OECD — RECENT DEVELOPMENTS — AN UPDATE

A. Re : Amendments to OECD Model Tax Convention :

1. Discussion draft on the application of Article 17
(Artistes and Sportsmen) of the OECD Model Tax Convention (23rd April, 2010) :

The OECD invites public comments on draft changes to the
Commentary on Article 17 of the OECD Model Tax Convention, which deals with
cross-border income derived from the activities of entertainers and sportsmen.

Under Article 17 (Artistes and Sportsmen) of the OECD Model
Tax Convention, the State in which the activities of a non-resident entertainer
or sportsman are performed is allowed to tax the income derived from these
activities. This regime differs from that applicable to the income derived from
other types of activities making it necessary to determine questions such as
what is an entertainer or sportsman, what are the personal activities of an
entertainer or sportsman as such and what are the source and allocation rules
for activities performed in various countries.

The Committee on Fiscal Affairs, through a subgroup of its
Working Party 1 on Tax Conventions and Related Questions, has examined these and
other questions related to the application of Article 17. This public discussion
draft includes proposals for additions and changes to the Commentary on the OECD
Model Tax Convention resulting from the work of that subgroup, which have
recently been presented to the Working Party for discussion.

The Committee intends to ask the Working Party to examine
these proposed additions and changes to the OECD Model Tax Convention for
possible inclusion in the OECD Model Tax Convention (these changes will not,
however, be finalised in time for inclusion in the next update, which is
scheduled to be published in the second part of 2010). It therefore invites
interested parties to send their comments on this discussion draft before 31st
July 2010. These comments will be examined at the September 2010 meeting of the
Working Party.

Comments should be sent electronically (in Word format) to
jeffrey.owens@oecd.org.

2. Revised discussion draft of a new Article 7 (Business
Profits) of OECD Model Tax Convention (24th November, 2009) :

On 24th November 2009, the OECD approved the release, for
public comment, of a revised draft of a new Article 7 (Business Profits) of the
OECD Model Tax Convention and of related Commentary changes. The first version
of the new Article and Commentary changes was released on 7 July 2008, (the
‘July 2008 Discussion Draft’). As was explained at the beginning of that earlier
draft, the new Article and its Commentary constitute the second part of the
implementation package for the Report on Attribution of Profits to Permanent
Establishments that the OECD adopted in 2008.

Public comments were carefully reviewed and a consultation
meeting was held with their authors on 17th September 2009. The Committee’s
subsidiary body responsible for drafting the new Article 7 has concluded that
changes should be made to accommodate many of these comments. This revised
discussion draft (issued on 24th November 2009) includes the changes that have
been made
for that purpose as well as a few minor clarifications, editing changes and
corrections. All the changes made to the earlier draft are identified in the
revised draft.

The most important change proposed in this
revised draft is the replacement of paragraph 3, as it appeared in the July 2008
Discussion Draft, by a broader provision that provides a corresponding
adjustment mechanism similar to that of paragraph 2 of Article 9, which applies
between associated enterprises.

The revised draft was released for the purpose of inviting
comments from interested parties. It does not necessarily reflect the final
views of the OECD and its member countries.

It is expected that once finalised, the new Article and the
Commentary changes will be included in the next update to the OECD Model Tax
Convention, tentatively scheduled for the second part of 2010.

3. Comments on the public discussion draft ‘The Granting
of Treaty Benefits With Respect to the Income of Collective Investment Vehicles’
(10th February, 2010) :

On 9th December 2009, the OECD released for public comment a
Public Discussion Draft of a Report which contains proposed changes to the
Commentary on the OECD MC dealing with the question of the extent to which
either collective investment vehicles (CIVs) or their investors are entitled to
treaty benefits on income received by the CIVs. The OECD has now published the
comments received on this consultation draft on to the website. The reader who
wishes to study the comments may visit the OECD’s website.

4. Comments on the public discussion draft ‘Tax Treaty
Issues related to Common Tele-communications Transactions’ (10th February, 2010)
:

On 25th November 2009, the OECD released for public comments
a Draft Report which contains proposed changes to the Commentary on the OECD
Model Tax Convention dealing with tax treaty issues related to common
telecommunication transactions. The OECD has now published the comments received
on this consultation draft on its website.

5. Comments on the public discussion draft ‘The
application of tax treaties to state-owned entities, including Sovereign Wealth
Funds’ (10th February, 2010) :

On 25th November 2009, the OECD released for public comments
a Draft Report which contains proposed changes to the Commentary on the OECD
Model Tax Convention dealing with the application of tax treaties to state-owned
entities, including Sovereign Wealth Funds. The OECD has now published the
comments received on this consultation draft on its website.

