David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: multinational mediation.

With multinational corporate taxation and transparency being a hot topic for more than a decade now, Tax Notes reporters Kiarra Strocko and Sarah Paez recently took a deep dive into a dispute resolution mechanism set up by the OECD and its role in tax. Their story, "OECD Corporate Mediation Lacks Teeth on Tax Matters, Critics Say," was published January 25. We'll hear from them on what they found in their investigation. 

Kiarra, Sarah, welcome to the podcast.

Sarah Paez: Thanks, Dave. It's good to be back.

Kiarra Strocko: Thanks so much. Happy to be here.

David D. Stewart: All right, so why don't we start off with an overview of what we're talking about here, the OECD guidelines and this sort of dispute resolution mechanism? What are they?

Sarah Paez: Sure. The OECD guidelines for multinational enterprises are basically the set of soft law standards. They're nonenforceable, but they govern multinational corporate behavior. These range from areas ranging from human rights and labor to the environment and, more specifically, taxation.

Basically how these work is if any sort of group, a federation or an individual, finds that any sort of multinational corporation has violated these guidelines, they can file a complaint, called a specific instance, against a corporation for violating any chapter of the guidelines — there's 10 chapters — with any one of the 51 national contact points. Those are the participating countries in these multinational guidelines.

So basically what happens is these national contact points pick up the complaint if they think that it's worthy, and then they consider the request for mediation. They will work with the company and the individual or the group that filed the complaint to resolve the issue.

David D. Stewart: What are they really trying to do with using soft law here?

Sarah Paez: Well, it seems like the OECD and the countries that are involved in this specific instance complaint process related to the guidelines are just trying to hold multinational corporations to a certain standard, so whether that be a higher human rights standard for their supply chains or a higher labor standard for their employees. Then in the vein of taxation, that really leads to companies not practicing tax avoidance and basically following the spirit of the law, not just the letter of the law.

David D. Stewart: Kiarra, how did this issue come up on your radar?

Kiarra Strocko: Yeah. Both Sarah and I went to the Investigative Reporters and Editors Journalism Conference in Denver back in June 2022, and one of the panels we went to was led by individuals from Open Secrets, which is a nonprofit that tracks data on campaign finance and lobbying. They went into detail during the panel on how to search for filings under FARA, which is the Foreign Agents Registration Act.

Basically, that requires certain agents of foreign principles engaged in political activities to make these periodic disclosures of their relationship, activities, receipts, or disbursement. From there, Sarah and I became super interested in oil and gas companies and their spending related to foreign lobbying in Congress. Followed the money, as they say.

Then somehow we stumbled upon the complaint brought against Chevron on the OECD's database of specific instances, and we were shocked to see how many big name companies were involved in these cases related to tax specifically that were not well known. Amongst others, the companies that stuck out to us were Starbucks, Airbnb, and Pluspetrol.

David D. Stewart: All right, so let's get into the Chevron case. Could you tell us what this case is about and what happened during the proceedings?

Sarah Paez: Yeah, absolutely. So basically in 2018, a coalition of trade unions and nongovernmental organizations filed a complaint, a specific instance, with the Dutch NCP, which is housed within the Ministry of Foreign Affairs, against Chevron, the oil and gas multinational company. They were alleging that the company had violated the multinational guidelines by concealing information about how it relied on Dutch subsidiaries that were acting as shell companies in what they call tax avoidance schemes.

They basically said that Chevron hid tax-related information about its use of 14 shell companies established in the Netherlands that were used allegedly to facilitate tax avoidance through likely nonpayment of corporate and dividend withholding taxes in countries like Nigeria and Venezuela.

Basically, what these groups were asserting was that they just could not find this information. So not only was Chevron in violation of the taxation guidelines of the multinational guidelines, but they were actually also in violation of the disclosure guidelines, which say that multinational corporations must disclose certain financial and other information to the public.

David D. Stewart: OK. And what happened during the proceedings?

Sarah Paez: We heard from both sides. We interviewed people who were involved in putting the complaint forward, and we also interviewed a spokesperson from Chevron. And we were able to interview someone who works in the Dutch NCP.

What we found out was that, according to Chevron, they received this invitation from the Dutch NCP to engage in a mediation process based on this complaint. Chevron said that they did work with the Dutch NCP for about three years, answering their questions and going back and forth with them, and at the end of that three years decided to pull out of the mediation process because they felt that there were issues with certain things being disclosed to the public as a result of this complaint that they did not want disclosed. They thought that that was unfair.

