The biggest paradox of curtailing tax avoidance that results from base erosion and profit shifting (BEPS) may put companies in the middle of disputes among multiple countries over which of them has the right to tax the same profit.
The Organisation for Economic Co-operation and Development (OECD) has made it clear its BEPS recommendations aren’t intended to trigger double taxation or worse.
“In this moving landscape, will the competent authorities be able to have a common understanding of the new set of rules?“
But its official body offering taxpayer input — the Business and Industry Advisory Council — has warned that “most countries who have offered a public opinion on the matter seem to have assumed that the implementation of the proposals will increase their tax revenues substantially.”
Controversy on the rise
Competent authorities — government officials tasked with resolving international tax disputes that a business has with multiple countries — are bracing for an uptick in controversy if countries implement BEPS provisions inconsistently.
The number of new mutual agreement procedure (MAP) cases more than doubled to 2,266 in 2014, up from just 1,036 in 2006, according to the OECD.
Many predict a further rise as countries act to protect their tax bases with differing interpretation of BEPS guidelines.
“The challenge will be for governments to handle the increased volume and to resolve issues involving more than two countries,” says Frank Y. Ng, former US competent authority and now a senior member of the EY Tax Controversy and Risk Management Services team, based in Washington, DC.
These tensions may be particularly pronounced when countries at different levels of economic development are involved.
“In this moving landscape, will the competent authorities be able to have a common understanding of the new set of rules?” asks Jean-Pierre Lieb, former competent authority for France, who now leads the EMEIA Tax Policy and Tax Controversy teams in Paris.
“They are very complex, very tactical and the level of understanding will not necessarily be consistent.”
With an ever-growing caseload, competent authorities say they need more resources.
And even if they could get the resources in an era notable for widespread austerity in government budgets, finding people with the right skills remains a challenge.
“It’s not just about hiring people, it’s about hiring people with experience in this area,” explains Siew Moon Sim, EY Singapore Head of Tax, who has 33 years of experience working with competent authorities.
“So we may see tax authorities beefing up their department with experienced personnel, even those from other countries that are more advanced or developed in this respect with competent authorities.”
One option, Sim says, is to seek competent authorities with experience in business.
Where a competent authority is aware of the concerns and viable positions of business, she suggests, the resolution will be smoother.
“It’s not good enough for them to just understand tax concepts only. They also need to understand business better and how business is run so they can get a better feel as to the right amount of tax to collect based on activities, assets and risks linked to the transfer price,” Sim says.
While the problems for competent authorities will not be identical in every jurisdiction, experience, resources and policy will change how competent authority negotiations are carried out.
Most agree, however, that businesses and even the most experienced and best-resourced competent authorities face a challenging transition.