By: Jay Nibbe, EY Global Vice Chair Tax
In 1776, Adam Smith described his four canons of good taxation: equity, convenience, efficiency — and certainty.
Nearly 250 years later, the world continues to struggle with tax certainty.
With trade inextricably linked across borders, there are more sources of uncertainty than ever.
“We need a fair and consistent approach to allocating profits to tax jurisdictions around the world. And we need to preserve the cornerstone principle that double taxation should be avoided.“
When tax uncertainty exists — arising from unstable tax regimes, unpredictable tax administration policies or other sources — companies do not invest, invest less or invest elsewhere.
Governments are then left with lower and less predictable revenue streams.
Moving into a post-BEPS (base erosion and profit shifting) world, equilibrium remains out of reach.
Companies are seeing more robust audit approaches, while tax authorities often consider certain tax planning behaviors of companies to be too aggressive.
Finding a better way
As taxpayers and governments seek certainty, it is in the interest of both to find better ways to resolve disputes, or even better, to avoid them altogether.
Solutions should provide taxpayers with a stronger right to effective resolution mechanisms.
And they should also be timely: justice delayed is justice denied.
When excessively postponed, even good or fair outcomes on the principles are unsatisfying and costly.
Efforts to bring certainty earlier in the process, such as rulings on tax arrangements, advance pricing agreements (APAs) and cooperative compliance, are valuable.
But there is more work to be done.
Recent decisions by the European Commission involving State aid in the context of a tax ruling from tax authorities call into question the reliance one can put on government rulings, casting a pall of uncertainty over well-established processes in many EU countries.
There is also more room for improvement with mutual agreement procedures (MAPs), a process by which countries can resolve cross-border disputes.
Taxpayers can request a MAP but cannot compel jurisdictions to pursue or reach an agreement.
Most do not set a time frame, and taxpayers have very little participation in or visibility over the process.
More mandatory arbitration between jurisdictions would also help improve certainty.
The multilateral instrument
In November 2016, the Organisation for Economic Co-operation and Development (OECD) released a multilateral instrument to implement tax treaty-related BEPS recommendations, including a provision enabling (but not requiring) countries to include mandatory binding arbitration in their tax treaties.
More than 100 countries have agreed in principle but only 20 have committed to implement mandatory arbitration in their bilateral tax treaties.
But MAPs and mandatory arbitration alone are not enough.
Neither these processes nor voluntary arbitration has sufficient transparency or taxpayer involvement to prevent double taxation.
The good news is that the G20 and the OECD are now focused on the need to improve tax certainty, and a recent OECD survey asked businesses for detailed input about sources of uncertainty and suggestions for solutions.
The OECD is pushing for more jurisdictions to commit to mandatory binding arbitration.
Its agenda also includes promoting the value of cooperative compliance and APAs.
Further work on a broader arbitration process would also help.
Searching for the three c’s
It is said that businesses crave three c’s:
Nothing is truer when it comes to taxes, but governments benefit as well.
We need a fair and consistent approach to allocating profits to tax jurisdictions around the world.
And we need to preserve the cornerstone principle that double taxation should be avoided.
In this important period of global transformation in the taxation systems around the world, let the dialogue for tax certainty continue to be a priority.