Tax Policy Bulletin Momentum behind the Action Plan on

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Tax Policy
Bulletin
Momentum behind the Action Plan on
Base Erosion and Profit Shifting (BEPS)
15 September 2013
Leaders of the G20 countries publically endorsed outline proposals to address
BEPS during their summit in St Petersburg on 5/6 September 2013. Responding
to a report presented to them by Angel Gurria, OECD Secretary‑General, which
included progress on the challenges previously set by them, the G20 encouraged
swift time frames for further development and implementation.
The BEPS Action Plan published by the OECD
on 19 July 2013 reflects an attempt to deliver
the biggest reform of global taxation in the
lifetime of most of us. The global tax system
(i.e. broadly, the body of tax treaty rules
and guidance addressing the interaction of
separate domestic tax regimes) isn’t being
rewritten from scratch, but the Plan thrashed
out with the tax authorities of the G20 is
taking on every aspect of the system that is
perceived as not working in today’s world
as well as elements of those domestic tax
regimes. Taking account of the range and
depth of issues now being considered, it is
clear the OECD is mounting an unparalleled
full scale review.
The global tax system was designed originally
to prevent corporate profits being taxed
twice. The heart of the OECD’s focus now
is on preventing cases where profits might
inappropriately escape tax or where taxable
profits are separated from the location of
the valuable activities that generate them.
Further, the package of new measures
pursued by the OECD is likely to lead to
tougher tests to assess taxable presence
and the substance of business activities in a
particular country.
Work by the OECD on BEPS reflects a set of wider
concerns of a number of states with the global
tax system. However, notwithstanding the scale
of its ambition, change is not going to happen
overnight – but seems likely to come from a number
of directions. Change will come from countries
adopting new or amended domestic rules, changes
to international tax treaties and changes to the
practical application of existing rules by both tax
authorities and business.
In the context of this strong – and heavily backed
– agenda for change, it is in everyone’s interest
that the tax system is amended in a proportionate
and balanced way. The Action Plan is a first step
in creating an agenda for action over the next two
years or so. Its success will depend on continued
commitment and effort by governments and
business. The biggest threat to the BEPS project
will be if momentum and buy‑in wanes. Since that
would also markedly increase the risk of unilateral
actions by states (and therefore of double taxation),
business has a strong interest in encouraging
multilateral progress toward uniformly agreed
standards that can be meaningfully applied in
practice. How does the Action Plan fit in with what
governments are doing?
Achieving consensus
The Action Plan is only a framework and specific
actions will be formulated in existing and new
OECD Working Groups. The importance of
achieving consensus in the outcomes of those
taking forward the Plan is critical to discourage
unilateral action (for more information, see
our June 2013 Tax Policy Bulletin on the BEPS
Action Plan). The level of political pressure for
unilateral action if BEPS measures are not quickly
forthcoming should not be underestimated. For
example, it was noticeable in the announcement
on 30 August 2013 of proposals by the Dutch
government to prevent unintended use of its
tax treaties in conduit arrangements etc., that it
considers it appropriate to take some pro‑active
measures ahead of anything that may be agreed at
a later date in an OECD or EU context. In the US,
the BEPS project has been discussed in a hearing
held by the tax writing committee of the US House
of Representatives, including testimony from
an OECD official as part of its consideration of
international tax reform legislation.
Although the Action Plan has been formally
approved by leaders of the G20, a broader
consensus is required internationally if it is to
be effective.
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The OECD will be seeking a clear mandate from
its 34 member states and has also been actively
engaging with other non OECD member major
trading countries in the process of forming the
Action Plan. Other supra‑nationals, like the United
Nations and the International Monetary Fund, have
expressed some level of commitment which may
help with further countries, particularly developing
nations but it remains to be seen whether the
OECD can develop and maintain a broad consensus
amongst states as it works up the detail of the
individual actions of the Plan.
The 15 Actions
The Action Plan proposes 15 areas in which work
will be pursued by the OECD to advance the
BEPS project.
Some tax authorities are expected to be forceful
contributors but business does have a chance
to input to the process and should make its
voice heard.
