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Policy Proposals  Business Law Comments on the Public Discussion Draft on BEPS Action 14 (Make Dispute Resolution Mechanisms More Effective)

January 16, 2015

Marlies de Ruiter
Head, Tax Treaties, Transfer Pricing and Financial Transaction Division
Centre for Tax Policy and Administration
Organisation for Economic Co-operation and Development

Comments on the Public Discussion Draft on BEPS Action 14
(Make Dispute Resolution Mechanisms More Effective)

Keidanren hereby submits its comments on the Public Discussion Draft "BEPS Action 14: Make Dispute Resolution Mechanisms More Effective" published by the OECD on December 18, 2014.


Keidanren welcomes the OECD's work to "make dispute resolution mechanisms more effective".

International double taxation puts a huge economic burden on taxpayers and therefore should be resolved promptly. Especially, taxation not in accordance with tax treaties in Transfer Pricing happens and bilateral mutual agreement procedures (hereinafter "MAP") under tax treaties, which should contribute to eliminate such taxation, are not virtually working in many countries, and thus, a lot of taxpayers are forced to seek to resolve by way of prolonged domestic litigations. We totally endorse these options raised by the OECD in this Discussion Draft, as it intends to make a MAP working more effectively by removing various obstacles which have been preventing utilization of a MAP. Especially, as other BEPS Actions except for Action 14 are expected to increase disputes and associated double taxation, it is imperative that, prior to those Actions being implemented, a more efficient MAP will be achieved as envisaged by Action 14 by securing strong political commitment. For example, it would be considered that the Transfer Pricing Documentation requested in Action 13 should not be implemented unless the improvement to the MAP processes, which include the introduction of a mandatory and binding arbitration provision, are achieved.

The introduction of a mandatory and binding arbitration provision into the existing MAP provisions in all tax treaties is the most important to resolve the double taxation and it should make significant strides toward facilitating effective MAP and resolving disputes. We believe that resolving double taxation disputes through arbitration will benefit governments, including developing countries, to obtain a neutral view towards the issues disputed and reduce competent authority resources for dispute resolution by use of an arbitrator, and also benefit taxpayers to increase predictability through the accumulation of cases disclosed. We also hope that the OECD overcome the challenge that there is no consensus among the countries participating in the Base Erosion and Profit Shifting ("BEPS") Project on the introduction of a mandatory and binding arbitration provision due to a matter of national sovereignty to which treaty provisions relate.

The public discussion draft aims as a first step to set a non-binding minimum standard to which all the participating countries are able to commit, by presenting options to address obstacles to the effective functioning of the MAP. We consider this an important step toward making dispute resolution mechanisms more effective and appreciate the approach taken by the OECD. We hope the final proposal under Action 14 would also include more effective measures (such as a mandatory and binding arbitration).

Ultimately, it will be necessary to go beyond incorporating an arbitration provision of the OECD's Model Convention with Respect to Taxes on Income and on Capital ("OECD Model") into bilateral tax treaties to establish an international arbitration organization, one similar to that of the World Trade Organization. By rendering an arbitration decision on specific issues of a MAP case, such an organization is expected to expedite case resolution and to increase predictability, as well as the stability of judicial decisions, through the accumulation of cases resolved.

The public discussion draft presents a total of 34 options. Although we support the principles underlying these options in general, we have the following views on some specific options.

Views on the Issues on Which Comments Are Sought

1. Paragraph 20: Best audit practices

Re: Best audit practices that reflect an appropriate global awareness and that facilitate an effective mutual agreement procedure

  • Ensuring that audit settlements do not block access to the MAP is crucial to its effective operation. Accordingly, current practices such as imposing additional penalties on taxpayers seeking MAP assistance, implying a reduction of the amount of corrections in a return for the taxpayer`s waiver of its right to seek MAP assistance, and urging restraint for a taxpayer's MAP request on the grounds of the prevention of a MAP case with low priority in both competent authority must be discontinued immediately. Option 7 also refers to taking appropriate steps, including voluntarily notifying the competent authorities of both contracting states of the details of audit settlements. In connection with this point, we propose that, when a notification has been made and the transaction in question is ongoing during a certain year in which both competent authorities conclude an agreement, the competent authority of one contracting state should promptly accept the corresponding adjustments made by the competent authority of the other contracting state based on its audit settlements, for and after the tax year at issue. This treatment is expected to help eliminate double taxation and facilitate adjustments.

