Explanatory Memorandum
(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)Chapter 5 - Improving dispute resolution
Outline of chapter
5.1 This Chapter explains the way in which the Multilateral Convention will modify Australia's Covered Tax Agreements to strengthen the effectiveness and efficiency of the mutual agreement procedure (MAP) with respect to the resolution of disputes arising under tax agreements.
Context of amendments
5.2 The 2013 OECD/G20 BEPS Action Plan recognised that measures taken to address BEPS needed to be complemented with methods to provide greater certainty and predictability for business.
5.3 Recognising that improving the MAP in resolving treaty-related disputes is an integral component of the work on BEPS, the BEPS Final Report on Action 14 (Making Dispute Resolution Mechanisms More Effective) identified the following elements of a minimum standard to ensure the timely, effective and efficient resolution of treaty-related disputes:
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- jurisdictions should ensure that obligations under a tax agreement related to the MAP are fully implemented in good faith and that MAP cases are resolved in a timely manner;
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- jurisdictions should ensure that administrative processes promote the prevention and timely resolution of treaty-related disputes; and
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- jurisdictions should ensure that taxpayers can access the MAP when eligible.
5.4 The minimum standard is complemented by a set of best practices that jurisdictions are encouraged to adopt. The best practices are not mandatory because they are predominantly subjective or qualitative in nature, rather than involving clear and objective criteria for implementation.
5.5 The BEPS Final Report on Action 14 also considered the implementation of mandatory binding arbitration in jurisdictions' tax agreements to complement the MAP. Chapter 6 of this explanatory memorandum covers mandatory binding arbitration.
5.6 The BEPS Final Report on Action 14 recommended that to ensure its MAP obligations are fully implemented in good faith and in a timely manner, jurisdictions should:
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- include Articles 25(1) to (3) (MAP) of the OECD Model in their tax agreements; and
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- provide access to the MAP in transfer pricing cases and implement the resulting mutual agreements.
5.7 Article 16 of the Multilateral Convention implement these Action 14 recommendations and is a BEPS minimum standard.
5.8 Article 17 implements the Best Practice of providing a mechanism to make corresponding adjustments unilaterally (i.e. without requiring the use of the MAP).
Summary of new law
5.9 Part V (Improving Dispute Resolution) of the Multilateral Convention contains the following rules to provide a more effective dispute resolution procedure so that actions to counter BEPS do not inadvertently lead to double taxation or cause unnecessary uncertainty for taxpayers. These rules are:
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- Article 16 - MAP; and
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- Article 17 - corresponding adjustments.
5.10 Article 16 allows taxpayers to present cases involving the application of a Covered Tax Agreement to the competent authority of either jurisdiction, regardless of any domestic law remedies.
5.11 Adopting Article 16 is mandatory. Australia has provisionally indicated that it will adopt the Article without reservation.
5.12 Article 17 obliges a Contracting Jurisdiction to make an appropriate adjustment to the tax of a resident enterprise. Such adjustments are made to reflect an adjustment to the profits (and resultant tax) of an associated enterprise resident of the other Contracting Jurisdiction that is made by the competent authority of that other jurisdiction.
5.13 Australia has provisionally indicated that it will make the reservation contained in Article 17(3)(a) to prevent Article 17 from applying to Covered Tax Agreements that already contain equivalent rules.
Detailed explanation of new law
Improving MAP
5.14 Article 16 is a mandatory provision of the Multilateral Convention that aims to ensure the effective and timely resolution of disputes regarding the interpretation or application of tax agreements.
5.15 Article 16 contains the following six elements:
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- Element one (first sentence of Article 16(1)) - allows a taxpayer the option to present a case to the competent authority of either Covered Tax Agreement partner jurisdiction if the taxpayer believes they are not (or will not be) taxed in accordance with the terms of the Covered Tax Agreement, irrespective of any domestic law remedies;
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- Element two (second sentence of Article 16(1)) - limits the time in which taxpayers can request MAP assistance to a period of three years. This period commences on the first notification of the action that results in taxation that is not accordance with the Covered Tax Agreement;
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- Element three (first sentence of Article 16(2)) - obliges the respective competent authorities to endeavour to resolve the case by mutual agreement. This obligation only applies where the competent authority that is presented with the case considers the case to be justified and is unable to arrive at a satisfactory solution itself;
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- Element four (second sentence of Article 16(2)) - obliges any resulting mutual agreement to be implemented notwithstanding any time limits in the domestic law;
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- Element five (first sentence of Article 16(3)) - obliges the respective competent authorities to endeavour to resolve by mutual agreement any difficulties or doubts arising from the interpretation or application of the Covered Tax Agreement; and
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- Element six (second sentence of Article 16(3)) - allows the competent authorities to consult for the elimination of double taxation in cases not provided for in the Covered Tax Agreement.
[Articles 16(1) to (3) of the Multilateral Convention]
5.16 Articles 16(1) to (3) broadly replicate Articles 25(1) to (3) (MAP) of the OECD Model.
5.17 The effect of each of those elements on each of Australia's Covered Tax Agreements depends on the symmetrical application of the different compatibility clauses, reservations and associated notification requirements.
