February 26, 2021
OECD releases new transparency framework for Action 5 for 2021 through 2025
On 22 February 2021, the G20/Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) published a renewed process for the BEPS Action 5 peer review of the transparency framework for the compulsory spontaneous exchange of certain types of tax rulings for the years 2021 through 2025 (the transparency framework).
Overall, the transparency framework remains similar to the initial transparency framework covering the years 2017 to 2020.
The transparency framework contains the terms of reference and the methodology for the conduct of the peer reviews. The terms of reference capture key elements such as the information gathering process, exchange of information, confidentiality and statistics. The methodology sets out the procedural mechanisms by which jurisdictions will complete the peer review, including the process for collecting the relevant data, the preparation and approval of reports, the outputs of the review and the follow-up process.
In October 2015, the OECD released the final reports on all 15 focus areas of the BEPS Action Plan. The recommendations made in the reports include new minimum standards to reinforce international standards, common approaches to facilitate the convergence of national practices, and guidance on best practices.
Minimum standards are the BEPS recommendations that all members of the Inclusive Framework have committed to implement, covering some of the elements of:
The minimum standards are all subject to peer review processes. The mechanics of the peer review processes were not included as part of the final reports on these Actions. Instead, the OECD indicated at the time of the release of the BEPS 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 February 2017, the OECD released the peer review documents (i.e., the terms of reference and assessment methodology) for BEPS Action 5 on the compulsory spontaneous exchange of certain types of tax rulings as agreed under the transparency framework related to harmful tax practices.1 The terms of reference translated the Action 5 minimum standard for the transparency framework into four key areas of review:
The assessment methodology set out procedures for peer review and monitoring during 2017 through 2020. Each peer review was focused on whether the assessed jurisdictions had complied with the minimum standard in all four key areas, based on each jurisdiction's legal framework and on how it applied the framework in practice.
The OECD has released four annual peer review reports relating to the transparency framework:
Transparency framework 2021 through 2025
On 17 February 2021, the OECD Inclusive Framework on BEPS approved the new transparency framework for the years 2021 through 2025. The transparency framework contains the terms of reference and the methodology for the conduct of the peer reviews going forward.
Terms of reference
The terms of reference remain the same as the initial transparency framework, capturing the following elements:
Information gathering process
Jurisdictions should collect information relating to the tax rulings that are in the scope of the transparency framework. This includes six categories of taxpayer-specific rulings which, in the absence of compulsory spontaneous exchange of information, could give rise to BEPS concerns:
Jurisdictions should identify for each of these categories of tax rulings whether they have issued "past rulings" and "future rulings." The definitions of "past ruling" and "future ruling" vary by jurisdiction and depend on when the relevant jurisdiction joined the Inclusive Framework on BEPS or, in the case of a jurisdiction of relevance, when it has been identified as such a jurisdiction. Whether a ruling qualifies as "past" or "future" is also affected by a jurisdiction's request for additional time to implement the transparency framework. The obligation to identify and gather information on past rulings remains in place for those members that joined the Inclusive Framework, and jurisdictions of relevance6 identified, by 1 September 2017 as well as developing countries (non-financial center) that requested additional time for the implementation, under the following circumstances:
For those jurisdictions that joined the Inclusive Framework, or were identified as a jurisdiction of relevance, on or after 1 September 2017, there is no obligation to conduct spontaneous exchange of information on past rulings.7
The supervision mechanism remains the same as included in the earlier transparency framework (i.e., jurisdictions should have in place a review and supervision mechanism to ensure that all relevant information is captured adequately, taking account of the separation of taxing powers between different levels of government).
The exchange of information
This element remains the same as the initial terms of reference. Jurisdictions should undertake the compulsory spontaneous exchange of information on tax rulings within the scope of the transparency framework.8 Among other obligations, this requires the following:
This element also remains the same as the initial terms of reference. Jurisdictions should ensure that the information received is kept confidential with respect to information on rulings received under the transparency framework. Among other obligations, this requires the following:
This element remains the same as the initial terms of reference as well. Jurisdictions should keep statistics on the exchange of information under the transparency framework for which they should report: (i) the total number of spontaneous exchanges; (ii) the number of spontaneous exchanges by category of ruling; and (iii) for each category of ruling exchange, a list identifying the jurisdictions with which information was exchanged.
Overall, the methodology remains similar to the initial methodology. The updated methodology sets out the procedural mechanics for undertaking the reviews in the years 2021through 2025 by which jurisdictions will complete the peer review, including the following elements:
Following the decision of the Inclusive Framework, the continuation of peer reviews for the BEPS minimum standards, was agreed for the period 2021 through 2025.
Unlike the earlier methodology, the methodology provides that members of the Inclusive Framework and jurisdictions of relevance will be assessed for compliance with the transparency framework if they have a corporate income tax system that has both the legal framework and the administrative practice in place to issue rulings in scope of the standard. The frequency of the assessment will be on an annual basis, which is the same as the initial methodology.
