The OECD, the UN and Israel
The new Israeli coalition government is still on the way, but Israel has been a member of the OECD since 2010 and members are supposed to apply OECD pronouncements under the 1960 OECD Convention. It is like EU membership minus a Brexit option. What does the OECD say? Why is the OECD fighting the United Nations? How does Israel compare? Read on.
Tax shenanigans continuing:
The OECD published data on November 17 which shows continuing base erosion and profit shifting (BEPS) tactics by large multinational enterprises (MNEs) The OECD’s data covers over 160 countries and almost 7000 MNEs
The data shows that the median average revenue per employee in offshore jurisdictions with a corporate income tax (CIT) rate of zero is around USD 2 million as compared to around USD 300,000 for more taxing jurisdictions with a CIT rate above zero.
Moreover, in investment hubs (i.e. offshore locations), intercompany revenues between related parties account for 35% of total revenues, compared with around 15% in all types of locations. The OECD says these effects could reflect commercial considerations, they are more likely reflect BEPS i.e. shifting profits offshore.
The OECD says this demonstrates the need to implement the Two Pillar package. Pillar 1 would reallocate some profit to where the customers are. Pillar 2 stipulates a 15% global minimum CIT rate
United Nations Versus OECD:
A strange war of the worlds – developed versus less developed – has just begun.
On November 23, 2022, the United Nations Second Committee (Economic and Financial) approved a resolution on “Promotion of inclusive and effective international tax cooperation at the United Nations” (document A/C.2/77/L.11/Rev.1).
Under its terms, the UN Assembly should begin intergovernmental discussions on ways to strengthen the inclusiveness and effectiveness of international tax cooperation, including the possibility of developing an international tax cooperation framework or instrument.
Also, the UN Secretary-General is requested to prepare a report analysing all relevant international legal instruments, other documents and recommendations that address international tax cooperation.
The USA and EU unsuccessfully objected expressed objections to this UN resolution as the OECD Inclusive Forum has already developed just such an international tax cooperation framework.
So what’s going on? The UN resolution reflects the fact that Nigeria, South Africa and other developing nations feel they have insufficient say at the OECD, so they want to give the UN a try.
Dispute Resolution Statistics:
Where there’s tax, there’s scope for a dispute. To encourage international trade, tax disputes need to be resolved quickly and efficiently. So it is worth noting that on November 22, the OECD released mutual agreement procedure (MAP) statistics covering dispute resolution in 127 jurisdictions (including Israel) and nearly all MAP cases worldwide in 2021.
What’s in these statistics? They show a number of trends.
First, more MAP cases were closed in 2021. Approximately 13% more MAP cases were closed in 2021 than in 2020, with both transfer pricing cases (22%) and other cases (almost 7%) closed being significantly more than in 2020. Tax authorities were able to close more cases in 2021 due to the greater use of virtual meetings, the prioritisation of simpler cases and greater collaboration. Further, jurisdictions noted that increases in staff and the experience of these staff are now reflected in their ability to be able to resolve more cases.
Second, there were slightly fewer new cases in 2021. The number of new MAP cases opened in 2021 decreased (almost 3%) compared to 2020.
Third, outcomes remain generally positive. Around 75% of the MAPs concluded in 2021 fully resolved the issue both for transfer pricing and other cases (similar to 2020). Approximately 2% of MAP cases were closed with no agreement compared to 3% in 2020.
Fourth, cases still take a long time. On average, MAP cases closed in 2021 took 32 months for transfer pricing cases (35 months in 2020) and approximately 21 months for other cases (18.5 months in 2020).
How does Israel compare?
The OECD dispute resolution statistics include an annex on Israel. This reveals 13 dispute cases in progress at the beginning of 2021, 4 new cases were opened and one closed, resulting in 16 cases in progress at the end of 2021. The 16 included 5 transfer pricing cases with the US, 3 transfer pricing cases with other treaty countries and 8 other cases with other treaty countries.
In short, few and slow.
Please contact us if you have an international tax dispute or difficulty.