Action 1 – The digital economy
Given that ‘solving’ the digital issue – specifically
identifying appropriate tax rules to deal with
digital business – is perhaps the hardest problem
facing the OECD, it may seem odd that it has
been made the number 1 action in the Plan
(although arguably the goal of this Action is
modest – i.e. identifying alternatives rather than
implementing solutions).
Widely differing views exist on how to approach
the digital economy and discussions about very
different alternatives are still taking place. A tax
policy debate on the relative merits of seeking
direct and indirect tax solutions still needs to be
played out for digital business as for economies
more generally (see, for example, our June 2013
publication Shifting the balance: From direct to
indirect tax).
Current initiatives in the US, where states have
been resolving nexus issues around digital business
in relation to sales taxes, and in France, where
the Government commissioned a report and
announced plans to tax the digital economy as part
of the 2014 French Budget, seem to provide some
indications of a path to an indirect tax solution. The
possibility of some sort of ‘digital transactions tax’
is arguably more likely since VAT options appear
limited (and the switch to a destination basis for
EU suppliers of various e‑services to consumers
from 2015 – which aligns the B2C treatment with
the reverse charge restrictions already in place
for equivalent B2B services – should effectively
end VAT ‘rate shopping’ where supplies might
in some circumstances be made via territories
applying a low rate). But it’s interesting to note
that in refuting calls for an online sales tax in the
UK, David Gauke (the Exchequer Secretary to
the Treasury), said the Government favoured “an
approach which aims to ensure common principles
apply to all businesses whether operating online,
from physical premises or with a combination”.
He also added “This area is extremely complex;
with large parts of the economy moving towards
having some form of digital presence, it’s important
to ensure fair competition between digital and
non‑digital businesses.”
On the direct tax side, the identification of a
so‑called ‘server PE’ or the presence of one or more
dependent agents has been considered in relation
to certain digital operations and might be more
actively pursued. However, we don’t think that
the widening of the definition of a permanent
establishment (PE) to cover the digital economy
beyond these concepts will produce an appropriate
solution. Further, the desirability – and feasibility
– of any ‘solution’ solely for digital business seems
a long way off, given the technical and practical
problems in this area.
Action 2 – Hybrid mismatch arrangements
The OECD’s second action point is to “neutralise
the effects of hybrid mismatch arrangements”.
Various countries have in the past taken actions
through domestic law provisions aimed at hybrid
arrangements (e.g. Denmark, Germany, UK).
These are likely to contribute to the design of what
is considered best practice and the OECD already
has done detailed work in this area in identifying
problems and possible solutions (see our bulletin
on the OECD report on Hybrid Mismatch
Arrangements of March 2012).
In relation to hybrid instruments, the EU intends
to adapt the ‘Parent‑Subsidiary Directive’, as noted
in the EC Action Plan of 6 December 2012. This
would, in particular, give effect to the political
agreement reached in 2010 by Member States in
the Code of Conduct Group on profit participating
loans (PPLs). The EC plan aims to prevent the
Directive from providing exemption from taxation
of distributions received in cases where they are
deductible for tax purposes in the source country.
This could even result in a new approach with
the Directive specifically mandating a tax charge
on income otherwise exempt if it has effectively
entitled the payer to a deduction, rather than
permitting a relief in specified circumstances.
The main problem that has faced action on hybrid
instruments is that they are in practice difficult
to define. Hybrid entities on the other hand are
arguably easier to define in theory and identify in
practice and consensus on how to deal with them
might be more easily reached.
Although potentially of significant scope,
short‑term action in the US at the entity level
(e.g. cutting back on check‑the‑box) is likely to be
hampered by competing views on check‑the‑box
and by political deadlock and the wider domestic
tax reform agenda in the US.
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An additional point of interest in this area is the
extent to which the coherence of tax rules to produce
a level playing field between MNCs and nationallybased entities has become a more important influence
in some territories. MNCs should not, some countries
suggest, have access to more sophisticated planning
techniques than those entities operating solely
within a domestic market. This line of argument
clearly adds pressure for action against hybrids.
Action 3 – Controlled foreign company (CFC) regimes
Although OECD Member states generally apply CFC
regimes, the OECD has done little work on this area
in the past. This situation is set to change as the
third proposed OECD action is to strengthen CFC
rules, although very little comment on this is made
in the Action Plan.
