The tenth session of the UN Committee of Experts on International Cooperation in Tax Matters took place in Geneva from 21 to 25 October 2014. The experts considered issues relating to the next update of the UN Model Tax Convention and commentary, updates to the Practical Manual on Transfer Pricing, issues arising from the G20 action plan on base erosion and profit shifting and a draft of a practical manual on the negotiation of bilateral tax treaties.
Issues currently under consideration by the expert committee include the concept of permanent establishment. The Committee is considering a revision to Article 5 (3) of the UN Model in respect of a permanent establishment resulting from the provision of services in the other contracting state. The committee is in agreement with the traditional interpretation that Article 5 (3) (b) requires the physical presence of an employee or personnel of the enterprise providing the services to create a permanent establishment in the other state. However the rise of the digital economy has given rise to issues that should be considered in the commentary to Article 5. An alternative provision or provisions could be suggested in the updated commentary.
Another issue currently under consideration by the experts is the next update of the UN Practical Manual on Transfer Pricing for Developing Countries. The contents of the Manual are closely linked to the commentary to Article 9 (associated enterprises) of the UN Model Tax Convention. The current version of the commentary to Article 9 establishes a close connection with the OECD transfer pricing guidelines. The relevant part of the commentary to Article 9 of the UN Model may be amended in the next update to reflect the fact that many UN members are not members of the OECD. Any amendments to the commentary on this point would not be far reaching and would not require revisions to the Practical Manual on Transfer Pricing.
Some of the issues considered in the OECD/ G20 action plan on base erosion and profit shifting are concerned with transfer pricing, with the objective of ensuring that the transfer pricing outcomes were in line with value creation. The timetable for the action plan requires the completion of the transfer pricing work by September 2015 and this will allow enough time to the UN experts to incorporate the conclusions of the action plan into their next update of the Practical Manual on Transfer Pricing if this is considered appropriate.
Some of the UN experts consider that various issues of great importance to developing countries are not included in the action plan, and developing countries could take a different view from OECD countries on some of the issues included in the plan. The Committee therefore decided at their previous meeting to set up a subcommittee on base erosion and profit shifting for developing countries to engage with the work of the OECD and other relevant bodies.
In the next update to the Practical Manual on Transfer Pricing the treatment of transactions in intangibles, intragroup services and management charges will need to be considered as these are all significant for developing countries. An annex on training and capacity is also considered by the experts to be a valuable addition to the Manual. The Subcommittee on Article 9 (associated enterprises) which is responsible for updating the Manual will also be looking at the addition of more examples, particularly examples that are relevant to the requirements of developing countries.
The subcommittee is drafting a revised commentary on Article 9 for consideration by the committee of experts and is also working on updating the Manual, with a final updated draft manual to be provided for discussion at the twelfth session of the committee of experts in 2016.
At the previous meeting of the committee of experts a decision was made to set up a “Subcommittee on Negotiation of Tax Treaties – Practical Issues”. This has been given the task of drafting a practical manual on the negotiation of bilateral tax treaties that would be a training tool for beginners or for tax officials with limited experience. The Manual would take into account the practical situation faced by developing countries at the various stages of capacity development that they may have reached. An intermediate report was presented to the expert committee during the current meeting. The Manual would also reflect the UN Model Tax Convention and commentary, the updates to be included by the committee and previous work of the committee and inputs from other bodies.
Following consideration of the first draft of the Manual a second draft is to be presented by 31 January 2015. This will be circulated by the Subcommittee for further comments by March 2015 and finalized and presented to the Committee at its eleventh session in October 2015.