Artigos

Texto para “Tax Notes International”, Volume 79, Number 3 – July 20, 2015.

Autor: Ramon Tomazela Santos

A CRITICAL EVALUATION OF THE OECD’S BEPS PROJECT

Aggresive tax planning has become a sensitive political issue, especially in light of the initiatives of the OECD and the European Union to tackle harmful tax practices and aggressive tax avoidance. The OECD base erosion and profit-shifting project represents an attempt to eliminate the double nontaxation stemming from BEPS, which reflects the view that the international standards may not have kept pace with changes in the global corporative business environment.¹

This article analyzes the most fundamental issues raised by the OECD proposals to amend the international tax rules. It focuses on key issues of tax policy essential for creating a new international tax standard to overcome the challenges posed by the economic development.

CRITICAL ANALYSIS

Action 1 of the BEPS project addresses the tax challenges of the digital economy. A major issue involves companies that manage to have a significant business presence in the economy of another country without being liable for taxes there because of the lack of nexus under the concept of permanent establishment. The digital economy is the only business field that received an action plan dedicated to its main challenges.

1 OECD, ‘‘Addressing Base Erosion and Profit Shifting’’ (2013), at 47.

Generally, digital-based activities may give rise to two types of difficulties:

• identification of the states with jurisdiction to tax, which requires a new concept of nexus for activities developed without any physical presence; and

• development of mechanisms for the allocation of taxable basis for each state with jurisdiction to tax.

The second issue will likely be the more difficult to solve because the allocation of taxable profit in the digital economy raises complicated economic issues. Standard transfer pricing methods may lead to inaccurate results, while more sophisticated methods may be too complex and costly to be applied consistently for all transactions in the digital economy, especially by developing countries.²

Action 2 of the BEPS project is intended to neutralize the effects of hybrid mismatch arrangements, which exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to produce a mismatch in tax outcomes, thus reducing the overall tax burden of the parties concerned.³ In attempting to resolve the issue, the OECD sets out recommendations for domestic rules to align the tax treatment of payments made under a hybrid financial instrument or payments made to or by a hybrid entity with the tax outcomes in the other jurisdiction.

The OECD initiative against hybrid mismatches is addressing a problem caused by the lack of coordination among tax systems around the world. The absence of tax neutrality between the treatment applicable to equity and debt in the different countries is precisely the reason why numerous tax planning schemes can be successfully created with hybrid instruments.

2 Julien Pellefigue, ‘‘Transfer Pricing Economics for the Digital Economy,’’ 22 Int’l Transfer Pricing J. 95-100 (2015).

3 OECD, ‘‘Neutralising the Effects of Hybrid Mismatch Arrangements’’ (2014), at 29.

Similarly, the use of hybrid entities is possible only by virtue of the discrepancies in national systems in relation to the tax classification of legal entities. The autonomous methods used by countries for the tax classification of companies or partnerships allow — and even stimulate — the use of hybrid entities as a powerful instrument for cross-border tax arbitrage. Thus, to accept the anti-hybrid rule proposed by the OECD, it seems necessary to analyze the subject from an international perspective to establish a direct link between the deductibility of the remuneration derived from the hybrid instrument at the subsidiary level and the taxation of the corresponding amount at the parent level. That is required because the use of some types of financial instruments or legal entities is not illegal or abusive in itself, which is why general antiavoidance rules do not provide a comprehensive mechanism to counter the use of hybrid mismatch arrangements.

A GAAR may recharacterize a financial instrument based on its economic substance, regardless of its legal form, but it does not provide a comprehensive response to cases of hybrid mismatch arrangements.⁴ Therefore, the underlying reasoning of the OECD proposal on linking rules, intended to link tax treatment of a hybrid entity or hybrid instrument in one jurisdiction with that applied in another jurisdiction, may rely exclusively on the concept of inter- nation equity, which is at least debatable because countries do not consistently observe it.

The linking rules proposed by the OECD find potential support in the single tax principle, whereby income from cross-border transactions should be subject to tax once and only once.⁵ More specifically, the linking rules may be considered a mechanism to achieve the matching principle in the international tax field beyond the scope of tax treaties.

It is well known that in a tax treaty context, withholding taxes are reduced in the source state based on the assumption that the corresponding income is subject to tax in the residence state. It follows that the preservation of the matching principle is the primary reason for not entering into tax treaties

4 Christoph Marchgraber, ‘‘Tackling Deduction and Non-Inclusion Schemes — The Proposal of the European Commission,’’ 54 European Tax’n 133 (2014).

