The new OECD Proposal to Making Dispute Resolution more Effective: BEPS Action 14: A Comparison between the December 2014 Draft and the Final 5 October 2015Recommendations

Introduction

Tax avoidance practices of multinational are currently under public scrutiny. Weaknesses in tax systems lead to Base Erosion and Profit Shifting (BEPS).The current rules on the avoidance of international double taxation and double non-taxation will become more strict and complex and we can expect a significant increase in disputes. This is why one item of the BEPS Action Plan focuses on effective dispute resolution. On 5th of October 2015 the OECD presented its final recommendations on “BEPS Action 14 – Making Dispute Resolutions Mechanisms More Effective”.[1]The final report proposes new standards and best practices on mutual agreement procedures (MAP) and notes that a group of OECD countries agreed to pursue arbitration.

The problems of the existing MAP procedure are well known. Frequently competent authorities are unable to effectively conclude agreements.[2] The MAP proceedings can be time consuming and frequently the taxpayer is not informed on the current standings of the procedure.[3] Also, the taxpayer has no right to participate in the proceedings and only limited legal protection. Furthermore Art 25 OECD-MC only imposes a duty to negotiate on the competent authorities.[4] Thus, there is no guaranteed outcome for the taxpayer.

The OECD’s suggestions on improving Art 25 OECD-MC

With the BEPS 15 Actions now released, many new rules are being introduced into tax treaties and also into domestic law. These changes may lead – at least in a transitional period - to uncertainty among taxpayers and thus an increase in international tax disputes. In order to foster cross-border trade and investment legal certainty and effective methods for dispute resolution are of crucial importance. Countriesparticipating in the BEPS project have agreed on minimum standards and best practiceswith respect to the resolution of treaty-related disputes, including a commitment to the effective and timely resolution of disputes through the MAP.[5]Moreover, an effective monitoring mechanism is to be established in order to ensure that the minimum standard is met andfurther progress in resolving disputes is made. Additionally, a group of 20 OECD countries have committed to adopt mandatory arbitration in their tax treaties.

A Comparison of the Discussion Draft and the Final Report on BEPS Action 14

The first work on BEPS Action 14, the discussion draft published in December 2014,[6] provided an opportunity to re-evaluate both the MAP and arbitration as tools for dispute resolution. This discussion draft followed the approach of presenting problems[7] which were identified regarding the MAP as well as arbitration. The discussion draft was guided by four principles: First, ensuring that treaty obligations related to MAP are fullyimplemented in good faith; second, ensuring that administrative processes promote the prevention and resolution of treaty-relateddisputes; third, ensuring that taxpayers can access the MAP when eligible; and fourth, ensuring that cases are resolved once they are in the MAP.[8]Already in December 2014 the main focus was placed on MAP, although issues arising from arbitration were also included in the report.[9]

The final report on BEPS Action 14 issued on the 5 October 2015 had a different approach. Instead of presenting problems and obstacles, the focus lies on presenting possible solutions. However, these solutions mainly focus on increasing the effectiveness of MAP. No consensus was reached among all participating states regarding mandatory binding MAP arbitration in bilateral tax treaties.[10]

The final report is split into three parts. First, the minimum standard with respect to resolution of treaty-related disputes is described. Second, the minimum standard is complemented by a set of supplementarybest practices. Both the minimum standard and the set of best practices contain solutions for problems regarding MAP identified in the initial discussion draft. Third, the establishment of a robust peer-based monitoring mechanism is planned.[11]The different categorization of measures into a minimum standard and into best practice example cannot be found in the initial discussion draft, whereas the introduction of a monitoring mechanism was already briefly mentioned. The final report is characterized by offering the taxpayer a more comprehensive and uniform application of the already existing rules in Art 25.

Minimum Standard to ensure timely, effective and efficient resolution of treaty related disputes

The minimum standard is backed by a political commitment to eliminate taxation not in accordance with a tax treaty by improvingand ensuring the application of the existing MAP. Obstacles blocking access to MAP should be removed.The minimum standard is carried by convergence of understanding and an agreement on the goals between governments. In contrast to the discussion draft of December, which was guided by four principles, the minimum standard comprises three elements:

First, countries are encouraged toensure that treaty obligations resulting from the MAP are fully implemented in good faith and that MAP cases are resolved in a timely manner. In order to have a more comprehensive application of MAP, all bilateral tax treaties should include Art 25 (1) to (3).[12] This is aimed attackling the most fundamental issues in the MAP process. The principle that access to MAP should not be artificially limited is repeated throughout the final report.[13]

A furthermeasure included into the final report is that, in principle, competent authorities should resolve all MAP cases within an average timeframe of 2 years.[14] It became necessary to express a certain time period in the minimum standard of the final report, because without a broad commitment to mandatory binding arbitration no time frame for the completion of MAP cases is included in the OECD MC.Still, the final report speaks about an average time of 2 years, failing to stipulate any consequences for cases lasting exceptionally longer than this period.

