The impact of BEPS on tax controversy
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

The impact of BEPS on tax controversy

Monique van Herksen, Paul Mulvihill, Justin Liebenberg and Vikita Shah look at how BEPS recommendations affect tax controversy and dispute resolution.

The OECD's BEPS Action 14 report presents measures that aim to improve the MAP process. The following analysis provides practical insight on what dispute resolution mechanisms may be available in the case of tax controversy for taxpayers, how they work and what pitfalls could and should be avoided in order to achieve rapid resolution of these matters.

Domestic dispute resolution options

Tax disputes usually originate from a review of the taxpayer's filed tax return, published and public information, or information obtained otherwise by tax authorities. To manage a tax dispute, the appropriate amount of engagement with the issues being raised by the tax authorities is required. Multinational enterprises generally focus on global business opportunities and global tax impact. This focus may easily be misunderstood or misinterpreted as a focus on eroding a local country's tax base.

Audit and settlement process

During a tax audit, several issues may be raised. Many of them can usually be resolved by providing additional information or explanation. If the information requested is not readily available locally, an appropriate response needs to be considered. If the requested information is sensitive or confidential, and the taxpayer does not have it or there is no approval for the taxpayer to disclose the information as it relates to associated enterprises, it can always be obtained via a formal exchange of information request under an available treaty.

In that case, a confidentiality agreement is likely to be applicable, thanks to the treaty mechanism. This may be challenging for countries that don't have a wide treaty network – many developing countries, for example. If information is available or can be provided without internal complications, a swift response to the request will inevitably help overall with the preparation and resolution of the audit. It should be noted that some developing countries, such as South Africa and Kenya, have introduced rules that prevent the taxpayer from later using information to support their position if it was previously held back; this stops taxpayers from alleging that it is not possible to obtain information requested on foreign operations.

Once the tax authorities have received the requisite information, they will assess whether the tax return is filed correctly or an adjustment is required. In many countries, there is an opportunity to discuss facts and information with the relevant tax inspector and explain the position taken. This can help to resolve issues and close the audit. Most local country tax systems provide a formal administrative objection process. This means that an administrative objection has to be filed on time with the revenue authorities. The objection will usually be reviewed and decided on by a person separate from the division or person who issued the assessment. Many countries require an administrative objection process to be followed before a formal appeal can be filed with an independent court. In some instances, where an objection is rejected, there is a procedure that allows the taxpayer to request the reason for the rejection formally, if it is not clear. This can be useful in deciding what steps to take next.

Audit settlements are relatively common. Here, the taxpayer and tax inspector agree to a certain interpretation of the facts or outcome. Audit settlements are being scrutinised lately, as some settlements are seen as the outcome of undue pressure rather than being an actual voluntary agreement. Also, settlements subject to conditions that deprive taxpayers of the right to obtain avoidance of double taxation have been occurring more frequently. They should be entered into with great care; in many developing countries, it is essential to get settlements in writing to avoid future disputes on the same matter.

Alternative dispute resolution (also known as mediation)

Tax audits can escalate. Misunderstanding, miscommunication, legacy issues and lack of trust can color the experience of the audit. Alternative dispute resolution mechanisms may serve to avoid this. They may be available through separate forums, where subject matter experts, unrelated to the taxpayer and competent tax inspector, review the issues raised, or where experts trained in negotiation and settlement techniques get involved.

There is ample reason for introducing alternative dispute resolution opportunities; taxpayers and tax authorities will generally have to continue interacting with each other year after year. Working toward a good working relationship is usually beneficial for all parties involved. A specific alternative dispute resolution mechanism for transfer pricing matters is the advance pricing agreement programme, discussed later in this report. In addition, some countries have mediation for tax matters. This serves to rebuild relationships between the parties and to resolve specific tax issues. It can be offered as a separate administrative process, or as an independent procedure (which is less common for tax matters).

There are countries using administrative mediation procedures that are reporting favourable results, such as the Netherlands and Kenya. However, alternative dispute resolution procedures do not necessarily resolve international tax issues and double taxation, so ways of avoiding double taxation should be considered, and any applicable statutes of limitations to file for relief need to be observed. In some countries, there is not a culture of settlement after assessment and, generally, disputes need to be settled by a court.

