Mexico: To Arbitrate Or Not To Arbitrate? The Mexican Perspective

If representatives wisely choose to apply Part VI of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLC), it will definitely be considered as a winning bet on the future of foreign investments in Mexico. If instead, the decision goes the other way, we unenthusiastically point out that Mexico would be missing out on a historic opportunity to strengthen the rule of law and to guarantee legal certainty in the resolution of conflicts arising out of double taxations.

International arbitration in tax matters

International arbitration in tax matters is regarded as an integral part of the already renowned mutual agreement procedures (MAPs) included in double taxation model treaties, such as (i) the OECD Model Convention (OECD Model), or (ii) the United Nations Model Convention (UN Model).

Traditionally, international tax-related disputes have been solved through MAPs. Nevertheless, and with the release of the Base Erosion and Profit Shifting (BEPS) project in 2013, the general expectation regarding tax related controversies is that a significant number of new and more complex disputes will arise. Hence, speculation falls on the belief that present mechanisms will prove insufficient to solve these international double taxation (or double non-taxation) issues.

Since the 2008 recession, foreign governments have increased the number and sizes of tax audits and assessments because they are in need of increasing their revenue. This has also brought an increase of double taxation cases of international taxpayers. This is a real challenge for domestic courts since these controversies are very sophisticated and require deep specialisation by the judges that will analyse and decide which interpretation should prevail.

In fact, OECD MAP statistics for 2015 "reveal that at the end of the 2015 reporting period, the total number of open MAP cases reported by OECD member countries was 6176, a 14% increase as compared to the 2014 reporting period and a 163% increase as compared to the 2006 reporting period". Also, "the average time for the completion of MAP cases with other OECD member countries was" of 23.22 months, from 2006 till 2015, taking each year's average.

Base erosion and profit shifting has been a concern for the OECD country members and therefore a group of 60 countries have been working together to implement 15 actions to tackle these practices.

Mexico has led the implementation of many of such recommendations in its domestic legislation.

Referring in particular to Action 14 (Making Dispute Resolution Mechanisms More Effective) of the BEPS project, it was said: "Countries agree that the introduction of the measures developed to address base erosion and profit shifting pursuant to the Action Plan on Base Erosion and Profit Shifting (...) should not lead to unnecessary uncertainty for compliant taxpayers and to unintended double taxation. Improving dispute resolution mechanisms is therefore an integral component of the work on BEPS issues".

Although in this particular case Action 14 refers to directly improving MAPs through the commitment of implementing the minimum standard resulting of the BEPS Project, other countries took it a step forward and declared the "commitment to provide for mandatory binding MAP arbitration in their bilateral tax treaties as a mechanism to guarantee that treaty-related disputes will be resolved within a specified timeframe".

These forward-thinking member states are: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the US. Together, these countries were involved in more than 90% of outstanding MAP cases at the end of 2013.

In order to fulfil its commitment, this group worked separately through an ad hoc subgroup to create Part VI of the MLC. It needs to be said that also other countries participated in the discussions, including Mexico.

The main reasons to envision an arbitration-dedicated section of the MLC were because, in its opinion:

  • expectation of the increase of double taxation disputes exists;
  • arbitration has proved the most effective mechanism to treat the risk of double taxation;
  • it gives legal certainty to taxpayers;
  • arbitration prevents unresolved issues and long periods of time to resolve cases; and
  • it would incentivise competent authorities to resolve issues by themselves, instead than by a third party.

Unfortunately, Part VI is not deemed to be complete, since its provisions need complimentary treatment, which will take place with the implementation of specific competent authority agreements (CAAs). These will be implemented in order for the arbitral procedure to work correctly. The following items, among others, could and should be included in the CAAs, as explained in §230 and on, of the explanatory statement to the MLC:

  • Minimum information that should be presented to analyse the case.
  • Detailed requisites that arbitrators shall comply in order to be appointed.
  • Timeframes to hand in the position papers by the competent authorities.
  • Timeframe for the arbitral panel to issue its final decision.
  • Costs allocation.

But, even though the number of treaties that make reference to arbitration has increased considerably in the last few years, arbitration still poses some thorny issues, such as:

  • Countries' (fiscal) sovereignty;
  • Negative prior arbitration experiences in other fields;
  • Arbitrators' impartiality;
  • Requisites for selecting arbitrators;
  • Developing countries vs. stronger economies;
  • Burdens of arbitration costs; and,
  • Which cases would be eligible for arbitration, among others.