Then they also mentioned that there was an issue with conflict of interest within the Dutch NCP. The Dutch NCP is composed of four experts. They have one from each of the relevant stakeholder groups that would be involved in the MNE guidelines. So that's business, one from NGOs, one from trade union, and one from academia. The chairperson of the NCP that Chevron was alleging had a conflict of interest had actually worked for one of the groups that brought the complaint, FNV, which is a trade union. Now she's, of course, not part of that anymore, but they were saying that they had a problem with the fact that she had been involved with that group prior.

But of course, what we heard from the people who brought the complaint and even also from the person we talked to within the Dutch NCP was that's how that works. They do need somebody who is representative of trade unions, who's really gotten to a point in their career where they're considered an expert. And obviously, the chairperson had worked in many different capacities. She hadn't just worked with this one organization, and of course, they have representatives from other areas. So anyway, that was something that was interesting that we heard from all the relevant groups that were involved in this complaint process.

But Chevron pulled out, and the Dutch NCP issued its final statement and basically acknowledged from what they could find from the publicly available information that they were able to access — they said, "Yeah, this complaint's pretty reasonable," and they issued a few recommendations for Chevron to up its transparency and to get in line with the OECD multinational guidelines that they found that they had violated.

David D. Stewart: So Chevron withdrew from this process, but have they done anything to respond to the recommendations of the panel?

Sarah Paez: From what we can tell, not really. Of course, Chevron has told us that they comply with all tax laws in all of the countries that they operate in. But in November, the social justice nonprofit Oxfam International actually came out with a report saying that there are several oil and gas companies, including Chevron, that continue to practice secretive tax practices and that these companies, including Chevron, have ignored repeated requests to disclose tax details that are in line with the standards of the Independent Global Reporting Initiative. That report was issued in November of 2022, so even five years on, it appears that Chevron is still not disclosing information up to the standards that countries would like to see.

David D. Stewart: Since all of this is taking place in the Netherlands, have we heard anything from the Dutch government about it?

Sarah Paez: Well, we have not heard anything from official government ministries about it. However, the Dutch NCP, while they are an independent structure that is not technically affiliated with the Dutch government, they are at arm's length with the Dutch government. So hearing from them on something of this caliber, a violation of the multinational guidelines by a rather large multinational company — what we heard at least from some of the NGOs and trade unions was that it was a really big deal that the Dutch NCP did issue those recommendations and that they did basically side with the complainants in saying that they really needed to see more from Chevron in terms of transparency.

David D. Stewart: All right. Now, turning to this process in the larger picture, you mentioned how this organization is at arm's length with the government. Would it benefit from perhaps a closer relationship with the government and information sharing?

Kiarra Strocko: Yeah. This topic of access to data between tax authorities and NCP officials kept coming up in our interviews with sources, and it made us think, "Why is there this lack of communication with tax authorities when that would be super useful if companies chose not to engage or participate in the process?"

That was the issue with Chevron and why there were possible factual errors in the Dutch NCP's final statement, which we mentioned in our story. Basically, the NCP must conduct its assessment using publicly available information. When a company doesn't participate, then the numbers might get skewed or rounded up or down. So what we thought was interesting was when the Dutch NCP official said to us that she didn't think there was a need for further coordination with other departments when we asked her about whether this is something that might be considered in the future.

I'm not sure if there are privacy and data protection concerns, a lack of resources, or if they just simply don't think it would help. But from the people we spoke to ranging from practitioners, professors, and individuals from involved NGOs, it seems like it would be beneficial. We spoke with a law professor, Martijn Scheltema, and he told us that in the case of the Dutch NCP, it would potentially be because if the government supplied this type of information, it might jeopardize its independence, which Sarah mentioned previously and which we talked about in our story about how they are separate.

David D. Stewart: Now, from the people that you spoke with, have you heard any ideas of how they could make this process work better?

Kiarra Strocko: Yeah, so we received interesting recommendations from Martijn, who I just mentioned, and he said that there should be escalation mechanisms in place if parties don't agree or one party doesn't want to participate. He also emphasized that the NCP processes between OECD jurisdictions that adhere to the MNE guidelines should be aligned and have more cohesion.

We learned that 51 governments have an NCP, and each NCP has the autonomy to structure itself and its procedures as they deem appropriate, so long as it aligns with these OECD/RBC (responsible business conduct) rules. He said that government should just be more aware and attach consequences to NCP procedures if companies aren't willing to participate or implement the recommendations. This would definitely level up that enforcement aspect of things, which might be lacking now.

It was interesting also because Sarah and I went to a conference in Vienna in January with tax professionals, some in government, and many people were not aware of this mediation process generally. And so overall, gaining visibility, accountability, and compatibility would be a good start.