Element one - Presentation of a case to either competent authority if taxpayer considers they are not (or will not be) taxed in accordance with the terms of the Covered Tax Agreement
5.18 The first sentence of Article 16(1) of the Multilateral Convention enables a person (a taxpayer) to present a case under the MAP to either of the two competent authorities under a Covered Tax Agreement. That sentence will replace provisions of Covered Tax Agreements that only allow a person to present a case to the competent authority of the person's jurisdiction of residence (as is currently the case in all of Australia's proposed Covered Tax Agreements). That sentence will also replace provisions of Covered Tax Agreements that only allow a person to present such a case to the competent authority of the person's jurisdiction of nationality. [Article 16(4)(a)(i) of the Multilateral Convention]
5.19 If a Covered Tax Agreement does not contain such a provision, the first sentence in Article 16(1) of the Multilateral Convention will be added to the Covered Tax Agreement. [Article 16(4)(a)(i) of the Multilateral Convention]
5.20 Australia has provisionally indicated that the relevant provisions are contained in all of Australia's Covered Tax Agreements and therefore could be replaced by the first sentence of Article 16(1).
5.21 The replacement of such a provision is only effective if both Parties to a Covered Tax Agreement do not make the reservation in Article 16(5)(a) (to not apply the first sentence of Article 16(1) to its Covered Tax Agreements) and notify the Depositary of the affected provisions to be replaced. [Article 16(6)(a) of the Multilateral Convention]
Element two - Three year limit to request MAP where taxpayer believes they are not (or will not be) taxed in accordance with the terms of the Covered Tax Agreement
5.22 The second sentence of Article 16(1) of the Multilateral Convention provides that a person must present a case under the MAP within three years from the date on which the person was first notified of an action resulting in taxation not in accordance with the relevant tax agreement. That sentence will replace provisions of Covered Tax Agreements that provide for a time period (during which cases may be presented) of less than three years or that do not provide for any time period. [Article 16(4)(a)(ii) of the Multilateral Convention]
5.23 The provision will be replaced if each Party to the Covered Tax Agreement does not make the reservation in Article 16(5)(b) (to not apply the second sentence of Article 16(1) to its Covered Tax Agreements) and notifies the Depositary of the provisions to be replaced. Such reservations can only be made where the jurisdiction will nevertheless allow the person to present the case within a period of at least three years. [Article 16(6)(b)(i) of the Multilateral Convention]
5.24 Australia has provisionally indicated that provisions providing for a time period (during which cases may be presented) of less than three years are contained in Australia's tax agreements with Italy, Malaysia and Philippines and, thus, those provisions could be replaced by the second sentence of Article 16(1).
5.25 However, the second sentence of Article 16(1) will not modify Australia's Covered Tax Agreements that contain provisions that allow a person a period of at least three years to present such a case to the competent authority, if Australia notifies the Depositary of those Covered Tax Agreements and the relevant provisions. [Article 16(6)(b)(ii) of the Multilateral Convention]
5.26 Australia has provisionally indicated that all of its tax agreements except those with Canada, Italy, Malaysia, Philippines, Singapore and the United Kingdom have provisions that require taxpayers to present such cases within a period of at least three years.
5.27 Subject to other jurisdictions' reservations, the rules contained in the second sentence of Article 16(1) ensure that taxpayers have three years (or a longer period provided by a Covered Tax Agreement) to present such a case to the competent authority of either jurisdiction of a Covered Tax Agreement.
Element three - Obligation to endeavour to resolve an objection
5.28 The first sentence of Article 16(2) of the Multilateral Convention obliges a competent authority to endeavour to resolve a case by mutual agreement with the competent authority of the partner jurisdiction where the receiving competent authority considers the case to be justified and is unable to arrive at a satisfactory solution itself. That sentence will be added to Covered Tax Agreements that do not contain corresponding provisions. [Article 16(4)(b)(i) of the Multilateral Convention]
5.29 The first sentence of Article 16(2) will only be added to a Covered Tax Agreement if both Parties to the Covered Tax Agreement notify the Depositary of the affected Covered Tax Agreements. [Article 16(6)(c)(i) of the Multilateral Convention]
5.30 Australia has provisionally indicated that the relevant provision is not contained in its tax agreements with Mexico, Singapore and the United States. Thus those tax agreements could be modified to include the first sentence of Article 16(2), to ensure that relevant disputes are considered jointly by the two competent authorities.
5.31 As per paragraph 8 of the Commentary on Article 25 (MAP) of the OECD Model, the MAP is a special procedure outside the domestic law. As such a taxpayer's decision to present a case to a competent authority does not deprive a taxpayer of any review or appeal rights available under domestic law (see also paragraph 7 of the Commentary on Article 25 of the OECD Model).
