The Organisation for Economic Co-operation and Development (OECD) last week released a proposed discussion draft pursuant to Action 14 (Make dispute resolution mechanisms more effective) under the base erosion and profit shifting (BEPS) action plan.
The following report provides initial impressions of the discussion draft [PDF 213 KB] under BEPS Action 14
The goal of BEPS Action 14 is to improve the effectiveness of the mutual agreement procedure (MAP) in resolving treaty-related disputes. The OECD’s proposed discussion draft attempts to identify comprehensively the obstacles that prevent countries from resolving disputes through MAP and to develop possible measures to address those obstacles.
Recognizing that there is no consensus on moving towards universal, mandatory binding MAP arbitration, the OECD’s report introduces a three-pronged approach to improving the resolution of treaty-related disputes through MAP:
The BEPS Action 14 discussion draft states that the OECD’s work in this area is guided by four principles:
One obstacle to ensuring that treaty obligations related to MAP are fully implemented in good faith may be the absence of an obligation to resolve MAP cases under Article 25. Accordingly, the importance of resolving cases under MAP could be clarified in treaty commentary.
Another potential obstacle is the absence of paragraph 2 of Article 9 in some treaties, which causes some countries to take the position that they are not obliged to make corresponding adjustments to grant access to MAP with respect to the economic double taxation that may otherwise result from a primary transfer pricing adjustment by a treaty partner. Thus, treaties could be amended to specifically include Article 9(2).
The effectiveness of MAP may be undermined by a variety of factors, including the lack of independence of the competent authority (CA) and inappropriate influence of considerations related to the negotiation of possible treaty changes, the CA’s lack of resources, or inappropriate performance indicators for the CA function and staff.
In addition, CAs may not actively employ their authority under Article 25(3) to pre-empt potential disputes by reaching mutual agreement on matters of a general nature involving treaty interpretation or application. CAs also may fail to consider the implications of a taxpayer’s MAP or advance pricing agreement (APA) case for other tax years.
Finally, field auditors in some countries may seek to enter into audit settlements requiring a taxpayer to forego access to MAP, and some countries may not have implemented bilateral APA programs. Addressing each of these shortcomings could help ensure an environment in which CAs are able to fully and effectively carry out their mandate
Obstacles to MAP access include complexity and lack of transparency of the procedures to access and use the MAP; excessive or unduly onerous documentation requirements; time limits to access MAP; and the requirement that the disputed tax be paid in order to access MAP.
In addition, the right to access MAP may be unclear when domestic or treaty-based anti-abuse rules have been applied or, conversely, when domestic law remedies also may apply.
MAP access also may be uncertain in the case of certain self-initiated taxpayer adjustments. Finally, MAP access may be denied by the unilateral decision of one CA that a taxpayer’s objection is not justified.
The draft discusses various ways in which these issues could be addressed or clarified.
Certain of the main obstacles to the resolution of treaty-related disputes through MAP are issues related to MAP processes, including lack of a principled approach to the resolution of MAP cases; lack of co-operation, transparency or good CA working relationships; and the absence of a mechanism, such as MAP arbitration, to ensure the resolution of all MAP cases.
In addition, multilateral MAPs and APAs raise novel and complex issues for the traditionally bilateral MAP, and uncertainty exists around the consideration of interest and penalties in MAP. The discussion draft explores various options for improving these issues with MAP processes.
For more information, contact a tax professional with KPMG LLP:
Manal Corwin | +1 (202) 533 3127 | firstname.lastname@example.org
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.