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BEPS Action 14: Making Dispute Resolution Mechanisms More Effective
Gurbachan Singh GSM Law LLP Singapore
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BEPS Action 14 BEPS Action 14 contains a commitment by participating jurisdictions to implement a minimum standard to ensure that treaty-related disputes are resolved in a timely, effective and efficient manner. The minimum standard consists of specific measures that countries will take, including: commitment by countries to a minimum standard access to the mutual agreement procedure (“MAP”); resolving MAP cases within an average timeframe of 24 months; provision of statistics pursuant to an agreed reporting framework; and transparency of rules relating to MAP.
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BEPS Action 14 Taxpayers have used provisions in Bilateral Investment Treaties (“BIT”) or Free Trade Agreements (“FTA”) to resolve tax disputes. The advantage to the taxpayer in initiating tax-related claims under these treaties is that taxpayers can directly bring proceedings against a Contracting State. The taxpayer’s home state is not involved and does not act as a gateway or filter to the taxpayer’s claim.
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Article 25 of OECD Model Tax Convention 2017
Where a person considers that the action 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 the remedies provided by the domestic law of those States, present his case to the competent authority of either Contracting State. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention. The competent authority shall endeavor, if the objection appears 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, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States. The competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in this Convention. The competent authorities of the Contracting States may communicate with each other directly, including through a joint commission consisting of themselves or their representatives, for the purpose of reaching an agreement in the sense of the preceding paragraphs.
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Article 25 of OECD Model Tax Convention 2017
Where, under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of the Convention, and the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within 2 years from the date when all information required by the competent authorities in order to address the case has been provided to both competent authorities, any unresolved issues arising from the case shall be submitted to arbitration if the person so requests in writing. These unresolved issues shall not, however, be submitted to arbitration if a decision on those issues has already been rendered by a court or administrative tribunal of either State. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in domestic laws of those States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph.
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MAP under Article 25 The MAP is targeted at situations where taxpayers are obliged to litigate in each Contracting State in relation to application of the Model Tax Convention (“MTC”). Paragraph 1 makes the MAP available to taxpayers affected, without depriving them of domestic legal remedies. Usually, taxpayers will not be allowed to avail themselves to the MAP and domestic legal remedies simultaneously. Taxpayers will be required to waive their rights under domestic legal remedies, or suspend domestic legal process pending outcome of the MAP. Otherwise, the MAP will be automatically terminated upon delivery of a domestic court judgment.
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MAP under Article 25 The Inland Revenue Authority of Singapore (“IRAS”) has taken the position that, whereas the MAP does not deprive taxpayers of other remedies available in domestic law, taxpayers should inform the respective competent authorities (“CAs”) if the matter is adjudicated through any legal proceedings and the CAs will discuss and decide if the MAP should continue. Where the matter has been determined by Singapore courts or tribunals, IRAS is unlikely to depart from the determination of courts or tribunals.
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MAP under Article 25 Article 25 also provides machinery to enable CAs to consult on economic double taxation, in addition to juridical double taxation, such as Transfer Pricing (“TP”) problems. Paragraph 1 gives the taxpayer the right to apply to the CAs, whether or not domestic remedies are exhausted. Whether or not the claim made by the taxpayer may be subject to litigation under domestic law should not affect the relevant CA’s assessment on whether the claim is eligible for the MAP. Under Paragraph 1, the taxpayer becomes entitled to trigger the MAP as soon a it is probable that the actions of either or both of the Contracting State will result in taxation not in accordance with the MTC. The taxpayer is not obliged to wait till the relevant taxation is actually charged against him.
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MAP under Article 25 Article 25 allows taxpayers to present their case to either Contracting State. The intention is to provide as wide and flexible access to the MAP as possible. It does not preclude the taxpayer from presenting their case simultaneously to both CAs. Under Paragraphs 1 and 2, the relevant CA would be under a duty to consider whether the objection is justified and, if it appears justified, take action to either give the complainant satisfaction by making the justified adjustment or set in motion the MAP. It is unclear from the wording of Article 25 whether the taxpayer has any recourse against the relevant CA where the CA takes the view that the objections do not appear justified or that it has already arrived at a “satisfactory solution” within the meaning of Paragraph 2.
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MAP under Article 25 The three-year period in Paragraph 1 continues to run during any domestic law proceedings. This in effect requires taxpayers to choose between pursuing domestic legal remedies or the MAP and could result in the MAP being inefficiently utilized. If the CA in receipt of taxpayers’ claim is bound by a final decision of the judiciary, the CA may nevertheless present the case to the treaty partner for measures to be taken for the avoidance of double taxation. Under Paragraph 1, if the CA having received the taxpayer’s presentation takes the view that the taxation complained of is due to a measure taken by the treaty partner, it will be incumbent on the said CA to set in motion the bilateral/second stage of the MAP under Paragraph 2. The use of the language “endeavor” in Paragraph 2 entails that the CAs are merely under a duty to negotiate but not under a duty to reach an agreement.
