Trends in cross-border tax controversy: multilateralism rising

In June this year, I had the pleasure of participating in a panel at EY’s 2021 EMEIA Transfer Pricing Forum entitled: ‘Trends and developments in transfer pricing controversy: multilateralism rising’. During this panel, Luis Coronado, Juliane Sassmann and I discussed a shared view that multilateralism, in the form of increased cooperation, coordination and communication between tax administrations is increasingly becoming the norm in cross-border tax controversy. In the weeks since our panel session, I have found myself increasingly reflective on the future of cross-border tax controversy in this multilateral world. Outlined below are some of the key topics Luis, Juliane, and I discussed on the panel, as well as my own thoughts on how the growth of multilateralism has, and will continue to, impact cross-border tax controversy.

Changes to the landscape prompting multilateral engagement

We opened our panel session with a discussion about the international tax enforcement landscape – which has seen continued globalization of business operations, new and complex ways of doing business, a shift in public sentiment, and pressure on public finances. These various forces have already resulted in, and continue to produce, significant changes to tax policy and administration. In the face of these challenges, tax authorities are increasingly using multi-sided analyses, expanding their use of exchange of information, and participating more in both formal and informal collaboration. For example, some 162 jurisdictions have now signed up to the Global Forum on Transparency and Exchange of Information for Tax Purposes – which has the stated purpose of tackling tax evasion through monitoring, reviewing, and assisting with the implementation of tax transparency and exchange of information (EoI) programs.[1] Similarly, the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration (FTA), which counts amongst its members 53 tax administrations from advanced and emerging markets, [2] leads the way when it comes to multilateral engagement and collaboration between tax authorities and taxpayers.

Where has multilateralism already had an impact

In seeking to explore where and how multilateralism has impacted global tax administration with respect to both transfer pricing and broader cross-border tax controversy, we discussed five broad but distinct areas which have experienced significant change in recent years:

Transparency and exchange of information: This has been an area of considerable growth and focus since the OECD first released its 2015 Action 13 and Action 5 final reports, advocating for the development and exchange of country-by-country (CbC) reports for multinationals and the exchange amongst tax authorities of taxpayer-specific rulings respectively.[3] In the years since, the European Union (EU), for example, has introduced its own rulings sharing program,[4] introduced mandatory reporting of cross-border arrangements,[5] and recently agreed on the public reporting of CbC information.[6] Mexico and Argentina have similarly set up cross-border transaction reporting regimes,[7] which, in the case of Argentina, can also be seen as part of the OECD-sponsored 2018 Punta del Este declaration on reforming tax co-operation and transparency in Latin America which currently includes 13 signatory jurisdictions.[8]

Policy has also been reflected in practice, where we are observing exchange of information being regularly utilized by tax administrations, particularly in transfer pricing audits. For example, the OECD reported that nearly 100 countries carried out automatic exchanges of information in relation to 84 million financial accounts, covering total assets of EUR10t in 2019, which represents information on nearly double the number of accounts and assets than was exchanged in 2018.[9] Similarly, the drive towards transparency has started to impact the tax compliance obligations of multinationals – for example, Australia has introduced a ‘Reportable Tax Position’ schedule which requires large public and multinational groups to disclose uncertain tax positions as part of their tax return preparation process.[10] Likewise, the UK government ran a public consultation from March to June 2021 on whether to introduce additional transparency-oriented transfer pricing compliance obligations for taxpayers including, amongst other potential options, the idea of requiring an ‘Evidence Log’ where taxpayers are required to substantiate key factual matters as part of a their annual filing obligations.[11]

Advance pricing agreements (APAs): Since the 2015 Base Erosion and Profit Shifting (BEPS) reports and investigations by the European Commission into ruling practices, arguably, we have seen a clear policy shift away from unilateral APAs and towards bilateral and, more recently, multilateral, APAs. By way of example, the UK expressly states that they are less likely to accept requests for unilateral APAs into their APA program.[12] Similarly, the US has a published preference for bilateral and multilateral APAs and requires taxpayers to justify requests for a unilateral APA where the same matter could be resolved bilaterally or multilaterally,[13] whilst Singapore warns that unilateral APAs offer a lower level of protection against double taxation and consequently advises taxpayers to seek bilateral APAs wherever possible.[14] This adds to the countries which had expressed reservations regarding unilateral APAs years before the BEPS reports were issued – for example, Germany made the following observations in the 2007 ‘Report prepared by the EU Joint Transfer Pricing Forum’:

“Germany does not agree with the statement in paragraph 104 that a unilateral APA reduces the risk of double taxation. Germany also observes that its domestic legislation does not allow unilateral APAs and that it is not prepared to enter into APA negotiations with another Member State when the other Member State has already concluded a unilateral APA concerning the same transactions and taxpayers.”[15]

Beyond the now well-established policy preference for bilateral APAs, multilateral APAs have also started to become a favored option by certain taxpayers in the consumer products and technology sectors, despite their use traditionally being somewhat more limited to the financial services sector. The FTA, as part of its 2020 Plenary Session communique, has stated that its member tax administrations will “Continue to work to identify how greater tax certainty can be provided…through the greater use of multilateral APAs…”[16]

Mutual Agreement Procedures (MAPs): This is an area where the OECD has acknowledged an increasing need for multilateralism.[17] Demand for MAP is strong and increasing - 2,690 MAP cases were started in 2019,[18] representing an 80% increase on the number of cases started in 2016.[19] In this regard, it should be noted that Action 14 and the peer review process has resulted in some significant improvements to the MAP process, the OECD also states that “more needs to be done”.[20] Further, given the increasing complexity of supply chains and operating models as well as the greater reliance on multi-sided transfer pricing analyses, there is increasing demand (and need) for multilateral MAPs. However, this is an area where there is a general desire for international guidance and clarity as to how these processes should and will operate.[21] Both the FTA, and the OECD more broadly, has announced that the continued development of multilateral MAP is an area of continued focus.[22] Guidance at the domestic level can be limited though some countries have produced guidance that specifically references multilateral resolution of MAP cases.[23] Given the ever-increasing interconnectedness of multinational enterprises’ (MNEs’) business affairs and the focus of the private and public sector on obtaining and providing tax certainty, it can be reasonably expected that the demand for multilateral MAPs will continue to build.

