This article looks at BEPS Action 14 (making dispute resolution mechanisms more effective) and associated developments in transfer pricing.
BEPS Action 14 seeks to improve dispute resolution mechanisms for relieving double taxation. Multiple announcements from the OECD, the European Commission and HMRC are changing the landscape for transfer pricing dispute resolution. The BEPS project is expected to substantially increase the number of cross-border tax disputes as tax authorities are likely to interpret the BEPS changes differently. Multinational taxpayers and their advisers need to understand the remedies available to them, and how those remedies are changing. Although Action 14 has not delivered universal binding arbitration, significant progress has been made towards making dispute resolution more effective. Binding arbitration is also becoming more widely available, and as a result tax treaty mutual agreement procedures are expected to be an increasingly popular option for taxpayers facing double taxation.
There has been a steep increase in transfer pricing and other cross-border tax disputes in recent years which will only accelerate as BEPS actions are implemented. Double taxation risk continues to be a significant concern for multinationals. Groups frequently live with unrelieved double taxation because the remedies in place are limited in scope and burdensome in operation.
When the OECD’s BEPS action plan was announced, Action 14 was considered to be a key counterbalance to the radical modernisation of international tax, which would deliver an effective mechanism to relieve double taxation. Sadly, it was one of the slowest actions to make progress, and expectations of an agreement to binding mandatory arbitration by all countries proved unrealistic.
It is essential that taxpayers have access to an efficient, wide-ranging and enforceable process for eliminating double taxation. Binding mandatory arbitration is undoubtedly the most effective mechanism to achieve this.
Through Action 14, the OECD has set minimum standards and best practices for tax authorities in seeking to eliminate double taxation through bilateral tax treaties, and provided a peer monitoring system to ensure compliance. Meanwhile, twenty countries have committed to implement binding arbitration through the OECD Multilateral Instrument (MLI) and hopefully this will encourage others to do the same.
Within the EU, there are welcome proposals to strengthen the European Arbitration Convention, broaden its scope and improve access and enforceability through a proposed EU Directive.
In the UK, the introduction of the Diverted Profits Tax has added to the general uncertainty for taxpayers arising out of BEPS. Brexit only adds another layer of complexity. Meanwhile, HMRC’s revised Statement of Practice on Advance Pricing Agreements has stricter acceptance criteria and HMRC also recently published guidance preventing any transfer pricing discussions with taxpayers outside the formal APA or enquiry process. However, there are some positive signs. The UK is one of the countries committed to binding arbitration through the MLI, and several recently updated treaties with key trading partners have binding arbitration clauses.
The effectiveness of the new dispute resolution measures will be truly tested with the inevitable increase in disputes after the first Country-by-Country reports are submitted this year and the new transfer pricing rules start to bite. To succeed it will be necessary for tax administrations to respond positively to the proposals by committing sufficient resources to their competent authority teams and creating a culture where delivering effective dispute resolution is deeply embedded in the organisation.
On April 25 we will be hosting a webinar on this subject. To sign up for this, please follow this link.
A longer version of this article is available to Chartered Institute of Taxation members and other subscribers to Tax Adviser Magazine here.
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