United States: International Tax Disputes: A Ray Of Hope

Despite the anticipated tsunami of tax disputes generated by underlying tensions in international taxation, there is reason for hope that appropriate means are being developed to address them efficiently and effectively.

Multinational enterprises (MNEs) should be addressing their existing international taxation planning structures in light of coming changes in international tax regimes. This process is likely to be supervised at the board of directors level, reflecting the seriousness of events on the horizon.

There exists today the unfortunate circumstance that long-standing, increasingly out-of-date treaty-based mutual agreement procedures (MAP) and domestic resolution processes are being overwhelmed by both the complexity and sheer volume of international tax disputes they are meant to, but are ill-equipped to, handle. The underlying tensions include:

  • Disputes over historic residence versus source country treaty and transfer pricing (TP) models;
  • Revenue collection from international businesses for all countries;
  • Base erosion and profit shifting (BEPS) measures;
  • Competition between countries for MNE tax bases;
  • The desire of developing/source countries to address their own perceived needs;
  • The United Nations (UN) Secretariat's focus on dispute resolution;
  • The needs of international financing organizations;
  • The perspectives of civil societies, and
  • The need on the part of MNEs to: 1) adapt global effective tax rate planning to the existing and evolving tax regimes of various countries and 2) anticipate means of handling disputes to minimize incidences of double taxation.

As a result, countries are likely to devote additional resources to tax base protection. Each country needs the ability to efficiently challenge tax planning that it believes provides insufficient tax revenue, including situations involving so-called double non-taxation. Inefficient dispute resolution processes slow down the ability to resolve such challenges.

In addition, MNEs are likely to focus on effective tax rate planning to take maximum advantage of competing tax regimes to minimize taxation and dangers of double taxation. The unpredictable nature of the BEPS process provides stark encouragement for MNEs to take the most aggressive approaches possible, exploiting differences in various tax regimes while monitoring developments in international taxation and dispute resolution processes.

Threats to the predictability of the tax base raise serious issues to taxing jurisdictions and MNEs alike. The only realistic antidote may be to create a dependable and independent treaty-based international tax dispute resolution process (ITDRP) designed to accommodate the needs of all stakeholders. While there may be broad dissatisfaction with the status quo, there is ample guidance in related areas of dispute resolution to provide light at the end of this tunnel.

Wirtschafts University, Vienna, January 2015

In a January 2015 meeting at Wirtschafts University, the attendees, as a group, began a process of developing a consensus on a way forward for dispute resolution in the international tax world. For an ITDRP to be meaningful for MNEs and countries alike, it will need to be embraced by as large a body as possible. Acceptance by a unanimous action of, for example, the UN membership, would provide a solid foundation for predictability.

The following elements will be key to developing a successful ITDRP:

  • A thorough understanding of the obstacles to be overcome (including observations about sovereignty, cost, independence of arbitrators, control of process, scope creep, confidentiality and transparency);
  • The identification of the parties' common objectives
  • A study of the experience of successful alternative dispute resolution (ADR) mechanisms in other areas;
  • An approach that deals with the obstacles to the use of arbitration in tax disputes, e.g., transparency versus confidentiality;
  • A broad consensus for the proposed approach; and
  • Implementation of the approach by an institution that has broad experience in administering cases through dispute resolution mechanisms in other contexts.

Steps Forward

On 5 October, the OECD released its final deliverables with respect to BEPS, including Action 14. The following is an extract from the report (authors' emphasis):

Through the adoption of this Report, countries have agreed to important changes in their approach to dispute resolution, in particular by having developed a minimum standard with respect to the resolution of treaty-related disputes, committed to its rapid implementation and agreed to ensure its effective implementation through the establishment of a robust peer-based monitoring mechanism that will report regularly through the Committee on Fiscal Affairs to the G20. The minimum standard will:

Ensure that treaty obligations related to the mutual agreement procedure are fully implemented in good faith and that MAP cases are resolved in a timely manner;

Ensure the implementation of administrative processes that promote the prevention and timely resolution of treaty-related disputes; and

Ensure that taxpayers can access the MAP when eligible.

The minimum standard is complemented by a set of best practices. The monitoring of the implementation of the minimum standard will be carried out pursuant to detailed terms of reference and an assessment methodology to be developed in the context of the OECD/G20 BEPS Project in 2016. In addition . . . the following countries have declared their 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: . . . . This represents a major step forward as together these countries were involved in more than 90 percent of outstanding MAP cases at the end of 2013, as reported to the OECD.

An initial review of Action 14 suggests that it is intended to outline a normal OECD approach of model treaty guidelines and monitoring. Of course, this is the only option the OECD has in the absence of a capacity to actually administer a process on a global basis. Whether or not an OECD-led process will be acceptable to a broad range of developing countries is an issue yet to be addressed.

A paper on ITDRP was then released on October 8, 2015, by the Secretariat of the UN Commission of Experts in International Taxation (the UN Committee). It broadly reviewed all issues pertinent to the evolution of an effective tax dispute resolution process.

When the OECD final Action 14 comments are read in conjunction with the UN Secretariat paper, it appears there is a natural link. The OECD paper establishes a framework for ITDRP within the treaty MAP process, including eventual guidelines and monitoring. The UN paper seems to take over at this point by framing the need for a neutral administrator. What remains is the need for the development of an organization with broad experience in non-tax areas of dispute resolution to actually facilitate and administer a process.

ICC Dispute Resolution

The Taxation Commission of the International Chamber of Commerce (ICC), which has almost 100 years of experience in all types of state-to-state, commercial, investment and other forms of dispute resolution, has made enhanced taxation dispute resolution mechanisms a priority for the global business community, working in cooperation with the OECD and UN.

A variety of concerns have, however, been raised for any type of ADR for international tax purposes, including:

  • How to control the costs
  • Transparency, confidentiality and secrecy
  • Enforceability
  • Sovereignty
  • Inexperience of developing countries, independence of arbitrators and their selection within an arbitral institution
  • Procedural models for tax treaty arbitration
  • Parallelism in domestic remedies and due process
  • Arbitrability of taxes

UN Committee

At the October 2015 meeting of the UN Committee in Geneva, there was broad, near unanimous support for the formation of a subcommittee to address ways of achieving ITDRP within the framework of the MAP provisions of global treaty networks. This is, frankly, a rather amazing evolution, as it reflects the coordinated efforts of developed and developing countries both within and outside the membership of the OECD to focus on this critical issue for all stakeholders in the international taxation world.

International Tax Disputes: A Ray Of Hope

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