BEPS 2.0 – What is the Model Competent Authority Agreement?
As discussed in our recent insight on Pillar 1 – Amount B, the Organisation for Economic Cooperation and Development (OECD)/G20 Inclusive Framework on BEPS (IF) have developed a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. This framework includes:
- Pillar 1 - including Amount A, permitting allocation of taxing rights to market jurisdiction in respect of the most profitable multinational enterprises worldwide, and Amount B, which aims to simplify the application of existing transfer pricing rules; and
- Pillar 2 – the introduction of a global minimum tax rate.
Amount B, or the simplified and streamlined approach, is intended to simplify the application of the arm’s length principle for baseline marketing and distribution activities, with a focus on supporting Low Capacity Jurisdictions (LCJs) that often have tax authorities lacking resources or access to data.
Ongoing work by the IF saw it extend its political commitment to respect Amount B outcomes for covered jurisdictions, which includes not only LCJ but also some low and middle-income countries. On 26 September 2024, the IF published the Model Competent Authority Agreement (MCAA) as a practical tool to facilitate the implementation of this political commitment. In this insight, we explore the definition of covered jurisdictions and the MCAA. Further detail can be found here.
What is a covered jurisdiction?
The IF has made a political commitment to respect Amount B outcomes in relation to covered jurisdictions and to take all reasonable steps to avoid any resulting double taxation. Following the publications by the IF in the first half of 2024 with respect to Amount B, work remained to agree a list of jurisdictions within the scope of this political commitment and to provide practical tools to further support this objective.
In June 2024, the IF published its Statement on the definition of covered jurisdiction for the Inclusive Framework political commitment on Amount B. The list currently includes 66 countries that fall into the determinative criteria. This criteria requires a jurisdiction to be a low- and middle income jurisdictions under the World Bank Group country classification by income level and either:
- Be a member of the IF, excluding EU, OECD and G20 members;
- Be a member of the IF and an EU, OECD and G20 member country where the jurisdiction has expressed to the IF willingness to implement Amount B[1]; or
- Be a non-IF member that has expressed a willingness to apply Amount B to the IF (upon request and approval by the IF).
The political commitment can also be extended to any other jurisdiction on a bilateral basis.
What is the MCAA?
The political commitment made by the IF can be implemented through domestic legal and administrative practices. In the absence of this, the MCAA facilitates the IF political commitment where a bilateral double tax treaty is in place. The agreement remains optional to introduce and the language subject to change through bilateral negotiations. Jurisdictions may enter into such agreements even in cases where neither party is a covered jurisdiction.
Notably, the MCAA requires respect for outcomes arising under Amount B in the applying jurisdiction as an appropriate approximation of an arm’s length return. This includes in cases where the Mutual Agreement Procedure (MAP) is initiated to resolve transfer pricing issues between Competent Authorities of different countries.
The MCAA also provides flexibility to agree the upper bound of operating-expenses-to-net-revenues of the quantitative filter to apply in the bilateral context.
Our observations
The MCAA is a helpful practical tool for resource constrained jurisdictions that are likely to adopt Amount B that will go some way to securing the political commitment made by the IF, regardless of the domestic legislative and administrative practices of other members of the IF that may choose not to adopt Amount B.
Securing this commitment is not only important for LCJs but for taxpayers that may be facing the risk of disputes as a result of the asymmetric adoption of Amount B. Despite the moves forward, uncertainty remains as MAP does not require a resolution to be reached and there is no guidance as to what the next steps might be in this scenario.
There are also complexities arising in relation to the quantitative filter, that may now see variation between the domestic and bilateral position. Agreeing the upper bound between states removes some difficulty that could arise as a result of asymmetric cross-border treatment but leaves open the possibility that transactions of the same nature could face different treatment depending on the counterparty. While the level of variation remains to be seen, a fixed upper bound would have provided greater certainty in this respect.
We are here to help
If you have any questions on Amount B’s simplified and streamlined approach, or would like assistance with understanding the impact on existing transfer pricing policies, please get in touch with our tax advisor, Nick Cullen via the form below. Alternatively, speak to your usual Azets advisor.
[1] This is the case in respect of Argentina, Brazil, Costa Rica, Mexico, and South Africa.
The information contained within this insight is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
