Indeed, many such audits will not reach a harmonious conclusion, warns Joy Svasti-Salee, a professor and international tax specialist at the Centre for Commercial Law Studies at Queen Mary University of London.
When one country takes a position in an audit and makes an upward adjustment to profit there is a direct impact on another county, and potentially a knock-on effect on other countries where the group is doing business, she explains.
The new country-by-country reporting requirements under BEPS, and the increasing amount of data sharing, means that countries are likely to identify profitable group companies and better focus their transfer pricing inquiries.
“This may result in more disputes with more at stake, including more potential double taxation and increased bilateral litigation, which is not a solution to a multilateral problem,” says Svasti-Salee.
The tax uncertainty is expected to lead to a surge of cross-border disputes, which makes it urgent for a clearer and more effective dispute-resolution process.
One recommendation prescribes specific improvements to MAP, seeking to resolve MAP cases within a two-year time frame.
To do so, G20 nations and others must join in this convention to subscribe to minimum standards related to dispute prevention, access to MAP processes, resolution of MAP cases and implementation/follow-through on MAP conclusions, in addition to peer review.
Owens believes requiring peer review is compelling.
Each participating tax administration will be monitored and reviewed by all the others who will be able to issue red, yellow or green cards against various criteria.
“For those countries that participate, it should lead them to allocate more resources and work more cooperatively,” Owens says.
Reluctance in the developing world
The main obstacle is that the countries with the skills and resources, such as Germany, are signing on to the change, while many developing countries continue to hesitate, according to Owens.
Nonetheless, he believes there are incentives for all nations to improve their dispute resolution.
“No one wants a bad business rating, as that can hurt foreign direct investment,” Owens says.
India, for example, is already working more closely with the US to settle a backlog of MAP disputes.
At a special October 2016 working session in Washington, DC, Indian and US authorities concluded over 100 pending MAP cases — many of them long-standing.
Another BEPS initiative aimed at delivering greater certainty prescribes the development of a multilateral instrument that will be used to help harmonize various definitions, treatments and conditions described in global tax treaties.
It is an essential step, as the 15 actions within the BEPS project, including the improved dispute-resolution process, would require lengthy amendments on a treaty-by-treaty basis without this mechanism.
In late November 2016, over 100 jurisdictions concluded negotiations on this instrument, which will now be used to update more than 3,000 treaties worldwide.
“This will help clarify rules and add greater transparency and consistency that should help to reduce the number of issues up front,” says Canale.
Mandatory dispute settlement
In a world characterized by political and economic uncertainty, governments need to avoid adding tax uncertainty, which in turn requires that cross-border tax disputes are resolved quickly and effectively.
This is why businesses and many governments are pushing for mandatory arbitration as a safety net to the traditional MAP process.
So far, 20 nations have committed to binding mandatory arbitration, according to Achim Pross, Paris-based Head of the OECD’s International Co-operation and Tax Administration Division.
He expects more to join in the near future and sign up to the arbitration provision in the multilateral instrument that the OECD recently released.
Here again, the challenge is widespread implementation.