Danish energy provider Ørsted and Saudi petrochemical company SABIC have warned the OECD that the new rules need arbitration.
“The existing dispute resolution mechanisms are simply unequipped to handle the unified approach, where disputes should be expected to increase dramatically,” Ørsted said.
Even though pursuing a bilateral advance pricing agreement (APA) is one such possibility in many countries, Ørsted's experience with the existing APA programme is that it fails to address complex businesses and inter-company transactions in such businesses — especially when the transfer pricing model differs from a principal set-up and have a more transaction-by-transaction based approach.
“We therefore suggest that mandatory binding arbitration should be the minimum standard,” said the Danish energy provider.
However, Ørsted is by no means alone in this. Many multinational companies (MNEs) favour some kind of arbitration in order to reduce the threat of litigation. Much of the opposition to arbitration comes from national governments in developing countries.
SABIC made it clear it favours mandatory binding arbitration and time-limited arbitration procedures. The company argued this would benefit bilateral tax treaties and new multilateral approaches to dispute prevention.
“Both MNEs and tax authorities enjoy increased certainty,” said SABIC. “Access to a swift and fair dispute resolution process would be a key element in successfully introducing the unified approach.”
Clarity means carve-outs
Much like the mining industry, many energy companies view the OECD-led project as being at odds with their industry. This is despite the fact that the pillar one proposals are targeted at consumer-facing businesses.
The American Petroleum Institute (API) has requested a carve-out on this basis. The API argue that income from extractive activities should be excluded from the scope of pillar one.
The institute stressed that “the extraction of oil and gas is an inherently local activity involving heavy capital investment in the jurisdiction where the natural resource is extracted. The value from extractive activities is clearly created in the source jurisdiction, where profits from extraction are generally subject to a high rate of tax.”
Since extraction is not a consumer-facing activity, the pillar one proposals should not apply to extractive industries. “Accordingly, it is appropriate the source jurisdiction should continue to be entitled to tax any profits derived from the extraction of natural resources, and none of those taxing rights should be reallocated to market jurisdictions under pillar one,” said the API.
Taxpayers in the oil and gas industry face unique challenges. Such companies tend to operate with relatively thin profit margins and are unlikely to generate deemed residual profits in excess of a routine return. As such, the impact of a new tax could hit profit margins hard.
As SABIC is an MNE that potentially could qualify as a commodity company, rather than consumer-facing, the concern is how such an MNE would establish that it was out of scope in potentially multiple jurisdictions, especially if it is not physically established in every country where sales take place.
“Carve-outs such as ‘commodities’ and ‘extractive industries’ could address this specifically by setting out the types of products and business activities covered,” said SABIC.
The Saudi company argued that the OECD could reduce ambiguity in the scope by defining the types of activities or business models outside of it. It even suggested the OECD fall back on existing procedures to reduce the burden of compliance for MNEs.
“This could include existing or developing available information and reporting platforms such as the country-by-country report, and local tax registration information,” the company said.
The API was also concerned with the compliance implications of the reforms. “The burden increases for an enterprise that is required to segment financial statements to eliminate the lion's share of revenue, in order to identify the relatively small amount of revenue that may be within the scope of pillar one,” said the institute.
The need for a new minimum standard
Many MNEs fear the unified approach could result in double taxation around the world and not just more legal problems for companies. This could even cause some companies to move assets out of jurisdictions seen to be ‘high risk’.
In its statement, SABIC called for “an effective and reliable system of relief from double taxation” to cover national tax law and tax treaties. “Members of the Inclusive Framework for BEPS would commit to align the double taxation relief treatment with the OECD and international standard practices, then this would be a welcome signal regarding certainty and simplicity,” said the company.
“We request the OECD to follow up on the members' commitment through a robust peer review process and support in their implementation of the unified approach,” said SABIC. “If the OECD consider the unified approach to be a minimum standard, then the double tax relief should be a condition of that minimum standard.”
In other words, there is still more work to do before the unified approach meets the needs of all taxpayers – including those companies in traditional industries.