5 Reuven S. Avi-Yonah, ‘‘International Tax as International Law — An Analysis of the International Tax Regime,’’ Cambridge Tax Law Series (2007), at 8-10.

with tax havens, in which the income is not properly taxed.⁶ Based on the single tax principle and its tenets (efficiency, equity, and prevention of revenue loss), the matching principle could be extended beyond the tax treaty context⁷ to establish a direct link between the deductibility of the remuneration derived from the hybrid instrument at the subsidiary level and the taxation of the corresponding amount at the parent level.

Thus, the preservation of a direct link between deduction and taxation, in a broader cross-country context, may be accepted as a result of the single tax principle. However, if that is the foundation for tackling international tax arbitrage, it must be recognized, for consistency’s sake, that countries should also offer proper solutions for all cases of double taxation, even outside a tax treaty context. It implies that double taxation should no longer be considered a simple result of the parallel exercise of taxing rights by sovereign countries, but rather as a violation of the single tax principle.

That approach is highly doubtful, taking into consideration that even in the context of EU law, the Court of Justice of the European Union has consistently held that fundamental freedoms offer no remedy against the problem of double taxation,⁸ which is a consequence of the parallel exercise of taxing rights and of member states’ fiscal sovereignty.⁹ If that is the case even in the single market created under community law, then it is much more difficult to recognize the single tax principle as a customary international law.

Also, taxpayers may choose financial instruments with hybrid features for various nontax reasons. The combination of equity and debt characteristics in a financial instrument can be motivated by several economic, financial, commercial, and legal reasons¹⁰ that bear no relation to tax-reduction

6See Avi-Yonah, ‘‘Commentary (Response to Article by H. David Rosenbloom),’’ 53 Tax L. Rev. 168-171 (2000).

7Id. at 171.

8 CJEU, Kerckhaert, C-513/04 (2006), and Damseaux, C-128/08 (2009).

9 Katharina Daxkobler and Eline Huisman, ‘‘Levy & Sebbag: The ECJ Has Once Again Been Asked to Deliver Its Opinion on Juridical Double Taxation in the Internal Market,’’

53 European Tax’n 400 (2013).

10 Eugene F. Brigham and Michael C. Ehrhardt, Financial Management: Theory &

Practice (2008), 742-766.

strategies. In general the development of hybrid financing has been motivated primarily by the opportunity to combine the qualities of both equity and debt instruments, rather than to exploit cross-border tax arbitrage. Thus, given the existence of nontax reasons for using hybrid financial instruments or hybrid entities, domestic linking rules should at least allow taxpayers the opportunity to prove that tax avoidance was not the primary reason for the structure in order to protect bona fide transactions.

Beyond that, it is possible to criticize the narrow scope of action 2 of the BEPS project, which focuses on tax arbitrage marked by the presence of a hybrid element, leaving out many other cross-border transactions used by multinational companies to exploit diferences among tax systems. Even in relation to hybrid financial instruments, action 2 of the BEPS project wasted a prime opportunity to solve the problem regarding the classification of income derived from hybrid financial instruments in the OECD model tax convention.

Indeed, qualification conflicts for income from hybrid financial instruments may lead to double taxation or to double exemption, both of which are incompatible with the objectives of tax treaties. To avoid those consequences, the first step would be to delete the reference to domestic law in article 10(3) of the OECD model treaty, which creates an overlap between the definitions of dividends and interest, so that the treaty concept of dividend would be regarded as closed and exhaustive. There is no justification for the adoption of different approaches for dividends and interest, and that distinction contributes to qualification controversies. Another alternative would be the inclusion of a provision addressing hybrid financial instruments in tax treaties, such as a tiebreaker rule to decide whether the remuneration should qualify as dividend or interest.

When it comes to the action 3 discussion draft of the BEPS project, whose goal is to strengthen controlled foreign corporation rules, it seems that even a further tightening of existing rules to cover any possible loopholes may not suffice to curb the allocation of untaxed income abroad. It is not difficult to envisage that it will probably stimulate inversions.¹¹ Although taxpayers may

11 See Avi-Yonah, ‘‘Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State,’’ Harvard L. Rev. 33-34 (2000).

choose to invert for various nontax reasons connected with competitive factors, it is undeniable that the reduction of the overall tax burden and the circumvention of CFC rules play a significant role in changing tax residence.

