1 Asia-Pacific Regional Tax Conference 2016 Seoul, Korea May 2016 Panel 4 – Treaty Dispute Resolution John Dryden Korea, Republic of Toshiyuki Kemmochi Japan Jae-Hyung Park Korea, Republic of PVS Satya Prasad India Niv Tadmore Australia Kees van Raad, Chair Netherlands c

1. Introduction 1.1.Conceptual: nature of TT disputes & avoidance of such disputes a – Art. 25 OECD Model b – pre-emptive: Advance Pricing Agreement c – OECD statistics 1.2. Real life a – mostly Transfer Pricing b – practical difficulties in TP disputes 2

1.1. – a. Art. 25 OECD (Mutual agreement procedure) [KvR] 1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may [irrespective of domestic remedies] present his case to the competent authority of the Contracting State of which he is a resident … 2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State. 3

3.[MAP for resolving – any difficulties or doubts arising as to the interpretation or application of the Convention – double taxation in cases not provided for in the Convention] 4. … 5. [added in 2008 >>] Where … the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the presentation of the case to the competent authority of the other Contracting State, any unresolved issues arising from the case shall be submitted to arbitration if the person so requests. [unless earlier decision by court // arbitration decision is binding] 4

1.1. – b. Advance Pricing Agreements (APAs) >> What is an APA? (NT) Unilateral, bilateral and multilateral "…[A]n arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time." ([4.123] of TP Guidelines) 5

>> Why have an APA? (NT) Certainty for the taxpayer Lessen the likelihood of double taxation Proactive prevention of disputes Facilitate a positive relationship with revenue authorities ([4.142] to [4.158] of TP Guidelines) 6

1.1. – c. OECD MAP Statistics – 1 [NT] Since 2006, the OECD has prepared annual statistics on MAP caseloads of all member countries 2013 reporting period – Total number of open MAP cases reported by OECD countries 12.1% increase from 2012 reporting period 94.1% increase from 2006 reporting period –23.57 months - Average time for completion of MAP cases months in 2006 reporting period 7

8 OECD MAP Statistics – 2 [SP] The 10 OECD Member countries with the highest number of new MAP cases in 2014 – Source: OECD Guess about countries that are not OECD MSs

9 OECD MAP Statistics – 3 [TK]

1.1. – d. Access to MAP (JD) Tp-CA Taxpayer’s request to CA of his residence state to initiate a MAP may be denied >> possible reasons ? CA-CA Request for MAP by CA of one treaty state made to CA of the other treaty state is not entertained by the other treaty state >> `not entertained´: no reply or express refusal >> possible reasons ? 10

Managing TP Disputes Real life (NT) – Managing TP Disputes

Life cycle of a TP Dispute StageProcessKey issues Information gathering Audit RFI - taxpayer EOI - other jurisdictions Context Location of information Relevance Position paperLegal, factual and economic analysisPurpose and effect Taxpayer response Legal, factual and economic response Format - Q&A, Written? Dispute resolution ADR? Mediation? MAP?Cost / benefit Co-operative engagement Mandate to settle OutcomeNo additional tax - great! Additional tax by agreement - ok Litigation - sometimes necessary? Global / broader implications Future income years

Global implications Revenue authority in one country can adopt a different interpretation to global understanding and / or another jurisdiction Transfer pricing rules may differ Decision / outcome in one jurisdiction can impact multiple jurisdictions How to manage this? 13

2. Present 2.1. Country practices (all) brief overview by each panel member of practice in own country regarding Treaty Dispute Resolution: – (pre-emptive) Advance Pricing Agreements practice: unilateral, bilateral, multilateral?; all negotiated by CA? – MAP practice: how effective and efficient: >> stock of cases (in % of annual case load); >> average processing time; % of cases not solved – Position regarding arbitration: yes / no / perhaps 2.2. TP case (NT) A recent and prominent court decision on Transfer Pricing: the Chevron case (Australia) 14

15 CHEVRON - Structure Chevron CFC pays 1.2% and charges 8.97% on usd 2.5 bln loan

16 Key legal issues How do you price a loan? Relevance of credit ratings Impact of implicit support (group affiliation) Currency of borrowing Transfer pricing analysis under Article 9 - including "reconstruction" Can Article 9 be used to impose tax?

17 Expert evidence issues >> lessons to be learned 20 experts (most evidence not relevant) Role of expert evidence –Heavy reliance on expert evidence in TP –Duty to the court (not an advocate) Pricing experts - not helpful Credit rating experts - not relevant Other experts - not relevant

3. Future 3.1. Initiatives a –Forum on Tax Administration (FTA, 2014) (NT) b – BEPS Action 14 (SP, JD) c – Fast Track Tax Arbitration: Tribute Foundation & Permanent Court of Arbitration (KvR) 18

Forum on Tax Administration (FTA) [JHP, TK] October 2014 Dublin Meeting: agreement among CAs of 46 countries on greater cooperation on international tax avoidance, automatic exchange of information & MAP November 2014 paper `Multilateral Strategic Plan on MAPs: A Vision for continuous MAP improvement´: establishment of `FTA MAP Forum´: CAs meeting regularly on: -- collective improvement of practical operation of MAP -- work closely with OECD CFA’s WP1 and WP6 -- minimize to the fullest possible extent incidents of double taxation, unintended double non-taxation and taxation otherwise not in accordance with the provisions of applicable tax conventions. 19

20 BEPS Action 14 – October 2015 Report: Aim: to improve effectiveness and efficiency of MAP processes to resolve disputes Key proposals: minimum standards for resolution of treaty disputes [SP] best practices: complementary recommendations [SP] -- Peer-based monitoring system with reporting obligations [JD, TK, JHP] Reflected in proposed amendments to Art 25 and Commentary to Art 25 Countries required to take a position re Art. 25 OECD [JD] 20 countries commit to provide mandatory binding arbitration >> these countries represent 90% of outstanding MAP cases [NT]

21 Fast track arbitration [KvR] O Initiative by Tribute Foundation and Permanent Court of Arbitration (PCA) at the Peace Palace (The Hague, NL) OThe arbitration is conducted in accordance with the PCA Arbitration Rules 2012 subject to such modifications as the Competent Authorities mutually agree. OThe Competent Authorities (CAs) may mutually agree an Arbitral Tribunal of either one or three persons. OThe Tribute Foundation prepared List of Experts OArbitration may regard a bilateral or multilateral dispute. OThe International Bureau of the PCA serves as administrator for the arbitral proceedings. O The Tribute Foundation may advise at request of either or both CAs on the use of preparatory or alternative dispute resolution mechanisms (such as mediation).

22 Oarbitration proceedings only through written pleadings and restricted to page-limited position and reply papers Opossibility of short hearing by telephone/video conference Obased on either “independent opinion” or “last best offer” approaches Otimelines for submissions preferably not to exceed 30 days OArbitral Tribunal delivers its award within 30 days. OArbitral Tribunal provides reasons for the choices it makes in its award, unless the Competent Authorities mutually agree that no reasons are to be given. OThe arbitral award may be made public only with the consent of the Competent Authorities and in such form as the Competent Authorities may mutually agree. OCosts not to exceed a total of EUR 15,000 in case of a sole arbitrator, and EUR 40,000 in case of three arbitrators

Country positions (all) Each panel member discusses briefly his country’s position regarding: – BEPS Action 14 – Fast-track arbitration Questions ?