As countries wrangle in the OECD and the UN to reform international tax rules, two tax heads told an audience at the ITR’s Managing Global Tax Disputes Summit at the Pullman St Pancras Hotel, London, that countries would do better to fund their tax authorities to process their backlog of work than to ambitiously seek consensus on new procedures.
One said their company had even resorted to lobbying their government to increase funding to the tax authorities in order for their cases to be processed. “As a company, we had to lobby with the ministry to get more resources at the level of the competent authorities, to make sure that our cases didn’t conclude after the date was actually passed! That’s how crazy it is, in the harsh reality,” said the tax head.
“My team consists of five people, and the only thing we’re doing, in 75 countries, is running around the world and meeting authorities,” the tax head continued.
“We push them to meetings, because, if you don’t do that, it’s a paper case that sits somewhere in a drawer,” they said. “So what we need as a trade is maybe not a further strengthening of the framework – which is so nicely, and, all compliments, academically, it’s all very good.”
“The problem is the reality, which is that we meet on a weekly basis; the authorities, which are driven by anything else than sound and academic approach to the case. In other words, any APA [advance pricing agreement] or MAP [mutual agreement procedure] case, at a certain moment in time – and it could take years – always ends up in what we call a ‘second-hand car purchase negotiation’. Everything is set, all the technical elements have been exchanged; we agree that we disagree. And then what?”
Measures to achieve certainty have ‘limitations’
A tax chief at another company, meanwhile, suggested the last-ditch measure already in place to enable companies and governments to reach tax certainty – the mutual agreement procedure (MAP) – is not available to companies in all the circumstances where they need it.
“MAP has some limitations,” the tax head said.
“The current tax treaties work well if the adjustment is in the country where you’re tax resident; it doesn’t work so well if you’re in the country where you’re not tax resident. For example, you can have a very significant permanent establishment where it’s not clear that you actually have entitlement to MAP in that country.”
Getting access to MAP depends on the goodwill of the individual tax authority, they said. “The UK does generally give it to you. But you can see some tax authorities being stroppy and actually denying it.”
Nor do advance pricing agreements (APAs) offer a perfect solution to taxpayers and authorities.
“There are some downsides [with APAs]”, the tax head said, “If it’s unilateral, you have to disclose it in your [country-by-country] report. You potentially have the ruling disclosed, if it is treated as a ruling in the EU.”
The first tax head again placed the blame on budget constraints for the tax authorities. “These governmental departments are not able to handle it in the same way as they are not able to handle MAP and APA cases. They just don’t have the resources for it!”
The same resource constraints that are preventing tax authorities from completing cases are encouraging them to open more audits, one tax head suggested.
“We are experiencing more audits in more countries on a more regular basis, and the driver for this is that a lot of countries have got fairly awful finances at the moment and they want more money,” they said.
Lack of resources also means that countries are more likely to disagree about profit allocation, and less likely to reach an agreement on new profit-allocation and nexus rules. “If they all want more money, that doesn’t quite fit with them all agreeing, sitting down nicely and agreeing, ‘This is my share and this is your share and it all equals 100%,’” said one attendee.
The tax director of a multinational company expressed scepticism about the idea of joint audits, conducted by multiple tax authorities working together, to achieve certainty and avoid double taxation.
“If there are joint audits, do you just simply move at [the pace of] the slowest tax authority?” they asked.
“And does that mean, as the head of tax, when you go in to see your CFO, your head of global tax, your annual review, and they say, ‘Why is it you’ve got this mega-audit and it hasn’t been settled after so many years?’ You’re basically saying, ‘Well, because I’m still waiting for the tenth tax authority to get in line.’”
“You end up putting your own personal bonus at risk,” the tax head concluded.