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The role of the competent authority proceedings and double taxation resulting from DSTs, minimum tax and other taxes
Axel Bödefeld, Oppenhoff, Cologne
Lori Hellkamp, Jones Day, Washington, DC
Felice D’Acquisto, LMS Studio Legale, Rome
Sandra Knaepen, Centre for Tax Policy and Administration of the Organisation for Economic Co-operation and Development, Paris
Emilie Lecomte, August Debouzy, Paris
Jenni Parviainen, Hannes Snellman, Helsinki
Raoul Stocker, Bär & Karrer, Zürich
Patrick Schmid, Bär & Karrer, Zürich
The panel discussed dispute resolution tools available to address double taxation, with a particular focus on competent authority (CA) proceedings. Considering that the best path for seeking relief can vary depending on the circumstances and jurisdictions involved, the panel addressed key strategies and practical considerations that advisors should be aware of from the perspective of practitioners in multiple jurisdictions.
The structure of this report follows the questions raised in the slides that formed the basis for the panel discussion. Topics not addressed by the speakers, but considered on the slides, are not included in the report.
Sandra Knaepen opened the panel and discussed selected recurring issues with respect to mutual agreement procedures (MAP). These included: (1) access to MAP, (2) the time to resolve an issue, (3) no guaranteed solution but the endeavour to find one and (4) the taxpayers’ perception of MAP being a ‘black box’. She highlighted that the OECD’s Base Erosion and Profit Shifting (BEPS) Action 14 addresses all four issues. Nevertheless, Knaepen reported on issues that still need to be resolved. She then pointed out that beginning in January 2023, there is a new round of peer reviews covering all jurisdictions to the inclusive framework and that this review will also allow taxpayers’ input.
Particular fact patterns or country-specific causes for double taxation
Emilie Lecomte reported on French MAPs regarding double taxation related to capital gains derived by Belgian tax residents from the sale of shares in French real estate companies. She further mentioned MAPs concerning Brazilian technical services to France without a transfer of technology (eg, software maintenance), on which Brazil levies withholding taxes and France refuses to grant a tax credit due to technical services not qualifying as royalties. The same issue has partially been resolved when dealing with Argentina. Lecomte further highlighted that French tax authorities are obliged to report all tax audits resulting in reassessments above €100,000 to French prosecutors.
Regarding Finland, Jenni Parviainen reported that the new Finnish transfer pricing regulations allow the tax authorities more room for interpretation regarding the re-qualification of transactions and, until now, Finland is the only country that has implemented the OECD Treaty Relief and Compliance Enhancement (TRACE) scheme, which has led to more refund requests and could result in more litigation.
Felice D’Acquisto highlighted that Italian tax penalties are outside the scope of MAP and advised on how to prevent them. He then reported that the Italian tax authorities have denied the deduction of management fees based on a re-qualification of the services (benefit test) and, by doing so, has prevented possible MAPs. D’Acquisto mentioned another trend relating to local distributors, where the Italian tax authorities assume the creation of local marketing intangibles solely based on high local advertisement payments to a related company.
Axel Bödefeld reported that Germany has witnessed all the patterns mentioned by the other speakers. He then highlighted the German extraterritorial taxation of intellectual property (IP)-related income and that it is disputed whether such taxation allows access to German MAPs.
Raoul Stocker mentioned that Swiss MAPs are mostly triggered by foreign transfer pricing adjustments and that the Swiss CA resolves approximately 95 per cent of its cases. In Stocker’s experience, the taxpayer’s main problem concerns countries that factually deny access to MAPs by re-qualifying transactions or that treat analogue cases differently depending on the other jurisdiction involved.
Options available for dispute resolutions
Lecomte presented the pros and cons of French domestic litigation vs MAP and highly recommended the initiation in France of both domestic litigation and MAP. She explained that French taxpayers will not receive any interest from the French treasury based on MAP and in case taxpayers’ interest payments or penalties are directly linked to MAP, a separate informal request for relief needs to be filed with the head of the French CA. Lecomte praised the French International Desk that assists French taxpayers facing foreign tax audits. In her opinion, France in general is compliant with BEPS Action 14 and although it does not provide a roll-back period for advance pricing agreements (APAs), the CA will agree to initiate a MAP with the arguments concerning the related APA.
Parviainen discussed the Finnish unilateral tools (ie, pre-emptive discussion and advance ruling) and the cross-border tools (ie, cross-border dialogue and APA). She stated that contrary to APAs, cross-border dialogue is not limited to transfer pricing. However, such dialogue is limited to certain countries (eg, Germany, Estonia, Latvia, Hungary, the Czech Republic, Netherlands, Canada, Austria and Denmark) and other countries will not agree to enter such dialogue (eg, United States (US), Sweden). Furthermore, she mentioned that Finnish MAPs are on hold while domestic litigation is ongoing and that from a Finnish perspective it is possible to combine APAs with MAPs.
