Executive summary
On 15 April 2021, the Organisation for Economic Co-operation and Development (OECD) released the fourth batch of Stage 2 peer review reports relating to the outcome of the peer monitoring of the implementation by Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand, and Portugal (the assessed jurisdictions) of the Base Erosion and Profit Shifting (BEPS) minimum standard on dispute resolution under Action 14 of the BEPS project.
These Stage 2 reports focus on evaluating the progress made by the assessed jurisdictions in addressing any recommendations that resulted from the Stage 1 peer review reports that were released on 30 August 2018.1 In addition, jurisdictions can request feedback on their adoption of the best practices. Australia (pdf), Japan (pdf), Malta (pdf),and New Zealand (pdf) made such a request and therefore the OECD also released four accompanying best practices reports.
The outcomes of the Stage 2 peer review process demonstrate overall positive changes across the assessed jurisdictions. Australia, Ireland, Japan, Malta, and New Zealand addressed almost all of the deficiencies identified in the Stage 1 peer review and Mexico and Portugal addressed some of them. According to the peer review report, Israel meets most of the elements of the Action 14 minimum standard but it has not yet addressed any of the deficiencies identified in the Stage 1 peer review.
Detailed discussion
Background
In October 2015, the OECD released the final reports on all 15 Action areas of the BEPS project. The recommendations made in the reports ranged from new minimum standards to reinforced international standards, common approaches to facilitate the convergence of national practices, and guidance drawing on best practices.
Minimum standards are the BEPS recommendations that all countries participating in the Inclusive Framework on BEPS have committed to implement. Minimum standards were provided for under Action 5 on harmful tax practices, Action 6 on treaty abuse, Action 13 on transfer pricing documentation and Country-by-Country reporting and Action 14 on dispute resolution.
The minimum standards are all subject to peer review processes. The mechanics of the peer review process were not specified in the final reports on these Actions. Instead, the OECD indicated at the time of the release of the BEPS final reports that it would, at a later stage, issue peer review documents on these Actions providing the terms of reference and the methodology by which the peer reviews would be conducted.
In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 on dispute resolution. The Terms of Reference translated the minimum standard for dispute resolution into 21 elements and the best practices into 12 items. The Assessment Methodology provided procedures for undertaking peer review and monitoring in two stages. Both stages are coordinated by the Secretariat of the OECD Forum on Tax Administration’s (FTA) Forum on Mutual Agreement Procedures (MAP). In Stage 1, a review is conducted of how a jurisdiction implements the minimum standard based on its legal framework for MAP and how it applies the framework in practice.
In Stage 2, a review is conducted of the measures the jurisdiction has taken to address any shortcomings identified in Stage 1 of the peer review. An assessed jurisdiction should within one year of the adoption of its Stage 1 peer review report by the OECD’s Committee on Fiscal Affairs submit a detailed written report to the FTA MAP Forum on: (i) the steps it has taken or is taking to address any shortcomings identified in its peer review report; and (ii) any plans or changes to its legislative or procedural framework relating to the implementation of the minimum standard.
Following the peer review documents, on 31 October 2016, the OECD released an assessment schedule (pdf) covering the peer review process on dispute resolution under Action 14 where it grouped the assessed jurisdictions into 10 batches for review. The peer reviews for a number of jurisdictions were deferred until 2020.2 On 30 August 2018, the OECD released the Stage 1 peer review reports covering the implementation by the fourth batch of jurisdictions of the BEPS minimum standard on dispute resolution.
Prior to this release, the OECD had released 82 Stage 1 peer review reports which cover the first 10 batches of jurisdictions3 and 21 Stage 2 peer review reports.4
Fourth batch of Stage 2 peer review reports
On 15 April 2021, the OECD released the Stage 2 peer review reports for the fourth batch of jurisdictions on the BEPS minimum standard on dispute resolution. The Stage 2 reports follow the same structure as the Stage 1 reports, with four main sections: (i) preventing disputes; (ii) availability and access to MAP; (iii) resolution of MAP cases; and (iv) implementation of MAP agreements.
In addition, the Stage 2 reports take into account any relevant developments from each jurisdiction between 1 January 2018 (i.e., from the month following the launch date of the Stage 1 review of the assessed jurisdictions) and 31 August 2019 (i.e., until the month of the launch of the Stage 2 review of the assessed jurisdictions), including developments relating to the tax treaty network of that jurisdiction and other developments regarding the minimum standard on dispute resolution. Further, the reports build on the MAP statistics for the years 2016, 2017 and 2018 (the Statistics Reporting Period). The peer review reports were approved by the Inclusive Framework on BEPS on 28 October 2020 and were prepared for publication by the OECD Secretariat.
In general, the progress of the assessed jurisdictions on addressing deficiencies identified in the Stage 1 reports has been categorized as satisfactory in their respective reports, although not all the jurisdictions show the same level of progress according to the OECD press release. Australia, Ireland, Japan, Malta, and New Zealand addressed almost all of the identified deficiencies identified in the Stage 1 peer review and Mexico and Portugal addressed some of them. According to the peer review report, Israel has not yet addressed any of the identified deficiencies.