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MAP under Article 25 Where the taxpayer had already brought a suit in the competent court, the CA should accept the taxpayer’s request to defer acceptance of the agreed solution until delivery of the court judgment. It is suggested in the Commentary that where the taxpayer’s suit is pending before a competent court, MAP discussions between CAs of any depth should await the court decision where the MAP solution may be affected by the court decision in one way or another. This principle should also apply in cases where another taxpayer has brought a suit relating to the same legal issue. One difficulty associated with the use of the MAP may be that the CAs in certain jurisdictions may be bound by the final decisions of the courts pursuant to the State’s Constitution. However, Article 27 of the Vienna Convention on the Law of Treaties requires that “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.”
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Arbitration under Paragraph 5 of Article 25
The arbitration process provided by Paragraph 5 is not an alternative, but an extension, to the MAP. It does not constitute an additional recourse to taxpayers who disagree with the solution reached via MAP. The taxpayer cannot apply for the entire dispute to be resolved by mandatory arbitration. Instead, the taxpayer can only apply to resolve issues that remain outstanding from the bilateral MAP between the CAs. The procedural aspects of the arbitration process are expected to be determined in agreement between the CAs.
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Arbitration under Paragraph 5 of Article 25
A taxpayer should not be allowed to pursue the arbitration process if the issues have already been resolved through the domestic process of either Contracting States. Where domestic legal remedies are still available, the CAs may require that the taxpayer agree to suspend those remedies or delay the MAP until the remedies are exhausted. Where a mutual agreement has been reached, the taxpayer may be offered a chance to accept the agreement and renounce any domestic legal remedies, or to reject the agreement and pursue the domestic remedies. Where the taxpayer has exhausted domestic legal remedies, most CAs would consider it impossible to override that judicial decision through MAP, the taxpayer in the circumstances may only pursue the MAP in order to obtain relief of double taxation in the other Contracting State.
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Arbitration under Paragraph 5 of Article 25
Where a mutual agreement is reached before domestic legal remedies have been exhausted, it is normal for the CAs to require, as a condition for the application of the agreement, that the persons affected renounce the exercise of domestic legal remedies that may still exist as regards the issues covered by the agreement. Where there is disagreement about the relative merits of the positions of the two CAs, the case may be helped if the issues are clarified by a mediatory where the mediator could communicate a view of the strengths and weaknesses of each side. If the issue is a purely factual one, the case could be referred to an expert whose mandate would simply be to make required factual determination.
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Arbitration under Paragraph 5 of Article 25
The availability of the MAP as an alternative remedy to domestic judicial proceedings could potentially create inconsistent outcomes within the jurisdiction. Tax uncertainty for taxpayers in analogous circumstances may result notwithstanding that arbitral decisions have no precedential value. Further, the reliance of the MAP may deprive the domestic judiciary of the opportunity to set binding precedents for the jurisdictions and thereby preventing future disputes.
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Taxpayer’s role In general, the person presenting the objection is unlikely to be permitted to participate in the MAP or arbitration process. The express wording of Article 25 of the OECD MTC is silent on the role of the complainant. The IRAS’ position is that taxpayers do not participate in or attend as observers at the negotiation unless they are called upon to make any clarification. The role of the taxpayer is therefore limited to that of presenting the case at the first instance and to satisfy the CAs’ requests for additional information as the MAP negotiation develops.
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Taxpayer’s role Despite the broadening of scope for the invocation of the MAP and the inclusion of mandatory binding arbitration, the MAP remains an opaque process. Once a taxpayer has presented its case to a Contracting State, the procedure takes place at the level of dealings between states, leaving the taxpayer in the dark as to how its claims are progressing or whether its position has been adequately articulated. The inter-state process may also be susceptible to horse trading exercises where two Contracting States have multiple ongoing MAP cases with each other. The taxpayer’s interest may be compromised without its knowledge if the states decide to strike a bargain based on the aggregate levels of taxation in dispute rather than considering each case objectively on its own merits.
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Singapore-India DTA The existing Article 27 of the Singapore-India DTA derives its form from the original 1994 DTA. It has not been amended since. Paragraph 1 of Article 27 restricts its application to taxpayers who are residents of the Contracting States. Paragraph 2 prescribes a higher threshold, compared to Article 25 of the OECD MTC 2017, for triggering the obligation of the CA to invoke the MAP – the CA is obligated to invoke MAP only if it is not itself able to arrive at an “appropriate solution” rather than a “satisfactory solution” The arbitration procedure provided in Paragraph 5 of the OECD MTC 2017 is not available in the existing Article 27. Both Singapore and India are signatories to the Multilateral Instrument (“MLI”). However, Singapore has indicated acceptance of the mandatory binding arbitration under the MLI; India has yet to do the same.
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MAP under the Multilateral Instrument
Article 16 of the MLI contains paragraphs that are in pari materia with Paragraphs 1 through 3 of Article 25 of the OECD MTC 2017. Singapore has indicated reservation in respect of Paragraph 1 of Article 16 on the basis that it intends to meet the minimum standard for improving dispute resolution under the BEPS Package. The effect of the reservation is that only a person resident in a Contracting Jurisdiction or is a national of a Contracting Jurisdiction will be permitted to present a case to the CA of that Contracting Jurisdiction. The CA in receipt of the objection will implement a bilateral notification or consultation with the CA of the other Contracting Jurisdiction for cases not considered justified. India has indicated adoption of a similar position.
