Broadly speaking, taxpayers want three things in return for the taxes they pay:
Certainty (in outcomes);
Consistency (in application of the tax laws across tax years and across taxing jurisdictions); and
Currency (in terms of the timely resolution of issues and uncertainties, including disputes).
Achieving some level of tax certainty in return for not only the money they pay but also the time, effort, and expense to comply with legislation is a reasonable expectation. But securing these three seemingly modest goals has never been a straightforward exercise.
As we have travelled the twisting journey of international tax reform since BEPS was first introduced in early 2013, tax certainty has arguably become more elusive. More than one taxpayer has asked why, under the original BEPS Action Plan, Action 14 – Making Dispute Resolution Mechanisms More Effective – was Action 14 and not Action 1 in the first place?
Almost a decade later, and despite clear and early discussion that businesses should indeed receive certainty as some form of quid pro quo for pillar one, similar questions are being posed of the OECD Secretariat: why do we not have clarity on exactly how disputes under the new Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (BEPS 2.0) framework will be addressed – or prevented – in the first place?
The short answer is that we simply do not yet know what the final form of the pillar one (or two) rules will be. Without full consensus established, setting out how disputes will be prevented and resolved is impossible without understanding the very genesis of disputes in the first place.
The OECD nonetheless seems to have taken the original BEPS project feedback of taxpayers on board and made an attempt to define what could be, at least as far as pillar one goes (if not yet pillar two), a draft framework for dispute prevention and resolution.
The OECD’s consultation on tax certainty for pillar one amount A
On May 27 2022, the Secretariat released two consultation documents on tax certainty aspects related to amount A under pillar one of BEPS 2.0. The first consultation document – a dense, technical 87 pages – is the Tax Certainty Framework for Amount A (upon which this article will focus), aiming to guarantee certainty for groups over all aspects of the amount A rules, including the elimination of double taxation.
The second consultation document is the Tax Certainty Process for Issues Related to Amount A, which aims to ensure that in-scope groups benefit from dispute prevention and resolution mechanisms for all issues related to amount A (which the Secretariat outlines to be things such as transfer pricing and business profit calculations) in a mandatory and binding manner.
The OECD consultation documents make stark reference to the importance of the job at hand. “In the event tax administrations did reach different views and proposed adjustments to a group’s tax returns, double taxation could arise involving not just two jurisdictions but potentially every jurisdiction in which a group sources revenue,” it reads. “In this situation, mutual agreement procedure (MAP) resolution… would be unimaginably complex, even if ultimately certainty was assured through mandatory binding dispute resolution.”
In essence, then, this is more than just a MAP situation with pillar one. The consultations address this very topic, setting out several suggested approaches that span dispute prevention and resolution around not only the calculation of amount A itself, but issues related to amount A.
Both consultation documents reflect a different format than the previous consultations on amount A, with the operative text not laid out in the form of model rules. The documents indicate that work will begin at a later stage to translate parts of the text into model rules, as well as the text for a Multilateral Convention (MLC) needed for implementation purposes.
Importantly – and in common with many before it – this consultation was issued as a Secretariat paper and on a non-consensus basis, without prejudice to the final mechanisms.
As a result, the consultation documents also include information describing a number of key areas that have not yet been agreed, a series of alternative views that have been expressed during negotiations, and insights regarding a number of proposals that were still under discussion when the consultation was published.
Also missing from the consultation documents were any model rules related to the tax certainty processes, which will in due course be implemented via an MLC. A subsequent July progress report from the OECD does note, however, that the model rules will be released in due course, and before the Inclusive Framework (IF) meeting in October.
The timing of pillar one’s final implementation has always been at risk of changing. Indeed, the timetable for introduction in agreements made by the IF, a group of more than 140 jurisdictions that collaborate on the development and implementation of the new rules, in July and October 2021 proposed that implementation would occur from 2023. However, given the complexity of the task at hand, meeting such a deadline was always going to be ambitious.
It was therefore of little surprise that the progress report notes that: “work on the detailed provisions of the multilateral convention (MLC) and its Explanatory Statement are expected to be completed so that a signing ceremony of the MLC can be held in the first half of 2023 with the objective of enabling it to enter into force in 2024, once a critical mass of jurisdictions as defined by the MLC have ratified it”.