There are CFC regimes in all G20 member states,
with the exception of four developing countries,
two of which have announced an intention to adopt
a CFC regime. The taxation of foreign income,
derived directly or derived via a foreign subsidiary,
is an important aspect of the fiscal policy of
national governments to encourage economic
growth, competitiveness and foreign investment.
That is one of the main reasons why CFC rules vary
so much between jurisdictions. It’s very unlikely
that a common position on CFC rules can be
achieved when sovereign nations have chosen such
different ways to encourage economic activity.
The best we’re likely to see is some narrowing of
practices on CFC rules.
While it’s common for unrelated party passive
income for example, (relating to third party
investments etc.) to be subject to inclusion in
amounts attributable back to the home territory,
certain countries like Canada, the UK and the US
have an exemption for certain related party passive
income. A proposed relaxation of Australian CFC
rules to facilitate exemption for related party
passive income has been deferred indefinitely.
There is also continuing political debate in the US
as to whether the check‑the‑box and ‘look through’
concessions to the CFC rules should be withdrawn.
There are potential EU issues with extending CFC
rules given the Cadbury Schweppes decision that
within the EU the concept can apply only to wholly
artificial arrangements. While those outside the EU
suggest change in this area should be considered,
the prospect of getting agreement to a change at
EU Treaty level is daunting.
Action 4 – Financial payments
The OECD seeks to target a broad range of what
it describes as ‘excessive’ interest and other
financial payments, including guarantee fees and
derivatives. It will look at financing costs both in
the country of the parent and the subsidiary.
Many countries have already introduced limitation
to the deductibility of such payments between
related parties, e.g. a debt:equity ratio or an
“interest cover” ratio, or simply applying the arms
length principle of transfer pricing for the level
of debt. Hence the extent of the actual tax at risk
is unclear and many countries may consider the
matter is already well covered.
The OECD has also encouraged member states to
look harder at how generously they allow interest
expense, particularly of a parent company relating
to foreign investments that generate exempt or tax
deferred income. Tax authorities have noted the
innovative ideas proposed and adopted with an
eagerness to see how well they work in practice.
Co‑ordinating such a review in this area as is
envisaged by the Action Plan will not require any
major OECD initiative and will be a relatively
simple action to tackle.
It has been suggested there is room for more
harmonisation across territories on what
constitutes an acceptable level of debt (measured
in relation to available equity) and beyond which
levels of debt would lead to interest restrictions.
As transfer pricing (TP) analysis remains at the
heart of the thin cap debate, some greater accord
on general ‘safe harbour’ levels of debt may be
most likely.
The OECD has stated that the level of debt
and interest in certain intra‑group finance
arrangements is sufficiently arbitrary that it is one
of the situations in which the arm’s length principle
breaks down and as a result ‘special measures’ are
required. Restrictions on interest deductions alone
may be pursued but the OECD may also consider
that the intercompany debt might be disregarded or
recharacterised, as discussed further below.
Action 5 – Harmful tax practices
Notwithstanding the overall nature of the OECD
BEPS undertaking, (i.e. the focus on the actions of
corporates) there remain objections that it is the
privileged tax regimes created by states that are
the source of much of the problem. It is therefore
understandable that the OECD would wish to
put the topic of harmful tax practices back on the
agenda of its Action Plan. However, it still seems
a little surprising that the proposal is largely to
revamp the work (from the late 1990s and early
2000s) on harmful tax practices given the struggle
encountered then with developing a consensus
within the OECD for this work.
Lowly taxed regimes have been created in many
countries, whether for example in relation to
particular geographical development areas,
sectors or income streams. Evidence points to it
being an increasing phenomenon rather than a
decreasing one.
We consider companies should be at liberty to
finance their operations with either equity or
debt, as long as the arrangements are in line with
TP principles on the level of debt and the rate
of interest payable. It’s a basic tenet of the arm’s
length principle, which the Action Plan endorses,
that the tax treatment within a country should
essentially be the same whether payments are
made to a foreign group entity or to a third party.
It is possible that the OECD will seek to develop
a commentary on regimes it thinks are harmful,
which may discourage certain states from adopting
or maintaining such regimes. However, a focus on
the competitive behaviour of states may make some
states rather less co‑operative in dealing with the
issues raised. This may also mean that it becomes
more difficult for the OECD to make progress on
the issues raised.