After the inversion, the parent company may prevent the application of CFC rules, no matter how strict the tax treatment applicable to low-taxed foreign income. In the new jurisdiction, the parent company may also make use of loopholes and base erosion techniques, which might not have been otherwise possible in its original home country because of strict rules against artificial tax avoidance schemes. It shows that simply hardening CFC rules will not necessarily achieve the results intended by the OECD.

Provisions against inversions, such as that in section 7874 of the U.S.

Internal Revenue Code, may also be circumvented, even though to achieve that objective, multinational companies must bear the risk of consumer boycotts, brand erosion, and scrutiny by tax authorities. The solution of redefining the tax residence of the parent company based on the residence of shareholders is likely to be ineffective or costly to administer, especially for multinational companies whose shares are publicly traded on different stock exchanges.¹²

Also, from a political standpoint, it is doubtful whether the U.S.

Congress is willing to accept the repeal of the check-the-box rules, used in many taxplanning structures to treat an intermediate company as a transparent entity for tax purposes and, as a consequence, turn passive income into active income to avoid the application of the CFC rules (subpart F).

Most European countries have a participation exemption for foreign dividends and capital gains, which reinforces the view that the strengthening of CFC rules might not be accomplished, especially because within the EU framework, far-reaching CFC rules are difficult to reconcile with the freedom of establishment and the free movement of capital, which may restrict their application by EU member states.¹³ Thus, a stringent CFC rule may be incompatible with EU law, as recognized by the OECD itself.

12Id. at 36.

13 Edward D. Kleinbard, ‘‘Stateless Income’s Challenge to Tax Policy,’’ Tax Notes, Sept. 5, 2011, p. 1021.

The action 4 discussion draft of the BEPS project focuses on the limitation of base erosion via interest deductions and other financial payments.

In general, the establishment of limitations on interest deduction is not a new issue. Many countries already have thin capitalization or similar rules to avoid the erosion of tax bases using interest payments made to related parties or lenders domiciled in low-tax jurisdictions.

Conceptually, one can ask whether restrictions on interest deductions are incompatible with the ability-to-pay principle as the debtor’s ability-to-pay principle is decreased by the interest payment. If the interest expense is not deducted from the taxable profits, it implies that the debtor — not the creditor — has in fact been taxed. From a tax treaty perspective, domestic rules restricting interest deduction may breach arm’slength principles in articles 9(1) and 11(6), as well as the nondiscrimination clause in article 24(4) of the OECD model treaty. Despite that, it seems that the controversy on the compatibility of domestic rules on interest restrictions with tax treaty provisions may be solved by including a saving clause in the OECD model and in future multilateral tax treaties, which has not been proposed so far.¹⁴

What is not so clear, however, is how to work around EU law, which may set important restrictions on actions suggested by the OECD. Indeed, OECD proposals in this area may restrict the exercise of fundamental freedoms or conflict with the nondiscrimination principle, which may prevent their implementation by EU member states. Because the partial implementation of BEPS actions — only outside the EU — may jeopardize the efficiency of the BEPS project as a whole, EU law should also be taken into account in developing possible solutions for action 4.¹⁵

Action 5 of the BEPS project deals with countries’ harmful tax practices, which is the other side of the problem, because the erosion of tax bases and the shift of profits cannot be attributed only to the behavior of taxpayers engaged in cross-border activities. It is curious that action 5 is the sole

14 Emilio Cencerrado Millán and María Teresa Soler Roch, ‘‘Limit Base Erosion via Interest Deduction and Others,’’ 43 Intertax 58 (2015).

15 Eric C.C.M. Kemmeren, ‘‘Where Is EU Law in the OECD BEPS Discussion?’’ 23 EC Tax Rev. 190 (2014).

action plan to focus on competition among countries to improve their economies and attract foreign investments by granting tax benefits, which is at the core of all international taxplanning structures used by multinational companies. That lack of focus weakens the transparency and appeal of the BEPS project, which might be seen as a mere instrument to raise tax revenues and overcome the economic crisis.

