June 4, 2021 OECD releases fifth batch of Stage 2 peer review reports on dispute resolution Executive summary On 25 May 2021, the Organisation for Economic Co-operation and Development (OECD) released the fifth batch of Stage 2 peer review reports relating to the outcome of the peer monitoring of the implementation by Estonia, Greece, Hungary, Iceland, Romania, the Slovak Republic, Slovenia, and Turkey (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 of the recommendations that resulted from the Stage 1 peer review reports that were released on 14 February 2019.1 The outcomes of the Stage 2 peer review process demonstrate overall positive changes across the assessed jurisdictions. According to the peer review reports, Hungary, Iceland, the Slovak Republic, Slovenia, and Turkey addressed almost all of the deficiencies identified in the Stage 1 peer review and Estonia, Greece, and Romania addressed some of them. 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 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 14 February 2019, the OECD released the Stage 1 peer review reports covering the implementation by the fifth batch of jurisdictions of the BEPS minimum standard on dispute resolution. Prior to this current release, the OECD had released 82 Stage 1 peer review reports which cover the first 10 batches of jurisdictions3 and 29 Stage 2 peer review reports.4 Fifth batch of Stage 2 peer review reports On 25 May 2021, the OECD released the Stage 2 peer review reports of the fifth batch of jurisdictions of 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 May 2018 (i.e., from the month following the launch date of the Stage 1 review of the assessed jurisdictions) and 31 October 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 11 January 2021 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 scored as satisfactory in their respective reports, although not all show the same level of progress. According to the peer reviews, Hungary, Iceland, the Slovak Republic, Slovenia, and Turkey addressed almost all of the deficiencies identified in the Stage 1 peer review and Estonia, Greece, and Romania addressed some of them. All assessed jurisdictions with the exception of Iceland and Romania 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. Romania does not meet the requirements under the Action 14 minimum standard concerning the prevention of disputes as it does not enable taxpayers to request roll-back of bilateral advance pricing agreements (APAs). As Iceland has no bilateral APA program in place, there are no further elements to assess regarding the prevention of disputes. All 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, Estonia, Iceland, Romania, Slovenia and Turkey were below the 24-month average timeframe which is considered as the appropriate time period to resolve a MAP under Action 14. Greece, Hungary, and the Slovak Republic did not close cases within the average timeframe. Additionally, on the evolution of the MAP caseload over 2016, 2017 and 2018, the caseload increased in all assessed jurisdictions with the exception of Hungary. For Hungary, there was a reduction of approximately 11% of its MAP inventory as of 31 December 2018 in comparison to 1 January 2016. Furthermore, Estonia, Hungary, the Slovak Republic and Turkey 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 Greece and the Slovak Republic that have one treaty each that does not contain such provision. 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 Romania and Turkey which have not ratified the MLI yet. Where treaties will not be modified upon entry into force and entry into effect of the MLI, all of the assessed jurisdictions reported that they intend to update all of their tax treaties to be compliant with the requirements under the Action 14 minimum standard via bilateral negotiations. Lastly, Estonia, Greece, Hungary, the Slovak Republic, and Slovenia meet the Action 14 minimum standard with respect to the implementation of MAP agreements. Iceland, Romania and Turkey 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. According to the peer review reports, no issues have surfaced regarding the implementation of MAP agreements in Iceland, Romania and Turkey throughout the peer review process. Next steps The OECD will continue to publish Stage 2 peer review reports in accordance with the Action 14 peer review assessment schedule. The sixth batch of Stage 2 peer reviews will be released in a few months. The Action 14 peer review documents indicated that the assessment methodology was going to be reviewed by 2020 in light of the experience in conducting peer monitoring, and keeping in mind the need for an assessment methodology which effectively improves the shortcomings identified in the peer review reports with the aim of ensuring an effective MAP. Although this time frame was not met, it can be expected that a review of the methodology will be implemented 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
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young Solutions LLP, Singapore
Ernst & Young LLP (United Kingdom), Global Tax Desk Network, London
Ernst & Young LLP (United States), Global Tax Desk Network, New York
Ernst & Young LLP (United States), Washington, DC
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