In order to fully understand the debates over the choice of OECD member states to implement, or not, mandatory arbitration as a complement and second step after the MAP has not been successful, we need to look at the OECD Model and its explanatory statement.

Article 25(5) of the OECD Model Convention was introduced in 2008 in order to provide a solution when the competent authorities are unable to reach an agreement within two years from the initial presentation of the case. It provides in fact for mandatory arbitration.

On the other hand, the UN Model, in Article 25B(5), introduced two alternate versions in 2012: mandatory arbitration and voluntary arbitration.

Regarding the types or arbitration relating to tax matters, there are basically two: the 'free' or 'conventional arbitration', and the 'baseball', 'final offer' or "last best offer" arbitration. The commonly referred to "baseball arbitration" comes from rules for settling salary disputes between Major League Baseball teams and their players: the two parties put out their offer and the third party, in this case, the appointed arbitrators, will settle the dispute by picking the number they judge to be closest to the right answer.

Mexico's past experience and present opportunity to be avant-garde

So far, Mexico has never implemented a mandatory arbitration provision in any of its tax treaties. Nevertheless, Mexico has agreed to voluntary arbitration with the following countries:

  • Canada
  • the US
  • Greece
  • Indonesia
  • Ireland
  • Israel
  • Rumania
  • Singapore
  • United Kingdom
  • Luxembourg (relating only to article 9 of the treaty)
  • Chile

It is in our interest to point out that Mexico has already lost the specialisation on tax matters since the Federal Administrative Court no longer solves predominant tax cases.

There has also been a public concern among the legal community and private sector regarding the origin and background of some of the judges that have been appointed to the Mexican Supreme Court of Justice and also to the Federal Administrative Court since some of them used to be counterparties to taxpayers.

We have come to know, unofficially, that Mexico has been evaluating the inclusion of mandatory arbitration, even though only in limited cases like the ones regarding articles 4 (dual residency but only for natural persons), 5 (permanent establishment), 7 (business profits), and 9 (associated enterprises) of the OECD Model and, in any case, Mexico seems more inclined to a "baseball type of arbitration" than the conventional arbitration.

Our opinion is that this is a perfect time for Mexico to really strengthen the rule of law in dispute tax resolutions regarding the interpretation and application of the tax treaties.


Taking in the words of Michael Lang and Jeffrey Owns, when "tax revenues intensifies between countries looking to address budget shortfalls, the business community is confronted with the seemingly ever-expanding spectre of double taxation". At least in Mexico, tax audits and tax administrations have become more aggressive, with more information and technological resources, and taxpayers, and even more, foreign investors, are evermore left without legal security and certainty over their investments.

The reality in Mexico is that taxpayers and foreign investors need to live with the fact that the Federal Court for Administrative Justice has lost its specialisation on tax matters, and has also lost perspective on whose rights should be always protected and guaranteed. Domestic remedies have proven inadequate and inefficient when it comes to rapidly solving international tax issues.

As the UN Committee of Experts in International Cooperation in Tax Matters pointed out in a 2010 report: "legal certainty provided by tax conventions may be jeopardised even if the number of unsolved cases is negligible; any domestic judicial system failing to provide for a solution (...) would be considered as seriously flawed. Consequently, arbitration is needed to provide the necessary certainty favouring cross-frontier investments [...] Mandatory arbitration is apparently a powerful incentive facilitating the endeavours of the competent authorities to reach an agreement."

In our opinion, one of the main advantages that mandatory arbitration would bring to Mexico is that it would have a positive impact on foreign direct investment, giving out a good faith message to investors looking to come to Mexico. It is a reality that FDI can generate new jobs, bring new technologies, promote growth and employment, etc.

It should be considered that adhering to mandatory arbitration translates into adding to the efficiency of the MAP, meaning it is adding on already acquired experience. Mexico would not be starting 'from scratch'.

It would be a sign of good faith from Mexican authorities, that the taxpayer and the foreign investor are not enemies, but government allies. Without assurance, without transparency, what message would the Mexican government be sending to commercial and economic partners as well as Mexican individuals?

It is also public policy to provide certainty and a safe environment for investments which translates into better domestic conditions. Because, at the end of the day, it is not about safeguarding a single case's taxes allocation, but the bigger picture. It is about avoiding double taxation and applying the rule of law.

Mandatory arbitration can be most definitely used as a 'safety valve', meaning something that relieves the pressure of overcrowding, which will happen once the MLC comes into force. Mexico would be missing a historic opportunity to be avant garde, to be aligned with international interests. As Robert Frost wrote: "Two roads diverged in a wood, and I – I took the one less travelled by, and that has made all the difference".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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