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Arbitration under the Multilateral Instrument
Pursuant to Article 18 of the MLI, Contracting Jurisdictions may opt to apply Part VI (i.e. mandatory binding arbitration) of the MLI. Part VI applies only if both treaty partners commit to adopt the special procedures set out in Part VI. As of February 2018, 27 jurisdictions have committed to adopting and implementing the mandatory binding arbitration procedure in their Covered Tax Agreements.
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Arbitration under the Multilateral Instrument
Provisions relating to mandatory binding arbitration in the MLI set out the procedure in greater detail than Article 25 of the OECD MTC 2017. Paragraph 1 of Article 19 is in substance in pari materia with Paragraph 5 of Article 25 of the OECD MTC 2017. Paragraphs 2 through 9 of Article 19 set out an elaborate timeline for the arbitration process.
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Arbitration under the Multilateral Instrument
Singapore has indicated reservations in respect of the arbitration process: Any unresolved issues arising from a MAP case shall not be submitted to arbitration if a decision on the issue has already been rendered by a court or administrative tribunal of either jurisdiction; The arbitration process will terminate if, at any time after a request for arbitration has been made and before the arbitration panel has delivered its decision, a decision concerning the issue is rendered by a court of administrative tribunal of either jurisdiction; Singapore will also apply the confidentiality provision, which provides that each person presenting the case and their advisors must agree not to disclose to any other person any information received from either jurisdiction or the arbitration panel in the course of the arbitration process. India has yet to opt in for the special procedures provided in Part VI.
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Arbitration under the Multilateral Instrument
Singapore has indicated adoption of the “final offer” (also known as “last best offer” or “baseball arbitration”) model for arbitration. Under the “final offer” model, each CA submits a proposed resolution (limited to a disposition of specific monetary amounts or rate of tax charged) for the adoption of the arbitral panel. The arbitral panel will select one of the proposed resolution without stating any rationale or grounds for the decision. The decision will have no precedential value. Singapore remains open to discussion of applying the “independent opinion” model where the relevant treaty partner so reserves. Under the “independent opinion” model, each CA submits all necessary information for the determination of the unresolved issues by the arbitration panel in accordance with the terms of the Covered Tax Agreements and other sources of law. The decision shall contain written grounds and all sources of law relied on, though it will have no precedential value.
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Arbitration under the Multilateral Instrument
The default mode of arbitration under Article 23 of the MLI is the “final offer” model. While this model of arbitration serves to significantly reduce costs and increase the speed of proceedings, arbitrators may be forced to choose from proposals that they do not consider justified. The model is also ill-suited to scenarios where an exact monetary value is not the primary issue in dispute but that qualitative issues are in dispute between the Contracting States. The absence of a rationale for any particular decision also makes the process opaque and increases its susceptibility to bias, particularly where taxpayers are not permitted to participate in the proceedings.
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Arbitration under the Multilateral Instrument
Singapore has also reserved that if the CAs agree on a different resolution of all unresolved issues within three calendar months after the arbitration decision has been delivered then the arbitration decision shall not be binding or implemented.
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Transfer Pricing and MAP
Related entities resident in two separate jurisdictions are required to deal with each other on an arm’s length basis. When related entities fail to transact at arm’s length prices, tax authorities may make transfer pricing adjustment – substituting the price of the transaction with one that would have been charged if the parties were unrelated. Where two or more tax authorities take different positions in determining the arm’s length price for a given transaction, double taxation may occur. Pursuant to Paragraph 2 of Article 9 of the OECD MTC 2017, if a Contracting State makes a transfer pricing adjustment for a certain transaction, the other Contracting State is obliged to make a corresponding adjustment for the same transaction in order to avoid double taxation.
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Transfer Pricing and MAP
If a taxpayer has suffered double taxation, it may take legal remedies in the appropriate domestic forum, or make a request to the relevant tax authority to invoke the MAP pursuant to Article 25 of the OECD MTC 2017. If a taxpayer wishes to avoid future transfer pricing disputes, it may apply for an Advance Pricing Agreement (“APA”) for its related party transactions for future years. An APA can take the form of: a domestic or unilateral APA (an arrangement between the domestic revenue authority and the taxpayer); a bilateral APA (an arrangement between the domestic revenue authority and the CA of the relevant treaty partner); or a multilateral APA (an arrangement between the domestic revenue authority and the CA of two or more relevant treaty partners).
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Transfer Pricing and MAP
Article 17(1) of the MLI is in pari materia with Article 9(2) of the OECD MTC 2017. Where a Contracting State makes a transfer pricing adjustment, the other Contracting State must provide corresponding adjustment. Nonetheless, the minimum standard under Action 14 requires that jurisdictions provide access to the MAP in transfer pricing cases. Singapore has indicated adoption of Paragraph 1 of Article 17 without reservation. India has also opted to include the same.
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