Global Tax Dispute Resolution: OECD 2020 Review Ahead

Disputes over audits and multilateral double taxation issues have reached new norms as tax complexity, subjectivity, and international tax legislation continue to change.

Multinational companies look to dispute resolutions mechanisms—apart from lengthy and costly litigious avenues—to gain tax certainty, minimize risk on their positions, and prevent their profits from getting taxed twice through competing jurisdictions.

There are two key dispute resolution tools through the Organization for Economic Cooperation and Development’s 2015 Base Erosion and Profits Shifting plan: Advance Pricing Agreements and Mutual Agreement Procedures. APAs help multinationals lock-in their arrangements for a certain number of years with one or more tax authorities, while MAPs are a formal multilateral process to minimize double taxation and avoid adverse one-sided results.

The OECD is now reviewing BEPS Action 14, Making Dispute Resolution Mechanisms More Effective, which it published in October 2015. This document prescribed a minimum standard, in addition to best practices, to timely and effectively resolve treaty-related disputes. Most importantly, 137 members of the BEPS Inclusive Framework committed themselves to implement this standard.

The OECD published a consultation document on Nov. 18, providing a venue for interested stakeholders to comment on the state of the global dispute resolution process by Dec. 18. A virtual public consultation meeting is expected to follow in early 2021.

A peer review process has been ongoing for approximately four years for 82 OECD members, while 55 members have been able to defer such reviews—a point of discussion later in this article.

The 2020 review’s objective is to communicate what is working well in the peer review process and offers the opportunity to adopt future learnings. The OECD consultation document poses 27 questions for comment, with summary context leading to each query for consideration.

(Noteworthy of mention is that several jurisdictions opposed some of the proposals, thereby the proposals do not reflect consensus member views.)

In addressing the consultation questions, here are some thoughts to consider:

Q1: Comments on dispute resolution status, including 55 members with deferred peer reviews

Dispute resolution is typically a lengthy process, with inefficiencies, which prolong tax certainty for the year(s) in review, including potential issues extending to the current year.

Peer reviews are an opportunity to assess the strengths and shortcomings from implementation of the Action 14 Minimum Standard. Although all members of the BEPS Inclusive Framework committed themselves to the peer review process, it is apparent that the 55 OECD members opting for deferral are not yet ready for such transparency. It would presumably be in their best interest to delay such transparency by their peers and stakeholders, and thereby defer their country’s pledge to be similarly transparent.

But because audits have not been deferred by the 55 tax administrations, there should be no valid basis for additional deferral of peer reviews.

Instead, the dispute resolution process should be fast-tracked. The OECD’s Pillar One (a digital services tax) and Pillar Two (a global minimum tax) are in process for execution in 2021, thus the resolution process and reviews should not be in a long-term holding pattern.

Q2: Requiring a bilateral Advance Pricing Agreement program, with limited exception

This idea was a best practice articulated in BEPS Action 14. Formal and informal APA programs should be introduced to reduce the number of disputes, while avoiding double taxation in advance. Limitations should exist for jurisdictions with a small number of cases.

Q3: Requiring rollout of the Global Awareness Training Module, or similar training

The Global Awareness Training Module is a training tool developed by the OECD designed for international tax examiners working on a case involving a country with a bilateral income tax treaty with the U.S. The module provides general guidance for making cross-border tax adjustments that might result in double taxation.

As another Action 14 best practice, consistent training programs should be required in the minimum standard for all members to re-establish current practices and/or minimize future missteps during audit assessments. This training should be provided as soon as possible, with tracking to ensure timely execution. The training will be a win-win initiative for tax administrations and multinationals.

Q4: Suggestions for international tax training for audit teams

A toolkit comprising national tax issues and related international issues should be a required part of training. The training should have beginner, intermediate, and advanced levels correlating to the levels of the auditors’ responsibility and ability to decide on issues. New legislation also should be included to match the timing of contemporaneous audit practices and compliance programs ongoing with many multinationals. This training would reduce the number of issues entering the dispute resolution process that may have been avoided.

Q5-8: Timely access to a Mutual Agreement Procedure

MAP guidelines, including a set of consistent requirements for all members, should be provided upon commencement of all audits of multinationals. Some jurisdictions will have additional local requirements, but a set of basic documents addressing the types of dispute issues would introduce consistency among the OECD members. Additionally, there should be a formal process stipulating reasons why the MAP process was—inappropriately—denied.

The general treaty provision requires a MAP request to be submitted within three years from the first notification of a taxing event. The first notification date should be communicated by the auditor to ensure all parties have the same timeline.

The date of acceptance by a tax administration is also a potential issue that may present delays in commencing MAP or potential arbitration. Tax administrations may claim that all required documentation was not received timely, thus this timeline may not commence after receiving initial information, without knowledge of the taxpayer. A potential remedy is for the auditor to provide receipt, and acknowledgment, of the requested information as of a certain date.

Q9-11: Suspending tax collections during the MAP process and mirroring domestic rules

The requirement to pay taxes prior to an ultimate resolution presents significant cash flow consequences for multinationals, in addition to awaiting a timely refund of such taxes for a favorable result.

The MAP process for tax collections versus domestic rules are dissimilar and should be changed for consistency. The OECD best practice is highly recommended as a minimum requirement. In the absence of such a requirement, a tax administration may not find the suspension of tax collections favorable and thereby will maintain status quo of forming an unintentional bias against the taxpayer, knowing monies have already been collected.

