Carrots of various sizes: tax certainty and amount A
Mark Martin and Thomas Bettge of KPMG in the US discuss the tax certainty provisions of the Multilateral Convention for amount A and evaluate their utility for businesses
After about a year of comparative quiet, pillar one’s amount A returned to the limelight with the release of the draft Multilateral Convention (MLC) and accompanying documents in October. Although some items remain undecided, the MLC represents the first comprehensive view into amount A, the ambitious project from the OECD/G20 Inclusive Framework on BEPS to reallocate taxing rights over about 100 large, profitable multinational enterprises (MNEs) to market jurisdictions. The US Treasury Department is currently holding a consultation to gather public input on the MLC.
Because amount A provides for a multilateral allocation of taxing rights and relief obligations that could implicate over 100 jurisdictions, it needs something that has never existed before: an efficient multilateral dispute prevention process that can provide tax certainty and avoid the chaos that would come with piecemeal enforcement. Amount A is, after all, intended to stabilise an increasingly shaky international tax framework, not to open the doors to unchecked multiple taxation.
At the same time, it has long been agreed that amount A cannot just provide an efficient multilateral process to resolve amount A disputes; it must also provide a means of resolving the host of disputes that in-scope taxpayers face for issues related to amount A. These include disputes around issues such as transfer pricing and permanent establishment that would affect allocations under the amount A system.
The ability to obtain mandatory, binding certainty for amount A and related issues has been seen as a carrot for taxpayers. For many of them, tax certainty is, in fact, the only carrot. Despite its origins in the challenges of the digitalising economy, amount A does not ring-fence digital businesses, and so many amount A taxpayers will benefit little, if at all, from the rollback of digital services taxes and relevant similar measures.
The pursuit of multilateral certainty
The certainty provisions for amount A are extremely detailed. The challenges of providing effective multilateral certainty have been compounded by the need to address the concerns and preferences of about 140 countries, many of which have historically looked askance at treaty-based arbitration for tax matters.
The drafters’ answer to these challenges has taken the form of a plethora of different certainty processes – certainty on whether an MNE is within the scope of amount A, advance certainty on the thorny revenue-sourcing issues at the heart of amount A (together with certain other things), and a comprehensive certainty process for everything not covered in a separate process. Each process has three basic phases:
A review, which may be carried out by the MNE’s lead tax administration or by a panel of tax administrations;
An opportunity for all the other affected tax administrations to object to the outcomes of the review; and
If issues remain, a quasi-arbitral determination panel.
The certainty process for related issues is less intricate – essentially just an alternative mutual agreement procedure (MAP) with a quasi-arbitral component – but may offer more surprises.
Two things stand out as positive: related issues are now understood to include not only transfer pricing and permanent establishment disputes but also disputes around whether payments belong to a category subject to treaty withholding or to general business profits. Then, too, only one tax administration need agree with the taxpayer’s view that an issue qualifies as related for the taxpayer to access the process. This is a significant certainty advancement: under the existing system, a tax examiner can take something that walks and talks exactly like a transfer pricing adjustment, label it a domestic issue (for example, a denial of deductions under domestic law), and keep it out of a MAP.
On the other hand, the scope of certainty for related issues is disappointingly slim: it only applies where there is already a tax treaty between the relevant jurisdictions. Notwithstanding issues such as the one noted above, MAP cases under existing treaties are generally quite successful, so providing a mandatory binding backstop to a MAP offers only an incremental benefit in many cases. However, many transactions remain outside the scope of existing treaties, and the US treaty network is notable for significant gaps with jurisdictions such as Singapore, Hong Kong, and Brazil, and most of the developing world. The decision not to use the MLC to expand tax certainty to cover these transactions is disappointing.
Plenty to chew over
What kind of a carrot does the MLC offer? There are real carrots and there are miniature carrots. There are fresh, earthy carrots and there are carrots that have lingered too long in refrigerator crispers that have failed to keep them crisp. How appetising the MLC’s certainty provisions appear will depend, to some extent, on the priorities of the business evaluating them.
The information in this article is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 because the content is issued for general informational purposes only. The information contained in this article is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of KPMG LLP, the US member firm.