I know that they're actually planning on having a ministerial meeting February 14-15 to discuss some of these guidelines, and it's going to be promoting and enabling responsible business conduct in the global economy. That's their focus for this one.

David D. Stewart: As you've mentioned earlier, this process is for many different areas of multinational activity. Are there any specific challenges for working in the tax area?

Sarah Paez: Absolutely. Many of the people we talked to, including the current director of the Center for Tax Policy and Administration at the OECD, Grace Perez-Navarro, said that taxes are a particularly tough area to have mediation in because many companies really see tax as "This is the area of the tax authorities. We really don't want to engage in any other arena or medium because we engage with the tax authorities on tax matters." The tax authorities often are the ones who have the mandate and the ability to look through personal taxpayer data and make determinations about what's owed, whereas for something like the Dutch NCP, they really don't have that same type of authority.

We heard this from Grace, but we also heard it from others that we interviewed, is that taxes, it's really tough because, again, the tax authorities is an area where companies already engage. They don't really know about other forms of mediation that are available. It's a two-pronged issue. It's that companies may not want to engage with anyone other than the tax authorities, but they also might not know to engage in any other places other than the tax administration.

Kiarra Strocko: Yeah. We heard from a few other officials that it's more effective in the environmental and human rights sector, and so Grace was saying that she's not sure if it works. It might work better among different policy areas. Since there's not many incentives in the tax sector, maybe merging the tax chapter and disclosure chapter and putting it into the human rights chapter or environmental chapter because the way that these companies structure and do their tax planning, it affects the lives of employees and different people. That was another thing that we heard from the people that we spoke with.

David D. Stewart: Well, Kiarra and Sarah, this has been fascinating. Thank you for being here.

Sarah Paez: Thanks for having us.

Kiarra Strocko: Yeah, thanks for having us. It's really great to discuss this.

David D. Stewart: And listeners who are interested in reading this story can check out a link in the show notes.

And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Executive Editor for Commentary Jasper Smith. Jasper, what do you have for us?

Jasper Smith: Thanks, Dave. In Tax Notes Federal, Steven LaGarde and Christa Bierma explore what's next for the nonprofit executive compensation excise tax. Benjamin Alarie and Christopher Yan examine the intersection between tax credit and trader business.

In Tax Notes State, three Eversheds Sutherland practitioners describe water's-edge combined reporting and the 80/20 rules. Brian Hamer highlights troubling tax behavior that illustrates the need to change state tax codes.

In Tax Notes International, Mindy Herzfeld performs a reality check on the OECD's updated revenue estimates for its tax reforms by examining the economic impact of the TCJA. Jenny Longman and Nora Newton Muller examine the U.S. tax treatment of property that is divided into a usufruct and a bare ownership interest.

In Featured Analysis, Nana Ama Sarfo reviews the OECD's updated economic impact assessment for pillars 1 and 2.

On the Opinions page, Robert Goulder comments on congressional consideration of a national sales tax.

And now, for a closer look at what's new and noteworthy in our magazines, here's Tax Notes Federal Editor in Chief Ariel Greenblum.

Ariel Greenblum: Thanks, Jasper. I'm here with Abraham Leitner, a director at Goulston and Storrs. Welcome to the podcast, Abe.

Abraham Leitner: Thank you, Ariel. It's great to be here with you.

Ariel Greenblum: We're here to discuss your upcoming Tax Notes Federal piece titled "Reexamining Underwater Lease Assumption Transactions," which you co-wrote with Leah Segal, also of Goulston and Storrs. Could you give us a brief overview of the article?

Abraham Leitner: Sure. First, let me say I appreciate you're inviting me here to talk with your listeners about the article. The title of our article is "Reexamining Underwater Lease Assumption Transactions."

So for some context, parties entering into a new lease will normally negotiate the rent to a level that they perceive to be the market rate for the lease property, taking into account the type of property, size and condition of the property, length of the term and market conditions.

But sometimes the tenant discovers that the bargain it struck was a bad deal, and perhaps due to subsequent market changes or other factors, the rental rate for a similar property turns out to be lower than the rent that the tenant is obligated to pay under the lease. Such a lease is said to be underwater.
If the tenant wants to give up the space by assigning the underwater lease to a new tenant, the original tenant may need to pay the new tenant to assume the unfavorable terms of the lease.

Our article analyzes the treatment of a transaction like this, in which a tenant that's a party to an unfavorable lease assigns the underwater lease to a new tenant in consideration for a payment it makes to the new tenant. The primary issue for the new tenant who agrees to assume an underwater lease is whether the payment they receive from the original tenant is taxable income.