2. Paragraph 27: Information required to be submitted with a request for MAP assistance

Re: Whether existing country guidance or practices with respect to the information required to be submitted with a request for MAP assistance create other obstacles to the proper functioning of the mutual agreement procedure and, where this is the case, to provide suggestions on ways to address these obstacles

  • We agree to the proposal made in Option 11. Despite advice being often sought from professional tax corporations when submitting a request for MAP assistance, in some cases, transfer pricing documentation is filled with economic analyses. Given that situation, guidance should be issued to clarify the minimum necessary contents of a request. We also propose the rule that information and documents other than clearly specified in guidance are submitted discretionally, and are not a necessary requirement for MAP.

3. Paragraph 40: Additional measures other than arbitration adopted in order to facilitate the resolution of a MAP case

Re: What additional measures (other than arbitration) could be adopted in order to facilitate the resolution of a MAP case that competent authorities have been unable to resolve within two years of the MAP case being accepted (or some other reasonable target timeframe)

  • Comments are sought on what additional measures other than arbitration could be adopted to facilitate the resolution of a MAP case that has not been resolved within two years of being accepted. Creating a framework whereby consent is obtained from the three parties—the competent authorities of both contracting states and the taxpayer—may help the final agreement to be reached in a shorter period of time.

4. Paragraph 46: Advantages and disadvantages of potential limits to the scope of MAP arbitration

Re: Advantages and disadvantages of potential limits to the scope of MAP arbitration

  • Limitations to the scope of MAP arbitration under specific conditions would be considered, such as exclusion from the scope of arbitration cases involving the application of treaty or domestic law anti-abuse rules. But we also consider that a certain rule is necessary not to limit the scope of arbitration which would be contrary to the intended objective (e.g. competent authority should disclose the reason to a taxpayer where he deems it a case that is unsuitable to adopt arbitration.).

5. Options 29 and 30: Default form of decision-making in MAP arbitration, and evidence

Re: Preferred default form of decision-making in MAP arbitration, and approaches to evidentiary issues in the MAP arbitration process

  • The application of the "conventional" or "independent opinion" approach should be conditional on the arbitrators, before reaching an independent decision, being properly and sufficiently presented with the objective facts in the course of the competent authorities' arguments and explanations. Similarly, the adoption of the "last best offer" or "final offer" approach should be permitted only when the competent authorities of both contracting states gain a full and objective understanding of the taxpayer's business model.
  • Furthermore, as all of these approaches call for the arbitrators to fully understand the facts, the taxpayer should be given the opportunity to provide an explanation as needed.

6. Option 33: Address issues related to multilateral MAPs and advance pricing arrangements ("APAs")

Re: Other examples of multilateral situations that raise issues for the mutual agreement procedure

  • An example of multilateral transactions that raise issues for the MAP is as follows: suppose the transactions of an entity (domiciled in Country A) that are subject to transfer pricing taxation involve two other countries (Countries B and C). In this case, if MAP negotiations between Countries A and B start but those between Countries A and C do not due to the absence of corresponding adjustment, any MAP agreement reached between Countries A and B may be applied, as it is, to transactions between Countries A and C without giving the opportunity to rebut separately. For that reason, the taxpayer can not request MAP between Countries A and B. Developing a multilateral instrument as envisaged by BEPS Action 15 is important.

Comments on Other Issues

1. Option 1: Clarify in the Commentary the importance of resolving cases presented under Article 25(1)

  • Though we agree with the proposed concept, the paragraph should be directly added to the OECD Model Convention itself (Article 25(2)), since its mere addition to the Commentary would only have limited impact.

2. Option 2: Ensure that paragraph 2 of Article 9 is included in tax treaties

  • There exist tax treaties that do not have a corresponding adjustment provision as stipulated in paragraph 2 of Article 9 of the OECD Model. In some countries, the competent authority makes it a policy not to enter into MAP discussions with a nation with which a tax treaty containing a corresponding adjustment provision has not been concluded. This means that the MAP may depend on the highly technical matter of whether or not a corresponding adjustment provision is contained in tax treaties. In order to enable the MAP to function more effectively, a corresponding adjustment provision should be included in tax treaties as soon as possible.
  • However, the inclusion of paragraph 2 of Article 9 of the OECD Model alone will not suffice to eliminate double taxation if treaty partner competent authorities differ in their views on arm's length pricing and other matters. To achieve the elimination of double taxation, which every tax treaty aims at, the competent authorities need to have the same view on arm's length pricing-related matters, including the definition of a related party, the application of the transfer pricing method by segment according to the taxpayer's functional and risk analysis, and the provisions of paragraph 1 of Article 9 of the OECD Model. Political commitment is required to ensure competent authorities recognize this need.