We also believe that a natural extension of this,
as well as a consequence of market dynamics, is
that the non‑taxation of the income received by
a recipient – whether or not a foreign recipient –
should not impact upon deductibility to the payer
provided the above TP tests are met. The OECD,
however, wishes to link rules on the deductibility
of interest with a consideration of whether the
recipient is taxed on that interest.
As long as there is full transparency and sufficient
economic activity, we think states should be
at liberty to develop tax regimes to encourage
economic activity and investment. There’s likely
to be a ‘read‑across’ to this area from Action 13 on
the requirement for MNCs to provide information
regarding their global allocation of income,
economic activity and taxes paid. In other words,
if the bulk of an MNC’s income were disclosed
as arising in a tax haven (taking advantage
of the absence of a corporate profits tax), that
would almost certainly lead to a requirement for
demonstration of appropriate substance there.
Discussion on these issues has led to the proposal to
use a group’s global debt to equity ratio as the cap
for financing affiliates, a suggestion that seems to
be receiving some degree of acceptance.
The OECD’s plan to develop further guidance
on guarantees, derivatives and other financial
instruments will be a welcome development.
But new ways of dealing with the ever‑changing
commercial environment in financial markets will
inevitably mean there’s a constant need to keep this
under review.
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Overall, the tax authorities are probably closer
to an agreed list of approved anti‑base erosion
measures that will apply consistently to MNCs and
others for financial payments than has hitherto
been the case even without the additional impetus
given by the Action Plan. The challenge is whether
countries, already satisfied with their own
interest limitation rules, feel any compulsion to
change them.
We believe that countries will indeed continue
to adopt policies to suit economic needs but
may be smarter about designing them within
certain boundaries (those that don’t may be ‘cold
shouldered’ and business may think twice about
the reputational impact of using such regimes).
Action 6 – Treaty abuse
According to the OECD, it is inefficiencies in tax
treaties that have triggered double non‑taxation
in a number of situations. This is why the
OECD flagged it as one of the most important
sources of BEPS concerns and plans to develop
model treaty provisions and recommendations
for domestic law measures to counter the
granting of treaty benefits in what it refers to as
“inappropriate circumstances”.
Some states have felt it necessary to terminate
tax treaties as a response to abuse of particular
treaty articles. The basis on which agreement has
been reached by the states in the first place may
have been at least partly to blame. While broader
use of anti‑abuse provisions may be likely in
future, the OECD’s intention to clarify tax policy
considerations to be taken into account prior to
the signing of a treaty may also help to stop this
process escalating.
We consider that, as a matter of principle,
taxpayers should be able to rely on the text of a
treaty, even if this arguably leads to ‘unintended
benefits’. It’s up to governments to agree which
measures – and constraints – are required and
to provide appropriate wording to deliver them.
Otherwise it will be very difficult for taxpayers to
understand what rules do in fact apply to them.
A fundamental purpose of double tax treaties is
to promote bilateral investment and trade; one of
the principal means of achieving this basic goal
is providing taxpayers with greater clarity and
certainty of the tax consequences of investing or
doing business in the source jurisdiction.
Action 7 – Permanent establishment (PE) status
As a general matter any review of PE principles,
perhaps more so than any of the other aspects
of BEPS, brings to the forefront the concern that
the BEPS project could become a battle ground
for source country versus residence country
rights of taxation. OECD officials have gone out
of their way to make clear that BEPS is not about
source country taxation versus residence country
taxation but whether this disavowal proves true is
yet to be seen. More countries (e.g. France, Italy,
Norway, Spain, UK) have recently been challenging
overseas companies as regards the presence in
their jurisdiction of a PE. Discussion recently at the
OECD on the Model Treaty Commentary on Art
5 has already featured heavily the ‘economically
bound’ concept that some tax authorities wish to
use to challenge commissionaire arrangements
(on the basis of an interpretation of the dependent
agent PE test) so it is no surprise that the OECD
would want to pursue this area further. However,
it may be difficult to address the dependent agent
rule with a view to hitting the target of abusive
commissionaire arrangements alone. It seems more
likely that, in pursuing these issues, the OECD will
be drawn into a complete re‑think of the terms not
just of the dependent agent rule in Art 5(5) but also
the independent agent rule in Art 5(6).
