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OECD: countries commit to minimum standards on international tax dispute resolution

Countries should commit to minimum standards on the resolution of international tax disputes, the Organisation for Economic Co-operation and Development (OECD) said in a report published as part of its base erosion and profit shifting (BEPS) project.

The standards would include a commitment to "seek to resolve" cases within an average timeframe of 24 months.

In addition, the OECD announced that 20 countries, including the UK, the US, France, Germany and Australia, have declared their commitment to provide for mandatory binding arbitration in their tax treaties. This is designed to ensure that treaty-related disputes will be resolved within a specified timeframe.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-law.com, said "Measures to improve the resolution of international tax disputes are crucial because there is a huge risk that the implementation of the BEPS proposals is going to lead to many more instances of double taxation. Inevitably implementation will lag behind in some countries and not all countries will implement the proposals in exactly the same way. This could expose companies to double taxation, for example if withholding taxes are incorrectly applied".

"Whilst a step in the right direction, it is disappointing that the disputes proposals do not go further. The proposal for a 24 month time limit for resolving cases is welcome but it is still too slow. Often disputes don’t get into the formal process until they are several years old," she said.

The OECD Model Convention provides a mechanism called the mutual agreement procedure (MAP) through which tax authorities can resolve differences or difficulties regarding the interpretation or application of double tax treaties.

Double tax treaties are agreements between companies designed to ensure that individuals and businesses operating in different countries are not taxed in more than one jurisdiction on the same profits. The OECD publishes a 'Model Convention' which is used as the basis for most double tax treaties.

The OECD said that the minimum standard is intended to ensure that treaty obligations related to MAP are fully implemented in good faith and that MAP cases are resolved in a timely manner. It is also intended to ensure that taxpayers can access the MAP when eligible.

The minimum standard will be complemented by a set of 'best practices'. The OECD said that the implementation of the minimum standard will be monitored through a "robust peer-based monitoring mechanism" that will report regularly to the G20.

"The OECD proposals are almost entirely focused on MAP, which is a cumbersome process. We need a new initiative for collaborative dispute resolution," said Self.

The countries that have declared their commitment to provide for mandatory binding MAP arbitration in their bilateral tax treaties are: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the UK and the US. The OECD said "This represents a major step forward as together these countries were involved in more than 90 percent of outstanding MAP cases at the end of 2013, as reported to the OECD".

Heather Self said: "Although the list of countries that have signed up to binding arbitration gives good coverage of countries with past disputes, future disputes are much more likely to be with less developed countries. Few of those have signed up and they are likely to be nervous of doing so."

The report said that although the business community and a number of countries consider that mandatory binding arbitration is the best way to resolve disputes, there is no consensus among OECD and G20 countries on this issue. It said that there are differences of view among those who have committed to arbitration, with some countries wanting arbitration for all disputes and others wanting arbitration limited to "a subset of MAP cases". It is intended that these differences will be considered as part of the negotiation process for the multilateral instrument.

The adoption of minimum standards in relation to dispute resolution is likely to be achieved through a multilateral instrument. Rather than each country having to renegotiate all its double tax treaties, the multilateral instrument is intended to allow the modification of many treaties in one go. It will be negotiated during 2016 and over 90 jurisdictions have indicated they will participate in the negotiation.

The announcements came as part of the package of 13 reports published by the OECD in connection with its BEPS project. BEPS refers to the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems so that little or no tax is paid. Following international recognition that the international tax system needed to be reformed to prevent BEPS, the G20 asked the OECD to recommend possible solutions. In July 2013, the OECD published a 15 point Action Plan and the first formal proposals dealing with seven of the 15 specific actions were published in September 2014.

Dispute resolution is one of four areas where OECD and G20 countries have committed to minimum standards to ensure consistent implementation. The other areas are country-by-country reporting, preventing treaty shopping and fighting harmful tax practices. 

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