3. Option 3: Ensure the independence of a competent authority

  • We agree with the proposed option.
  • In some countries, an absence of the "firewall" provisions between the competent authorities handling MAP cases and the field tax officers handling the Transfer Pricing assessment often raises concerns that it may undermine the effectiveness and promptness of the exchange of information between taxpayers and competent authorities. Therefore, it should be clarified in the domestic law or rules of each country that the competent authorities handling MAP cases and the field tax officers handling the Transfer Pricing assessment are independent, there is a need to implement an efficient firewall between the two, and thereby the information provided by taxpayers is kept confidential and should not be utilized for the purpose of the Transfer Pricing assessment.
  • Also, in some countries, there are cases where the competent authorities display reluctance to withdraw the whole or a part of the tax demand raised in their country due to excessive precautions to the possible scrutiny from the board of audit responsible for bureaucratic corruption. Therefore, participating countries should commit to clarify the competent authorities' autonomy from such board of audit, and guarantee that the competent authorities shall not be wrongfully penalized for an appropriate adjustment it has made as a result of the MAP agreement.

4. Option 4: Provide sufficient resources to a competent authority

  • In some countries, the lack of sufficient resources allocated to competent authorities to deal with its existing inventory of MAP cases is resulting in increased delays in processing the cases and obstructing an efficient admission of new MAP cases. Therefore, we agree with the proposed option. The OECD should fully support participating countries to provide competent authorities with sufficient resources and proactively monitor such system to make it stable.

5. Option 5: Use of appropriate performance indicators

  • Though we agree with the proposed concept, it should be noted that an excessive emphasis on time to resolve cases as the performance indicator may result in competent authorities rejecting the applications itself of complicated MAP cases which are expected to be time-consuming. Such a situation will undermine the taxpayers' benefit.

6. Option 8: Implement bilateral APA programs

  • The public discussion draft encourages the use of bilateral APAs as a means to resolve disputes. We strongly support the OECD proposal that all the countries participating in the BEPS Project commit to implement bilateral APA programs.
  • Since bilateral APAs are applicable only where a tax treaty is concluded between the states and the tax treaty network to eliminate double taxation is not sufficient, participating countries should facilitate to conclude tax treaties.
  • In the light of these circumstances, a partial convention may also be addressed within the framework of the multilateral instrument discussed in Action Plan 15.
  • Furthermore, since the foreseeability of treaty entitlement is likely to diminish for taxpayers if the anti-abuse provisions discussed in Action Plan 6 are introduced, advance confirmation through bilateral MAP as to whether treaty benefits is granted should be established.

7. Option 9: Implement administrative procedures to permit taxpayer requests for MAP assistance with respect to recurring (multiyear) issues and the rollback of APAs

  • We agree with the proposed option and consider that competent authorities should take flexible approaches so as to resolve the uncertainty about transfer pricing management and reduce the complexity of administrative processes required for reaching an agreement through the MAP. Such approaches tailored to the taxpayer's business cycle include the verification of facts for a certain long period (for multiple tax years, not for variable single year) in verifying the validity of the Arm's Length Pricing ("ALP") of transactions between associated enterprises and adjustments for taxable income for the tax year at issue.
  • Furthermore, a mechanism should be introduced whereby a MAP or APA can be rolled back according to the statute of limitations for transfer pricing tax assessments. This will prevent competent authorities from holding separate discussions on cases of the same nature for each tax year, thereby helping them reduce resources.
  • The proposal should clearly state that the "roll-back" mentioned in the option is intended to apply the conditions of the APA to the period prior to the year of APA application.

8. Option 14: Clarify the meaning of "if the taxpayer's objection appears to it to be justified"

  • We hope that the OECD addresses this issue by amending the Commentary by providing some examples.
  • Also, in some countries, there is a practice where the application for the MAP is not accepted until after a tax demand has been actually raised despite the mention in Article 25(1) of the Model Convention that "where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention...". In this regard, we hope that the competent authorities commit to observe Article 25(1) and related commentary of the Model Convention and accept the MAP application when taxation not in accordance with the tax treaty is reasonably foreseeable even if a tax demand is yet to be raised.

