RBRT’S Comments on Public Discussion Draft BEPS Action 14: Make Dispute Resolution Mechanisms More Effective

Par Robert Robillard - 16 janvier 2015

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Comments on Public Discussion Draft  BEPS Action 14:  Make Dispute Resolution Mechanisms More Effective

January 14, 2015

Mrs. Marlies de Ruiter
Head, Tax Treaties, Transfer Pricing and Financial Transactions Division
By email: taxtreaties@oecd.org


We are pleased to comment on public discussion draft BEPS Action 14: Make dispute resolution mechanisms more effective (the draft) through the consultation taking place from December 18, 2014 to January 16, 2015.

We provide remarks on specific options of the draft below and conclude with some general comments.

This document may be posted on the OECD website. Full credit goes to Robert Robillard, RBRT Transfer Pricing. [1]

1. Specific comments on the draft

1.1. Options # 1, #2, #13, #14, #15, #18, #19 and #34 are welcome additions. But it is difficult to envision how such soft language may result in different behaviors from tax administrations worldwide.

1.2. With respect to options #3 and #7, there are specific situations where interdependence between the competent authority and the audit function is necessary for an orderly administration of the domestic tax regime of any given country. In other situations, independence is indeed required. [2]

1.3. Options #4 and #5 are honourable but no funding available, no resource. More to the point, the complexity of the rules keeps increasing. The number of rules is following suit. This can only result in a higher workload.

1.4. Option #6 suggests interesting changes. However, these changes go against the typical practices of tax administrations around the world. [3]

1.5. Option #8 is obviously a welcome suggestion. However, an APA program necessitates specialized resources. See 1.3 above. On the other hand, many APA programs worldwide are lacking in their actual coverage of various legitimate commercial transaction types. For example, most APA programs will not accept taxpayers with commercial transactions involving intangibles. This is illogical with respect to 21st century transfer pricing. [4]

1.6. Option #9 has already been made available in most industrialized countries under specific conditions. [5]

1.7. Options #10 and #11 are welcome suggestions. But they raise once again the issue of the availability of specialized resources. They also demonstrate the need for less complexity in the international taxation rules. [6]

1.8. Option #12 is a welcome suggestion. It may help increase tax certainty for taxpayers, if not in the results at least in the processes.

1.9. Options #16 and #17 make sense both from the taxpayer and the tax administration perspectives. [7]

1.10. Options #20 and #21 are wishful thinking at best. “Principled and objective” MAP resolution is incompatible with the protection of the tax base for any given State. Each elected government is accountable to its citizens.

1.11. Options #22 to #32 on arbitration are simply incompatible with the basic principle of absolute sovereignty of the State with respect to taxation inside its territorial borders.

1.12. Option #33 relates to multilateral MAP. The inclusion of the arbitration process in the multilateral MAP is simply unrealistic. See 1.11 above. Multilateral APAs may indeed be considered, although they are difficult to design, implement and enforce. [8]

2. Taxation is (and will stay) a national phenomenon

2.1. The draft allegedly puts forward 34 actions/options that will “ensure certainty and predictability for business” as advocated in paragraph 2.

2.2. In general we remain highly skeptical. After all, the OECD Model Tax Convention recently celebrated its 50 years of existence. [9]

2.3. In spite of its apparent maturity, contentious issues and tax disputes have never been more significant and as numerous with respect to double taxation.

2.4. Kobrin (2002) tells us that “in the Westphalian state system the basic unit of economic governance is the national market defined, as in the sovereign state, in terms of mutually exclusive geographic jurisdiction. Economic governance – attempts to exert authority over economics and economic actors – is exercised through borders and territorial jurisdiction.” [10]

2.5. Gyarmati (2010) reminds us that “states have the absolute monopoly of legitimate large-scale use of force and they are the sole subjects of international law. All national and international institutions – international law, international organizations, armies, etc. – have been created to address and deal with the challenges posed by states.” [11]

2.6. These are well-known facts recognized by the OECD member countries, at least as it pertains to global formulary apportionment.

2.7. Regarding that controversial matter, it has long been recognized by the OECD member countries that it would “require substantial international coordination and consensus” [12] for any chance of a successful implementation.

2.8. Paragraphs 1.19 to 1.32 of the OECD Transfer Pricing Guidelines list a series of alleged “obstacles” to the implementation of a global formulary apportionment system.

2.9. It should be pointed out that these obstacles in fact apply to any efficient and effective dispute resolution mechanism such as the MAP and arbitration processes already included in Article 25 of the OECD Model Tax Convention.

2.10. In the preamble of the draft, we read indeed that “it is recognised that, in spite of several attempts to make dispute resolution mechanisms work better, further progress remains to be achieved, especially at a time when the number of disputes has increased.”

2.11. This increase in the number of disputes should come as no surprise. And it shall continue in the years to come.

2.12. It does not matter how many hundred pages of guidance are put forward by the OECD, IMF or the UN for that matter. As long as each State will give priority to unilateral action, no final resolution of the various challenges highlighted in the draft should be expected.

2.13. For example, on September 16, 2014, the OECD released its Guidance on Transfer Pricing Documentation and Country-by-Country Reporting [13] where it can be read in Part E that “it is essential that the new guidance in this Chapter of the Guidelines, and particularly the new country-by-country report, be implemented effectively and consistently.”

2.14. On December 15, 2014, the fifth webcast on the BEPS initiative indicated that guidance on the implementation of CbC reporting was forthcoming as early as February 2015. [14]

2.15. Nonetheless, this has not prevented Australia [15], the United Kingdom [16] and France [17], to name some predominant OECD member countries, from unilaterally issuing “new transfer pricing rules”.

