Tax Certainty in an uncertain economy: busy times at the OECD

Recently the OECD announced important tax and economic updates. Tax Certainty is a major theme; another is the economic challenge we face.

The 2021 MAP statistics have been published.

The OECD has announced a range of important publications and updates over the past few days. These cover statistical data on corporate income taxes worldwide (including some very interesting Country-by-Country Reporting results) and on the effectiveness of Mutual Agreement Procedures (MAP) provided for by tax treaties for prevention of double taxation. Profit allocation and attribution disagreements are responsible for more than half the MAP caseload. 22 November 2022 – ‘Tax Certainty Day’ - also saw updates on the proposed mechanisms for dispute prevention and resolution proposals under each of the two BEPS 2.0 ‘Pillars’, the detailed international tax reform plans. But while the OECD recognises the benefits of certainty for taxpayers and tax administrations, these updates come against a backdrop of significant economic challenges. The updated 2022 economic outlook, also published on 22 November, will be of great interest to tax professionals, not least for the implications for related party pricing in uncertain times.

The OECD publishes its MAP statistics each year to summarise the developments made in resolving international disputes, largely resulting from different countries’ application of the arm’s length principle (both the ‘actual’ transfer pricing of transactions, as well as profit attribution to permanent establishments). Countries have committed to resolving treaty-related disputes in a timely, effective and efficient manner.

With fewer transfer pricing (TP) cases opened in 2021 than in 2020, and more closed, the TP cases inventory fell slightly at year end. Despite the undoubted difficulties imposed by the COVID-19 pandemic, the greater use of virtual meetings by competent authorities (CAs) is cited as one of the reasons for the increased numbers of cases resolved. As well as bilateral discussions, the virtual approach has facilitated collaboration among CAs to reach collective agreements on issues common to multiple MAP cases. The OECD has praised the adaptability of CAs in ensuring engagement with their treaty partners. While face to face meetings have resumed, a welcome development, it is hoped that the successful experience of virtual working will expedite the progression of cases between these meetings. This progress is also reflected in the modest reduction in the average time taken to reach agreement on TP cases, to 32.3 months from 35 months in 2020 – noting, of course, that this is still a very long time for taxpayers to be left with potential unrelieved double taxation.

Tax certainty is also highly topical in connection with the reform of international taxation known as BEPS 2.0. The OECD took the opportunity to feed back in connection with public comments received on certainty and dispute resolution proposals under Pillar One, the reallocation of some taxing rights to market jurisdictions. This was followed by an update on corresponding measures relating to Pillar Two, the 15 percent effective minimum tax rate for all jurisdictions worldwide. The compliance burden on taxpayers remains a concern for respondents under both Pillars, as does the ability of tax authorities to muster the anticipated necessary resources.

Certainty and dispute resolution are important aspects of international taxation, but another strong theme in recent years has been the drive towards greater tax transparency for multinationals. For the first time, the OECD’s annual corporate tax statistics have included an aggregation of Country-by-Country Reporting data, including much higher revenues per employee in nil-rate jurisdictions than in those with a non-zero corporate income tax rate. The OECD points to this disparity and others as providing strong evidence for the merits of the ‘Two Pillar’ solution to international tax reform, notwithstanding the concerns raised by business and others over the risks of international disputes over interpretation of the rules. ‘Substance’ to support important entrepreneurial functions and the management of commercial risks, and the associated arm’s length returns, remains in focus.

Also affecting arm’s length pricing are the economic circumstances surrounding the related party transactions. The gist of these being, the OECD’s updated 2022 Economic Outlook concludes, “very difficult”. Real wages are falling; energy costs, food prices and interest rates are rising. Inflation, long relegated to newspapers’ finance pages, is back in the headlines. Also rising is business and consumer uncertainty. The OECD recommends bold policy responses for governments to meet these challenges. For TP, coming off the back of the pandemic (itself by no means vanquished) the turmoil in markets is likely to continue to present complexities in identifying reliable comparable data.

Certainty in uncertain times: the work goes on.