Key building blocks of the proposed approach to tax certainty
The first consultation document sets out four key processes that the Secretariat hopes will provide effective dispute prevention and resolution with respect to pillar one amount A. The second document sets out a series of additional processes that are hoped will allow tax certainty to be achieved in relation to issues concerning amount A.
The key processes laid out in each document are as follows:
Consultation document 1: Tax Certainty Framework for Amount A:
Scope certainty review (SCR);
Advance certainty review (ACR);
Comprehensive certainty review (CCR); and
Determination panel (DP).
Consultation document 2: Tax Certainty Process for Issues Related to Amount A:
Access to dispute resolution – specifically, the MAP;
A mandatory binding dispute resolution mechanism for issues related to amount A, such as an arbitration panel or other similar body; and
An alternative elective binding dispute resolution (applying instead of the mandatory binding dispute resolution mechanism) for disputes involving developing countries that meet specified criteria, which are yet to be agreed (this method of resolution would provide an alternative to arbitration, a process not supported by a number of developing economies).
The Tax Certainty Framework for Amount A
According to the document, there is a risk that during the first years of applying amount A rules, groups that are not within the scope of the rules could nevertheless be subject to inquiries from multiple tax administrations that believe them to be in-scope.
The SCR would allow such a group to request binding certainty that they are out of scope. To do so, the group would submit a request to the lead tax administration for multilateral certainty that it is not a covered group for the period, including a list of the relevant tax administrations from which the group seeks certainty (listed parties).
A tax administration not included on the list submitted by the group could submit a proposal to be added, along with an explanation as to why it would be affected by the outcome of the SCR. If the group does not agree to add the tax administration making the proposal, it should provide an explanation. The lead tax administration may subsequently require the tax administration be added if it considers there to be a reasonable basis for doing so.
If the determination regarding scope requires the application of the amount A rules, such as excluded revenues or segmentation, a scope review panel of tax administrations, coordinated by the lead tax administration, would conduct a review. However, if a group would be out of scope because its total revenues or profitability are below the applicable threshold, the lead tax administration only would conduct the review.
Review outcomes would be shared with all listed parties for comments, and any disagreements among members of the scope review panel (if there is one) or among the listed parties would be sent to a determination panel (see below) for final deliberation.
If a scope review panel determines a group was not in scope for a period and the group wants to obtain certainty that it remains out of scope, a high-level follow-up review based on simplified documentation, focused on any relevant changes to the group, would be available. Any determination that the group remains out of scope would again be binding on all listed parties.
The document stresses the importance of early determination that a group’s methodology for identifying the source of its revenue can be relied upon, further stating that early determination regarding other aspects of the new rules, such as the application of rules on segmentation, could also be beneficial.
The document notes the challenges that groups may face to comply with amount A – in particular, with respect to revenue sourcing – and indicates that the IF is considering transitional approaches that would apply for a limited period.
One approach under consideration is the provision of a ‘soft landing’ for purposes of the CCR and ACR processes. Under this approach, if a group were to make reasonable efforts to reflect a correct application of the revenue sourcing rules, their filing would be accepted, and no changes would be required if certain criteria are met. The group would also be provided with guidance in the transition period on how it could apply the revenue sourcing rules more accurately in future.
A second approach being explored is the provision of easier access to allocation keys in the short term; in particular, before systems may be in place to apply the revenue sourcing rules.
A group’s first request for advance certainty would be made when it files its common documentation package for the first year of amount A. The ACR process would involve a review of the group’s proposed methods and controls with respect to revenue sourcing and would be conducted by another review panel. This panel would consist of the lead tax administration and other listed parties in which the group has in-scope revenue or that provide relief from double taxation, selected at random from those that express interest.
The review panel will also rely on recommendations from an expert advisory group of tax officials who meet agreed criteria with respect to training and experience in conducting systems reviews and audits.