9. Option 16: Clarify the relationship between the MAP and domestic law remedies

  • We agree with the proposed option.
  • In some countries, it is prescribed that the MAP process stops when a litigation under domestic law is completed, which results in a situation where a MAP virtually does not work at all as the MAP takes quite a long time and litigation under domestic law always completed is earlier.
  • Also, in some countries, though both options of litigation under domestic law and a MAP are provided to taxpayers in formality, the competent authorities tend to refrain from proceeding with the MAP until the litigation is completed so that they can review the result of the litigation under domestic law. This is also one of the reasons why the MAP virtually does not work.
  • Though taxpayers have no choice but to make an objection under domestic law as there is a prescribed deadline thereof, having regard to the above circumstances, it is one idea that participating countries keep the objection and litigation process under domestic law in abeyance in case the MAP is applied and to proceed with the MAP in priority. Thereby it will also be possible for tax authorities to save their costs for dispute resolution as there would be no need to proceed with both the litigation and the MAP simultaneously.

10. Option 17: Clarify issues connected with the collection of taxes and the mutual agreement procedure

  • Even with effective administrative processes for the MAP in place, there are cases where obtaining a refund of the corporation tax already collected entails procedural or political difficulties. In those cases, even if an agreement has been reached through the MAP, the ensuing refund procedure delays the issuance of the refund, with the result of failing to ensure the effectiveness of the MAP. Therefore, the introduction of an administrative process must also be guaranteed that enables refunds following an agreement through the MAP to be implemented in a timely and appropriate manner.
  • In some countries, interest accumulates while the MAP is pending. Taxpayers may give up applying MAP due to the burden of such interest accumulation. Therefore, in order to make the MAP work more effectively, participating countries should commit to legislate to the effect that the collection of tax and the accumulation of interest are kept in abeyance until the MAP process is completed.

11. Option 18: Clarify issues connected with time limits to access the mutual agreement procedure

  • Taxpayers spend a lot of time and incur the cost of labour at the stage of the examination from the application through the start of the negotiation.
  • Especially, where the examination is lengthened, the authority's person in charge is changed, and a redundant explanation is necessary, this results in a further examination period being needed. Additionally, where the successor takes up the directionality that is different from the interpretation of the predecessor and an argument is restored, there is the case of this being highly burdening to the taxpayer. Participating countries should establish the time frame of the examination from the application through the start of negotiation in light of the prompt tax practice execution.

12. Option 19: Clarify issues related to self-initiated foreign adjustments and the mutual agreement procedure

  • We agree with the proposed option.
  • In case a tax demand is proposed to be raised as a result of a tax assessment in foreign countries, taxpayers may sometimes accept such a tax demand, amendment of the tax return, and self-adjustment in subsequent years under a certain agreement with the tax authorities in order to avoid prolonged litigations and a huge amount of penalty, to achieve stability in taxation in the future years. However, taxpayers may subsequently decide to request for removal of the initial tax demand in a situation where the tax authorities do not abide by such an agreement and raise further tax demands in subsequent years. In such a case, even if taxpayers have made an amendment of their tax return or self-adjustment, the application of MAP should be allowed.
  • In fact, in some countries, there is a practice that taxpayers are forced to make self-adjustment or accept the proposal made by the tax authorities without reasonable rationale being given, even before the assessment is completed or at the stage of pre-assessment which is carried out before the substantial assessment. It should be clarified that in such a case, the application of MAP is allowed as it can be said that the tax demand has virtually been raised.

13. Option 24: Policy issues: Facilitate the adoption of MAP arbitration following a change in treaty policy

  • We agree with the proposed option.
  • We consider that such most favored nation provisions more effectively work if they are introduced under a multilateral instrument taken up under Action Plan 15.

14. Option 25: Clarify the coordination of MAP arbitration and domestic legal remedies

  • When an arbitration decision has been rendered, the resolution of the case itself can be expected because the competent authorities are required to have the details of the decision incorporated into MAP discussions and reflected in a mutual agreement. However, if a mutual agreement is not reached owing for example to inconsistency with domestic law, taxation not in accordance with the tax treaty remains, with the result that the taxpayer has to seek a domestic legal remedy (filing a lawsuit). The problem in this case is that, when the arbitration decision was rendered, the taxpayer probably had to waive its right to file a lawsuit in exchange for accepting the decision. It is noted that as a consequence, the availability of domestic legal remedies may be limited in reality.

15. Option 26: Practical issues: Amend Article 25(5) to permit the deferral of MAP arbitration in appropriate circumstances

  • The proposed option raises concerns that the competent authorities easily defer the initiation of MAP arbitration and the MAP does not effectively work. Therefore, the deferment of the initiation of MAP arbitration should be subject to an acceptance of taxpayers and the period of deferment should be limited (e.g. 6 months).


Subcommittee on Taxation

Business Law