2015 cases pending on 31 December 2016 (21 cases) within a timeframe that results in an average timeframe of 24 months for all post-2015 cases. As Korea closed MAP cases in 37.60 months on average, there may be a risk that post-2015 cases are not resolved within the average of 24 months, which is the targeted average for resolving MAP cases received on or after 1 January 2016. This indicates that Korea's competent authority is not adequately resourced, especially because of the fact that the governance within its competent authority is not conducive to ensure that post-2015 cases are resolved within the pursued average. Korea should ensure that the governance within its competent authority enables that the resources available are adequate in order to resolve MAP cases in a timely, efficient and effective manner. This, as also suggested by peers, in particular concerns: (i) avoiding that the frequent change in personnel does not affect progress of pending cases; (ii) position papers are issued in due time and ahead of face-to-face meetings; and (iii) its competent authority at the level of the National Tax Services endeavors to discuss and resolve MAP cases in a timely, efficient and effective manner when a case is being handled by the Ministry of Strategy and Finance that is of an interpretative nature. As it has done thus far, Korea should continue to ensure that its competent authority has the authority, and uses that authority in practice, to resolve MAP cases without being dependent on approval or direction from the tax administration personnel directly involved in the adjustments at issue and absent of any policy considerations that Korea would like to see reflected in future amendments to the treaty. There is a risk that not all MAP agreements will be implemented because of the requirement for taxpayers to request correction of a tax assessment within a period of two months as a prerequisite for having a MAP agreement implemented, when the other jurisdiction concerned has initiated the MAP. As it has done thus far, Korea should continue to implement all MAP agreements if the conditions for such implementation are fulfilled. Additionally, Korea should closely monitor whether the requirements for taxpayers to request correction of the tax assessment within a period of three months results in obstructions in practice concerning the implementation of MAP agreements, where the underlying tax assessment was made by the other jurisdiction concerned. Where this is the case, Korea should consider amending this process in order to enable the implementation of all MAP agreements. Furthermore, Korea should ensure that implemented MAP agreements are not annulled by domestic court rulings after such implementation, for which it could consider amending its domestic law in line with its stated intention. As it has done thus far, Korea should continue to implement all MAP agreements on a timely basis if the conditions for such implementation are fulfilled. Out of Korea's 95 tax treaties, 27 do not contain a provision that is equivalent to Article 25(2), second sentence of the OECD Model Tax Convention, nor the alternatives provisions in Article 9(1) and Article 7(2). Korea should promptly ratify the MLI to incorporate the equivalent to Article 25(2), second sentence, of the OECD Model Tax Convention in those 11 treaties that currently do not contain such equivalent and that will be modified by the MLI upon its entry into force. For the remaining 16 treaties that will not be modified by the MLI to include the equivalent of Article 25(2), second sentence, of the OECD Model Tax Convention following its entry into force to include such equivalent, Korea should request the inclusion of the required provision via bilateral negotiations or be willing to accept the inclusion of both alternative provisions. To this end, Korea should, following the outcome of its analysis on which treaties need modification in light of the Action 14 minimum standard, put a plan in place on how it intends on updating these treaties to include such equivalent. In addition, Korea should maintain its stated intention to include the required provision, or be willing to accept the inclusion of both alternatives provisions, in all future treaties. Korea is already working to address deficiencies identified in its peer review and will now move on to Stage 2 of the process, where Korea's efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Under the peer review program methodology, Korea 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 Korea's peer review report represents the continued recognition and importance of the need to achieve tax certainty for cross-border transactions for MNEs. 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 mutual agreement process. Furthermore, the peer review for Korea 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 Korea and any other jurisdictions, and to perhaps 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 third batch of peer review reports on Action 14, dated 14 March 2018. 2 See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October 2016. Document ID: 2018-5656 |