The truth behind the BEPS project will be revealed only after analyzing its effect on national tax legislation to regulate harmful tax competition. Apart from that conceptual issue, action 5 of the BEPS project can be seen as a new attempt to achieve the objectives outlined in the 1998 OECD report on harmful tax competition by strengthening the substantial activity requirement and introducing compulsory, spontaneous exchange of rulings on preferential tax regimes.

However, considering the vagueness and generality of the goals, it is possible to predict that the outcomes of action 5 will be highly dependent on countries’ political will. Also, as far as harmful tax competition is concerned, a proposal based on a collective action should not be limited to only OECD and G- 20 countries, as in the BEPS project. A comprehensive solution is necessary to reach consistent and long-lasting results.

An interesting example involves the numerous patente box regimes available in Europe to attract research and development activities and mobile income. The OECD developed the nexus approach, under which the proportion of income that may benefit from an intelectual property regime is the same proportion as that between qualifying expenditures — that is, R&D expenditure incurred by the taxpayer in the development of IP assets — and overall expenditures.¹⁶

In theory, the nexus approach requires direct nexus between the income receiving the favorable tax treatment and the expenditures incurred to generate it. However, attempting to link the income with an intangible asset through a previously incurred expense can be complicated and cumbersome

16 OECD, ‘‘Countering Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance’’ (2014), at 29-32.

because the income derived from a specific product may be connected with several intangible assets (patents, trademarks, knowhow). It follows that the nexus approach fails to recognize the complexities of tracing expenses to income-generating assets and that the use of estimations to solve the issue will be completely arbitrary.¹⁷

Action 6 of the BEPS project addresses treaty shopping.¹⁸ Among its recommendations, the OECD pleaded for including in the title and preamble of tax treaties a statement that the contracting states intend to avoid the creation of opportunities for nontaxation or reduced taxation through tax avoidance and treaty shopping.

Strictly speaking, that amendment is unnecessary. It is widely accepted that ‘‘the principal purpose of double tax conventions is to promote, by eliminating double taxation, exchanges of goods and services, and the movement of capital and persons,’’ as stated in paragraph 7 of the OECD commentary on article 1 of the OECD model.

Thus, considering that the purpose of a tax treaty is to promote economic relations between contracting states, and that its provisions will be interpreted in good faith and in light of its object and purpose (Vienna Convention article 31, paragraph 1), it is indisputable that interposed companies, without an effective economic presence in the residence state, should not have access to treaty benefits. That follows from the proper interpretation of the term ‘‘resident’’ in article 1 of the OECD model treaty, which defines the subjective scope of a tax treaty given its object and purpose of promoting the economic relationship between the contracting states.

Besides being unnecessary, the amendment will probably also be ineffective on most occasions. For countries that adopt the exemption method to eliminate double taxation, the risk of double nontaxation will continue to exist in the application of tax treaties that do not have a subject-to-tax provision. In that case, including in the treaty’s preamble a clear statement against double

17 Manfred Naumann, ‘‘International Tax Competition and Patent Boxes,’’ Kluwer International Tax Blog (Mar. 18, 2015).

18 OECD, ‘‘BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances’’ (2014), at 10.

nontaxation will not be completely effective because the mere intention of the contracting states cannot override the result of the application of other treaty provisions and their interaction with domestic law. The same holds true for exemption granted by domestic law (‘‘participation exemption’’) despite the adoption of the credit method in the relevant tax treaty.

The OECD also recommended including a limitation on benefits provision and a more general antiabuse rule based on the principal purpose test (PPT) to get the most out of both rules, which have their strengths and weaknesses. The combination of LOB and PPT rules in the OECD model is justified under the argument that the LOB rules do not address some forms of treaty shopping (conduit financing arrangements) and other types of treaty abuse.¹⁹

What may be questioned, though, is the convenience of subjecting access to treaty benefits to a strict anti-treaty-shopping rule, which requires the taxpayer to satisfy a combination of subjective and objective tests. The combination of both tests, a non-mandatory alternative proposed by the OECD, may be too constraining in some situations, discouraging foreign investments in the country. It remains to be seen how the OECD will combine those kinds of alternatives in the multilateral tax treaty proposed in action 15.

The inclusion of antiavoidance rules in tax treaties is the most effective way to combat treaty shopping, given that in most countries, tax treaties provisions override domestic legislation, including antiavoidance rules, which in general do not enjoy a special status. Most OECD countries think that domestic law antiavoidance provisions are generally compatible with tax treaties, even in the absence of any specific treaty provision recognizing that possibility.