6. Draft documentation for cross-border tax claims (9th
February, 2010) :

The OECD has released for public comment draft documentation (Implementation Package) for implementing a streamlined procedure for portfolio investors to claim reductions in withholding rates pursuant to tax treaties or domestic law in the source country. This release represents the continuation of work that was begun by the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross -Border Investors (ICG). The ICG was established in 2006 by the OECD’s Committee on Fiscal Affairs (CFA) to consider legal questions and administrative barriers that affect the ability of collective investment vehicles (CIVs) and other portfolio investors to effectively claim the benefits of tax treaties. On 12th January 2009, the OECD released two reports prepared by the ICG in fulfilment of this mandate. The ICG’s first Report, on the ‘Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles’, addresses the legal and policy issues relating specifically to CIVs. A modified version of that Report was released by the OECD for public comment on 9th December 2009.

The report by the ICG on ‘Possible Improvements to Procedures for Tax Relief for Cross-Border Investors’, discusses the procedural problems in claiming treaty benefits faced by portfolio investors generally and makes a number of recommendations on ‘best practices’ regarding procedures for making and granting claims for treaty benefits for intermediated structures. The Implementation Package was developed by the Pilot Group on Improving Procedures for Tax Relief for Cross-Border Investors (Pilot Group) to provide standardised documentation that could be used by countries that wish to adopt the ‘best practices’ described in the ICG’s report. The Pilot Group includes representatives of the tax administrations of some OECD member countries as well as representatives from the financial services industry.

The Implementation Package provides a system for claiming treaty benefits that allows authorised intermediaries to make claims on behalf of portfolio investors on a ‘pooled’ basis. One of the major benefits of such a system is that information regarding the beneficial owner of the income is maintained by the authorised intermediary that is nearest to the investor, rather than being passed up the chain of intermediaries. Although a source country may be willing to provide benefits on the basis of pooled information, it may want to maintain the ability to confirm that benefits that have been provided were in fact appropriate. In addition, when a residence country’s investor obtains income from abroad, the residence country has a compliance interest in knowing the details of that. For those reasons, the Implementation Package also recommends that those financial institutions that wish to make use of the ‘pooled’ treaty claim system be required to report on an annual basis directly to source countries (i.e., not through the chain of intermediaries) investor-specific information regarding the beneficial owners of the income.

The Implementation Package is the work of the Pilot Group; neither the views expressed in the ICG reports nor the ‘best practices’ reflected in the Implementation Package should be attributed to the OECD or any of its member states. The CFA will be deciding whether and how the work on improving procedures should be carried forward. Because the development of standardised documentation is useful only if the documentation is widely accepted by businesses and governments, the CFA has decided to invite comments from all interested parties before further consideration of the Implementation Package. Interested parties are therefore invited to send their comments on the Implementation Package before 31st August 2010. Comments should be sent electronically in Word format to : jeffrey. owens@oecd.org

    Amendments to OECD Transfer Pricing Guidelines :
On 9th September 2009, the OECD released for public comments a proposed revision of Chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter ‘TPG’). This follows from the release in May 2006 of a discussion draft on comparability issues and in January 2008 of a discussion draft on transactional profit methods, and from discussions with commentators during a two-day consultation that was held in November 2008. This represents an important update of the existing guidance on comparability and profit methods which dates back to 1995. The main proposed changes are as follows :

3.2009 edition of OECD’s Transfer Pricing Guidelines (9th September, 2009) :

On 7th September 2009, the OECD released the 2009 edition of its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter ‘TP Guidelines’).

The TP Guidelines provide guidance on the application of the arm’s-length principle to the pricing, for tax purposes, of cross-border transactions between associated enterprises. In a global economy where multinational enterprises (MNEs) play a prominent role, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm’s-length remuneration for their cross-border transactions with associated enterprises.

Since their adoption by the OECD Council in 1995, the TP Guidelines have been under constant monitoring by the OECD. They were complemented in 1996-1999 with guidance on intangibles, cross-border services, cost contribution arrangements and advance pricing arrangements. In this 2009 edition, amendments were made to Chapter IV, primarily to reflect the adoption, in the 2008 update of the Model Tax Convention, of a new paragraph 5 of Article 25 dealing with arbitration, and of changes to the Commentary on Article 25 on mutual agreement procedures to resolve cross-border tax disputes. References to good practices identified in the Manual for Effective Mutual Agreement Procedures were included and the Preface was updated to include a reference to the Report on the Attribution of Profits to Permanent Establishments adopted in July 2008.

The OECD is currently undertaking an important further update to the TP Guidelines, focussing on comparability issues and on the application of transactional profit methods3.

