One of the key takeaways of the consultation document is that many open issues are still to be resolved. There appears to be no consensus on the definition of "issues relating to Amount A", the composition of the dispute resolution panel, the definition of jurisdictions for which the dispute resolution mechanism is elective, and whether the dispute resolution mechanism can be invoked if the relevant jurisdictions have no bilateral tax agreement.
Once these issues are resolved by the members of the Inclusive Framework ("IF members"), the draft model rules will be released.
At a high level, the consultation document proposes that related issues covered are limited to transfer pricing adjustments and allocation of profits to permanent establishments. In respect of these issues, the dispute resolution mechanism will follow a nine-step process, starting with a MAP request by the relevant taxpayer. If the request is not mutually resolved by the relevant Competent Authorities within two years from the start date of the MAP, the taxpayer can request that the unresolved issue is referred to a dispute resolution panel.
The outcome of the dispute resolution panel will be binding and mandatory for the relevant jurisdictions, but the taxpayer may reject the outcome and seek domestic remedies.
It is important to note that the process described in the consultation document is only of a bilateral nature, whilst any proposals for a multi-lateral dispute resolution mechanism is conspicuously absent from the consultation paper.
Unlike the previously released building blocks of Amount A, there appears to be little consensus amongst IF members on the process of Tax Certainty. Based on this consultation document, it is evident that divergent views remain and have yet to be worked out. Significant differences remain on the scope of the dispute resolution process - some jurisdictions are of the view that the definition "related issues" requires a direct or indirect connection with Amount A, while other jurisdictions prefer a more extensive explanation. As noted, the scope is currently limited to transfer pricing and permanent establishment profit allocation issues. The technical details of the scope definition are expected to be finalized following the public consultation.
Jurisdictions have also not yet reached a consensus on the composition of the dispute resolution panel - an issue that was also highlighted in the October 2020 Pillar 1 Blueprint. While one group of jurisdictions prefer a panel consisting of independent experts, another group of jurisdictions are of the opinion that the dispute resolution panel should only consist of government representatives, as mandatory and binding dispute resolution by independent experts would raise sovereignty concerns. These divergent views were also described in the October 2020 Pillar 1 Blueprint, and it seems that no progress has been made since then on this topic. Naturally, a compromise on sovereignty issues can hardly be expected. It remains to be seen how the IF members reach resolution on this issue.
Another issue that the IF members have yet to reach consensus on is the "roll-forward" of the dispute resolution outcome. While there is consensus amongst IF members that the decision of the dispute resolution panel has no precedential value, some members are of the view that the potential "roll-forward" of the decision to future years would accelerate the resolution of recurring issues. However, others find the "roll-forward" mechanism to be inconsistent with the principle that the dispute resolution outcome has no precedential value.
Divergent views also remain on whether dispute resolution under the Pillar 1 Multilateral Convention (still to be drafted) can be invoked when the relevant jurisdictions have no bilateral tax treaty. There is also no consensus on where the taxpayer is required to submit a request for dispute resolution. The current draft indicates that this can be any of the relevant jurisdictions. However, some IF members are of the view that the request must be submitted to the competent authority in the jurisdiction of the taxpayer (tax) residence.
While the dispute resolution mechanism will be mandatory and binding for applicable jurisdictions, there is consensus that the mechanism should be elective for developing jurisdictions with little or no MAP experience. However, there is no consensus yet on the definition of such jurisdictions for the purposes of this proposed dispute resolution.
Dispute resolution process
It is important to note that while the October 2020 1 Blueprint referred to "multilateral dispute resolution", the current proposal describes only a dispute resolution process between two Competent Authorities, and there is no reference to multi-jurisdictional cooperation. This is of concern bearing in mind that it is likely that issues related to Amount A will have an impact on the tax liability for a Covered Group in more than two jurisdictions at any given time.
In addition, it is envisaged that the bilateral dispute resolution will not apply where there are already other existing mechanisms to force dispute resolution, for example under existing double tax treaties or under the EU arbitration convention processes.
Once invoked, the dispute resolution panel will consist of 5 members, 2 from each Competent Authority jurisdiction and 1 member, appointed as Chair, who is not a national or resident of the relevant jurisdictions. There is no reference to additional members on the panel in case the dispute involves more than two jurisdictions.