International Compliance Assurance Programme (ICAP) which, through the continuing collaboration of FTA members, has now been migrated from two successful pilot projects into a fully-fledged program open to all 53 FTA member tax administrations.[24] ICAP facilitates open and cooperative upfront multilateral engagement between large MNE groups and tax administrations in jurisdictions where the MNE groups have business activities. At the time of writing, 22 jurisdictions have signed up to ICAP with additional tax jurisdictions expected to confirm participation in the future.[25]

Joint and simultaneous audits have also seen a rapid rise since the idea was first officially broached by the FTA in 2010,[26] with more than 200 actual joints audits believed to have been conducted or initiated as at May 2020.[27] The German Federal Central Tax Office, which initiated nearly half of the aforementioned 200 joint audits,[28] states that joint audits can be a “time-saving and effective” means of providing “legal certainty and planning security” in the early stages of a potential dispute.[29] We are seeing a rise in joint audit activity, with both tax administrations and taxpayers being interested in pursuing joint audits depending on the situations.

What does this mean for cross border tax controversy strategy?

Irrespective of whether taxpayers are ready for it, multilateralism is rising and it is incumbent on taxpayers to determine which multilateral controversy management approaches will proactively ensure they are taking consistent positions, obtaining advance certainty, accelerating resolution of disputes, increasing information sharing, and lessening their risk of double taxation.

By embracing new or emerging tools for multilateral engagement, such as ICAP or joint audits, as well as taking fresh and globalized approaches to MAP and APA strategies, taxpayers may identify and resolve new transnational risks proactively rather than waiting for disputes to arise.

Regardless of the specific approach ultimately adopted, the increase in multilateral actions by tax authorities requires an increase in the consideration of multilateral approaches by taxpayers.

If you would like to discuss, please feel free to contact me at joel.cooper@uk.ey.com.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

[1] OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes, access July 2021.

[2] OECD FTA, Overview, accessed July 2021.

[3] OECD, Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 - 2015 Final Report and Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 – Final Report, both dated October 2015.

[4] See European Commission press release, Council Directive (EU) 2015/2376, accessed August 2021.

[5] See EY article, Are you ready for DAC 6?, dated 26 May 2020.

[6] See EY article, EU co-legislators reach agreement on public CbCR, dated 9 June 2021.

[7] See EY Tax Alert, Argentina implements mandatory disclosure rules, dated 21 October 2020; and EY Tax Alert, Mexico’s Tax Administration publishes regulations on reporting under mandatory disclosure rules, dated 2 December 2020.

[8] OECD, Punta del Este Declaration - A call to strengthen action against tax evasion and corruption, accessed August 2021.

[9] See OECD press release, International community continues making progress against offshore tax evasion, dated 30 June 2020.

[10] See EY Tax Alert, Australian Taxation Office proposes expansion of Reportable Tax Position schedule requirements to private groups, dated 11 July 2019.

[11] See EY Tax Alert, UK issues new consultation on transfer pricing documentation, dated 6 April 2021.

[12] HM Revenue and Customs, Statement of Practice 2 (2010), as updated on 12 July 2019, paragraphs [12]-[13].

[13] Internal Revenue Service, Revenue Procedure 2015-41, page 19.

[14] Inland Revenue Authority of Singapore, Transfer Pricing Guidelines (Sixth Edition), paragraphs [10.15] and [10.16].

[15] European Commission, Report prepared by the EU Joint Transfer Pricing Forum, dated 26 February 2007, page 27.

[16] OECD FTA, 2020 FTA “Amsterdam” Plenary Communique, accessed August 2021, page 3.

[17] See EY Article, OECD holds second Tax Certainty Day, dated 3 December 2020.

[18] OECD, Mutual Agree Procedure Statistics for 2019, accessed August 2021.

[19] OECD, Mutual Agreement Procedure Statistics for 2016, accessed August 2021.

[20] OECD, Public Consultation Document, BEPS Action 14: Making Dispute Resolution Mechanisms More Effective – 2020 Review, page 2.

[21] See EY comment letter, Comments on Public Consultation Document – BEPS Action 14: Making Dispute Resolution Mechanisms More Effective – 2020 Review, dated 11 January 2021.

[22] OECD FTA, 2020 FTA “Amsterdam” Plenary Communique, accessed August 2021, page 3.

[23] See, for example: Colombian National Directorate of Taxes and Customs, Resolution Number 85, as released on 21 August 2020 at paragraph [17].

[24] See EY Tax Alert, OECD Forum on Tax Administration releases new handbook for International Compliance Assurance Programme (ICAP), dated 24 February 2021.

[25] OECD, OECD International Compliance Assurance Programme (ICAP), accessed August 2021.

[26] OECD, Joint Audit Report, dated September 2010.

[27] Diana Criclivaia, Joint Audits – Ten Years of Experience: A Literature Review, (World Tax Journal, August 2020) at page 666.

[28] Ibid.

[29] German Federal Tax Office, Joint Audit (direct taxes), accessed July 2021.