If the group’s proposed revenue sourcing approach is accepted, certainty will apply for a specified number of future years (yet to be defined), provided the group experiences no relevant changes. If improvements are identified during the review, certainty will apply only once the improvements have been implemented and confirmed.
If the review panel does not reach agreement, or if the panel’s proposal is not accepted by affected tax administrations, the disagreement will be referred to a determination panel for a final outcome.
Comprehensive certainty review
A key element of the Tax Certainty Framework for Amount A is a structured, comprehensive review of each aspect of an in-scope group’s application of the amount A rules that results in an outcome that would be binding on all parties to the MLC.
The first time a group requests a CCR, it would be conducted by a review panel consisting of the lead tax administration and the tax administrations in which the group has in-scope revenue or that provide relief from double taxation, again selected at random from those that expressed interest. The lead tax administration would conduct subsequent reviews, with a review panel established to conduct a review after a specified number of years (five years is noted in the document in brackets but that has not yet been agreed) or in specific circumstances.
The review panel would be supported by an expert advisory group of systems specialists to provide advice on the reliability of the group’s internal control framework. The participating tax administrations would be kept informed regarding the review’s status and could provide input, raise concerns, and suggest alternative outcomes to address disagreements.
The CCR process includes two phases, conducted sequentially or simultaneously. At the end of the process, or at the end of each phase, the results of the review and a recommendation accepting the rules or suggesting changes would be shared among participating tax administrations. Where one or more tax administrations does not agree, or if the review panel does not reach agreement, specific areas of disagreement would be referred to a determination panel for resolution.
Disagreements that arise during any of the tax certainty review processes described above would be referred to a DP. The DP will be required to resolve issues referred to it by choosing from among the alternative outcomes submitted to it by the lead tax administration and scope review panel members, review panel members, or listed parties. Decisions of the DP on each issue should be made by consensus, but where this is not possible, an outcome supported by an overall majority may be chosen.
The composition of the DP remains under discussion, with the document including three options:
An independent-expert-only panel;
A government-official-only panel; or
A mixed panel of independent experts and government officials.
The document also proposes the establishment of a tax certainty secretariat to coordinate the nomination and appointment of experts.
Will the tax certainty processes work as intended?
It is abundantly clear that the tax certainty processes as currently defined will be subject to significant change before they are finalised. Indeed, taxpayers should take every opportunity to engage, both locally and with the OECD, to ensure what they get is what they want. The OECD has always been open to input, both during and outside consultation periods. That said, there are plenty of issues for the Secretariat to consider at this point in proceedings.
Consultation document 1: Tax Certainty Framework for Amount A
At the highest level, there are arguably too many cumbersome layers of review and interaction, and, as a result, delays seem likely. The consultation describes a succession of committees and subcommittees, including the involvement of various review panels, an expert advisory group of tax officials, and all listed parties. Here, the Secretariat may wish to remember one of the key principles of the 2003 Ottawa Taxation Framework: simplicity.
Given their central role in the taxation process, it is somewhat disappointing that taxpayers are not given greater participation in the suggested processes. What could that look like?
First, a taxpayer should have the choice of applying for certainty or not, and a company should not be penalised for not having applied for certainty in advance. If the taxpayer does not apply for certainty, and one or more tax administrations adjust the taxpayer’s amount A, the taxpayer potentially will be confronted with double taxation, even if the taxpayer makes use of any available domestic rights to appeal or bilateral MAP procedures. This would violate one of the three key tenets set forth at the inception of the project: avoiding double taxation.
Next, the ultimate parent entity (UPE) or surrogate UPE should be allowed to represent all members of its group as it relates to global determinations, including sourcing and the elimination of double taxation. Additionally, the taxpayer should have the opportunity to make representations in all phases of the process, in addition to the tax administration’s presentations of their positions. Such direct participation is essential given the nature of the issues involved in this process.
Staying with roles and responsibilities, the lead tax administration is given a relatively small role as a coordinator, and all countries in practice will participate in the determinations. This approach risks bogging down the process and would be significantly improved if the lead tax administration had a larger role.