Court-based adjudication of tax matters

The more traditional dispute resolution avenue is one where the taxpayer submits an appeal against an adjustment to an independent court of first instance. This avenue is generally a highly procedural one where, in addition to formal filings, statutes of limitations, filing fees and timely requests for extension of payment for assessments apply that need to be observed. Depending on the docket of the relevant court, it may take a long time before a decision is rendered. A decision by the court of first instance may be appealed to a court of second instance by either party. These courts will usually adjudicate based on facts and applicable law. The final competent court, or Supreme Court, usually only reviews issues regarding the correct application of the law. Some countries allow for independent review at the administrative level, after which a taxpayer has no further avenues to appeal the decision. Court-based adjudication does not guarantee avoidance of double taxation. This needs to be separately requested, within the applicable timeframe.

International dispute resolution

Increasing international trade and investment is accompanied by growth in cross-border commercial disputes. MAPs, APAs and international and commercial arbitration have emerged as preferred options for resolving cross-border tax disputes.

Mutual Agreement Procedure (MAP)

An MAP is an alternative dispute resolution mechanism available under most tax treaties. In a MAP, a taxpayer can ask the competent authority (CA) of its resident country to review the matter and for avoidance of double taxation. If the request is accepted, the CAs of both countries endeavor to resolve the dispute raised by mutual agreement. The OECD recently published MAP statistics for the reporting period ending in 2014. The figures show that, at the end of 2014, the total number of open MAP cases reported by the OECD member countries amounted to 5,423. This is an 18.77% increase compared with the previous year (2013) reporting period, and a 130.57% increase compared with the initial 2006 reporting period, when the OECD started collecting this type of data.

Phase 1 – the competent authority process

The MAP article (Article 25) of the OECD model encourages resolution but does not necessarily make it mandatory to resolve double taxation. Taxpayers essentially have no international or treaty-based regress or action in cases where the CAs do not resolve a case submitted to them. Procedural rules apply. There is a time period within which an MAP request can be filed (usually three years) and a time period within which an MAP case should be resolved (usually a two years). There is some tension in the relationship between domestic measures (objection and appeal under national law) and avoiding double taxation under the convention via an MAP. However, as these two procedures usually do not go well together and one has preference over the other, Often, a domestic (one-sided) settlement impedes (full) MAP discussions, because the country of the primary adjustment may not wish to further amend a transfer pricing adjustment after having settled the case under domestic law. As a result, the other state may not provide for correlative relief. In some one-sided settlements, an explicit denial of access to the MAP process is even a condition to the settlement.

The above concerns have been addressed, to some extent, in the OECD's final report on Action 14. The report proposes measures aimed at strengthening the effectiveness and efficiency of the MAP mechanism, such as specific actions to be taken by countries, suggested changes to legislation and administrative practices, and changes to the OECD Model Tax Convention and its commentary.

The report lists the main objectives of the measures as:

  • To allow taxpayers access to the MAP process when the requirements for taxpayers to access the MAP process are met;

  • To ensure that domestic administrative procedures don't block access to the MAP process; and

  • To ensure that countries implement Article 25 of the OECD Model Tax Convention in good faith.

A number of these measures constitute a 'minimum standard' for treaty-based dispute resolution, to which all OECD BEPS and G20 countries have agreed to adhere. The minimum standard is complemented with additional measures designated as 'best practices' to which only some of the OECD BEPS and G20 countries were willing to commit.

Phase 2 – the arbitration process

In 2008, the OECD issued an updated model including a major change to the MAP article (Article 25(5)) and added arbitration as an option for resolving double taxation.

Arbitration under the OECD model applies to any person resident in a contracting state or, under Article 24(1) (discrimination based on nationality), to a national of a contracting state (if no avoidance of double taxation is achieved during the regular MAP process within two years), provided that the treaty between the contracting states contains an arbitration clause. States may limit the application of the arbitration clause to a more restricted range of cases, however.

Arbitration serves to resolve MAP cases swiftly if the CAs did not manage to reach an agreement during the two-year term they had to resolve double taxation. Generally, the procedure envisages that an arbitration committee is put in place to decide on the matter. Once a case goes to arbitration, the decision, when accepted by the person affected and by the respective authorities, has the status of a bilateral agreement resulting from the MAP.