A corollary action is to separate the process and identification of tax collections from the MAP negotiating process. In this manner, the MAP personnel are solely engaged to resolve the issue, without knowledge of advance payment.

A simple agreement, consistent for all jurisdictions, could provide rules equating the MAP result to a domestic dispute, where a refund or tax assessment would be paid by the relevant party. It is unlikely that a multinational would not agree to pay such taxes, unless there are alternative avenues of appeal that it could pursue.

Statute of limitation issues may present themselves in certain situations, though a thoughtful and fair approach, perhaps short and long-term solutions, can be drafted.

Q12-13: Alignment of penalties and interests

Current MAP rules present material inequities in that a taxpayer is liable for interest until an agreement is final, regardless of whether a tax assessment is reduced. This inequity is a significant roadblock for multinationals to gain entry to MAP and does not match payment of a fair share of tax with a grossly unfair amount of interest and penalties.

The suggestion of linking penalties and interest to the final MAP obligation would follow domestic legislation and tax assessments. This match is imperative, irrespective that these provisions are formally outside the boundaries of a tax treaty.

An additional separate process whereby the taxpayer could pay interest in advance, without penalties, to stop the buildup of this obligation is also necessary. However, this prepayment should also be independent from, and outside the purview of, the MAP process.

Q14-16: MAP and domestic statutory time limitations result in preclusion of the MAP process

This mismatch is a real issue for which a solution is needed going forward.

The first phase of legal action should be immediate implementation of Article 25(2) of the Model Tax Convention in all tax treaties, which provides that any agreement reached shall be implemented notwithstanding any time limits in domestic law. Implementation may be possible via a multilateral instrument, prior to enactment of provisions in domestic or treaty law.

An alternative option, suggested in the document, references enactment of domestic legislation. However, this option is not practical, as legislatures change, fiscal budgets are reviewed, and the likelihood of unanimous and timely adoption by all OECD members is remote.

Q17-19: Multi-year MAP resolution of recurring issues for previously filed tax years

Presuming identical facts and circumstances for recurring issues in prior years, a multi-year resolution of such issues is practical and efficient, saving time and resources for taxpayers and tax administrations. This practice should be included as part of the minimum requirement.

The multi-year resolution is analogous to determining identical issues for several years that are under audit outside the MAP process.

Alternatively, separate MAP agreements would be filed for each prior tax year that is not time-barred pursuant to Article 25(1) of the Model Tax Convention.

Q20-22: Implementing MAP arbitration/dispute resolution mechanism to guarantee timely and effective case resolution

It is noted that several countries wishing to retain their sovereign rights and legislative flexibility will not choose this option.

A variety of solutions can be implemented, especially for countries that lack resources and capacity to carry out individualized programs. For instance, an individualized arbitration program, or formal dispute resolution program separate from the tax examiners developing tax assessments, provides an efficient dispute resolution tool to close cases with independent authority. This program can be developed by any country, formally or informally, to achieve certainty and reduce the number of pending cases. The program could include tax judges and similar experts with technical comprehension, coupled with the ability to reach a compromise.

Therefore, this argument lacks creativity and needs encouragement by all members of the Inclusive Framework to suggest toolkits, processes, regional or global resource possibilities, and so forth to effectively implement.

Additionally, a timely resolution process is also paramount in the OECD Pillar 1 project addressing the digital economy. This is an effective backstop to gain certainty within a prescribed time period, which is a high priority for multinationals.

If effective and timely solutions are not implemented as a minimum requirement, countries claiming sovereign and legal issues as impediments will be further burdened by digital and minimum tax proposals expected in 2021.

It is better to adopt this resolution sooner than later to prevent a further tiering of ongoing MAP cases.

Q23-27: Elements included in the MAP Statistics Reporting Framework and Advance Pricing Agreements

Jurisdictions are currently reporting on several MAP statistics, such as the number of cases concluded and time spent on resolution, and the OECD is seeking input for additional points that may be relevant to increase transparency and performance metrics.

A minimum MAP standard for tax administrations is to resolve cases within a 24-month average period. The 24-month period is a backstop to timely resolve issues, although some countries may not be fully achieving this goal. Still, the additional best practices advocated by the OECD, with a willingness to resolve issues timely, is a realistic time period. To the extent this time period would be subject to further delays, the dispute resolution process is impaired exponentially for all.

One of the most important indicators should be the year in which the MAP cases pending at year-end were initiated. The true age of cases is now unknown, as recent cases may be closed with long-standing cases still open. Providing the year of cases remaining in inventory will give a more accurate picture of the progress made to resolve issues timely. This is easy to implement and should be a part of the reporting process going forward.

APA statistics are also meaningful—focusing on beginning and ending inventory, case closures and withdrawals, unilateral or bilateral, new versus renewed requests, roll-back periods included, and average completion time.

A final suggestion is a 360 process, similar to performance reviews, for multinational companies. The business community should have observations and a grading mechanism for each jurisdiction with which they had experience during the year. This is a customer-focused process meant to provide useful insights and learnings.

The MAP initiation and execution process is paramount to achieve success. A fast-track process is recommended, matching the speed of new legislation with new minimum dispute resolution requirements and resulting in creative ideas and solutions for all.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information
Keith Brockman is a CPA, CGMA, and authors a Best Practices international tax blog at strategizingtaxrisks.com. He is a frequent presenter at international tax conferences, having over 30 years of experience as a corporate tax executive. He has served on tax committees in the U.S. and Europe with Tax Executives Institute and Manufacturers Alliance for Productivity and Innovation.