That approach relies on the idea that GAARs affect only facts that give rise to tax liability under domestic law, a subject not addressed in tax treaties and therefore not affected by them. However, the recharacterization of a transaction by domestic antiavoidance rules may lead to double taxation, an

19 Evgenia Kokolia and Evgenia Chatziioakeimidou, ‘‘BEPS Impact on EU Law: Hybrid Payments and Abusive Tax Behaviour,’’ 55 European Tax’n 5 (2015).

outcome the tax treaty specifically tried to avoid. In that situation, the application of antiavoidance provisions may not be in accordance with the objective and purpose of tax treaties.²⁰

Thus, because the OECD’s argument that domestic GAARs do not conflict with tax treaties²¹ is unconvincing, the inclusion of antiavoidance rules is an appropriate alternative for combating treaty shopping.²² The problem is that LOB provisions are extremely complicated, which may give rise to conflicts and litigation in their concrete application by tax authorities.²³

Other than the U.S. and a few other countries with experience with LOB provisions, such as India and Japan, many countries might struggle with the lack of administrative capacity to apply them as an instrument to challenge treaty-shopping structures.²⁴

Regarding the PPT, the provision drafted by the OECD follows the wording used in many domestic antiavoidance rules and in some U.K. tax treaties.²⁵ What is appalling here is the high degree of subjectivity granted to tax authorities in determining whether the taxpayer’s main purpose is to take advantage of treaty benefits, because the OECD provides no guidance on how to distinguish between principal and ancillary purposes.²⁶

The objective facts and circumstances analysis does not necessarily reveal the intention or the principal purpose of the taxpayer, which may create difficulties for its practical application. Also, treaty entitlement should not be denied based only on the principal intention of obtaining treaty benefits, given

20 Marjaana Helminen, ‘‘The International Tax Law Concept of Dividend,’’ Series on International Taxation (2010), at 105-106.

21 Paragraphs 9 and 22 of the commentary on article 1 of the OECD model convention (2010), at 60-61; 70.

22 Jonathan Schwarz, Schwarz on Tax Treaties (2013), 261.

23 Qunfang Jiang, ‘‘Treaty Shopping and Limitation on Benefits Articles in the Context of the OECD Base Erosion and Profit Shifting Project,’’ 69 Bulletin for Int’l Tax’n 148 (2015).

24 Luc De Broe and Joris Luts, ‘‘BEPS Action 6: Tax Treaty Abuse,’’ 43 Intertax 146 (2015).

25 For example, the India-U.K. and Spain-U.K. tax treaties; see supra note 22, at 261.

26Id. at 132.

that tax treaties are signed precisely to foster transactions that would not have occurred in their absence.²⁷

Just like all other features of a tax system, the tax treaty network is one of the important business reasons to allocate economic activities in a specific country.²⁸ Thus, what should be investigated is the taxpayer’s level of economic presence in the resident state, whatever the principal purposes pursued by the taxpayer. Moreover, because the provision is vague and subjective, it could create legal uncertainty for foreign investors, hindering their ability to rely on the tax treaty in structuring legitimate transactions.²⁹

Also, the conjugation of PPT along with the LOB provision might endanger the legal certainty brought by the objective tests provided in the latter, which should work as a safe harbor for taxpayers that meet its conditions.

Indeed, if the taxpayer complied with the requirements in the LOB provision, treaty entitlement should be granted because its legitimate connection with the residence state has been proved.

However, with the inclusion of a PPT clause, tax authorities may argue that the taxpayer is not entitled to the benefits provided by the tax treaty because of the lack of a nontax reason, despite its genuine economic link with the residence state. It shows that the OECD’s suggested approach may not be the best alternative to address treaty-shopping cases not covered by the LOB provision, because of the serious risk of overlap.

Given that, and considering that the traditional LOB provision is not broad enough to combat all forms of treaty shopping, it would be preferable to extend the LOB provision to cover conduit arrangements. A specific anti-conduit provision can be found in the U.K.-U.S. tax treaty, as well as in U.S. law (IRC section 7701(1) and Treas. reg. section 1.881-3), which could both serve as a reference for the OECD.

27 Id.

28See Kemmeren, supra note 15, at 191.

29 Michael Lang, ‘‘BEPS Action 6: Introducing an Antiabuse Rule in Tax Treaties,’’ Tax Notes Int’l, May 19, 2014, p. 655.