2.16. Our intention is not to criticize these unilateral actions. As aptly summarized by the International Monetary Fund: “Although there is no written constitution in the United Kingdom, British tax law also respects the principle of legality on the basis of the prescription of « no taxation without representation » that was introduced in the Magna Carta in 1215. This principle was reiterated in 1628 in the Petition of Rights, which states that « no man be compelled to make or yield one gift, loan, benevolence, tax or such like charge, without common consent by act of Parliament. » This principle is one of the cornerstones of Western democracies, in that the consent to be given by the representatives of the taxpayers in parliament is considered to be a democratic guarantee against arbitrary taxation by the government.” [18]

2.17. As such, it is not a few hundred pages (or a few thousand pages as far as the BEPS initiative seem to be concerned) of OECD guidance that will shatter an 800 hundred year-old principle which is, after all, the foundation of western democracies.

2.18. Taxation is and shall stay a national phenomenon.

3. Conclusion

3.1. As more and more “rules” are put forward by the OECD, more and more divergent interpretations of these rules by tax administrations are to be expected.

3.2. The increased efforts to include non-members of the OECD in the international tax regime must however be applauded. [19]

3.3. Nevertheless, it should be recognized that each of these countries, like any industrialized country, will also interpret the rules to the best of its knowledge in order to protect its own tax base.

3.4. As we suggested in a previous OECD public consultation [20], the international tax regime has demonstrated its efficiency in eliminating double taxation pertaining to individuals all across the globe.

3.5. It may be time to revisit corporate taxation from an economic perspective.

Robert Robillard, CPA, CGA, MBA, M.Sc. Economics
Transfer Pricing Chief Economist, RBRT Transfer Pricing (RBRT Inc.)
Professor, Université du Québec à Montréal

January 14, 2015

[1] Robert Robillard, CPA, CGA, MBA, M.Sc. Economics, is the Transfer Pricing Chief Economist at RBRT Transfer Pricing (RBRT Inc.) and also Professor at Université du Québec à Montréal; 514-742-8086; robert.robillard@localhost. He is a former Competent Authority Economist and Audit Case Manager at the Canada Revenue Agency.

[2] In Canada, see Information Circular IC 71-17R5 Guidance on Competent Authority Assistance Under Canada’s Tax Conventions for some examples.

[3] In Canada, Information Circular IC 70-6R6 Advance Income Tax Rulings and Technical Interpretations explains that both rulings and technical interpretation are softly binding at best from the Canada Revenue Agency perspective.

[4] In Canada, see Information Circular IC94-4R International Transfer Pricing: Advance Pricing Arrangements (APAs).

[5] In Canada, see Transfer Pricing Memorandum TPM-11 Advance Pricing Arrangement (APA) Rollback and Information Circular IC94-4R International Transfer Pricing: Advance Pricing Arrangements (APAs).

[6] In Canada, Information Circular IC 71-17R5 Guidance on Competent Authority Assistance Under Canada’s Tax Conventions provides taxpayers with specific guidance on the MAP process.

[7] In Canada, Information Circular IC 71-17R5 Guidance on Competent Authority Assistance Under Canada’s Tax Conventions allows taxpayers these courses of action.

[8] Our professional experience with multilateral APAs leads us to think that satisfactory resolution of the issues for every party involved (that is, both States and taxpayers alike) is very unlikely.

[9] Jeffrey Owens and Mary Bennett; contributor: Rafaelle Russo, “OECD Model Tax Convention. Why it Works.”, OECD Centre for Tax Policy and Administration, online: http://www.oecdobserver.org/news/ archivestory.php/aid/2756/OECD_Model_Tax_Convention.html.

[10] Stephen J. Kobrin 2002, “Economic Governance in an Electronically Networked Global Economy”, p. 43, in Hall, Rodney Bruce et Thomas J. Biersteker, eds., 2002, The Emergence of Private Authority in Global Governance, Cambridge University Press, New York, pp. 43-75.

[11] Istvan Gyarmati 2010, “How to Ensure Security and Freedom in the New, Post-Westphalien World (Dis)order”, Security and Human Rights, Vol. 21, No. 1, pp. 40 41.

[12] OECD Transfer Pricing Guidelines, par. 1.22.

[13] OECD (2014), Guidance on Transfer Pricing Documentation and Country-by-Country Reporting, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing.

[14] See slide #15 of the Fifth BEPS Webcast, available at http://www.oecd.org/tax/beps-webcasts.htm.

[15] See the Australian measures to “simplify transfer pricing record keeping” here: https://www.ato.gov.au/Business/International-tax-for-businesses/In-detail/Transfer-pricing/Simplifying-transfer-pricing-record-keeping/.

[16] See the UK proposal on the “diverted profits tax” here: https://www.gov.uk/government/uploads/ system/uploads/attachment_data/file/385741/Diverted_Profits_Tax.pdf.

[17] See France’s directive No 2257 on CbC reporting (in French) here: http://www.localhost/wp-content/uploads/2014/11/No2257-NOT-SD_Notice_explicative_art_223_quinquies_B_-CGI.pdf and Form no 2257-SD here: http://www.localhost/wp-content/uploads/2014/11/2257-SD_Déclaration_politique_de_ prix_de_transfert.pdf .

[18] International Monetary Fund, 1996, Tax Law Design and Drafting, Vol. 1, Chap. 2, (Victor Thuronyi, éd.), p. 4.

[19] See the Report to G20 Development Working Group on the impact of BEPS in Low Income Countries (Part I, August 1, 2014; and Part II, September 22, 2014) issued by the OECD on that matter.

[20] Robert Robillard, OECD Request for input (ref.: BEPS ACTION 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it), September 17, 2014.

See in pdf format here.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard « at » localhost

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