Resolving international tax disputes: The role of the OECD

The dramatic growth of cross-border trade and investment has raised an increasing number of international taxation issues. As economic activity involves more and more countries, questions involving the interaction of national tax systems have increased.

Tax rules which were fashioned in a more closed economic environment can discourage international activity. They can create conflict between countries as to the appropriate tax treatment of an international business and between taxpayers and governments.

Unresolved international tax disputes can undermine co-operation and discourage investment, and so become a serious impediment to global development. Clearly we must try and help ensure that such disputes do not arise and, if they do, provide procedures for resolving them.

Much of the work to date at the OECD has been in helping to fashion substantive principles and practices which can lessen the possibilities of tax conflicts. The Model Convention for the Avoidance of Double Taxation and the Transfer Pricing Guidelines are two of the principal contributions which the OECD has made in this area. These instruments form the bases for global co-operation in dealing with these questions.

But, however well the rules are crafted, there will inevitably be situations where disagreements arise; hence, the need to develop procedures through which these conflicts can be resolved.

Two important initiatives have been undertaken by the OECD Committee on Fiscal Affairs in the procedural area. The first is the development of so-called Advance Pricing Agreements (APAs) to deal with potential disputes. One of the most important issues concerning multinational corporations is the allocation of the overall income from the transactions between the various taxing jurisdictions involved. Generally speaking, large multinational groups that produce or distribute goods or services use subsidiaries and parent companies located in different jurisdictions. The group naturally wishes to calculate its tax liabilities in such a way as to concentrate payments in lower tax regimes.

With internal accounting, global firms can shift profits among companies and lessen their overall tax bill, or even avoid tax in some jurisdictions altogether. However, this “transfer pricing” obviously raises a double-edged problem: no tax authority wishes to be short-changed from legitimate tax revenue, and no business wants to be double-taxed by different governments for the same profit.

The Transfer Pricing Guidelines provide a framework to help authorities and businesses to attribute to each jurisdiction in which related companies do business the amount of income which would have been generated if the parties had been acting as quite separate and unrelated businesses. But applying these “arm’s length” standards in concrete situations is difficult and complex, and can still lead to disagreements, even costly and protracted litigation.

This is where the Advance Pricing Agreement procedure comes in. The multilateral APA process allows the taxpayers and the governments involved to reach agreement in principle on the appropriate taxation methods to apply to a particular case before the transaction takes place. The business submits to the tax authorities the economic information necessary to determine the exact nature of the underlying transactions and the tax authorities, using the various approaches developed in the Transfer Pricing Guidelines, can then agree on the appropriate methodology to apply to the case.

The APA does not settle all of the details as to how the transaction will be taxed, but simply establishes the basic framework by which the transactions will be analysed. APA builds trust between the parties: the likelihood of double taxation is greatly diminished and the jurisdictions involved can feel satisfied about their share of the tax revenue likely to be generated from the transactions.

Despite all this, costly disputes inevitably arise, which is why the OECD is working to improve the procedural mechanisms. The present Mutual Agreement Procedure (MAP) is a dispute resolution process laid out in the OECD Model Tax Convention and incorporated in bilateral tax treaties. Under the MAP process, taxpayers who are subject to potential double taxation can ask the countries involved to meet together to try to resolve the dispute over taxing rights.

MAP has worked effectively, but is increasingly being put under strain because of the sharply rising volume and complexity of cases it has to deal with. A review of the dispute resolution process in the tax area is now in progress. It is clear that the MAP process will continue to be the basic mechanism for the resolution of international tax disputes. However, there are a number of areas where the existing procedures can be improved and the work has highlighted situations in which obstacles to the use of the MAP can be eliminated.

In particular, as our consultations with the public have pointed out, it is important to ensure that the MAP process operates in an open and transparent fashion. One key step to improving the transparency of the process was taken in April 2004 by posting Country Profiles on MAP used by OECD countries on the OECD website (see references). Non-OECD countries will be invited to provide their profiles on the website too.

In addition, we are looking in some detail at a range of supplementary dispute resolution techniques, which can help to ensure that international tax disputes are brought to a satisfactory conclusion. These techniques could include the possibility of involving special mediators to help resolve difficult cases and arbitration procedures to help achieve a final and consistent resolution of outstanding cases. A possible structure for such procedures is being developed for use by those countries wishing to adopt arbitration procedures in their bilateral conventions.

The OECD is a consensus organisation and does not generate “hard law” but principles and agreed guidelines. Under this approach, it is unavoidable that differences in interpretation and application will arise. As a result, it is equally important to ensure that there is a well-functioning procedural mechanism to deal with tax disputes when they do arise.

References

OECD (1999), Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Paris.

