On 7 June 2017, the OECD announced that Pakistan signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA). About 70 countries have signed this Multilateral Instrument (MLI) agreement at the OECD Centre in the presence of Secretary-General OECD at the same time. According to the MCAA signatories, Pakistan intends to launch the first information exchange in September 2018.
The Pakistani ambassador said that Pakistan will now be part of the global effort to develop solutions to bridge gaps in the tax treaties that will allow companies to artificially shift to low or no tax havens. In addition, Pakistan will also receive consistent support and guidelines from the OECD to implement the standards of BEPS to counter harmful tax practices and tax treaty abuses.
On June 7, 2017, in Paris 68 nations signed a multilateral instrument to amend their existing tax treaties, adding provisions that would reduce multinational tax avoidance and reinforce tax dispute settlement procedures. The amendments implement the tax treaty related recommendations of the OECD’s final reports on base erosion and profit shifting (BEPS).
Countries at all levels of development have signed the instrument. A number of jurisdictions have also expressed their intention to sign the MLI as soon as possible and other jurisdictions are also actively working towards participation in the multilateral instrument.
In addition, the OECD published on its website the MLI signatories’ reports on the tax treaties covered by the MLI as well as their reservations, options and elections on these contracts. The instrument will result in modifications to more than 1,100 bilateral tax treaties.
The organisation Tax Inspectors Without Borders (TIWB) has issued it Annual Report for 2016/17. The report covers the period from January 2016 to April 2017.
TIWB aims to support developing countries in their efforts to raise more domestic tax revenue to support economic development. TIWB is therefore seen by the OECD and UN Development program as one of the key tools in assisting tax administrations in developing countries to ensure that all companies pay tax in the jurisdiction where economic activity is taking place and value is created.
When tax administrations request assistance from TIWB an expert with the relevant skills is selected to work directly with the local tax administration on their audits and related issues in international tax matters. Tax audit skills are therefore imparted to the local tax administration and the tax officials have a chance to learn by doing.
This transfer of knowledge and skills can lead to improvements in the quality of audits and can also bring broader benefits including the potential for more revenues, greater certainty for taxpayers and an improved culture of compliance as the enforcement of tax laws improves.
The activities of TIWB therefore support the aims of the Addis Ababa Action Agenda and help developing countries to increase their tax revenues thereby supporting their efforts to implement the Sustainable Development Goals. TIWB can also support developing countries in implementing the recommendations of the OECD/G20 reports on base erosion and profit shifting (BEPS) and more effectively tax multinational enterprises.
TIWB aims to support developing countries to raise more domestic tax revenue to support economic development. It is therefore seen by the OECD and UN Development program as one of the key tools in assisting tax administrations in developing countries to ensure that all companies pay tax in the jurisdiction where economic activity is taking place and value is created.
The Annual Report gives more information on activities performed in the TIWB programmes and looks at results achieved and lessons learned. The report also discusses how to better measure the results in future and sets out the draft work schedule for the next year.
On 29 May 2017 the OECD released the document that will form the basis of the peer review of the minimum standard on treaty shopping. This minimum standard arises from Action 6 of the project on base erosion and profit shifting (BEPS). Action 6 is concerned with preventing the granting of treaty benefits in inappropriate circumstances.
The minimum standard on treaty shopping is one of the four BEPS minimum standards that are subject to peer review. The four minimum standards relate to countering harmful tax practices; preventing tax treaty abuse; transfer pricing documentation in relation to country by country reporting requirements; and making dispute resolution mechanisms more effective. The standards are each subject to peer review to encourage implementation and ensure that there is a level playing field for taxpayers and tax administrations.
The jurisdictions that are members of the Inclusive Framework on BEPS are committed to including the minimum standard in their tax treaties. This involves including a statement that the intention of the parties to the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through treaty shopping or other arrangements. It also involves including treaty provisions to implement that intention, either by a Principal Purposes Test (PPT) combined with a limitation on benefits (LOB) rule; a Principal Purposes Test alone; or a detailed version of a LOB rule.
The minimum standard would be implemented in each bilateral treaty where the parties agree to this and by the method on which they agree. The commitment applies to existing and future tax treaties but does not oblige countries to conclude new treaties or amend existing treaties within any particular time frame. If a particular jurisdiction is not concerned about the effect of treaty shopping on its own taxation rights it is not obliged to apply the provisions provided that it is prepared to include provisions in the treaty that the treaty partner can use to protect its own taxation rights.
The document issued by the OECD sets out the basis for the peer review process for Action 6 and includes the terms of reference with criteria for assessing how far the Action 6 standard has been implemented; and the methodology outlining the procedural mechanism for conducting the peer reviews.