On the other hand, we recognise that there
shouldn’t be an over‑reliance on legal form alone.
Tax authorities in many countries have already
become more aggressive in challenging beneficial
ownership or tax residence and general anti‑abuse
rules (GAARs) are increasingly being applied in
a treaty context. The introduction into treaties
of a treaty specific/ targeted anti‑abuse rule
(SAAR or TAAR) is also a consideration. Certain
countries (e.g. China and Indonesia) have already
introduced additional domestic criteria that need
to be satisfied. But the more popular route to date
has been to write limitation of benefits (LoB)
provisions directly into treaties to deal with things
like ‘triangular’ situations, base erosion payments
and conduit arrangements, as has been particularly
the case with recent US treaties.
As a result of the Action Plan, we expect to
see a greater reliance on these kinds of ‘break’
provisions. It will be important for agreement to
be reached on an optimal approach to avoid the
complexities of dealing with a variety of different
(and complex) methodologies. The practical
difficulties of agreeing and adopting alternative
ways of dealing with existing treaty provisions
(including a multilateral instrument as discussed
in Action 15 below) suggest action will likely be via
new and updated treaties. While there are differing
views about what would be preferable, it’s quite
likely that future treaties will increasingly include
anti‑abuse/ anti‑treaty shopping clauses in specific
articles including the business profits and capital
gains articles or alternatively a stand‑alone article
dealing with these issues.
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The OECD has also indicated it will be considering
the current specific activity exemptions from
the PE rule in Art 5(4) which deals with certain
situations involving storage of goods etc. and
business situations which are “preparatory and
auxiliary”. This is on the basis that multinationals
may artificially fragment their operations among
multiple group entitles to qualify for these
exemptions from PE status. However, as a practical
matter (and unlike the area referred to above) we
are not aware of any indications that there actually
has been any particular widespread abuse in
this area.
Action 8 – Transfer pricing and intangibles
The OECD revised discussion draft on transfer
pricing aspects of intangibles shows the direction
in which the OECD had been travelling on this even
before the Action Plan was published; the Plan will
help to focus the remaining work on this project.
Arguably, there has sometimes been too much
of a focus from tax administrations on defining
novel intangibles in order to justify large returns
in their jurisdictions. The revised discussion draft,
for example, considers things like features of the
local market, location savings, the availability of
an assembled workforce and corporate synergies,
concluding they should not be intangibles but
comparability factors for this purpose.
The language used in the Action Plan reflects some
of what we’ve seen recently regarding countries
interpreting or revising transfer pricing rules to
“align profits with value creation”. This has often
meant focusing more on where ‘important people
functions’ are performed, so that the location of
a particular intangible should be commensurate
with people who created, interpret or (in the case
of litigation and legal protection) defend it as well
as applying appropriate governance and controls
over it (rather than merely by reference to the legal
ownership). Countries may begin adopting rules
similar to the US ‘commensurate with income’ rules
or other special measures to price hard‑to‑value
intangibles (on which latter topic the OECD is
carrying out further work).
Existing guidance on cost contribution
arrangements at the OECD and among member
countries may also soon be updated to reflect
current thinking in this area. We think that it
should adopt principles that apply to similar
arrangements which are economically equivalent
such as those involving the licensing of rights by
a party incurring the full cost of development of
the intangible from which they derive. We also
believe that allowing for ex post valuation rules is
inconsistent with the arm’s length principle and
should be resisted.
Action 9 – Transfer pricing and risks/ capital
This work stream is designed to develop rules
to prevent base erosion and profit shifting being
achieved by the transfer of risks among, or the
allocation of excessive capital to, group members.
As with the contribution of intangibles and other
valuable assets, a reward is required for funding
risky ventures and that should also apply in the
case of transactions involving the provision of
capital or the assumption of the associated risk.
However, the OECD is giving consideration to
measures addressing what might be regarded as
‘inappropriate returns’, including transactions
involving the returns which can accrue to an entity
solely based on its assumption of risk or provision
of capital.