Data collection process
For the period 2021 through 2025, the process will remain the same as the process for the years 2017 through 2020, provided that no changes in the standard are agreed by the FHTP and the Inclusive Framework. Each annual review starts in January of each year with the OECD Secretariat sending a self-assessment questionnaire to reviewed jurisdictions. The process finishes in September of each year when the OECD Secretariat will send a revised draft annual report to the FHTP to reflect the written comments, if any.
For jurisdictions that have met all the terms of reference in a year, the subsequent review becomes simpler and only requires an update on statistics (such as timeliness of exchanges) and any changes in implementation.
Outline of the annual report
The outline of the annual report remains unchanged. The annual report will contain an introduction and executive summary explaining the background to the peer review transparency framework and a synthesis of the progress made. The annual report will also contain individual summaries and recommendations for each reviewed jurisdiction.
Approval of the report
The approval process remains unchanged. The FHTP will provide the report to the Inclusive Framework on BEPS each year to invite it to adopt the report.
Amendments and interpretation
This element remains the same as the initial methodology. The FHTP may decide to provide further clarifications on the inclusion of additional categories of rulings in scope of the framework or amendments to the terms of reference. The FHTP may agree to provide additional technical guidance to clarify the minimum standard.
Furthermore, in 2016 the FHTP agreed that it would conduct an evaluation of the effectiveness of the transparency framework in 2020. The process commenced at the October 2020 FHTP meeting and the results of the evaluation of effectiveness will inform the FHTP as to the need for any changes to the standard, or areas where further support or guidance would be useful. In the event that any changes to the standard are agreed by the FHTP and the Inclusive Framework following the conduct of the effectiveness review, the terms of reference may be subject to change.
Confidentiality of peer review reports
This element remains the same as the initial methodology. Any document produced by a jurisdiction during a review, as well as draft reports and written comments will be treated as confidential and for official use only. These documents should not be made publicly available. Any breach of confidentiality should be brought to the attention of the Co-Chairs of the FHTP, who will decide on the appropriate action in consultation with the FHTP.
By the end of 2021, the OECD is planning to release the fifth annual peer review report, covering jurisdictions for the 2020 calendar-year period. The report should include country-specific recommendations for improvement and will be adopted under the updated transparency framework.
A better understanding of how the BEPS recommendations are implemented in practice could reduce misunderstandings and disputes between governments. Greater focus on implementation and tax administration should therefore be mutually beneficial to governments and business.
The agreement on the new peer review process reconfirms the commitment of the Inclusive Framework to enhance transparency and expand information exchange in the area of tax. Jurisdictions covered by the framework not only have to adapt their laws to be able to implement the transparency framework, but also have to adapt their tax administration systems to be able to process and report on information exchange. The peer review process further reinforces the current transparency environment, where exchanging information automatically is the new standard. This, coupled with an ever increasing amount of other information being exchanged (financial account information, and country-by-country reports), reinforces the importance of businesses ensuring that information filed is submitted in such a way that it cannot be read out of context so as to reduce any possible misunderstandings.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP (United States), New York
Ernst & Young LLP (United States), Washington, DC
1 See EY Global Tax Alert, OECD releases peer review documents on BEPS Action 5 on Harmful Tax Practices and on BEPS Action 13 on Country-by-Country Reporting, dated 6 February 2017.
2 See EY Global Tax Alert, OECD releases first annual peer review report on Action 5, dated 5 December 2017.
3 See EY Global Tax Alert, OECD releases second annual peer review report on Action 5 on the exchange of tax rulings, dated 14 December 2018.
4 See EY Global Tax Alert, OECD releases third peer review report on Action 5 on the exchange of tax rulings, dated 13 January 2020.
5 See EY Global Tax Alert, OECD releases fourth peer review report on BEPS Action 5 on the Exchange of Information of Tax Rulings, dated 18 December 2020.
6 Jurisdictions of relevance are those whose adherence to the minimum standards will be necessary to ensure that a level playing field is achieved. The Inclusive Framework informs such jurisdictions about the minimum standards and invites them to commit to the BEPS package and participate in the review process. As such, Sint Maarten and the Philippines have been subject to review by the FHTP but have not yet joined the Inclusive Framework.
7 The majority of peer reviewed jurisdictions have successfully identified and conducted spontaneous exchanges of information on past rulings as required under the standard. However, there remain a small number of jurisdictions that have been issued recommendations in relation to past rulings, and who have not yet fully addressed these recommendations. Therefore, the terms of reference with respect to past rulings remain in place for these jurisdictions, who are urged to finalize identification and spontaneous exchange of information on past rulings as soon as possible.
8 Jurisdictions that have been identified as jurisdictions of relevance in respect of the work of the FHTP are required to send information on rulings, but members of the Inclusive Framework are not required to send information to these jurisdictions. The timeline that applies for a jurisdiction of relevance takes precedence, regardless of if that jurisdiction subsequently joins the Inclusive Framework.