The document covers the procedure to be followed in the case of any interpretation and application issues that may arise while implementing the minimum standard on treaty shopping. Also covered is the procedure to follow where a jurisdiction has difficulty in obtaining the agreement of another jurisdiction in the Inclusive Framework to implement the minimum standard on Action 6.
The document notes that inclusion of the minimum standard on treaty shopping in the multilateral instrument for implementation of tax treaty related BEPS measures would be an effective way of quickly implementing the minimum standard. The members of the Inclusive Framework are therefore encouraged to use the multilateral instrument for implementation of the minimum standard.
On 23 May 2017 the OECD issued a public discussion draft entitled Implementation Guidance on Hard-to-Value Intangibles. The draft is issued under Action 8 of the project on base erosion and profit shifting (BEPS) and invites comments on the guidance by 30 June 2017.
The recommendations of the final report on BEPS action 8 included provisions on the treatment of hard to value intangibles (HTVI). The provisions aimed to protect tax administrations from any negative effect resulting from information asymmetry at the time of the transaction in intangibles by allowing the tax administration to consider ex post outcomes as presumptive evidence of the appropriateness of ex ante pricing arrangements.
Under the recommended rules the taxpayer was given the possibility to demonstrate the reliability of the information supplied in support of the transfer pricing at the time of the transaction, and there were also a number of exemptions where the approach would not be applicable.
The discussion draft issued by the OECD relates to the practical implementation of these rules and sets out the principles with examples of how the rules would apply in real life situations.
The guidance states that it would not be correct for the tax administration to revise its valuation of the transaction only on the basis of the actual income or cash flows received without also considering the probability, when the transaction took place, of those outcomes being achieved.
The draft also notes that the time elapsing between the transaction and the emergence of the ex post outcomes may not tie in very well with tax audit cycles or administrative or statutory time periods, especially where the intangibles have a long incubation period and so income is not earned until a long time after the transaction in intangibles has taken place. Tax administrations should therefore be identifying transfers of intangibles that are potentially HTVI and evaluating the assumptions made by the taxpayer in its transfer pricing, in addition to looking for information on developments leading to ex post outcomes that may not correspond to those assumptions.
This should be done even where the outcomes take place in periods after the years under audit. By identifying transfers of HTVI at an early stage and acting on the presumptive evidence the tax administration can avoid any difficulties with statutory time limits for audit and reassessment. However countries could also consider introducing a statutory requirement for taxpayers to notify them of a transfer or licence of an intangible that falls within the definition of an HTVI.
The application of the OECD approach to HTVI follows certain principles:
- Where the HTVI approach is applicable the tax administration can take into account ex post outcomes as presumptive evidence of the appropriateness of the ex anti pricing arrangements.
- The ex post outcomes are used in determining the correct valuation of the transaction but the tax administration cannot just base the valuation on the actual income or cash flow without also considering the probability of achieving that income at the time of the transaction.
- The revised valuation can be assessed to tax after taking into account contingent payments and price adjustment clauses.
- The audit practices of the tax administration should ensure that presumptive evidence based on ex post outcomes is acted upon as soon as possible.
After setting out examples of the application of the above principles the draft also notes the importance of the application of the mutual agreement procedure to resolve cases of double taxation resulting from the application of the approach to HTVI.
On 6 April 2017 the OECD released further information to support the consistent implementation of the Common Reporting Standard (CRS). This guidance includes a series of additional frequently asked questions (FAQs) related to the CRS and the second edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters. The OECD has also set out additional technical guidance on how to handle corrections and cancellations within the CRS XML Schema, as well as a revised and expanded set of correction examples.
On 6 April 2017 the Inclusive Framework on BEPS released additional guidance on the implementation of country by country (CbC) reporting under BEPS Action 13. The guidance clarifies some issues surrounding the information to be included in the CbC report and application of the model legislation contained in the Action 13 report, to assist jurisdictions with the introduction of consistent domestic rules.
The issues addressed in the guidance are the definition of revenues; the accounting principles and standards for determining the existence of and membership in a group; the definition of total consolidated group revenue; the treatment of major shareholdings; and the definition of a related party for the purposes of completing the information required for Table 1 of the CbC report.
More than 100 countries are involved in the Inclusive Framework and in the development of the monitoring process for the four minimum standards and the review mechanisms for other parts of the BEPS package. The inclusive framework is also developing various toolkits to assist developing countries in BEPS implementation. The inclusive framework allows these countries to provide input to the work on toolkits and to impact the remaining BEPS standard-setting work.
The guidance document will be updated for any further guidance that may subsequently be published.