Disput Resolution arising out of Base Erosion and Profit Sharing
By Aditya Kumar, Ashwani & Associates
Base Erosion in Profit Sharing (BEPS) is a Package, negotiated in just over two years, which includes reports on fifteen “actions” ranging from countering harmful tax practices and treaty shopping to addressing transfer pricing, interest deductibility, and transparency in exploring the tax implications of the digital economy.
According to the OECD's briefing notes, BEPS works as a tax planning strategy that exploits gaps and mismatches in tax rules to make profits disappear for tax purposes. It also works as a mechanism that shifts profits to locations where there is little or no real activity, but where taxes are low, resulting in little or no overall corporate tax payment.
Like any policy, the factors mentioned above will be viewed differently by the Revenue Officials and the taxpayer. The familiar battle of distinguishing between ‘tax avoidance’ with ‘tax planning’ and ‘tax evasion’ would therefore be the result. Beauty lies in the eye of the beholder and, by the same token, planning lies in the eye of the taxpayer. As they say, there is a fine line between the two. Therefore, the question arises in the disputes and their resolution to determine which is what?
Considering the amount of subjectivity, the package is going to bring, there is a need for proper dispute resolution mechanism, and there is a general feeling that BEPS should make arbitration binding. Because of the vagueness of the BEPS rules proposed, in practice they are likely to lead to major differences in interpretation and disputes between tax authorities. Action 14 identifies mainly non-binding ways to make dispute resolution mechanisms under bilateral tax treaties (the so-called Mutual Agreement Procedure or MAP) more productive. However, it falls short of imposing binding arbitration. Many countries have agreed to provide for mandatory binding arbitration in their bilateral tax treaties. However, no developing country is on this list, and future disputes between, for example, the United States and India or Brazil are those most likely to bog down the post-BEPS tax environment. In the wake of BEPS, tax disputes are likely to be multi-country income-based (rather than two-country transaction-based) disputes.
In order to ensure practical implementation of BEPS, active third-party arbitration will therefore be required. If tax treaties do not provide that outlet, litigants will draw in neighbouring regimes and use, for example, investment treaties or WTO or free trade agreements to settle tax disputes. These neighbouring investment and trade treaties do provide for compulsory adjudication (albeit with limited tax carve-outs) but are not the most appropriate forums to interpret and develop the meaning of complex tax rules. If tax authorities and ministries of finance want to retain control, they would be well advised to establish dedicated tax tribunals.
A new international tax regime is emerging and, with this development,, novel ways of binding arbitration will need to be designed. Meanwhile, in this new environment, international tax lawyers and negotiators should be aware that they operate on a larger scene and carefully examine the interactions of tax law with other fields of international law, especially trade and investment law.
Aditya KumarAshwani & Associates, India
Aditya Kumar is an expert specialising in VAT/GST consulting in cross-border business in India and abroad. Having worked in every existing kind of indirect tax branch, he has experience and a vast working knowledge of all aspects of service tax, trade law, VAT and other related areas. Serving clients from national and international companies, he offers pragmatic solutions on a cost-effective basis.
ashwani & associates is an audit, tax and consulting firm with three offices in India. Clients range from emerging entities to large corporations with billions-dollar revenues. They include private businesses, not-for-profit organisations and publicly traded companies. The firm supports a local, national and international client base.
Published: March 2016 l Photo: wong yu liang - Fotolia.com