OECD (2002), Model Tax Convention on Income and on Capital, Volumes I and II: Update 2002, Paris.

Neighbour, J. (2002), “Transfer pricing: Keeping it at arm’s length”, OECD Observer No. 230, January 2002.

©OECD Observer No 243, May 2004




Economic data

GDP : +0.5%, Q4 2014
Employment rate: 65.9%, Q4 2014
Annual inflation : 0.57% Feb 2015
Trade : -3.0% exp, -3.7 imp, Q4 2014
Unemployment : 7.022% Feb 2015
More moderate expansion ahead? Composite leading indicators
Updated: 23 Apr 2015

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Today, after three years of drought, California is in the midst of a full-blown political and environmental crisis, with restrictions imposed across the state, reports the Financial Times.
  • Why is the gap between rich and poor growing despite rises in GDP? Do benefits help? Does aid work? (The Guardian)
  • Lack of water holding back Asian growth In Asia, the world’s most dynamic region with the fastest economic growth, 75% of countries face serious water shortages.
  • ADB water
  • Greek finance minister Yanis Varoufakis expressed its scepticism towards the Eurozone’s institutions and gave ideas for ways forward. "Greece must become reformable again", Yanis Varoufakis said.
  • Business brief: Israel's water
  • #OECD360: Your country in figures.
  • How to ensure transparency in public procurement? Read Cobus de Swardt's article on OECD Insights.
  • Asia to maintain a strong 6.3% growth rate in 2015 and 2016, according to the Asian Development Bank
  • After three decades of extraordinary economic development, China is shifting to a slower and more sustainable growth path, according to the OECD's latest Economic Survey of China.
  • In pursuit of the American Dream
  • Iceland's strong recovery stems from the good use of its natural resources, the energy sector and tourism according to Peter Dohlman, IMF Mission Chief for Iceland.
  • cyclone
  • Government representatives and experts from around the world are gathering in Japan this week to develop a post-2015 framework for global disaster risk reduction. The World Bank and the Global Facility for Disaster Reduction and Recovery (GFDRR) will share expertise at the conference.
  • Switzerland’s recent moves towards greater tax transparency were welcomed by the Global Forum on Transparency and Exchange of Information for Tax Purposes, based at the OECD, as a boost to international efforts to end tax evasion. Work will continue with Switzerland, notably on implementation, in 2015.
  • Help bridge the gap between business integrity policies & practices:participate in this new OECD survey by clicking on the image.
  • What can we do to promote better literacy skills for all? Read Andreas Schleicher's latest blog on oecdeducationtoday.
  • pisa
  • Secretary General Angel Gurría describes the Programme for International Student Assessment (PISA) as a useful tool to enhance educational systems but states that improving a country's ranking should not be a goal per se. Article in Spanish by El País.
  • [VIDEO] Although many countries have made great progress in narrowing gender gaps in education, new challenges are looming.
  • 5 things you might not know about the state of Amazonas. The World Bank identifies the main colossal challenges Brazil's biggest state is facing.
  • Gender mainstreaming: young French lady working in an engine assembly plant. Women and men in the same boat when it comes to job insecurity. © Raphaël Helle / Signatures / La France VUE D'ICI
  • The Asian Development Bank together with the International Labour Organization challenge the concept of women's work in Asia and the Pacific.
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.
  • The 5th Anti-corruption conference for G20 governments and business in Istanbul on 6 March will address how all businesses can play their part in contributing to growth and investment, and can operate with clean hands in a safe environment.
  • Success story. Discover the story of this young Ethiopian woman who launched a successful business in the footwear industry and became a UN Goodwill Ambassador for Entrepreneurship.
  • Transports in Asia. The Asian Development Bank advocates sustainable transport in a continent where vehicle ownership is perceived as a sign of social success.
  • Vote for your favourite photograph! This World Bank #EachDayISee photo contest aims to display visual stories from all over the world through which people express what they would like to see changed and improved.
  • Why is investment so low in the euro area? This short IMF blog post gives you an insight into the causes of the euro-zone's drastic decline in investment.
  • Have your say! The UN wants to know what matters most to you: pick six global issues in the list and send it to the United Nations.
  • Tim Harcourt Video
  • G20 and Australia: Bestselling economist Tim Harcourt speaks to the BBC about how Australia has gone from "Down Under to Down Wonder".
  • Clear air and healthy lungs: how to better tackle air pollution. From New Delhi to Accra, millions of people breathe polluted air. A new report examines the World Bank’s experience working to improve air quality.

Most Popular Articles

Poll

What issue are you most concerned about in 2015?

Euro crisis
Unemployment
Global warming
International conflict
Other

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2015