More specifically, the notion of a formal expert advisory group of systems specialists, sourced from various tax authorities, is probably unnecessary, given more practical approaches to addressing internal systems issues. Large multinational groups are already subject to significant internal and regulatory controls, and it is unthinkable that a company of the size paying amount A in the first place would not have these types of robust and effective tax controls in place and operating globally.
Guaranteeing that information exchanged within a specific programme will not trigger audits or other similar reviews elsewhere has long been a concern of multinational groups. Importantly, the specific data and information that would make up a group’s required package of documentation to be submitted to the lead tax administration has not yet been defined. Once defined, it is imperative that the OECD should fully explain the mechanisms under which this data may be exchanged.
Finally, the selection and independence of members of the panel raise concerns. The proposed method provides that a panel member is to be selected at random from a list of independent experts if the competent authorities fail to appoint one. It is also not clear, however, how these experts will be selected, whether there will be public transparency on who they are and what skills they possess, or how such random selection will occur or by whom. This is fundamental to the effectiveness of the tax certainty process.
A simple solution could be to specify that the taxpayer makes the selection from a list of independent experts if competent authorities fail to appoint a panel member.
Tax certainty process for issues related to amount A
Similarly, and notwithstanding the fact that much water remains to flow under the bridge before finalisation, there are several issues for the Secretariat to consider in relation to the second consultation.
First is the need for an ongoing, independent review of access to a MAP and determination on what constitutes related issues. To ensure that access to the proposed tax certainty process is available for all eligible cases, it should be possible for businesses to obtain an independent review on matters regarding access and process, including questions on access to the MAP phase.
In practice, there are still too many cases where access to a MAP is denied or indirectly circumvented by some revenue authorities, with taxpayers having no means to question these decisions. Such unappealing practices create significant additional uncertainty in the international tax environment.
If such an independent review were to result in a determination that there is a case for the competent authorities to consider, including a case on whether an issue is a related issue, access to the mandatory and binding dispute resolution procedure should be provided by the competent authorities. It should be noted that the Dispute Resolution Directive of the EU provides for such independent reviews.
As is the case with the first consultation, the role of the taxpayer in the prescribed processes should also be more closely addressed, and their direct involvement in the process should be considered essential. This will also help to reduce the occurrence of situations where competent authorities spend significant time on a solution that is subsequently not supported by the taxpayer.
Tax certainty for pillar two
While the timeline for pillar one implementation has been extended, an OECD report to a meeting of the G20 finance ministers in July (discussed here) noted that the technical work on pillar two is close to completion following the release of the Global Anti-Base Erosion (GloBE) Model Rules and related commentary. According to the report, most countries are planning for entry into force of the GloBE rules in 2024, which will provide sufficient time for the IF to develop the pillar two implementation framework.
It is highly likely that pillar two will similarly drive a new set of tax disputes. These are likely to focus on issues such as top-up entities, how a group applies its calculation processes, the outcomes of those processes (have the rules been properly applied, and various qualifications such as the income inclusion rule, the undertaxed profit rule, the qualified domestic minimum top-up tax, and qualified refundable tax credits), and, more broadly, a range of interpretation issues applied by revenue authorities scrutinising a group’s calculations.
It would be good to understand the OECD’s thinking sooner, not later.
While the three review processes set out in the first consultation document – the SCR, the ACR, and the CCR – seem to be somewhat robust in their design, the pillar one determination panels in particular give rise to significant concern.
That concern is heightened by the notion that while the ‘reviews’ arguably represent dispute prevention approaches, the ‘panels’ focus on the all-important resolution of disputes, an area giving rise to cost, resource drain, and reputation risk to groups if not addressed appropriately by all parties.
These panels and the framework in which they would operate is too convoluted as things stand and should be streamlined and made more practical. Consider the following potential scenario for a typical MNC group. It could simultaneously need to be involved in:
One or more MAPs in relation to the transfer pricing underpinning its calculation of amount A;
Seeking multiple advance pricing agreements outside amount A; and
Running one or several tax audits, also outside amount A.
This is just too complex and burdensome. The original BEPS project, implemented via a set of 15 recommendations in 2015, has already greatly increased the administrative burden on MNCs. Do we really need the same, all over again, less than a decade later?
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.
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