Many countries still refrain from arbitration, however. This may be because the process is seen as one that leads to giving up tax jurisdiction to 'outsiders'. The OECD BEPS Project and Action 14 report did not manage to achieve universal consensus to establish mandatory arbitration. Separately, however, 20 countries have committed to adopt and implement mandatory arbitration, however. Despite its reluctant acceptance so far, it is expected that mandatory binding MAP arbitration will be part of the negotiation of the multilateral instrument envisaged by Action 15.

Commercial arbitration for tax matters

Modern (commercial) arbitration has been promoted extensively by the International Chambers of Commerce to encourage foreign investment and offer a neutral and unbiased dispute resolution mechanism to foreign investors. Arbitration provides a way to resolve disputes between one or more unrelated persons, based on agreement of the parties and a decision that is general binding upon the parties.

Arbitration is offered and overseen via several organisations and forums. Commercial arbitration does not specifically cater to tax matters, and they are often explicitly excluded from commercial arbitration clauses. That said, in recent years, some tax matters have been eligible for arbitration, and the demand for resolution of tax matters by way of arbitration has increased. Commercial arbitration differs significantly from 'conventional' arbitration under the MAP process, however. The arbitration process is more akin to litigation than to the handling of a MAP request.


Of all the available options to resolve recurring international tax disputes, and in particular transfer pricing disputes, APAs are the preferred choice. Setting aside some of the challenges regarding accessing, administering, negotiating, and ultimately implementing APAs, these prospective (and often retrospective) arrangements are the most practical resolution to cyclical cross-border tax disputes. APAs are bothcost-effective and timesaving, enabling multiple years of controversy to be resolved in one arrangement between tax administrations and taxpayers. Participating taxpayers obtain current and future tax certainty, while tax administrations can redeploy audit resources. Compared with other dispute resolution options, including the typical audit examination followed by normal recourse methods for disputed income adjustments, APAs provide opportunity for enhanced tax certainty and more streamlined compliance.

APA programmes have their share of sceptics in the international tax community, in particular with regards to timelines and results. However, APA programmes often attract the most complex and contentious cases due to the somewhat subjective nature of transfer pricing. As a result, due diligence and negotiation phases are often extended by a requisite period of time as taxpayers and administrations work through challenging and sometimes unconventional issues. If these difficult cases encounter lack of preparation and poor administration by APA stakeholders, that may convert a tough APA case into the equivalent of a long, forced uphill march. Nevertheless, APAs rarely go unresolved. The benefit of tax certainty and multi-year solutions outweigh most other considerations.

The following highlights from the Action 14 report specifically address how APAs may help advance the dispute resolution agenda:

APA rollbacks a minimum standard

APA rollbacks are classified as a minimum standard in Action 14 for those countries with bilateral APA programmes. Therefore, we can expect to see more uniformity and an increase in coverage of years as APAs will be expanded to cover prior years in more jurisdictions. Currently, taxpayers in some countries are required to lodge a cumbersome two-part request: one for a MAP covering prior years, and another for an APA addressing the prospective component. In some jurisdictions, the MAP and APA programmes are managed by different divisions or branches of the tax administration, often with different procedures and requirements. In these circumstances, APA rollbacks will certainly be appreciated.

APA rollbacks are currently a valuable and efficient feature of many bilateral programmes, and those programmes that have existing rollback policies should continue to develop improvements that promote uniformity in access and coverage of APAs.

Implementing bilateral APA programmes – best practice no. 4, publishing APA guidance – best practice no. 11

For counties that do not have a bilateral APA programme, Action 14 recommends establishing a programme and developing and publishing APA guidance as soon as they have the capacity to do so.

The growth of countries with APA programmes in the past fifteen years suggests that multinational enterprises (MNEs) will have the option to consider an APA as a dispute resolution mechanism in the future. Whether the existing APA programmes will be able to accommodate and process the expected influx of APA applications in a post-BEPS environment is still unclear. Upgrading the efficiency of existing APA programmes is as important as improving the underlying MAP process, since the more complex and contentious tax disputes are apt to find their way to APA programmes.

Although not specifically directed at APAs, the following concepts apply to MAP and, by extension, to APAs:


Some countries consider APAs to be a privilege due to a perceived added benefit to taxpayers, either by avoiding an in-depth field audit or obtaining tax certainty for a future period. Due to this perception, APAs have been considered non-essential workload and have become less of a priority than MAP cases. More scrutiny has also been focused on an MNE's 'risk profile' as well as on the intended covered transactions of a proposed APA to ensure the tax authorities approve of the approach before accepting the case.