Readers who are unfamiliar with the case law in this area may be surprised to learn that there's a long-standing line of case law holding such payments are, in fact, not taxable to the assignee. The leading case on the issue is a Second Circuit case named Oxford Paper vs Commissioner, which was decided in 1952.

Oxford Paper involved in a company had acquired a paper mill that came along with a lease for water rights that was, I guess, ironically, underwater. The owner of the paper mill was so eager to be relieved of the payments it was required to make under the lease that it gave the entire plan to the assignee along with $100,000 in cash for no consideration other than the assignee's agreement to take over the unfavorable water lease. The Oxford Paper decision mainly focused on the question of whether the assignee could claim a basis in the plant it acquired, and the court essentially held that the assignee is treated as having purchased the plant for an amount equal to the negative value of the lease it assumed in the transaction.

However, the opinion makes clear that the assignee is not treated as receiving income from the assigner with respect to the cash payment. A few years after Oxford Paper was decided, the IRS issued a published ruling, Revenue Ruling 55-675, which followed the court's holding in Oxford Paper.

Our article focuses on a more recent line of authority that some practitioners have interpreted as casting doubt on whether the Oxford Paper case and subsequent ruling can still be relied on. These authorities include a series of private letter rulings and ultimately a decision by the Federal Circuit Court of Appeals in a case called Emergent Energy, which involved nuclear decommissioning liabilities.

So a nuclear facility operator is required by federal law to safely dismantle and decommission the nuclear reactor at the end of its life. The cost of decommissioning a reactor is so prohibitive that it's common practice for the seller of a nuclear facility to give the buyer cash in consideration for the buyer assuming the decommissioning liability. However, the IRS has consistently refused to allow purchasers of such facilities to exclude such payments from their income under the Oxford Paper doctrine. And in the emerging case, the court sided with the IRS on this issue.

These authorities assert that the economic performance requirement, which is contained in code section 461H, prohibits taxpayers from treating an obligation to incur future expense as a "liability," quote, unquote, for tax purposes until economic performance occurs, which allows the obligation to ripen into a liability that can be recognized for tax purposes.

Under the economic performance rules, economic performance of obligations to decommission a nuclear facility occurs only when the costs are actually incurred. Since the liability cannot be recognized for tax purposes before then, the payments a purchaser receives for assuming the decommissioning obligation cannot be treated as offset by the decommissioning liability, and the payments are therefore taxable to the buyer.

Now, section 461H was enacted in 1984, several decades after the Oxford Paper case was decided and then blessed by the IRS in Revenue Ruling 55-675. It's been suggested by some practitioners that the Oxford Paper doctrine can no longer be relied upon to exclude a cash payment received by the assignee of an underwater lease because economic performance of a tenant's obligations to pay rent under a lease generally incurs only as property is actually used by the tenant. So it's a similar problem to the one faced by the buyers of nuclear facilities.

Our article argues that the Oxford Paper doctrine is still good law and has not been adversely affected by the enactment of the economic performance doctrine. We argue that underwater leases are distinguishable from the adverse authority in the nuclear decommissioning context because the economic performance rules for underwater leases operate differently from the way those rules operate for nuclear decommissioning obligations.

Ariel Greenblum: Thanks, Abe. Wow. What prompted your interest in this topic in the first place?

Abraham Leitner: This article is actually repurposed from a paper Leah and I wrote and presented at a tax club in New York City. The idea for the paper came out of research we did related to a live transaction in which one of our clients assumed an underwater lease and received a substantial payment from the original tenant for taking over the lease.

I had a particular affinity for the issue because I had worked on a similar deal very early in my career as a junior associate, and I had, I guess, positive memories of that assignment and cutting my teeth on those issues. I was struck that this is really a fascinating issue. It touches on some fundamental principles of the tax law, such as the definition of income, the definition of a liability and how those two things intersect. So I felt it was a rich topic to explore in a paper.

Ariel Greenblum: The article is great. I've read it. Before we let you go, where can listeners find you online?

Abraham Leitner: Sure. My contact information and bio can be found on my firm's website at goulstonstorrs.com, and I'm also on LinkedIn. I would certainly welcome any comments or questions from your listeners or from people who read the article.

Ariel Greenblum: Thank you for joining us on the podcast, Abe.

Abraham Leitner: Thank you very much, Ariel.

Ariel Greenblum: You can find Abe's co-authored article online at taxnotes.com, and be sure to subscribe to our YouTube channel, Tax Notes, for more in-depth discussions on what's new and noteworthy in tax. Again, that's Tax Notes with an S. Back to you, Dave.

David D. Stewart: That's it for this week. You can follow me online at TaxStew. That's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions or suggestions for future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.