BEPS Action Plan 14: Making dispute resolution mechanisms more effective

In the first part of this article, we talked about provisions of the Organisation for Economic Co-operation and Development’s (OECD’s) final report on Base Erosion and Profit Shifting (BEPS) Action Plan 14, which reflects the commitment of participating countries to implement substantial changes in their approach to dispute resolution in the area of tax treaties.

We discussed how the measures developed under Action 14 seek to minimize the risks of uncertainty and unintended double taxation by ensuring the consistent and proper implementation of tax treaties, including the effective and timely resolution of disputes regarding their interpretation or application through a mutual agreement procedure (MAP).

We also talked about how the report recommended the development of a minimum standard on treaty-based dispute resolution to which all OECD BEPS and G20 countries have agreed to adhere, as well as the elements of that minimum standard. The report also recommended best practices that are designed to complement the minimum standard, which we will now look at in more detail.

BEST PRACTICES
Action 14 also identified a number of best practices related to the three general objectives of the minimum standard. However, these best practices are not part of the minimum standard. The best practices highlighted in the report include:

• the inclusion of paragraph 2 of Article 9 in countries’ tax treaties;

• the publishing of agreements reached pursuant to the authority provided by the first sentence of paragraph 3 of Article 25, which is “to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention” that affect the application of a treaty to all taxpayers or to a category of taxpayers (rather than to a specific taxpayer’s MAP case) where such agreements provide guidance that would be useful to prevent future disputes and where the competent authorities agree that such publication is consistent with the principles of sound tax administration;

• the development of “global awareness” of the audit/examination functions involved in international matters through the delivery of the FTA’s “Global Awareness Training Module” to appropriate personnel;

• the implementation of bilateral advance pricing arrangements (APA) programs;

• the implementation of appropriate procedures to permit, in certain cases and after an initial tax assessment, taxpayer requests for multiyear resolution, through the MAP, of recurring issues with respect to filed tax years, where the relevant facts and circumstances are the same and subject to the verification of such facts and circumstances on audit;

• the taking of appropriate measures to provide for a suspension of collections procedures during the period a MAP case is pending;

• the implementation of appropriate administrative measures to encourage usage of the MAP to resolve treaty-related disputes, recognizing the general principle that the choice of remedies should remain with the taxpayer;

• the inclusion by countries in their published MAP guidance of an explanation of the relationship between the MAP and domestic law administrative and judicial remedies, addressing, in particular, whether the competent authority considers itself to be legally bound to follow a domestic court decision in the MAP or whether the competent authority will not deviate from a domestic court decision as a matter of administrative policy or practice;

• the inclusion of a provision in the published MAP guidance that taxpayers will be allowed access to the MAP so that the competent authorities may resolve, through consultation, the double taxation that can arise in the case of bona fide taxpayer-initiated foreign adjustments permitted under the domestic laws of a treaty partner which allow a taxpayer under appropriate circumstances to amend a previously-filed tax return;

• the inclusion of a provision in the countries’ published MAP guidance on the consideration of interest and penalties in the mutual agreement procedure; and

• the inclusion of guidance on multilateral MAPs and AOAs in countries’ published MAP guidance.

MONITORING
According to the report, the monitoring mechanism that should be used to ensure that the minimum standard is implemented by the countries shall have the following general features:

• All OECD and G20 countries, as well as jurisdictions that commit to the minimum standard set out in the Report, will undergo reviews of their implementation of the minimum standard. The reviews will evaluate the legal framework provided by a jurisdiction’s tax treaties and domestic law and regulations, the jurisdiction’s MAP program guidance and the implementation of the minimum standard in practice.

• The core output of the peer monitoring process will come in the form of a report. The report will identify and describe the strengths and any shortcomings that exist and provide recommendations as to how the shortcomings might be addressed by the reviewed jurisdiction.

• The core documents for the peer monitoring process will be the Terms of Reference and the Assessment Methodology. The Terms of Reference will be based on the elements of the minimum standard and will provide a clear road map for the monitoring process. This will thereby ensure that the assessment of all jurisdictions is consistent and complete while the Assessment Methodology will establish detailed procedures and guidelines for peer monitoring of OECD and G20 countries and other committed jurisdictions by the FTA MAP Forum. It will also include a system for assessing the implementation of the minimum standard.

• Both the Terms of Reference and the Assessment Methodology will be developed jointly by Working Party No. 1 and the FTA MAP Forum by the end of the first quarter of 2016.

• The peer monitoring process conducted by the FTA MAP Forum, reporting to the G20 through the OECD Committee on Fiscal Affairs, will begin in 2016, with the objective of publishing the first reports by the end of 2017.

Action Plan 14 is relevant to us since Philippine tax treaties have provisions on MAP. Taxpayers should be made aware of this remedy as this is a very useful tool in preventing double taxation. It is also worthy to note that the current Philippine Transfer Pricing Guidelines (Revenue Regulations No. 2-2013) specifically recognized MAP provided in the Philippine tax treaties as a mechanism for the Bureau of Internal Revenue (BIR) to mutually arrive at satisfactory solution with the competent authority of the treaty partner to eliminate double taxation issues arising from transfer pricing adjustments. In relation to this, we anticipate that the BIR will be issuing separate guidelines on the application of MAP and APA processes.