Element four - Disregard time limit when implementing a resulting mutual agreement
5.32 The second sentence of Article 16(2) of the Multilateral Convention obliges the relevant competent authorities to implement a mutual agreement arising from a taxpayer's case without regard to any domestic law time limits that might otherwise apply to such tax disputes. That sentence will be added to a Covered Tax Agreement that does not contain a corresponding rule. [Article 16(4)(b)(ii) of the Multilateral Convention]
5.33 The addition of that provision is only effective if both Parties to the Covered Tax Agreement do not make the reservation contained in Article 16(5)(c) (to not apply the second sentence of Article 16(2) to its Covered Tax Agreements) and notify the Depositary of the affected Covered Tax Agreements. Such reservations can be made if the jurisdiction will implement the mutual agreement notwithstanding any domestic time limits or accept, through its bilateral tax agreement negotiations, provisions applying time limits to initiating transfer pricing adjustments. [Article 16(6)(c)(ii) of the Multilateral Convention]
5.34 Australia has provisionally indicated that the relevant provision is not contained in Australia's tax agreements with Belgium, Canada, Chile, Fiji, Ireland, Italy, Malaysia, Mexico, Philippines, Singapore, Switzerland, Thailand and the United Kingdom. Thus those tax agreements could be modified to include the second sentence of Article 16(2).
Element five - Obligation to endeavour to resolve interpretation or application of a Covered Tax Agreement
5.35 The first sentence of Article 16(3) of the Multilateral Convention obliges the competent authorities to endeavour to mutually resolve any difficulties or doubts concerning the interpretation or application of the relevant Covered Tax Agreement. That sentence will be added to Covered Tax Agreements that do not contain corresponding provisions. [Article 16(4)(c)(i) of the Multilateral Convention]
5.36 The addition of such a provision is only effective if both Parties to a Covered Tax Agreement notify the Depositary of the affected Covered Tax Agreements. [Article 16(6)(d)(i) of the Multilateral Convention]
5.37 In its provisional notifications, Australia has not indicated that any of its tax agreements do not contain such a provision.
Element six - Consultation in cases not provided for in a Covered Tax Agreement
5.38 The second sentence of Article 16(3) of the Multilateral Convention authorises the competent authorities to consult together in order to eliminate double taxation in cases not provided for by the relevant Covered Tax Agreement. That sentence will be added to Covered Tax Agreements that do not contain a corresponding provision. [Article 16(4)(c)(ii) of the Multilateral Convention]
5.39 The addition of such a provision is only effective if both Parties to a Covered Tax Agreement notify the Depositary of the affected Covered Tax Agreements. [Article 16(6)(d)(ii) of the Multilateral Convention]
5.40 Australia has provisionally indicated that relevant provisions are not contained in Australia's tax agreements with Austria, Belgium, Chile, China, Czech Republic, Denmark, Fiji, India, Indonesia, Ireland, Italy, Kiribati, Korea, Malaysia, Malta, Netherlands, Papua New Guinea, Philippines, Poland, Romania, Singapore, Slovak Republic, Spain, Sri Lanka, Sweden, Thailand, the United States and Vietnam. Thus those tax agreements could be modified to include the second sentence of Article 16(3).
5.41 Based on the known or proposed adoption positions of other Signatories to the Multilateral Convention, Article 16 is expected to modify Australia's tax agreements with: Argentina, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Fiji, Finland, France, India, Ireland, Italy, Japan, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Norway, Poland, Romania, Russia, Singapore, the Slovak Republic, Spain, Turkey and the United Kingdom.
Making corresponding adjustments in relation to transfer pricing
5.42 Article 17 of the Multilateral Convention applies to the taxation of cross-border business transactions between associated entities. All of Australia's tax agreements include an article dealing with the profits of associated enterprises and also describe the circumstances in which two enterprises are considered to be associated.
5.43 Article 17(1) of the Multilateral Convention obliges the competent authority of a Party to make an appropriate downward adjustment to the profits (and resulting tax charged) of a resident enterprise to reflect a corresponding upward adjustment by the competent authority of the other Party to the profits (and resulting tax charged) of an associated enterprise resident in that other Party that is involved in the relevant transaction. [Article 17(1) of the Multilateral Convention]
5.44 This obligation only applies if the upward adjustment is made in accordance with the arm's length principle. [Article 17(1) of the Multilateral Convention]
5.45 Furthermore, in determining the corresponding adjustment, consideration must be given to other provisions of the relevant Covered Tax Agreement and the competent authorities are to consult each other if necessary. [Article 17(1) of the Multilateral Convention]
5.46 The obligation in Article 17(1) will replace a comparable provision in a Covered Tax Agreement or add such a provision if there is no existing provision. [Article 17(2) of the Multilateral Convention]
5.47 Australia has provisionally indicated that it will reserve the right for Article 17 to not apply to its Covered Tax Agreements that already contain such a provision (i.e. all of Australia's Covered Tax Agreements except the agreement with Italy). [Article 17(3)(a) of the Multilateral Convention]
5.48 Based on Australia and Italy's provisional notifications, Article 17 is expected to modify Australia's tax agreement with Italy.