In order to achieve this minimum standard, a periodical review of open cases should take place. This periodical review is a peer-based process in the sense that only other governments are admitted to participate in the review process. The outcome of the review process will be a publication of statistics and reports.The periodical review can, however, only be an appropriate standard when all countries use the same method for the evaluation of time periods, cases initiated, cases completed, etc.[15]Therefore, the final report also suggests the countries to become members of the Forum on Tax Administration MAP Forum (FTA MAP Forum),[16] which should serve as a starting point for closer relations and a higher level of communication between competent authorities. The FTA MAP Forum will develop a common reporting framework for MAP cases. Thus, if countries provide timely and complete reports on their MAP statistics, compliance of countries can be measured and more transparency will be achieved. This approach is also aimed at resolving the problem regarding lack of data on MAP in certain countries. Critics would argue that the greatest amount of transparency can only be achieved if taxpayers are allowed to participate in the peer-based review process. However, it can also be stated that allowing external parties to participate in the review mechanism will lead to more caution in the work of competent authorities and hence less details about the process could be revealed.This focus on timely resolution of cases and the review of MAP statistics was given more importance in the final report than in the discussion draft. Time consuming, protracted paper disputes should be avoided. Therefore, the FTA MAP Forum will receive further tasks and responsibilities in order to ensure a closer administrative cooperation of competent authorities.

As transparency constitutes an element of crucial importance in revising and updating the MAP, one of the most important achievements of BEPS Action 14 is that the footnote to Art 25 (5) will be deleted.[17]Therefore, countries wishing not to adopt Art 25 (5) in their bilateral tax treaties need to make a reservation on this provision. As a consequence, lack of transparency as to countries positions on MAP arbitration will be tackled.

The second element of the minimum standard is that countries should put in placeadministrative processes to promote the prevention and timely resolution of treaty-related disputes. This section of the final report aims at providing the taxpayer all relevant information needed for initiating the MAP.[18] Additionally, a focus is placed oninternal dealings of tax authorities. Thus, countries are requested to assign staff with responsibility for the resolution of MAP as well as to provide sufficient resources. These recommendations of the final report were already part of the discussion draft issued in December.

Moreover, the relationship between audit settlements and access to MAP is not always clear.[19] Audits in one country leading to a unilateral adjustment might result in double taxation. Thus, the competent authority is held to ensure whether the outcome of the audit process might result in taxation not in accordance with the convention.

As a third part of the minimum standard, countries should grant taxpayers that meet the requirements of Art 25 (1) access to MAP. In this section the OECD elaborated further on suggestions which were already included in the discussion draft and suggested a change to Art 25 (1) and adding new provisions to the OECD Commentary. In the future, two alternative approaches should be possible:[20]The preferred possibility is that Art 25 (1) should be formulated in a way that the taxpayer may present his case to the competent authority of either Contracting State. This would lead to a change in the text of Art 25 (1) OECD MC. The other possibility, if a country does not wish to include an Art 25 (1) permitting a MAP request to either of the competent authorities, is to implement a bilateral notification or consultation process among competent authorities for cases which are not considered to bejustified by the competent authority to which the case was presented. Additionally, the new provisions of the OECD Commentary explain that a submission of a case to MAP is justified in cases of double taxation or in cases where it is “reasonable to believe” that there will be double taxation.[21]This new approach again aims at providing broad and timely access for the taxpayer to MAP. An early stage resolution of disputes could become more likely.

The three elements of the minimum standard are interlocking, and many of the 17 measures aim at providing an improvement to all three elements. As there is a seamless transition between these three elements, a few common underlying mechanisms can be found: One key position the report tries to implement is to put an emphasis on transparency. On the one hand, there needs be transparency between the governments about the handling and the content of eligible cases.[22] On the other hand, transparency is also required regarding options to the handling of cases.Of course, the taxpayer may choose regarding which type of remedy he would like to initiate. Nevertheless, the OECD is suggesting commencing with initiating MAP before choosing domestic remedies.[23]

Best Practices

The minimum standard laid out in BEPS Action 14 comprises the rules to which all participating countries committed. However, certain proposals, which were included in the first discussion draft, are not part of this minimum standard but have been identified as best practice examples,[24] because either the suggestions are not possible to being measured in the peer-based monitoring mechanism or simply no consensus was reached among the participating countries. The best practice examples are presented under the same three categories as the minimum standard. They contain recommendations regarding the inclusion of Art 9 (2) OECD MC in bilateral tax treaties;[25] the publication of agreements reached in MAP cases regarding the interpretation or application of the tax treaty (MAP pursuant to Art 25 (3) first sentence);[26] implementation of bilateral programs on advanced pricing agreements (APAs);[27] permission of multi-year MAP cases;[28] suspension of tax collection during a pending MAP;[29] facilitating recourse to MAP as well as providing a choice of remedies to the taxpayer;[30]guidance on the consideration of interest and penalties in MAP;[31] and the provision of guidance regarding multilateral MAPs and APAs.[32] All these best practices can already be found in the discussion draft of December.