According to the OECD, the action 7 discussion draft of the BEPS project is meant to prevent the artificial avoidance of the PE threshold. Use of the word ‘‘artificial’’ is questionable in this case, because the taxpayers either avoided the characterization of the PE or used the exceptions to the general PE definition in article 5 of tax treaties. That is a clear example of how the actual wording of tax treaties was not maintained in pace with changes in the business environment. For that reason, redefining the PE concept to extend it to situations in which business activities are carried on without physical presence (nonphysical PE) could help address tax planning structures commonly used in the digital economy.

Other key aspects for the success of action 7 rely on the redefinition of dependent agent PE to tackle commissionnaire structures that have been exploited recently based on a lack of authority to conclude agrements on behalf of the principal, as well as the repeal of exceptions for preparatory and ancillary activities and facilities used for storage, display, or delivery of goods (the main example is probably the Amazon case).

The main conceptual issue here is to determine whether the PE has a substantial relationship with the source state to justify its tax jurisdiction, because a merely occasional relationship is insufficient to allocate taxing rights.

The amendment of the PE definition should not work as an unlimited force of attraction derived from the mere supply of goods and services. In general, the expansion of the dependent agent PE provision would reflect the economic reality of corporate structures and business models designed to minimize the tax burden, thus contributing to the fair allocation of taxing rights between residence and source countries. Also, any amendment on concept of dependente agent PE should be accompanied by specific orientation for the profit attribution under the authorized OECD approach (article 7(2) of the OECD model).³⁰

The discussion draft on actions 8, 9, and 10 of the BEPS project are designed to align transfer pricing outcomes with value creation. The development of guidance on transfer pricing for intangible assets address an

30 Alfred Storck and Alexander Zeiler, ‘‘Beyond the OECD Update 2014: Changes to the Concepts of Permanent Establishments in the Light of the BEPS Discussion,’’ in The OECDModel-Convention and its Update 2014 (2015), at 262.

essential issue that raises many practical problems. However, the proposals released so far appear to indicate that no meaningful progress will be achieved in the allocation of profits.

Conceptually, the BEPS project was the perfect opportunity for the OECD to consider the convenience of keeping the transfer pricing rules based on the arm’slength principle or changing to a different approach. The arm’s-length concept ignores the essence of the business model used by multinational enterprises. Indeed, MNEs tend to act as one entity in the world market in order to gain competitive advantages through significant scale economy and synergy effects, but this residual profit is not properly allocated between associated enterprises.³¹

Apparently, actions 8, 9, and 10 of the BEPS project represent a final attempt to fix the transfer pricing rules and maintain the arm’s-length principle as the international standard — before implementing a more radical change toward formulary apportionment, which is based on the assumption that the multinational group is a single entity. The allocation factors commonly suggested for formulary apportionment are assets, payroll, and sales, which are considered proxies for profit allocation.

One may argue that formulary apportionment is not very effective in addressing the challenges of the digital economy, because at least two allocation factors (assets and employees) are not directly connected with where the consumers are located (consumer market) and where the sales are carried out.

Only the sales factor is designed to represent the demand side and the contribution of the market. However, if that is the case, a valid alternative would be to modify the formula and attribute double weight to the sales factor, although it may create a stimulus to export transactions. Another common criticism is that the three-factor formula does not cover intangible assets.

Even so, the truth is that values of intangibles are indirectly included in the formula, because intangible assets are generally produced by laboratories that have physical assets (assets) and scientists and researchers (payroll). Also,

31 Hubert Hamaekers, ‘‘Arm’s Length — How Long,’’ in International and Comparative Taxation—Essays in Honour of Klaus Vogel (2002), at 38-39.

considering that the entire group as a unitary entity shares intangibles assets, it is almost impossible to allocate intangible assets in one physical location, making it appropriate to not consider them directly in the formula.³²

Focusing on an alternative in line with the arm’slength principle, the BEPS project clearly tried to strengthen the functional analysis, whose practical results remain to be seen. It will probably be difficult to achieve significant results by applying a functional analysis to complex businesses, with the development of electronic commerce, Internet, and modern communications combined with the easy transference of intangibles assets, risks, and functions.