D'Acquisto presented the Italian possibility of a tax settlement immediately after a tax audit, where the payment of a third of the penalty is final unless the MAP cancels out the entire Italian tax claim. According to recent Italian case law, standalone domestic litigation became a considerable option in Italian withholding tax cases. For bilateral proceedings, he stated that two thirds of Italian double taxation treaty (DTT) protocols require both domestic litigation and MAP to avoid Italian limitation periods barring the later implementation. In any case, D'Acquisto stressed that domestic litigation should be suspended through a joint request with the Italian CA until the MAP is resolved as court rulings cannot be overruled by MAPs.
Stocker explained that transfer pricing issues in Switzerland are predominantly settled at the domestic level. Where the issue cannot be resolved, he recommended the initiation of a MAP and to trust the experience of the Swiss CA. Stocker further mentioned the positive results in arbitration cases with Germany. Bödefeld confirmed Stocker’s positive experiences with Swiss–German arbitration and praised the arbitration results in APA cases.
Knaepen pointed out that addressing penalties and the suspension of tax collection are part of BEPS Action 14’s best practice, but current revisions are trying to move the issues to the minimum standard.
Bödefeld reminded the audience to consider local regulations/practices, as well as the facts of the case, and to keep these in mind while exploring the options in cross-border cases.
Lori Hellkamp added that in the US a combination of APA and MAP is common and pointed out that administratively appealing domestic assessments in the US might preclude MAPs.
Applicable rules when cases involve a third jurisdiction, PE or hybrid entity
Lecomte stated that for French tax purposes, the permanent establishment (PE) of a foreign company is treated like a French legal entity, including concerning access to MAPs. As she mentioned, this does not apply to undisclosed French PEs. Tax audits revealing such ‘hidden’ PEs automatically lead to an 80 per cent penalty imposed on the reassessed French taxes and preclude access to MAPs.
Regarding Italy, D'Acquisto stated that there are no specific rules for cases involving third jurisdictions. In this context the Italian tax authorities agree to perform trilateral/bilateral MAPs in PE cases, provided that the taxpayer explicitly requests to do so and the relevant DTT is in line with Article 25 of the OECD’s Model Tax Convention (MC). He mentioned that in the past the Italian CA has also approved delegations of MAPs. D'Acquisto reported that in multi-jurisdictional cases, the Italian CA waited until all cases were resolved before allowing implementation, while interest also accrued for the resolved cases.
Stocker reported that the Swiss CA also enters trilateral MAPs. However, he and other speakers pointed out that in multi-jurisdictional MAPs the main issue is aligning the agendas and logistics of the CAs involved. In the case of a Swiss PE of a foreign company involving third country price adjustments, Switzerland has a long-standing practice to request taking over the MAP from the head office's jurisdiction. Bödefeld and Stocker believe that in such cases the procedural rules of the Swiss–third country DTT should apply by consequently applying the assumptions of the attributable income principle (AOA). Knaepen added that the OECD recently published the Manual on the Handling of Multilateral MAPs and APAs (MoMA) and highlighted that multilateral agreements prevent diverging results from multiple bilateral agreements.
Hellkamp reported that the newer US treaties contain a provision addressing fiscally transparent entities and third jurisdiction PEs that may preclude treaty (and therefore MAPs) availability in certain situations. She mentioned that domestic law can lead to the same result in certain cases (eg, hybrid entities, back-to-back lending, etc).
Addressing the adjustment when the matter is resolved
Lecomte stated that French taxpayers must agree to the implementation and must withdraw any domestic appeals. She highly recommended asking for a written confirmation of the agreement.
In Italy, D'Acquisto reported that the CA offers the taxpayer a 30-day period to accept the outcome and, if accepted, the responsible tax office must also file a request to withdraw from any domestic litigation. An additional request to the regional tax office asks for the net adjustments for each fiscal year concerned (including interest and penalties). In any case, Italy does not grant secondary adjustments and does not provide relief if the other jurisdiction grants secondary adjustments. However, a recent court ruling in a transfer pricing case on royalties allowed for the repatriation of a deemed loan without Italian tax consequences.
Parviainen explained that in Finland the taxable income/tax payable (including interest and penalties) is adjusted automatically based on the outcome of the MAP. She further reported that the Finnish domestic statutes of limitation do not restrict a retroactive tax assessment based on a MAP.
It was mentioned by Stocker that in Switzerland MAPs are implemented by way of a decree from the Swiss CA. He reported that some regional tax authorities grant a tax credit for future years in case of an adjustment. In case of a repayment to the taxpayer, there are interest payments due on the respective amount.
Bödefeld reported that the implementation in Germany works quite well and is very similar to the approaches mentioned by the other speakers.
Conclusion and final remarks
At the end, Bödefeld reminded the audience that international trade and business form an important part of a country’s economic wellbeing and reminded the tax authorities that resolving disputes on international taxation is in the interest of all parties involved. Thus, when the OECD makes proposals to its member countries on resolving such disputes, following them is also in their own best interest.