The new coalition government is still in the making 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?
Tax Shenanigans continuing
The OECD published data on November 17 that 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 $2 million as compared to around $300,000 for more taxing jurisdictions with a CIT rate above zero.
Moreover, in investment hubs (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 and more likely reflect BEPS (i.e. shifting profits offshore.)
The OECD says this demonstrates the need to implement the Two-pillar package. The first pillar would reallocate some profit to where the customers are, the second stipulates a 15% global minimum CIT rate.
United Nations vs OECD
An extraordinary clash of the tax titans has apparently begun. On November 23, 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 General 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 analyzing all relevant international legal instruments, other documents and recommendations that address international tax cooperation.
The US and EU unsuccessfully 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’s 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 prioritization 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, four new cases were opened and one closed resulting in 16 cases in progress at the end of 2021. The 16 included five transfer pricing cases with the US, three transfer pricing cases with other treaty countries and eight other cases with other treaty countries.
In short, few and slow.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@h2cat.com
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.