One of the many factors that multinationals take into account when considering where to do business is tax certainty. With multinationals having to come to terms with a multitude of international tax changes and filing requirements as a result of the OECD's BEPS Project, the OECD included new requirements for countries to improve how they resolve disputes.
Here, we cover the OECD's latest findings in this area, on six countries' efforts to meet the new standards on resolving tax disputes, covering Belgium, Canada, the Netherlands, Switzerland, the United Kingdom, and the United States.
BEPS Action 14
These recommendations were included in Action 14 of the BEPS Action Plan, which is focused on improving the effectiveness and timeliness of dispute resolution mechanisms.
Specifically, under Action 14, countries have committed to implement a minimum standard to strengthen the effectiveness and efficiency of the mutual agreement procedure (MAP). The MAP is included in Article 25 of the OECD Model Tax Convention, which is used as a basis for tax treaty negotiations, and commits countries to endeavour to resolve disputes related to the interpretation and application of tax treaties. The minimum standard is complemented by a set of best practices.
Reducing the Time to Resolve Disputes
One of the elements of the Action 14 minimum standard requires jurisdictions to seek to resolve mutual agreement procedure (MAP) cases within an average timeframe of 24 months.
The OECD previously released data in respect of 65 countries who have committed to providing it with statistics regarding their completion times. According to the data, typically cases involving multinationals' transfer prices continue to take the longest time to resolve. In 2016, these took an average of 30 months to resolve, compared with 17 months for all cases.
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With countries around the world dedicating more time to international tax topics, countries are beginning to clear the backlog of transfer pricing cases, with their caseload falling from 4,451 to 4,032 during 2016.
The OECD recently provided the first of a series of updates on how countries are actually improving their dispute resolution frameworks, focusing on a first six territories: Belgium, Canada, the Netherlands, Switzerland, the United Kingdom, and the United States.
Under Action 14, countries' efforts are peer-reviewed in two stages. Stage 1 assesses countries against the terms of reference of the minimum standard according to an agreed schedule of review. Stage 2 focuses on monitoring the follow-up of any recommendations resulting from jurisdictions' stage 1 peer review report.
Recently, the OECD took stock of how the six advanced nations have responded to Stage 1 findings, in the first stage two reports to be released.
For companies in these countries the news was positive. The countries were lauded for having effective mechanisms in place to resolve disputes in line with the minimum standard. Specifically, the OECD reported positive change across all six jurisdictions, including that some jurisdictions have updated or clarified issues in their MAP guidance.
All jurisdictions that had not already done so have introduced documented internal guidance to provide for a notification or bilateral consultation process with the other competent authority concerned in cases where an objection is considered as being not justified.
In some jurisdictions, more resources have been provided to the competent authority function and organisational changes were implemented or have been initiated with a view to handling MAP cases in a more timely, effective, and efficient manner, the OECD said. Each of the six jurisdictions decreased or at least maintained the amount of time needed to close MAP cases.
Five of the six jurisdictions met the sought-after 24-month average timeframe to close MAP cases, the OECD said.
In the UK report, the OECD said that it had remedied almost all deficiencies identified in the stage 1 review. Although 15 of its treaties do not yet include MAP provisions, the UK has signed up to the BEPS Multilateral Instrument to add such provisions. Its average time to remedy disputes was just 16 months.
All of Canada's treaties meanwhile include MAP provisions to resolve disputes. Canada has opted to provide mandatory binding arbitration in the event that it cannot resolve a tax dispute with another territory. In doing so, it is adopting best practices beyond what is required in the standard. Canada was recognised as having clear guidance in place and resolving cases within about 21 months.
The United States resolves cases within 27 months on average. The OECD said that in order to offer MAP resolution, amendments are needed to a number of treaties. The US decided not to sign up to the BEPS multilateral instrument, which means the country will need to renegotiate treaties on a piecemeal basis. It, too, was praised for having clear guidance and a regime that typically meets the Action 14 standard.