Appropriate resources

Not only a sufficient number of qualified personal to assess, perform due diligence and negotiate APAs, but appropriate training on executing their competent authority mandate, are needed.

Improved processing time

Documenting the negotiations and finalising the APA through drafting and execution of agreements can be tedious and often a drag on the overall timeline of an APA. Binding arbitration is an essential component of Action 14 and should apply to most protracted disputes under MAP, including APAs.

What does the future hold?

The adage, "the only constant is change", rings true with BEPS. The key elements of international tax and transfer pricing rules of five years ago are now dated. The overarching principles remain, but how we get there continues to change, and the OECD BEPS reports register a milestone in the progression of international tax rules. Globalisation and the recent economic climate have skewed policy development toward tightened rules and enhanced reporting and compliance requirements for MNEs. The only counterbalance in the new rules is Action 14, which seeks to improve the treaty dispute resolution mechanism.

The future will hold more scrutiny for MNEs across the board, resulting in a surge of international disputes. Without an appropriate response by governments through the implementation of Action 14, MAP and APA inventories will become overloaded, which might stifle trade and investment. At some point, MNEs may consider the cost of disputes so high that they adjust the way they do business in a country. The costs of tax disputes are eventually carried by individuals, who are end users and consumers of MNE-produced products and services, as MNEs invariably pass on costs to their shareholders or through the products and services offered. That may very well be the most compelling reason for tax authorities to take action and ensure that effective tax dispute resolution is available.



Monique van Herksen


Tel +1 202 327 6276

Monique van Herksen is EY's global head of transfer pricing controversy and specialises in cross-border dispute resolution including mutual agreement procedures (MAP) and arbitration. Her practice focuses on international tax controversy, transfer pricing-related compliance, policy and planning, and tax treaty matters. In addition, she serves the United Nations' transfer pricing-practical issues subcommittee, which is responsible for the UN Transfer Pricing Manual and deals with transfer pricing in developing countries.



Paul Mulvihill


Tel: +1 613 598 4339

Paul Mulvihill is an EY partner and the Canadian transfer pricing controversy leader, based in Ottawa. He focuses primarily on helping multinational enterprises to resolve their international tax disputes as well as dealing with tax administrations at the audit, appeals, and treaty relief levels. He has wide-ranging experience in transfer pricing planning, policy, and compliance. Before joining EY, Paul was an adviser on dispute resolution at the OECD's Centre for Tax Policy and Administration and an APA/MAP manager at the Canada Revenue Agency.



Justin Liebenberg


Tel: +27 11 722 3907

Justin Liebenberg is an EY partner and African international tax and transfer pricing leader, based in Johannesburg, South Africa. He focuses on advising and assisting multinationals investing into Africa, as well as African headquartered companies investing abroad. He is a member of the National Tax Committee of the South African Institute of Chartered Accountants.



Vikita Shah


Tel: +1 212 773 3395

Vikita Shah is a senior in EY's global transfer pricing controversy team, based in New York. Her work focuses on cross-border dispute resolution in transfer pricing and tax treaty matters. Before moving to US, she worked with EY India in the direct tax litigation practice. She is a member of the Institute of Chartered Accountants of India and has a degree in commerce from the University of Mumbai, India.

more across site & bottom lb ros

More from across our site

Paul Griggs, the firm’s inbound US senior partner, will reverse a move by the incumbent leader; in other news, RSM has announced its new CEO
EMEA research now open
Luis Coronado suggests companies should embrace technology to assist with TP data reporting, as the ‘big four’ firm unveils a TP survey of over 1,000 professionals
The proposed matrix will help revenue officers track intra-company transactions from multinationals
The full list of finalists has been revealed and the winners will be presented on June 20 at the Metropolitan Club in New York
The ‘big four’ firm has threatened to legally pursue those behind the letter, which has been circulating on social media
The guidelines have been established in the wake of multiple tax scandals and controversies that have rocked the accounting profession
KPMG Netherlands’ former head of assurance also received a permanent bar and $150,000 fine; in other news, asset management firm BlackRock lost a $13.5bn UK tax appeal
The new, fully integrated office will also offer M&A, dispute resolution, IP and corporate tax services
The new guidance concerns a recent 1% excise tax on the repurchases of corporate stock for both US and certain foreign companies
Gift this article