The BMG has now published its Submission on Dispute Resolution in response to the OECD report under AP14 of the BEPS project.
An effective dispute resolution mechanism should be an important part of a well functioning international tax system. We support the aim that disputes should be resolved in a `principled, fair and objective manner’, but suggest that the implications of these important criteria should be spelled out in more detail in the Commentary, as follows:
- principled: this requires that outcomes should take the form of reasoned decisions, based on analysis of the facts of the case, the applicable rules and how they have been interpreted and applied to the specific case;
- fair: like cases should be treated alike, and decisions should be published, to ensure consistency;
- objective: decision-makers should be independent of the disputing parties and have no vested interests or conflicts of interest; and rules to be applied should be formulated so as to be easily applicable to specific cases based as far as possible on their facts rather than requiring value-judgments.
The existing Mutual Agreement Procedure (MAP) in tax treaties is far from this standard, as at present it entails agreements in secret among tax authority representatives and multinationals’ tax advisers. Transparency, including publication of decisions, is key to principled, fair and objective decisions. Also, the rules themselves should be capable of being applied consistently and objectively, rather than leaving wide scope for interpretation. Until states and companies are willing to accept these procedural safeguards it is ineffective and pointless to require paper commitments to objectivity. Instead of seeking incremental steps towards an unstated objective, there should be a wide public debate about the objectives and desirable structures.
Strengthening of the MAP procedure would be a mistaken response to the understandable concerns that the BEPS reforms will take the international tax system into unchartered waters. Instead, the G20 should consider a transition mechanism, to supervise the process of implementation of the BEPS reforms, monitor the way the rules are introduced by states, and provide advice and perhaps even interpretations. The expansion of OECD Working Parties to include other G20 members, and now also some developing countries, provides only a temporary and rather unsatisfactory remedy to the institutional gap caused by the lack of an adequate international tax organisation. This question should be addressed through the only legitimate worldwide organisation, the United Nations, in the context of the forthcoming conference in Addis Ababa on Financing for Development.
The BMG has published its comments on the OECD proposals on Preventing Artificial Avoidance of Permanent Establishment Status, under Action 7 of the BEPS Project, which deal with the criteria for taxable presence of a foreign company.
Summary of BMG Comments
We welcome the move away from the independent entity principle, which allows and encourages multinationals to create complex corporate structures, fragmenting functions among different affiliates to avoid tax. Regrettably, however, these proposals are limited to (i) situations where a multinational selling in a country has an affiliate or agent involved with conclusion of contracts; and (ii) a proposed anti-fragmentation rule which only covers pre-sales-related activities, and not e.g. delivery or customer support. Many countries already have stronger rules, or are introducing them, notably the UK’s new Diverted Profits Tax. To avoid increasing conflicts, multilateral agreement is needed on a broader rule.
We suggest revision of Article 5(7) of tax treaties to reverse the presumption that the fact that two companies are under common control shall not ‘of itself’ create a taxable presence for the multinational as a whole. To align income from sales with expenses, greater use should be made of the profit split method in transfer pricing, or the apportionment approach which is still allowed for a PE in most treaties, especially with developing countries.
The BMG has submitted Comments on Treaty Abuse Follow-Up to the OECD proposals under Action 6 of the BEPS Project: Preventing Treaty Abuse.
Summary of the BMG Comments
Effective implementation is crucial especially to put pressure on key states with extensive treaty networks used for channeling investments (e.g. the Netherlands, Switzerland, United Arab Emirates, Qatar and Mauritius) to accept inclusion of anti-abuse provisions in their treaties. A political commitment should be sought through the G20 to issue a Declaration Against Harmful Tax Practices, which should include ending treaties which facilitate abuse.
Developing countries’ preferences should have priority, and technical assistance should be fully built into the BEPS project.
Limiting complexity should be a guiding principle.
Exchange of information is also key to effective implementation.
Discretionary relief must be limited to exceptional cases, and especially rare under the principal purpose test. Decisions should be published (redacted if necessary), like other tax rulings.