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An approach which places more weight on any
part of the ‘functions, assets, and risks’ model for
determining compensation creates the potential
for double taxation (as countries may seek to place
undue reliance on whichever of those factors
favours their jurisdiction). The action talks about
‘inappropriate returns’ but that involves judgement
on what is appropriate. It will therefore be
important for any changes in this area to represent
clear standards which can be – and are in practice –
uniformly applied by tax authorities.
Action 10 – Transfer pricing and other
high‑risk transactions
The objective of this action point is to develop rules
to prevent abusive transactions which would not,
or would only very rarely, occur between third
parties. Several countries have been advocating
that transactions which would not, or would rarely,
occur among independent parties should not be
respected, and should be recharacterised for tax
(particularly TP) purposes, instead of adopting
a pricing solution. Countries like Australia,
France and Germany are strong advocates of
recharacterisation while the US and, more latterly,
the UK seem to consider it less appropriate.
The overall approach adopted may indicate a
marked increase in importance of directly‑relevant
comparable pricing information. However, in our
view the arm’s length principle doesn’t require
that comparables between unrelated parties exist
for every transaction and also, that when they
don’t, transactions can still be priced by resort
to transfer pricing methods. Increasing use of
recharacterisation could lead to uncertainty and
double taxation.
Action 11 – data and methodologies
The OECD’s February 2013 report on BEPS
considered available studies and found little of
substance to shed light on the scale and impact
of BEPS. It seems the OECD has not yet given up
on continued economic analysis of the data and
the objective now is to establish methodologies to
collect and analyse data on BEPS and the actions to
address it.
It makes considerable sense to try to work out
what additional data would be needed in order to
provide trend and impact information in future.
The G8 conclusions of the Northern Ireland summit
included: commitments on reporting by large
companies to tax authorities according to an agreed
template; beneficial ownership registers; and
automatic sharing of information. So it is possible
that requests for information from business could
be moulded into those requirements.
Care will be needed to ensure that any new
types of data to be collected for the purposes
of assessing BEPS, and actions to address it, do
not impose a significantly greater burden on
business. That includes also any reference to more
public reporting on a ‘country by country’ basis
or otherwise.
The action point also recognises the importance of
taking into account the need to respect taxpayer
confidentiality, although there remain concerns
about the security of data transmission and
handling and a level of scepticism from business on
use of data by some tax authorities. There may, for
example, be commercial sensitivities around new
ventures which aren’t respected and disclosure
of certain data may have an impact on price
sensitive information.
Action 12 – Disclosure of aggressive tax planning
The OECD is aiming to require taxpayers to
disclose aggressive tax planning arrangements.
We support targeted transparency in this area.
Experience of tax planning disclosure requirements
(e.g. UK, US) suggests care is needed to make sure
they are suitably focused to avoid disproportionate
levels of reporting (for both business/ advisers and
tax administrations) and unnecessary costs.
This seems to be the area where it will be easier to
find consensus at international level, particularly
bearing in mind the work in this area carried out
by the OECD in the past. Best practice has been
established by those with current disclosure
regimes and the modular approach recommended
will allow them to comply with any new standard
with minimal changes.
Action 13 – Transfer pricing documentation
This action plan is aimed at re‑examining TP
documentation requirements and in particular the
objective is to provide for more information from
taxpayers which will provide useful indicators
for risk assessment and allow tax administrations
better to focus their limited resources. It seems
likely that the information to be stipulated by
the OECD for these purposes will be somewhat
rudimentary, involving the provision of data
broken down by country on global income and
taxes paid, according to a common template. For
transfer pricing purposes, we think it may be
more useful if any requirements in that template
were more narrowly focused on particular
risk, especially if that otherwise becomes an
involved and complex exercise to compile the
data required. Another concern that has been
voiced is that the country‑by‑country reporting
requirements potentially represent a shift towards
formulary apportionment as the reporting might
be used to see if an MNEs allocation of profits
aligns with how it would have been allocated
under a formulary apportionment system
(in proportion to sales, employees, assets, etc.).
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The OECD states that it will only be used as a risk
assessment tool, but if transactions are then singled
out for further examination (where profits aren’t in
alignment with one of the factors) then the fear is
those are the transactions where adjustments will
likely be made. The concern is double taxation will
likely increase, as countries will favour whichever
factor increases their tax collection.