The dispute resolution mechanism outlined in the consultation draft is described as a nine-step process.
A member of the Covered Group directly affected1 by the issue Related to Amount A submits a request in writing to the relevant Competent Authority, in accordance with the relevant bilateral tax treaty, or in case there is no bilateral treaty, article [X] of the Multilateral Convention. There is no consensus yet on the exact information and details that would need to be included in the request. However, it is likely that the request will need to contain the same information as a "standard" MAP request. The Covered Group is required to send a copy of the request to the Other Competent Authority.
The relevant Competent Authority will confirm to the Covered Group that it has received the request and will also send a copy of the request to the Other Competent Authority, in case it is not evident that the Covered Group has already done so.
The third step is to determine the start date of the MAP request. The determination will be done with reference to the required notifications. The start date of the MAP is important since the dispute resolution mechanism can be triggered by the member of the Covered Group, if the issue is not resolved within a two-year timeframe.
If the issue is not resolved within two years, the member of the Covered Group may request that the issue be referred to a dispute resolution panel, which is appointed in step 5.
Both Competent Authorities appoint two members to the dispute resolution panel within 60 days. Following the appointment of these panel members, the independent panel members have a subsequent 60 days to appoint another panel member as Chair, chosen from a list of experts. The Chair may not be a resident or national of the jurisdiction of the relevant Competent Authority. Also in step 5, the Terms of Reference and a statement of information will be agreed upon by the Competent Authorities. These documents will define the scope of the dispute and the views of the Competent Authorities.
Step 6 - 8
Within 60 days of the constitution of the dispute resolution panel, the Competent Authorities must submit proposed resolutions and, if desired, a supporting position paper. This is followed by another 60-day term in which the Competent Authorities will be given a chance to submit a reply. Following the receipt of the reply submissions or the expiration of the subsequent 60-day term, the dispute resolution panel has 180 days to choose one of the two submitted resolutions. The dispute resolution panel will use a final offer, or last-best offer, arbitration methodology, unless both Competent Authorities agree on another method.
Competent Authorities conclude a mutual agreement, reflecting the outcome of the dispute resolution panel, assuming that if the resolution is accepted by the member of the Covered Group. While the member of the Covered Group is not required to accept the outcome, it may however have to share in the cost if it does not do so.
This concludes the dispute resolution process. As noted above, the dispute resolution mechanism in its current form is designed for bilateral disputes. No reference is made to multilateral disputes, which would likely be a common occurrence for issues related to Amount A.
The deadlines are purposefully short in order to expedite the process and to ensure that any tax dispute is resolved in a timely manner. However, it is questionable whether such short timeframes for, often, complex and new tax issues, which often require expert analysis, are possible for many Competent Authorities, who may already be facing resource constraints.
It is important to note that, under limited circumstances, the member of the Covered Group may have to share in the cost. of the dispute resolution process. Circumstances in which the member of the Covered Group may have to bear at least some of the cost of the dispute resolution panel are outlined in par. 30(b). This would be the case for example if the member of the Covered Group, directly affected by the issue does not accept the outcome of the dispute resolution panel. A voluntary withdrawal of the request for dispute resolution, not at the request of the Competent Authorities, is also another circumstance where there may be a direct cost for the relevant taxpayer.
IF Members have diverging views on these proposed cost bearing rules. The fact that taxpayers have to bear the cost of the dispute resolution panel in case they do not accept the outcome may negate the voluntary nature of the dispute resolution and MAP process. However, given the cost and resource demands the process will bring, some IF members consider it appropriate for the taxpayer to bear at least part of]the cost under these circumstances.
The OECD will collect public comments on the Tax Certainty Framework for Amount A until 10 June 2022. Comments will be examined at the next meeting of the Task Force on the Digital Economy. Once the consultation has taken place and consensus has been achieved at the level of the Inclusive Framework, it is expected that model rules will be developed.
The OECD has now published just more than half of the building blocks of Amount A as draft versions. The remaining ones will cover Segmentation, Elimination of Double Taxation, Marketing and Distribution Profits Safe Harbor, Withholding Taxes, Administration and Unilateral Measures.
We will continue to closely monitor and provide client alerts on these future developments around Pillar One.
1 Again, "directly affected" is yet to be defined.