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New tax disputes tool necessary to advance digital tax debate

Tax professionals say that advanced pricing agreements (APAs) and mutual agreement procedures (MAPs) are not enough to gain agreement on the OECD’s digital tax proposals. They believe another tool or process is necessary.

The OECD released their interim report on a possible framework to a solution that addresses the tax challenges under a digital economy, but were vague on details of a dispute resolution mechanism.

“Our proposal aims to allocate [profits] to the market [jurisdictions] and provide tax certainty and a good elimination of double taxation to remove tension and disputes,” said Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD.

The report introduced a framework that brings together varied proposals to breakdown the digital economy, including marketing intangibles and significant economic presence, to set parameters and find an effective solution. The solution will reallocate taxing rights, creating winners and losers, and taxpayers are worried about reactions from jurisdictions that lose out.  

“From my experience, the jurisdiction you’re taking the ability away from tends not to react well,” said a head of group tax at a software security company.

Taxpayers told ITR that they were worried about aggressive tax authorities because transfer pricing complexities can be a real challenge for authorities to understand when some tax departments in developing countries don’t even have an economist among their staff.

“Various parts of this proposal [overlaying existing rules on transfer pricing] are bound to generate some degree of uncertainty and it is crucial to have effective dispute resolution mechanisms in place,” said Jesse Eggert, tax principle at KPMG US.

Although the OECD’s September 2019 statistics suggest MAPs have been a successful tool to help resolve disputes, the number of MAP cases on transfer pricing has grown by 20% since 2017. As MAPs and APAs take several years to conclude – and may expire before they are even approved – tax professionals expect that another tool or process will be necessary to help reach an agreement on how to tax the digitalisation of the economy.

“Anyone going through an APA or MAP process knows it’s somewhat worrying. I’ve been through both, and if you’re trying to do this with a limited amount of resources available for these processes or with some very aggressive tax authorities on the other side then it can be challenging,” said a VP of tax at a multinational consumer goods company.

Eggert told ITR: “It is a little unfortunate that they [the OECD] have not been able to be more specific about what that dispute resolution mechanism would be. One thing that everyone is looking for is mandatory binding arbitration.”

Tax professionals, including advisors, taxpayers, and authorities, agree that mandatory binding arbitration is not a perfect solution but it is the best tool available on cutting back on aggressive positions by tax authorities if they are not resolved through a MAP. 

What if the OECD fails to find agreement?

If the OECD fails to reach a consensus by 2020, there may be no available alternative to dissuade countries from taking unilateral action to address the tax challenges posed by the digital economy.

There are already corporate investment concerns ahead of countries implementing digital service taxes (DSTs) because it significantly raises the risk of double taxation in an already fragmented international tax environment. Wider concerns involve possible trade disputes because the US has threated tariff action against countries that implement DSTs. These political and economic uncertainties suggest the tax environment will move further away from tax certainty and slow down global economic growth in the process.

“It is impossible to avoid disputes, and will be increasingly complex moving forward because the government will have different approaches [if the OECD fails to find agreement],” said the tax director at a multinational construction company.

He explained that authorities have already started asking about his company’s platform and its data, which has led to worries about expanding the digital platform to other countries ahead of an OECD solution because the project is still in its early stages. He is closely following the OECD’s progress and consultation process to their interim report.

Tax certainty has been one of the biggest concerns for taxpayers through 2019 because of legislative changes and the compliance difficulties. Taxpayers don’t have a lot of confidence in 134 countries reaching an agreement to taxing the digital economy yet, but they do not want delays to result in more unilateral actions, or an eventual solution creating more lengthy disputes.

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