We are concerned that there is a potential for this
kind of information to be used inappropriately
by tax authorities and/ or become accessible by
the public, where it could be misinterpreted or
be used anti‑competitively. Strong safeguards
will therefore need to be in place to prevent this
happening if business confidence in the process is
to be maintained.
We also think that a surfeit of this type of basic
information may not assist the process of resolving
disputes. If any requirements are clearly targeted
as a risk assessment tool rather than as an
adjustment tool for field auditors, that should help
address potential issues with the effective use of
limited resources, a matter also clearly raised in the
EU Joint TP Forum’s June 2013 Report on transfer
pricing risk management.
Action 14 – Dispute resolution mechanisms
The OECD’s goal here of making dispute resolution
mechanisms more effective should be welcomed by
taxpayers. The OECD has been focusing on making
the mutual agreement procedure (MAP) more
effective and has been working with tax authorities
to understand the problems. This is a matter on
which business, through BIAC (Business & Industry
Advisory Committee), has for some time been
lobbying the OECD and the importance of the point
is emphasised by the recent publication of OECD
statistics which show a continued rise in unresolved
disputes. They indicate that at the end of the 2012
reporting period, the total number of open MAP
cases reported by OECD member countries was
4,061, a 5.8% increase as compared to the 2011
reporting period and a 72.7% increase as compared
to the earliest available 2006 reporting period. This
is at least partly due to the generally upward trend
of new cases across the OECD as a whole during
this period. The average cycle times for cases
completed, closed or withdrawn actually decreased
slightly in 2012 (23.20 months) as compared to
2011 (25.59 months) and when at its worst in 2010
(27.30 months), but is otherwise similar to what it
has generally been in earlier years.
MAP has been a problem for some time with access
to the process being denied to some taxpayers in
some territories and failure to reach agreement
is not uncommon. It is to be hoped the additional
impetus provided by the Action Plan will help to
bring issues to a head and provide more robust
ways for issues to be resolved.
Action 15 – A multilateral instrument
The OECD is investigating the feasibility of creating
an instrument which would enable countries to
amend or override a number of bilateral treaties
at one go if they wanted to do so. That mechanism
might then be used to give effect to other actions
above, as a one‑off exercise, or to provide for the
need to counter other practices as they evolve.
Countries will then need to decide whether it’s
something they might opt into.
Work has already been done which suggests that
it is in principle likely to be feasible from a legal
perspective to produce an instrument of this type
and, in fact, there is precedent for a multinational
pact in the international trade area, as well as with
respect to mutual administrative assistance on
taxes. But even if it proves possible, each country
would have to go through a process of adopting it
and that may not be straightforward, particularly
if in their eyes it subjugates part of their sovereign
right to tax.
What should businesses do?
There have been some important changes already
agreed by the OECD in the run up to BEPS that
suggest countries will find little difficulty in
agreeing requisite actions in some areas and that,
in any event, changes to the treaty rules relevant
to BEPS issues will clearly be effected. The
already‑agreed changes relate to the threshold PE
rules and much‑tightened beneficial ownership
requirements. Previous – and material – work in
progress at the OECD on what are now central
BEPS issues, such as intangibles and transfer
pricing, will also make agreement on at least
some aspects of the follow‑up to the Action Plan
more straightforward. If you have not reviewed
the output from these very recent (but pre BEPS)
OECD projects, it might be beneficial for you to do
so and to see whether your views are represented
in feedback so far.
A clear behavioural shift by a number of tax
authorities has already been noted in many areas,
including PE issues. There will be even more focus
on the substance of transactions and structures in
future. For example, do the relevant activities of
a regional holding company justify its role acting
as the common investment holding entity for
several investments and is there the appropriate
competence on the Board? You will find it useful to
review how well your organisation is geared up to
deal with the new approach, particularly in relation
to requirements of substance.
8
A review of existing and planned structuring in the
light of the potential changes from BEPS is clearly
important. It will also be helpful to keep aware of
what’s going on, how the proposals are developing
and when there are opportunities to review
progress and input your views, based on how they
might affect your organisation. The best way for
you to feed in specific comments, problems and
special circumstances for consideration may vary.