In any event, the OECD’s effort to maintain the arm’s-length principle deserves to be acknowledged, because a switch to formulary apportionment would depend on countries agreeing on a predetermined formula and its characteristics to avoid double taxation. The achievement of an international political consensus on that issue is an extraordinarily difficult obstacle to overcome.

Leaving aside conceptual questions, despite the participation of G- 20 countries as associated members and of the possible invitation of other countries on an ad hoc basis, developing countries might struggle with the lack of administrative structure, technical instruments, and human resources to approach the transfer pricing issues raised in the BEPS project. It might also be difficult to introduce mechanisms to enhance cooperation among tax administrations, such as advance pricing agreements, mutual agreement procedures (MAPs), and tax arbitration.³³ Ideally, the OECD should have considered that in its transfer pricing recommendations.

The analysis of the action plans on data and compliance reporting, although sensitive for many taxpayers, is beyond the scope of this paper. The action 11 draft establishes methods to collect and analyze data on BEPS, the action 12 draft requires taxpayers to disclose their aggressive tax planning arrangements, and the action 13 report addresses transfer pricing

32See Avi-Yonah, supra note 6, at 111-113.

33 Ana Paula Dourado, ‘‘The Base Erosion and Profit Shifting (BEPS) Initiative Under Analysis,’’ 43 Intertax 3 (2015).

documentation. A core aspect that may be highlighted is the growing importance of improving the relationship between taxpayers and tax authorities as a way to promote the voluntary fulfillment of tax obligations and the reduction of aggressive tax planning. Apart from focusing on collecting information to enable tax authorities to actively run inspections, the OECD should find alternatives to enhance the relationship between taxpayers and tax authorities as a longer-term goal.

The discussion draft on action 14 of the BEPS project covers dispute resolution mechanisms and alternatives to make them more effective, which is essential in the BEPS context where the risk of double taxation may increase significantly. It is unrealistic to believe that the outcome of the BEPS project will be neutral, without creating an overlap in the exercise of tax jurisdiction by the countries involved. For that reason, although it may not be the ideal way to develop international case law on tax treaty interpretation, arbitration is a reasonable solution for the problems that taxpayers will probably face in the BEPS project, because it avoids a unilateral outcome in tax litigation.³⁴

Action 15 of the BEPS project intends to develop a multilateral instrument to modify bilateral tax treaties in a quick, consistent, and coordinated way. However, the success of a multilateral agreement depends on the efforts among signatory countries to reach consensus — not an easy task.

Negotiating a multilateral tax treaty will probably be lengthier and more complicated than negotiating a bilateral treaty.

To develop a workable multilateral treaty, the countries concerned must accept provisions that ultimately will be applied to all parties. It is doubtful, however, whether it will be possible to attain a leveling out of different ideas on the BEPS project for purposes of negotiating a multilateral tax treaty.

Besides, the idea of a multilateral treaty is particularly challenging because international treaties usually depend on the approval of the legislative power to enter into force within each legal system, regardless of the discussion on monism or dualism. Thus, even if the delegation responsible for the tax treaty

34 See Dourado and Pasquale Pistone, ‘‘Some Critical Thoughts on the Introduction of Arbitration in Tax Treaties,’’ 42 Intertax 160 (2014).

negotiation agrees with a specific solution, congressional representatives will not necessarily share that opinion.

Finally, it is useful to remark that a multilateral MAP will be feasible only if binding decisions are handed down in an acceptable time frame. The experience with the EU arbitration convention³⁵ and the average duration of OECD MAP procedures³⁶ shows that it is not easy to reach a binding decision within a reasonable time.³⁷

CONCLUSIONS

The BEPS project targets only specific problems in the international tax regime without offering a comprehensive solution. The OECD clearly wants to fix problems caused by the failure of international tax rules to keep pace with changes in the global corporative business environment.

However, the problem is that the BEPS project represents a mere attempt to change the current international tax regime in specific ways without implementing more radical changes toward a tax regime for the future. In practice, the success of the OECD measures largely depends on whether countries will embrace the outcomes of the BEPS action plans even against their national interest.

35 Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (1990).

36 OECD MAP statistics 2013, available at http:// www.oecd.org/ctp/dispute/map- statistics-2013.htm.

37 CFE Fiscal Committee, ‘‘Opinion Statement FC 15/2014 on Developing a Multilateral Instrument to Modify Bilateral Tax Treaties (BEPS Action 15),’’ 55 European Tax’n 4-5 (2015).