All the assessed jurisdictions with the exception of Portugal meet the Action 14 minimum standard with respect to the prevention of disputes, and when disputes occur, they provide access to MAP in all eligible cases. Portugal does not meet the requirements under the Action 14 minimum standard concerning the prevention of disputes as Portugal does not enable taxpayers to request roll-back of bilateral advance pricing agreements (APAs).
All the assessed jurisdictions have issued or updated their MAP guidance on the availability of MAP and how it applies in practice.
Regarding the average timeframe to resolve MAP cases during the Statistics Reporting Period, Australia, Malta and New Zealand were below the 24-month average timeframe which is considered as the appropriate time period to resolve a MAP under Action 14. The average time for Israel, New Zealand, and Portugal decreased, while for Japan and Ireland the average time increased, in comparison to the average time in the Stage 1 peer review. Additionally, on the evolution of the MAP caseload over 2016, 2017 and 2018, the caseload increased in Ireland, Malta, Mexico, New Zealand, and Portugal. For Australia and Japan there was a reduction of approximately 14% of their MAP inventory, as of 31 December 2018, in comparison to 1 January 2016. The MAP inventory in Israel, on an overall level, has not changed.
Furthermore, Australia, Ireland, Israel, Japan, Mexico, New Zealand and Portugal have added more personnel to the competent authority function and/or made organizational improvements with a view to handling MAP cases in a more timely, effective and efficient manner.
All the assessed jurisdictions’ tax treaties contain a provision relating to MAP, with the exception of Australia and New Zealand which have one treaty each that does not contain a provision relating to MAP. According to the peer review reports, the multilateral instrument (MLI) developed under BEPS Action 155 was utilized by all of these jurisdictions to bring some of their tax treaties in line with the minimum standard and bilateral negotiations were concluded (or are ongoing) in most of the jurisdictions for the treaties that are not covered by the MLI. The MLI is in force for all assessed jurisdictions with the exception of Mexico which has not ratified the MLI yet.
Finally, all assessed jurisdictions also meet the Action 14 minimum standard with respect to the implementation of MAP agreements, except for Australia and New Zealand which almost meet this standard. Both of these jurisdictions monitor the implementation of MAP agreements. However, they have a domestic statute of limitations, as a result of which there is a risk that MAP agreements cannot be implemented where the applicable tax treaty does not include Article 25(2), second sentence, of the OECD Model Tax Convention. However, according to the peer review reports, no problems have surfaced regarding the implementation of MAP agreements in Australia and New Zealand throughout the peer review process.
Best practice peer review reports
In addition to the review of the minimum standard on dispute resolution, each assessed jurisdiction can provide information and request feedback from peers on its adoption of the 12 best practices on dispute resolution.
Australia, Japan, Malta, and New Zealand requested feedback concerning their adoption of the best practices and therefore, in addition to the peer review reports, the OECD released accompanying best practices reports for these jurisdictions.
The best practice reports are divided into the same four parts as the peer review reports on the minimum standard. Under each of these sections, the 12 best practices on MAP are addressed and if peers provided input with respect to a particular best practice, the input is reflected in the report. However, for most of the best practices, the peers provided only limited input. In most cases, peers only provided input on one of the best practices related to the jurisdictions’ implementation of bilateral APA programs and they commented on their APA relationship with the respective jurisdiction.
Next steps
The OECD will continue to publish Stage 2 peer review reports in accordance with the Action 14 peer review assessment schedule. The fifth batch of Stage 2 peer reviews will be released in a few months.
The Action 14 peer review documents indicated that the assessment methodology would be reviewed by 2020 in light of the experience in conducting peer monitoring, and keeping in mind the need for an assessment methodology that effectively improves the shortcomings identified in the peer review reports with the aim of ensuring an effective MAP. Although this has not yet occurred, it can be expected that a review of the methodology will happen in the near future.
Furthermore, the OECD held a public consultation on the review of the minimum standard on dispute resolution under BEPS Action 14 in February 2021.6 Hence, it can be expected that revised materials on Action 14 will be released in the near future.
Implications
In a post-BEPS world, where multinational enterprises (MNEs) face significant scrutiny from tax authorities and the number of MAP cases continues to increase, the release of the peer review reports reflects the continued recognition of the importance to MNEs of tax certainty with respect to their cross-border transactions. While increased scrutiny and greater subjectivity increases the risk of double taxation, the continued focus by the OECD and participating jurisdictions on the implementation of effective dispute resolution mechanisms can be seen as a positive in helping to improve access to an effective and timely MAP process.
Furthermore, the peer review reports provide insights to taxpayers on the availability and effectiveness of MAP in the assessed jurisdictions. As additional jurisdictions continue to be reviewed, the OECD has made clear that taxpayer input is welcome on an ongoing basis.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Ronald van den Brekel
- Marlies de Ruiter
- Maikel Evers
Ernst & Young Belastingadviseurs LLP, Amsterdam
- David Corredor-Velásquez
- Konstantina Tsilimigka
- Roberto Aviles Gutierrez
Ernst & Young Solutions LLP, Singapore
- Luis Coronado
Ernst & Young LLP (United Kingdom), Global Tax Desk Network, London
- Joel Cooper
Ernst & Young LLP (United States), Global Tax Desk Network, New York
- Jose A. (Jano) Bustos
Ernst & Young LLP (United States), Washington, DC
- Barbara M. Angus
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
