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April 29, 2021
2021-5503

OECD releases Australia Stage 2 peer review report on implementation of Action 14 minimum standard

Executive summary

On 15 April 2021, the Organisation for Economic Co-operation and Development (OECD) released the Stage 21 peer review report of Australia 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 Australia’s Stage 1 peer review report.2

Australia 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 accompanying document addressing the implementation of best practices.3

Overall, the report concludes that Australia addressed almost all the shortcomings identified in its Stage 1 peer review report. These shortcomings principally included issues with Australia’s treaties related to:

  • Various restrictions on taxpayers’ ability to submit a request for Mutual Agreement Procedure (MAP)
  • Restrictions on the time limits for submission for MAP
  • Restrictions imposed on implementation of agreement reached in MAP discussions by domestic law amendment periods
  • An inability for competent authorities to consult together for the elimination of double taxation in cases not provided for by the relevant treaties

In many instances, resolution of outstanding shortcomings will be resolved by treaty partners of Australia opting for the same elections as Australia when their treaties are updated via the Multilateral Convention (MLI).

Detailed discussion

Background

In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 which form the basis of the MAP peer review and monitoring process under BEPS Action 14.4

The Terms of Reference translate the minimum standard approved into a basis for peer review, consisting of 21 elements complemented by 12 best practices. The Terms of Reference assess a Member’s legal and administrative framework, including the practical implementation of this framework to determine how its MAP regime performs relative to the 21 elements in four key areas: (i) preventing disputes; (ii) availability and access to MAP; (iii) resolution of MAP cases; and (iv) implementation of MAP agreements.

The Assessment Methodology establishes detailed procedures and guidelines for a two-stage approach to the peer review and monitoring process. Stage 1 involves the review of a Member’s implementation of the minimum standard based on its legal framework for MAP and the application of this framework in practice. Stage 2 involves the review of the measures taken by the Member to address any shortcomings identified in its Stage 1 peer review. In light of the above, the OECD has also released a schedule for Stage 1 of the peer review and a questionnaire for taxpayers. The schedule catalogues the assessed jurisdictions into 10 batches for review.

Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration’s (FTA) MAP Forum.5 In summary, Stage 1 consist of three steps or phases:

  1. Obtaining inputs for the Stage 1 peer review

  2. Drafting and approval of a Stage 1 peer review report

  3. 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 Stage 2 peer monitoring report of an assessed jurisdiction; and (ii) publication of 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 reports

The report is divided into four parts, namely:

  1. Preventing disputes
  2. Availability and access to MAP
  3. Resolution of MAP cases
  4. Implementation of MAP agreements

Each part addresses a different component of the minimum standard.

Overall, Australia addressed almost all of the shortcomings identified in its Stage 1 peer review report.

Preventing disputes

Australia has 29 existing treaties that do not contain language equivalent to the first sentence of Article 25(3) of the OECD Model Tax Convention, which requires competent authorities to endeavor to resolve by mutual agreement any doubts or difficulties arising as to the interpretation or application of the treaty. However, Australia has signed the MLI, and a further 12 treaties are covered tax agreements (CTAs) under the MLI, so upon the coming into force of the MLI these 12 treaties are expected to be modified to include the equivalent of the first sentence of Article 25(3) of the OECD Model Tax Convention. Of the remaining 17 existing treaties, 10 treaty partners have been or will be engaged with a view to have the treaty modified by the MLI.

Further, Australia reported that it will seek to include Article 25(3), first sentence, of the OECD Model Tax Convention in all of its future treaties.

Subject to certain conditions, Australia allows roll-backs for bilateral APAs, in line with recommendations of Action 14. Australia does not anticipate any modifications regarding this element.

Availability and access to MAP

Currently, 9 of Australia’s 52 tax treaties do not contain a provision equivalent to the second sentence of Article 25(1) of the OECD Model Tax Convention allowing taxpayers three years from an action giving rise to taxation not in accordance with the convention to file a MAP request. Upon the coming into force of the MLI, it is expected that two of these nine treaties will be modified to a minimum three-year standard, and there are pending bilateral negotiations with several of the remaining seven treaty partners. Australia reported that it will seek to include the equivalent of Article 25(1), second sentence, of the OECD Model Tax Convention in all of its future tax treaties.

Currently, nearly all of Australia’s treaties are considered not to contain a provision the full equivalent to the first sentence of Article 25(1), which allows a taxpayer to make a MAP submission to the Competent Authority of either Contracting State, because the majority of Australia’s treaties are restricted to taxpayers only being able to submit a request for MAP to the Australian competent authority, and a further subset of Australian treaties only allowing MAP for transfer pricing cases. However, Australia has opted in the MLI to introduce in all of its treaties a provision that is equivalent to Article 25(1), first sentence.

