September 26, 2019
OECD releases Switzerland Stage 2 peer review report on implementation of Action 14 minimum standard
On 30 July 2019, the Organisation for Economic Co-operation and Development (OECD) released the Stage 2 peer review report of Switzerland relating to the outcome of the peer monitoring of the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard under Action 14 on improving tax dispute resolution mechanisms. Stage 2 focuses on monitoring the follow-up of any recommendations resulting from Switzerland’s Stage 1 peer review report.1 Switzerland requested that the OECD also provide feedback concerning their adoption of the Action 14 best practices, and therefore, in addition to the peer review report, the OECD has released an addressing the implementation of best practices.
Overall the report concludes that Switzerland addressed almost all the shortcomings identified in its Stage 1 peer review report.
In October 2016, the OECD released the (i.e., the Terms of Reference and Assessment Methodology) on Action 14 which form the basis of the Mutual Agreement Procedure (MAP) peer review and monitoring process under BEPS Action 14.2
Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration’s (FTA) MAP Forum.4 In summary, Stage 1 consist 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
(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 (CFA)’ to adopt the report for publication.
For Stage 2, there are two steps or phases: (i) approval of the Stage 2 peer monitoring report of an assessed jurisdiction; and (ii) publication of the Stage 2 peer review reports. More specifically, an assessed jurisdiction should within one year of the adoption of its Stage 1 peer review report by the CFA submit a detailed written report (Update Report) to the FTA MAP Forum. The Update Report should contain: (i) the steps that the assessed jurisdiction has taken or is taking to address any shortcomings identified in its peer review report; and (ii) any plans or changes to its legislative or procedural framework relating to the implementation of the minimum standard. Members of the FTA MAP Forum should also provide their comments on the Update Report provided by the assessed jurisdiction. Based on the Update Report submitted by the assessed jurisdiction and the input from the peers, the Secretariat will revise the Stage 1 peer review report of the assessed jurisdiction with a view to incorporate these updates in the Stage 2 peer monitoring report of the assessed jurisdiction. After adoption by the CFA, the Stage 2 peer monitoring report will be published.
Minimum standard peer review report
The report is divided into four parts, namely:
(i) Preventing disputes
(ii) Availability and access to MAP
(iii) Resolution of MAP cases
(iv) Implementation of MAP agreements
Each part addresses a different component of the minimum standard.
Overall, Switzerland addressed almost all the shortcomings identified in its Stage 1 peer review report. Where deficiencies were identified, Switzerland worked to address them, which has been monitored in Stage 2 of the process. In this respect, Switzerland has solved most of the identified deficiencies. All of Switzerland’s tax treaties include a provision relating to MAP, which generally follows paragraphs 1 through 3 of Article 25 of the OECD Model Tax Convention (OECD, 2017). Its treaty network is largely consistent with the requirements of the Action 14 minimum standard.
Switzerland meets the Action 14 minimum standard concerning the prevention of disputes.
There are some areas of improvement where 2 out of 95 tax treaties do not contain a provision that is equivalent to Article 25(3), first sentence, of the OECD Model Tax Convention.
Switzerland reported that where a tax treaty does not contain a provision that is based on or is the full equivalent of Article 25(3), first sentence, of the OECD Model Tax Convention, there are under its domestic legislation and/or administrative practice no constraints to endeavor to reach an agreement on the general interpretation of a tax treaty. In practice, the lack of the full equivalent in the two treaties mentioned above has not caused any issues.
Availability and access to MAP
Switzerland meets the requirements regarding the availability and access to MAP under the Action 14 minimum standard.
There are some areas of improvement where:
Resolution of MAP cases
Switzerland has committed to provide for mandatory and binding MAP arbitration in its bilateral tax treaties as a mechanism to provide that treaty-related disputes will be resolved within a specified timeframe. In addition, Switzerland continues to monitor whether it has adequate resources in place to ensure that future MAP cases are resolved in a timely, efficient and effective manner, particularly to cope with the significant increase in the number of other MAP cases.
Switzerland reported that it has taken a few steps to resolve the remaining 90% of its post-2015 MAP cases that were pending on 31 December 2016 (128 cases), such within a timeframe that results in an average timeframe of 24 months for all post-2015 cases. In view of these steps, Switzerland reported that these have contributed to a decrease in its MAP inventory. The average completion time has also slightly decreased in 2017 as compared to 2016.
There are some areas of improvement where out of the 95 tax treaties, 1 does not contain a provision equivalent to Article 25(2), first sentence of the OECD Model Tax Convention. Switzerland reported it will seek to include Article 25(2), first sentence, of the OECD Model Tax Convention in all future treaties.
Implementation of MAP agreements
Switzerland meets the Action 14 minimum standard with respect to the implementation of MAP agreements.
Switzerland reported that it has updated its MAP guidance to now include information on the role of the taxpayer in the implementation process and the time period to give consent to a MAP agreement. It also changed the approval process for the taxpayer, which is that the taxpayer now explicitly has to accept the MAP agreement for it to become valid.
There are some areas of improvement where 85 out of 95 tax treaties contain neither a provision that is equivalent to Article 25(2), second sentence of the OECD Model Tax Convention, nor the alternative provisions in both Article 9(1) and Article 7(2). None of these treaties will be modified by the Multilateral Instrument to include this equivalent. Nevertheless, Switzerland reported it is willing to seek to include the alternatives provisions for Article 9(1) and 7(2) in all its future tax treaties. Switzerland has a domestic statute of limitations for amending the taxpayer’s tax position, which would apply in respect of most of Switzerland’s tax treaties, as only a few tax treaties contain second sentence of Article 25(2) of the OECD Model Tax Convention (OECD, 2017) stipulating that any MAP agreement shall be implemented notwithstanding domestic time limits.
Best practice peer review reports
Next to its assessment on the compliance with the Action 14 minimum standard, Switzerland also addressed the Action 14 best practices and asked for peer input on best practices.
Generally, all peers indicated having good working relationships with Switzerland with respect to MAP and some of them emphasized the following areas:
In a post-BEPS world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Switzerland’s Stage 2 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.
1. See EY Global Tax Alert, OECD releases Switzerland’s peer review report on implementation of Action 14 minimum standards, dated 19 October 2017.
2. See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October 2016.
3. See EY Global Tax alert, OECD releases schedule of Action 14 peer reviews, dated 1 November 2016.
For additional information with respect to this Alert, please contact the following:
Ernst & Young AG, Geneva
Ernst & Young AG, Zurich
Ernst & Young LLP (United States), Swiss Tax Desk, New York