You might like to consider making use of multiple
routes to getting your points across, including via
your national tax administration, national tax
bodies and broader representative groups like
BIAC. You may be able to attend specific OECD
open/ public consultation forums.
Overall, the Action Plan has probably created an
increased level of uncertainty in the short term,
although the general direction of likely rule
changes (and behavioural shifts on the part of the
tax authorities) is becoming clearer. Nonetheless,
it will be some time before the precise outturn
from this project – especially in relation to specific
developments within a given state or inter‑territory
actions – become clear. You may find a closer
dialogue with your tax administration helpful over
this period.
As the Action Plan unfolds, with changes to
treaties, guidelines and domestic legislation
plus new interpretations of these, some group
organisation structures and operational value
chains may need to be reassessed. It seems
unlikely that there will be any attempt to make
changes retrospective, but there remain some
concerns that new thinking on the part of the tax
authorities will be applied in practice to historic
disputes. In any event, any long term investment
decisions clearly need sustainable operational
structures so a forward‑looking review now is
especially important.
It’s probably worth finishing with a reminder that
there will be opportunities for business to input to
the BEPS process and in so doing get more insight
on areas which impact crucial decision‑making.
Contacts
If you would like further advice or information in relation to the issues outlined in this bulletin, please
call your usual PwC contact or any of the individuals listed below:
Richard Collier (PwC UK)
+44 (0) 20 7212 3395
[email protected]
Pam Olson (PwC US)
+1 (202) 414 1401
[email protected]
Alan Ross (PwC Singapore)
+65 6236 7578
[email protected]
David Burn (PwC UK)
+44 (0) 161 247 4046
[email protected]
David Swenson (PwC US)
+1 (202) 414 4650
[email protected]
Andy Baik (PwC Singapore)
+65 6236 7208
[email protected]
Ian Dykes (PwC UK)
+44 (0) 121 265 5968
[email protected]
Tony Clemens (PwC Australia)
+61 (2) 8266 2953
[email protected]
Chai Sui Fun (PwC Singapore)
+65 6236 3758
[email protected]
Phil Greenfield (PwC UK)
+44 (0) 20 7212 6047
[email protected]
Axel Smits (PwC Belgium)
+32 3 2593120
[email protected]
Paul Cornelius (PwC Singapore)
+65 6236 3718
[email protected]
Aamer Rafiq (PwC UK)
+44 (0) 20 7212 8830
[email protected]
Isabel Verlinden (PwC Belgium)
+32 2 7104422
[email protected]
Nicole Fung (PwC Singapore)
+65 6236 3618
[email protected]
Tim Anson (PwC US)
+1 (202) 414 1664
[email protected]
Nelio Weiss (PwC Brazil)
+55 11 3674 3557
[email protected]
Abhijit Ghosh (PwC Singapore)
+65 6236 3888
[email protected]
David Ernick (PwC US)
+1 (202) 414 1491
[email protected]
Matthew Mui (PwC China)
+86 10 6533 3028
[email protected]
Brad Slattery (PwC Singapore)
+65 6236 7308
[email protected]
Mike Gaffney (PwC US)
+1 (646) 471 7135
[email protected]
Jürgen Lüdicke (PwC Germany)
+49 40 6378 8423
[email protected]
Tan Hui Cheng (PwC Singapore)
+65 6236 7557
[email protected]
Adam Katz (PwC US)
+1 (646) 471‑3215
[email protected]
Vijay Mathur (PwC India)
+91 124 330 6511
[email protected]
Florence Loh (PwC Singapore)
+65 6236 3709
[email protected]
Steve Nauheim (PwC US)
+1 (202) 414 1524
[email protected]
Yoshiyasu Okada (PwC Japan)
+81 (3) 5251 2670
[email protected]
Loh Eng Kiat (PwC Singapore)
+65 6236 3820
[email protected]
Kathryn L’Brien (PwC US)
+1 (202) 414 4402
[email protected]
Andrey Kolchin (PwC Russia)
+7 495 967 6197
[email protected]
www.pwc.com/taxpolicy
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act
upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is
given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does do not
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information contained in this publication or for any decision based on it.
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