    4. Discussion Draft on the Transfer Pricing Aspects of Business Restructurings (19th September, 2008) :

The OECD has released for public comments a discussion draft on the Transfer Pricing Aspects of Business Restructurings4.

Business restructurings by multinational enterprises have been a widespread phenomenon in recent years. They involve the cross-border redeployment of functions, assets and/or risks between associated enterprises, with consequent effects on the profit and loss potential in each country. Restructurings may involve cross-border transfers of valuable intangibles, and they have typically consisted of the conversion of full-fledged distributors into limited-risk distributors or commissionnaires for a related party that may operate as a principal; the conversion of full-fledged manufacturers into contract-manufacturers or toll-manufacturers for a related party that may operate as a principal; and the rationalisation and/or specialisation of operations.

As evidenced by a January 2005 OECD Centre on Tax Policy and Administration Roundtable, these restructurings raise difficult transfer pricing and treaty issues for which there is currently insufficient OECD guidance under both the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the ‘TP Guidelines’) and the OECD Model Tax Convention on Income and on Capital (the ‘Model Tax Convention’) (see outcome of the January 2005 CTPA Roundtable). These issues involve primarily the application of transfer pricing rules upon and/or after the conversion, the determination of the existence of, and attribution of, profits to permanent establishments (‘PEs’), and the recognition or non-recognition of transactions. In the absence of a common understanding on how these issues should be treated, they may lead to significant uncertainty for both business and governments as well as possible double taxation or double non-taxation. Recognising the need for work to be done in this area, the Committee on Fiscal Affairs (‘CFA’) decided to start a project to develop guidance on these transfer pricing and treaty issues.

In 2005 the CFA created a Joint Working Group (‘the JWG’) of delegates from Working Party No. 1 (responsible for the Model Tax Convention) and Working Party No. 6 (responsible for the TP Guidelines) to initiate the work on these issues. At the end of 2007, having taken stock of the progress made to that point, the CFA referred the work on the transfer pricing aspects of business restructurings to Working Party No. 6 and the work on the PE threshold aspects to Working Party No. 1. The discussion draft released on 19th September, 2008 has resulted from the work done on the transfer pricing issues by the JWG and Working Party No. 6. Working Party No. 1 intends to consider PE definitional issues under Article 5 of the Model Tax Convention, both in the context of business restructurings and more broadly, as part of its 2009-2010 programme of work, which will result in a separate discussion draft.

This discussion draft only covers transactions between related parties in the context of Article 9 of the Model Tax Convention and does not address the attribution of profits within a single enterprise on the basis of Article 7 of the Model Tax Convention, as this was the subject of the Report on the Attribution of Profits to Permanent Establishments which was approved by the Committee on Fiscal Affairs on 24th June 2008 and by the OECD Council for publication on 17th July 2008. The analysis in this discussion draft is based on the existing transfer pricing rules. In particular, this discussion draft starts from the premise that the arm’s-length principle and the TP Guidelines do not and should not apply differently to post-restructuring transactions than to transactions that were structured as such from the beginning.

The discussion draft is composed of four Issues Notes.

In light of the importance of risk allocation in relation to business restructurings, the first Issues Note provides general guidance on the allocation of risks between related parties in an Article 9 context and in particular the interpretation and application of paragraphs 1.26 to 1.29 of the TP Guidelines.

The second Issues Note, “Arm’s-length compensation for the restructuring itself”, discusses the application of the arm’s-length principle and TP Guidelines to the restructuring itself, in particular the circumstances in which at arm’s length the restructured entity would receive compensation for the transfer of functions, assets and/or risks, and/or an indemnification for the termination or substantial renegotiation of the existing arrangements.

The third Issues Note examines the application of the arm’s-length principle and the TP Guidelines to post-restructuring arrangements.

The fourth Issues Note discusses some important notions in relation to the exceptional circumstances where a tax administration may consider not recognising a transaction or structure adopted by a taxpayer, based on an analysis of the existing guidance at paragraphs 1.36-1.41 of the TP Guidelines and of the relationship between these paragraphs and other parts of the TP Guidelines.

    5. The OECD pursues dialogue with the business community on comparability and profit methods for transfer pricing purposes (19th September, 2008) :

In May 2006 and January 2008, respectively, the OECD released for public comment a series of issues notes on comparability and a series of issues notes on transactional profit methods. These two discussion drafts6, which related to the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, attracted very detailed responses from the business community (see comments received on the May 2006 discussion draft on comparability and comments7 received on the January 2008 discussion draft on transactional profit methods).

