In brief

On 26 September 2024, the OECD Inclusive Framework published a Model Competent Authority Agreement (MCAA) to assist jurisdictions that have implemented the simplified and streamlined approach under Amount B to provide tax certainty. The MCAA is mainly intended to be applied in relation to Covered Jurisdictions as defined in the 17 June 2024 guidance. However, the OECD notes that Inclusive Framework members may use the MCAA as a model for negotiations with jurisdictions that are not defined as Covered Jurisdictions. This workstream has remained pending since the release of the guidance reports in February and June 2024 (“Amount B Guidance“). Therefore, the MCAA brings Amount B one step further toward completion and political agreement, in light of the envisaged local implementation commencing in fiscal years beginning after 1 January 2025.

General content of the MCAA

The MCAA is a six-page document containing guidance to aid jurisdictions with a bilateral tax treaty in place to:

• Help implement their political commitment to respect the outcomes of Amount B without having to initiate a mutual agreement procedure to reach the Amount B result
• Give further guidance where a mutual agreement procedure is implemented because a specific outcome is not in line with Amount B

As a result, the outcomes appropriately determined under Amount B in one jurisdiction should be automatically accepted by the other jurisdiction, and any downward adjustment because of Amount B should be timely notified to the other jurisdiction to avoid any double taxation. Where the result is not in line with the Amount B Guidance, it should be applied and accepted in a mutual agreement procedure as an acceptable approximation of an arm’s length outcome.

The document clarifies that, while entering into such a competent authority agreement is optional for jurisdictions, its absence does not impede the implementation of their political commitment under Amount B, which could be implemented by jurisdictions through other means in light of their legal and administrative systems. This means that, absent the existence of an MCAA, jurisdictions should implement or provide for unilateral measures ensuring that the Amount B result is adhered to. This, of course, could mean a higher degree of uncertainty and administrative burden in those cases.

Specific noteworthy language

The OECD Inclusive Framework has drafted the text of the MCAA as suggested language only, with certain optional provisions that can be customized. Therefore, jurisdictions are free to modify the specific language of the different provisions in their bilateral negotiations.

The MCAA (rightfully so) does not dive into any technical details on the Amount B mechanism. Instead, it refers to the relevant Annex of Chapter IV of the OECD Guidelines. However, one interesting point is included in Paragraph 2, Section 2 – Scoping Criteria of the MCAA that relates to Item 13.b of the Amount B Guidance:

“2. For the purposes of this Agreement, the applicable upper bound of the operating expenses-to-net revenues criterion given by the Guidance in [Jurisdiction A] is [X]%.”

If adopted by the contracting jurisdictions, this would mean that the jurisdictions concerned cannot apply different upper bounds for the operating expenses-to-net revenues criterion. The result is that both jurisdictions apply the same scoping criteria to consider transactions to be in scope of Amount B, thus avoiding potential controversy.

The optionality left to jurisdictions to choose the level of the upper bound of this threshold was initially identified as a major source of uncertainty and potential disputes. In principle, the clarification in the MCAA should reduce the risk of disputes. However, because the competent authority agreements will each be negotiated bilaterally, there is still a risk that the same jurisdiction may agree to different upper bounds with different jurisdictions, creating further challenges to managing transfer pricing policies for MNEs.

Moreover, jurisdictions without an MCAA and that have implemented Amount B may still be subject to potential disagreements in relation to assessing the scope of the same qualifying transaction, on the basis of different standards with respect to the upper bound of the operating expenses-to-net revenues criterion.

The MCAA is a helpful tool to provide tax certainty for taxpayers if the respective jurisdiction uses it. However, given the optionality of Amount B and the fact that jurisdictions will likely take years to negotiate and enter into an MCAA, there is still a lot of potential for controversy — something that Amount B sought to avoid.