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Germany’s Kreienbaum seeks to prevent tax disputes

The new Chair of the Committee on Fiscal Affairs foresees further steps on tax transparency, certainty and digitalization.

Interview by Bill Millar

Martin Kreienbaum will arguably be one of the most important men in tax in 2017.

On 1 January 2017, the Director General of International Taxation at Germany’s Federal Ministry of Finance also became Chair of the Committee on Fiscal Affairs (CFA) at the Organisation for Economic Co-operation and Development (OECD).

With Germany now holding the G20 Presidency — and with the Hamburg G20 Leaders Summit fast approaching —few stakeholders will exert more influence on the direction that world leaders will take on taxation.

Kreienbaum recently spoke with Tax Insights about what to expect.

Tax Insights: What outcomes do you hope to achieve under Germany’s presidency of the G20?

Martin Kreienbaum: The G20 has an ambitious tax agenda, and our aim is to make progress on all relevant issues.

Obviously, this includes implementation of the BEPS (base erosion and profit shifting) recommendations and further steps on tax transparency, especially with respect to beneficial ownership information.

In addition, we want to continue the recent work on tax certainty; the OECD and IMF (International Monetary Fund) are expected to produce a comprehensive report for the G20.

“I am convinced that more tax certainty will translate into a better business environment and higher economic growth.“

We will also initiate a much-needed discussion on the tax challenges of digitalization, building on the work that has already been conducted during the BEPS project.

And in general, we will take the specific needs and interests of African and other developing countries into account, as this is one of the broader policy goals of Germany’s G20 presidency.

How do tax treaties between countries affect international trade?

Tax treaties are an indispensable instrument facilitating international trade.

They contribute to the creation of a level playing field by preventing serious distortions of competition resulting from double taxation as well as double non-taxation.

In addition, they include a mechanism for international dispute resolution (known as the mutual agreement procedure or MAP) that can provide relief for taxpayers where problems result from the unavoidable differences between national legislation and jurisprudence.

Last, but not least, the provisions on international assistance in tax matters can indirectly reduce the compliance burden for taxpayers and safeguard the correct application of tax laws.

With regard to certainty, what is the scale of tax controversy today in Germany, and how does it compare to worldwide trends?

We are seeing a rise: there were 374 new MAP cases in Germany in 2014 and 363 in 2015. But disputes are to be expected.

Today, we see companies that are deeply integrated internationally, and are executing more and more complex, cross-border activity than ever before.

This presents a real challenge not only for us but also for other administrations.

Over the last 10–15 years, we have seen a significant increase in MAP-based disputes worldwide.

If you look at the OECD figures for 2015, you see there are 2,509 new cases worldwide.

Many are counted twice because authorities from two or more countries report the same case.

In addition to the new cases, the size of the backlog increases.

So existing MAP cases are not being resolved as quickly as new cases are coming in, meaning the worldwide backlog is becoming quite sizable — over 6,000 cases.

The fact that so many are asking for access to MAP procedures is a positive development in a way.

It shows that companies are placing trust in the agreements and cooperation we have with our treaty partners.

There are many ways to handle disputes. In your view, what is the ideal approach?

I think we should focus not only on resolution but also on prevention of disputes.

I believe it all starts with the greater use of joint audits.

In cross-border situations, companies can make information available to other administrations so that everyone can operate on the same factual basis.

It starts with improving processes relating to transparency.

If, following an audit, the parties are too far apart and cannot reconcile, then MAP becomes an indispensable tool.

After that, I believe countries need a proper arbitration mechanism to resolve cases — which is available in Germany.

Of course, in Germany, this is a very small number of cases, as less than 3% of our MAP procedures closed without an agreement between the involved jurisdictions.

So we need all three steps: joint audits, then MAP, followed by arbitration.

How will the OECD’s BEPS project impact these processes?

Action 14 is one of the few BEPS actions that resulted in a binding minimum standard for tax administrations.

This demonstrates how vital it was for the OECD to make progress in dispute resolution.

BEPS will improve matters by granting access to MAP procedures: more nations will do so.

Second, timely resolution: two years on average, which will be a significant improvement in many cases.

How many nations are likely to adopt these measures?

All countries participating in the BEPS project have committed to the minimum standards.

And while this presents a challenge for Germany in terms of sufficient staff and resources, it will be much more difficult for many others.

In particular, there are developing nations that at this point do not have the needed skills and resources.

Here, the OECD and others are providing training, workshops, etc., to aid them in capacity building.

What will be the impact from Action 14’s peer review process?

The review and monitoring process is meant to encourage countries to have the appropriate policies and resources in place.

Peer review should be a very effective mechanism, as no country wants to be seen as underperforming standards, which will hurt investment.

Initially, the G20 nations will first be monitored, but others will likely participate at a later time.

We must start somewhere; the others will follow later.

Do you have any advice for businesses?

Most disputes and MAP cases stem from transfer pricing.

Here, the central issue for taxpayers is to provide sound documentation in a timely manner.

Without the necessary basis of established facts, the resolution of transfer pricing disputes becomes very difficult.

One more consideration: perhaps make more use of APAs (advance pricing agreements) or advance rulings.

Gain that certainty early and avoid disputes.

As Chair of the OECD’s Committee on Fiscal Affairs, how do you define success for its tax certainty program?

I am convinced that more tax certainty will translate into a better business environment and higher economic growth.

Compliance with the minimum standard as agreed in BEPS Action 14 has been continuously advocated by the Committee on Fiscal Affairs and will be crucial in this respect.

Moreover, the G20 should strive to agree on additional measures to make life easier for business and tax administrations at the same time.

As was mentioned earlier, this will be one of the core elements of our G20 tax agenda.

Are there any parallel or related actions by groups beyond the OECD?

There is an important one from Brussels where the European Commission has proposed to convert the existing arbitration convention into a directive and broaden its scope to comprehensively include business taxation.

There is also discussion on ways to expand the use of joint audits for preventing disputes.

Will US business tax reform herald a new period of uncertainty for other governments?

I think that there has already been a wealth of discussion about possible US business tax reform, and well-thought-out proposals have been put on the table.

Of course, it is up to the US to decide on the further direction of eventual policy changes.

Quite naturally, changes to existing tax rules always contain some element of uncertainty, but I count on the new US government to continue its excellent relationship with other countries about international tax issues.

How will the cross-border tax architecture of 2025 differ from that of today?

We have seen significant improvements of the international tax architecture over the last few years.

However, additional steps are necessary to further eliminate harmful double taxation and double non-taxation.

I am convinced that internationally concerted action is better suited to deal with these issues than unilateral measures.

In this regard, the Inclusive Framework on BEPS — which is open to all interested jurisdictions — will be of high importance as it presents a unique opportunity to intensify the constructive tax dialogue among countries worldwide.

So if we continue our close international tax cooperation, I am confident that the cross-border tax architecture of 2025 will be something we all can look forward to.

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