Mark Martin and Thomas Bettge of KPMG in the US describe the OECD’s recent proposals for strengthening the Action 14 minimum standard, and explore how adopting these proposals could improve dispute resolution.
On November 18, the OECD released a public consultation document concerning BEPS Action 14, which aims to make treaty-based dispute resolution mechanisms more effective. The consultation document contains a number of proposals that, if adopted, would improve dispute resolution and eliminate some longstanding issues.
In 2015, the Inclusive Framework on BEPS committed to adhere to an Action 14 minimum standard. The minimum standard is meant to ensure that taxpayers can access the mutual agreement procedure (MAP) under treaties, and that MAP cases are resolved in a timely and effective manner. The Inclusive Framework also endorsed several optional best practices related to MAP.
While peer reviews have revealed positive progress in the MAP arena, the OECD has determined that more must be done to make MAP effective, and thus the recent consultation document proposes expanding the Action 14 minimum standard in a number of key areas. While these proposals have been developed by the OECD Secretariat and do not reflect consensus by the Inclusive Framework, it is hoped that the consultation process (including a consultation meeting on February 1) will result in their adoption into the minimum standard.
MAP is an integral component of the international tax system, providing a mechanism for the elimination of double taxation between treaty partners (or taxation otherwise not in accordance with an applicable treaty). Yet the number of MAP cases, and the time required to resolve each case, results in significant strain on this system. The 2019 MAP statistics from the OECD show that the global MAP inventory of transfer pricing (TP) cases, which generally take longest to resolve, is rising. Although the Inclusive Framework member jurisdictions committed to seek to resolve MAP cases within 24 months on average as part of the minimum standard, this objective remains elusive: TP cases took an average of 30.5 months to resolve during 2019.
Among other things, the OECD’s proposals include requiring most jurisdictions to establish advance pricing agreement (APA) programmes, improve training for auditors, suspend the collection of tax during MAP proceedings, address penalties and interest in MAP, provide for roll-forward of MAP resolutions, and adopt arbitration or a similar mechanism as a backstop to MAP.
If adopted, these proposals would significantly improve the effectiveness and timeliness of MAP. Bilateral APAs can cover a large number of years with a single agreement, eliminating the need for separate MAP cases for each year. Similarly, the roll-forward of MAP by a procedure analogous to the accelerated competent authority procedure (ACAP) available in the US and Canada would eliminate the need for competent authorities to waste time addressing issues that have already been resolved for earlier years with materially similar facts. ACAP is not available in most countries, but would be a welcome addition to the minimum standard.
Training for auditors would reduce the number of cases that enter MAP in the first place. In February 2019, the IRS began requiring Large Business & International (LB&I) division examination teams to consult with the US competent authority prior to proposing TP adjustments that implicate US treaty partners, likely in response to the large number of IRS proposed adjustments that were eliminated or reduced by the US competent authority in MAP. While the consultation document only addresses training, expanding the minimum standard to include a consultation requirement would likely result in significant improvements, conserving taxpayer and tax authority resources that are often squandered when a contested audit results in a TP adjustment that is eliminated in MAP.
In addition to substantive proposals for buttressing MAP, the consultation document also proposes improvements to the MAP statistics reported by the OECD. Expanding the data that is reported by jurisdictions and published by the OECD would better enable taxpayers to assess whether to pursue MAP in a given case.
Action 14 has already led to improvements in MAP, but large MAP inventories and long timeframes for resolution make further work imperative. The OECD’s proposals are an important step in this direction, and it is hoped that the public consultation process will ultimately produce a stronger, more complete minimum standard.
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