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OECD document on international tax dispute resolution is "disappointing", says expert

A discussion document on making dispute resolution mechanisms in international tax disputes more effective is does not provide enough answers to the questions it raises, an expert has said.

It is "a disappointing document which points out many of the flaws with the existing process, but offers little in the way of practical solutions," according to James Bullock, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

The document was issued by the Organisation for Economic Co-operation and Development (OECD) as part of its base erosion and profit shifting (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 needs 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.

The document discusses improvements to the 'mutual agreement procedure' in double tax treaties. Double tax treaties are agreements between governments designed to avoid double taxation for individuals or businesses operating in more than one country. The mutual agreement procedure (MAP) in tax treaties allows designated representatives from the governments of the contracting states to interact to resolve international tax disputes. Most double tax treaties are based on the 'OECD model convention' which sets out suggested terms for treaties.

The document says that the BEPS process will inevitably result in an increase in disputes, as countries implement the various proposals at different speeds and in different ways. It recognises that achieving effective dispute resolution is therefore an important part of the BEPS project and that while it is reasonable for governments to want to ensure that tax is paid where profits arise, it is equally reasonable that companies should be protected from double taxation.

James Bullock said “It is good that the OECD is recognising that BEPS will result in additional disputes, and that better solutions than the current MAP process need to be found.  But it is disappointing that this document is long on warm words, while being short on practical actions.”

The OECD says that the intention is to introduce a "three-pronged approach designed to represent a step change in the resolution of treaty-related disputes through the MAP". This would consist of political commitments to effectively eliminate taxation not in accordance with the OECD model convention, to provide the new measures discussed in the discussion document to improve access to the MAP and improved procedures and to establish a monitoring mechanism to check the proper implementation of the political commitment.

The document identifies several problems with the MAP procedure, including that the OECD model convention says that that tax authorities “shall endeavour” to resolve a MAP case by mutual agreement, but there is no stronger obligation to resolve a dispute.

The document also discusses various procedural and other blockages that impede the timely and effective resolution of MAP cases. These include lack of resource put in to the process by the various tax authorities and procedural hurdles, complexity and delays for taxpayers attempting to use it.  

Bullock said that the document contains merely a 'political commitment' to 'improving best practice', and "a lack of recognition of the real burdens that the present cumbersome process imposes on taxpayers".

The document identifies that one of the main issues is the lack of mandatory binding MAP arbitration in many double tax treaties. It states that there is no consensus on moving towards universal mandatory binding MAP arbitration. Therefore, the document suggests "complementary solutions should be provided which will have a practical, measurable impact".

Bullock said "Binding arbitration works well as a mechanism for effective dispute resolution - including disputes between member states, but there is no consensus."

Comments on the discussion document should be sent by 16 January. The OECD is due to make its recommendations on this issue in September 2015.

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