Practically speaking, Australia allows MAP to apply to transfer pricing cases in all of its tax treaties. Further, Australia reported that it will seek to include Article 9(2) in all of its future tax treaties, requiring their state to make a correlative adjustment in case where a transfer pricing adjustment is imposed by the treaty partner.

Australia reported that its policy is to allow access to MAP for cases that have been decided by way of audit settlement. This is a revision to the former policy which often included a clause within audit settlements which denied the taxpayer the right to subsequently submit a MAP request in relation to that matter.

Currently, 16 of Australia’s 52 treaties do not contain the second sentence of Article 25(3) of the OECD Model Tax Convention (OECD, 2017), enabling them to consult together for the elimination of double taxation in cases not provided for by these treaties. However, Australia is consulting with nine of these treaty partners to include the required provision either by the MLI or otherwise via bilateral negotiations. For the remaining seven, Australia has reported it considers it inappropriate to give the competent authorities the possibility to consult in cases that have intentionally been excluded from the scope of the treaty, as is the case for these seven treaties, which are all treaties with a limited scope.

Resolution of MAP cases

Currently, 8 of Australia’s 52 tax treaties do not contain a provision equivalent to the first sentence of Article 25(2) of the OECD Model Tax Convention, which obliges competent authorities, in situations where the objection raised by taxpayers are considered justified and where cases cannot be unilaterally resolved, to enter into discussions with each other to resolve cases of taxation not in accordance with the provisions of a tax treaty. Regardless, Australia reported it will seek to include Article 25(2), first sentence, in all of its future tax treaties.

Action 14 provides that jurisdictions should seek to resolve cases within a 24-month average timeframe. Australia reported an average timeframe for resolution of MAP cases as 16.29 months over the reporting period. Approximately 61% of cases were attribution/allocation cases (transfer pricing).

Of 65 cases closed during the reporting period, 55.4% were resolved by an agreement fully eliminating double taxation or taxation not in accordance with the treaty; 15.4% were resolved by domestic remedy, 13.8% were resolved by the objection being deemed not to be justified, 6.2% were withdrawn by the taxpayer, 3.1% were resolved by agreement that there was no taxation that was not in accordance with the treaty; and the rest were closed with various results, including 1.5% that were closed with no agreement between the competent authorities.

Implementation of MAP agreements

Action 14 recommends that all MAP agreements reached should be implemented. In addition, it recommends that all MAP agreements should be implemented on a timely basis. Australia reports being able to implement MAP agreements, subject to the taxation years not being domestically statute-barred in tax treaties that do not contain Article 25(2), second sentence of the OECD Model Convention.

Currently, 11 of Australia’s 52 treaties do not contain this second sentence, though Australia is working to rectify this bilaterally or through the MLI in many of these 11 cases.

Further, Australia reported that it is presently working on developing appropriate procedures to ensure that all agreements reached under MAP will be implemented, including those agreements under tax treaties which do not contain the second sentence of Article 25(2) of the OECD Model Tax Convention.

Best practice peer review reports

Australia reports that it has met many of the best practices related to the Action 14 Minimum Standard. In particular:

  • Australia reports that it has been conducting bilateral APA’s since the mid-1990’s.
  • Australia reports that it publishes MAP Agreements of a general nature on a case-by-case basis and publishes unilateral interpretive decisions on its website/Legal Database. It also has published APA guidance.
  • Australia reports that it has issued guidance that sets out the conditions under which it will allow MAP consideration of taxpayer-initiated foreign adjustments.
  • Australia has issued guidance stating it remains amenable to considering multilateral MAP cases.
  • Australia is in line with the recommended best practice to suspend collection procedures during the period a MAP case is pending.

Implications

In a post-BEPS world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Australia’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.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young Australia, International Tax and Transaction Services (ITTS), Sydney

Ernst & Young LLP (United States), Australian Tax Desk, New York

Ernst & Young LLP (United Kingdom), Australian Tax Desk, London

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Endnotes

  1. https://www.oecd.org/australia/making-dispute-resolution-more-effective-map-peer-review-report-australia-stage-2-da7fc990-en.htm.
  2. https://www.oecd.org/tax/beps/making-dispute-resolution-more-effective-map-peer-review-report-australia-stage-1-9789264304208-en.htm.
  3. https://www.oecd.org/tax/beps/beps-action-14-peer-review-best-practices-australia-2021.pdf.
  4. See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October 2016.
  5. http://www.oecd.org/tax/forum-on-tax-administration/about/.
 
 

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