Moreover, further amendments to the OECD Commentary are suggested as best practices. They will deal with issues regarding the relationship between MAP and domestic remedies[33]and self-initiated foreign adjustments and MAP.[34]Additionally the FTA MAP Forum is prepared to provide a training module on “global awareness” to competent authority staff.[35]

The best practices refer to measures which may be harder to implement than the minimum standard. This might be due to a higher requirement for financial resources, time constraints of competent authorities or domestic country practices conflicting with best practices. It is unclear how far developing countries will be able to meet the minimum standards and best practices, especially as many have no experience with MAP.

Monitoring Mechanism

The participating countries’ commitment to the minimum standard on MAP should be evaluated through a peer monitoring mechanism.[36] The framework for the implementation of the minimum standard will be developed jointly by OECD Working Party No. 1 and the FTA MAP Forum. The peer monitoring process is intended to begin in 2016.

The peer-based monitoring mechanism will only relate to the minimum standard. Best practices are not subject to the monitoring mechanism. This will make it rather hard to determine whether substantial progress in moving forward towards a broader consensus was made. Countries’ positions on the implementation of best practices is will only be determinable when regarding the countries’ domestic legislation and administrative practice.

Summary

The key document to support the MAP process used to be the OECD’s Manual on Effective Mutual Agreement Procedures (MEMAP),[37]providing practical guidance on the roles of the parties, time frames and processes, interaction with domestic law remedies, and other related matters. While the discussion draft provided for a few references to the MEMAP, the final report on BEPS Action 14 no longer refers to the MEMAP. Instead, the FTA MAP Forum gained more importance. But in practice, many of the standards and best practices can be found in the MEMAP.

The business community had expectations that the OECD would proceed with its plans regarding mandatory binding arbitration in BEPS Action 14.[38] This aim was not achieved since no consensus between the G20 countries or OECD countries emerged. Optimists might even call this a bigger success than drafting a new provision on arbitration, because it comprises not only a paper solution.Instead, the implementation of a workable procedure for all participants was put into practice. Reporting and publishing of more detailed and aligned statistics on MAP cases will be co-ordinatedby the FTA MAP Forum. Additionally, each competent authority committed to provide sufficient resources to their staff members responsible from MAP cases. Most importantly, a change in the text of Art 25 (1) will allow the taxpayer to present future MAP cases to either competent authority. Alternatively, if cases may only be presented to the competent authority of the residence state of the taxpayer, the change in the commentary will result in a bilateral notification of competent authorities regarding the admittance of a case to MAP.

To summarise, the final results of BEPS Action 14 are a compromise which recognises that different countries have different perspectives on the best way to deal with cross border disputes. But there is a broad consensus that the minimum standard needs to be implemented. As regards mandatory binding arbitration, there is little progress between the December and October text and it is unlikely that non-OECD countries will join the “coalition of the willing” in the near future. However, the OECD did note the development of details of a provision on arbitration in 2016 as part of thenegotiation of the multilateral instrument envisaged by BEPS Action 15.[39]

[1] OECD (2015), Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. 8 October 2015).

[2] Avery Jones, “The Legal Nature of the Mutual Agreement Procedure under the OECD Model Convention – II,” British Tax Review (1980) p. 19.

[3] Nobrega/Loureiro, “Mutual Agreement Procedure: Preventing the Compulsory Jurisdiction of the International Court of Justice?” Intertax (2009) p. 539.

[4] See the text of Art 25 (2) OECD-MC: “The competent authority shall endeavor […] to resolve the case by mutual agreement with the competent authority of the other Contracting State […]”. (emphasis added by the author).

[5] OECD (2015), Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, OECD. p. 17, (accessed 8 October 2015).

[6] OECD, Discussion Draft “BEPS Action 14: Make Dispute Resolution Mechanisms more Effective” (18 December 2014).

[7] The phrase „Description of the obstacle“ was used as an opener for every suggestion included in the report.

[8]OECD, Discussion Draft,m.no. 4.

[9] OECD, Discussion Draft,m.nos 41 to 56.

[10]OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report,p. 41, m.nos 62 et seq.

[11]OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report, p. 9 – Executive Summary.

[12]OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report, p. 13, recommendation 1.1.

[13]OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report, p. 14, recommendation 1.2; p. 19, recommendation 2.6; p. 21, recommendation 2.7; p. 22, recommendation 3.1.

[14]OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report, p. 15, recommendation 1.3.

[15] Due to differing national regulations countries considered e.g. different dates as the initiation / finalization of a MAP. Therefore, the OECD statistics on MAP ( - accessed 8 October 2015) cannot be used as a truly objective index for country by country comparison.