Working Party No. 6, which is the OECD body responsible for the Transfer Pricing Guidelines, started discussing the comments received. Given the comments’ extent and complexity, delegates felt that the reviews of comparability and profit methods could greatly benefit from a face-to-face discussion with the commentators. Accordingly, it was decided to organise a consultation with the organisations that provided written comments.

C.   Tax Transparency and Exchange of Information Agreements :

1.  Tax Transparency — Global Forum launches country-by-country reviews (18th March, 2010)
The international fight against cross-border tax evasion has entered a new phase with the launch by countries participating in the Global Forum on Transparency and Exchange of Information of a peer review process covering a first group of 18 jurisdictions : Australia, Barbados, Bermuda, Botswana, Canada, Cayman Islands, Denmark, Germany, India, Ireland, Jamaica, Jersey, Mauritius, Monaco, Norway, Panama, Qatar, Trinidad and  Tobago.

The reviews are a first step in a three-year process approved in February by the Global Forum in response to the call by G20 leaders at their Pittsburgh Summit in September 2009 for improved tax transparency and exchange of information. In addition to a complete schedule of forthcoming reviews, the Global Forum also published three other key documents8 :

Welcoming this new step forward for the international tax compliance agenda, OECD Secretary-General Angel Gurría said : “The Global Forum has been quick to respond to the G20 call for a robust peer review mechanism aimed at ensuring rapid implementation of the OECD standard on information exchange. This is the most comprehensive peer review process in the world, and it is based on decades of experience at the OECD of conducting reviews of this kind in many other areas of policy making. I look forward to seeing the first results later this year”.

The Global Forum brings together 91 countries and territories, including both OECD and non-OECD countries. At a meeting in Mexico in September 2009, participants agreed that all members as well as identified non-members will undergo reviews on their implementation of the standard. These reviews will be carried out in two phases: assessment of the legislative and regulatory framework (phase 1) and assessment of the effective implementation in practice (phase 2).

The review reports will be published once they have been adopted by the Global Forum, whose next meeting will take place in Singapore at the end of September 2010.

Mike Rawstron, chair of the Global Forum, stated :
“This is the most comprehensive, in-depth review on international tax co-operation ever. There has been a lot of progress over the past 18 months, but with these reviews we are putting international tax co-operation under a magnifying glass. The peer review process will identify jurisdictions that are not implementing the standards. These will be provided with guidance on the changes required and a deadline to report back on the improvements they have made”.

For more information, contact Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration, (jeffrey.owens@oecd.org) or Pascal Saint-Amans, Head of the Global Forum Secretariat (pascal.saint-amans@oecd.org or) or visit www.oecd.org/tax/transparency and www.oecd.org/tax/evasion.

  2.  Progress on exchange of information in the Caribbean (24th March, 2010) :
Saint Kitts and Nevis, Saint Vincent and the Grenadines and Anguilla, an overseas territory of the United Kingdom, have signed a total of 14 tax information exchange agreements. These signings bring the total number of agreements signed by each jurisdiction to at least 12 that meet the internationally agreed tax standard. Accordingly, Anguilla, St. Kitts and Nevis and St. Vincent and the Grenadines become the 23rd, 24th and 25th jurisdictions to move into the category of jurisdictions that are considered to have substantially implemented the standard since April 2009. Since that time almost 370 agreements have been signed or brought up to the internationally agreed tax standard.

St. Kitts and Nevis and St. Vincent and the Grenadines signed agreements with Faroe Islands, Finland,  Greenland, Iceland, Norway and Sweden. These agreements add to agreements St. Kitts and Nevis had already signed with Australia, Monaco, The Netherlands, The Netherlands Antilles, Aruba, United Kingdom, Denmark, Belgium, New Zealand and Liechtenstein, bringing their total to 16 agreements. St. Vincent and the Grenadines has now signed 16 agreements that meet the standard, including its existing agreements with Australia, Austria, Denmark, the Netherlands, Aruba, Liechtenstein, Belgium, Ireland, the United Kingdom and New Zealand.

Anguilla, which signed an agreement with Australia and Germany on 19th March, had previously signed 11 other agreements — including agreements with the United Kingdom, Ireland, the Netherlands, New Zealand and the seven Nordic economies — and this signing brings their total to 13 agreements that meet the internationally agreed tax standard.

Each of these jurisdictions is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and has agreed to participate in a peer review of their laws and practices in this area. According to the schedule of reviews published by the Global Forum, they will undergo reviews of their legal and regulatory framework for exchange of information in 2011 and reviews of their information exchange practices in 2013.

Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration said, “We continue to see a great deal of progress as jurisdictions move to sign agreements. With Anguilla, St. Kitts and Nevis and St. Vincent and the Grenadines now reaching this benchmark, almost all of the Caribbean jurisdictions have substantially implemented the standard, and we will be working with the remaining jurisdictions— both in the Caribbean and elsewhere — to encourage them to follow this trend and provide whatever assistance we can. The real test will come with the peer review process, when the Global Forum can evaluate the quality of these agreements and the extent of the implementation of the standards in practice.”

For further information visit www.oecd.org/tax/ transparency or www.oecd.org/tax and www.oecd.org/tax/evasion.

    D. Other Developments at OECD :

    1. Draft Guidelines on the application of VAT/ GST to the international trade in services and intangibles for public consultation (9th February, 2010) :

The OECD Committee on Fiscal Affairs invites public comments on the draft Chapter II of the International VAT/GST Guidelines that deal with customer location in the context of identifying the jurisdiction of taxation.

These draft Guidelines build on the consultation documents that were issued by the Committee in 2008. They consider which jurisdiction has the taxing rights in cases where services and intangibles are supplied internationally. The Committee has already agreed the principle that the jurisdiction with the taxing rights is the one in which consumption takes place but there frequently need to be proxies to determine consumption. The draft Guidelines propose that, as a Main Rule, the location of the customer is the most appropriate proxy to determine consumption for business-to-business supplies. The draft assumes that all supplies are legitimate and with economic substance and that there is no artificial tax avoidance or tax minimisation taking place. Further, the Guidelines address services and intangibles received by enterprises with a single location only.

The Committee, through its Working Party 9 on Consumption Taxes and the Working Party’s Technical Advisory Group (TAG) comprising government, academic and business representatives, will work on the development of further Guidelines on enterprises with multiple locations and will deal with artificial avoidance and minimisation issues later. It will also consider appropriate exceptions to the Main Rule. Given that this further work may require the Committee to review this current draft, these Guidelines should be regarded as provisional.

The Committee invites interested parties to send their comments on this draft before 30th June 2010. Comments should be sent electronically (in Word format) to jeffrey.owens@oecd.org.

2. OECD Global Forum consolidates tax evasion revolution in advance of Pittsburgh (2nd September, 2009) :

On the eve of the Pittsburgh G20 meeting, the Global Forum on Transparency and Exchange of Information dealing with tax matters, took major steps to confirm the end of the era of banking secrecy as a shield for tax evaders.

Hailing the breakthrough OECD Secretary General Angel Gurria said “what we are witnessing is nothing short of a revolution. By addressing the challenges posed by the dark side of the tax world, the campaign for global tax transparency is in full flow. We have equipped ourselves with the institutional means to continue the campaign. With the crisis, global public opinion’s expectations are high, their tolerance of non-compliance is zero and we must deliver”.

Representatives from the Forum which now numbers almost 90 jurisdictions around the world and a host of International Organisations gathering in Mexico, took concrete steps to empower the Global Forum to play the leading role in the global campaign to fight tax evasion.

Building on the extraordinary progress made in the last few months to incorporate the globally accepted standards developed by the OECD in both new and existing agreements, the Forum took the following key decisions :

In its Assessment of Tax Co-operation in 2009 issued earlier (‘OECD assessment shows bank secrecy as a shield for tax evaders coming to an end’) the Global Forum highlighted that the standards on transparency and exchange of information pioneered by the OECD are now almost universally accepted and that extraordinary progress has already been made towards their full implementation.

The Forum also agreed on the need to convene regularly, with the next meeting scheduled for 2010.

Background :

The Global Forum on Transparency and Exchange of Information was created in 2000 to provide an inclusive forum for achieving high standards of transparency and exchange of information in a way that is equitable and permits fair competition between all jurisdictions, large and small, developed and developing. The initial group of jurisdictions numbered 32. It now brings together almost 90 jurisdictions. It has been the driving force behind the development and acceptance of these international standards. The 2009 Global Forum meeting was its fifth, the last taking place in 2005.

In 2002, Global Forum members worked together to draft a Model Agreement on Exchange of Information on Tax Matters which is now used as a basis for bilateral agreements. Since 2006, the Global Forum has published annual assessments of the legal and administrative frameworks for transparency and exchange of information in more than 80 countries.

Its most recent assessment, Tax Co-operation 2009
    Towards a Level Playing Field based on information available up until 31st July 2009, was published on 31st August 2009.

Since the London G20 meeting in April, 2009, over 50 new Tax Information Exchange Agreements have been signed (doubling the total number of Agreements signed since 2000) and over 40 double taxation conventions have been signed.

As a consequence, a further 6 jurisdictions have since substantially implemented the internationally agreed tax standards.