Abstract The paper highlights certain areas where a dispute arises in the international tax arena and the mechanism that are in place for effective dispute management. An attempt has been made to provide a high-level analysis of some of these dispute management techniques. The paper also briefly discusses Action Plan 14 and the EU measures for dispute resolution. Further, with the aim of depicting the domestic tax law interaction with the international legal framework, the status of Mutual agreement proceedings in comparison to national court proceedings has been analyzed. The article lays down some open questions and possible characteristics that an efficient dispute resolution mechanism may entail.
With the increase in globalization, there has been an increase in cross-border transactions and changes in the modalities/ level of complexities in doing these transactions. Hence, the design of sensible tax policies for modern economies requires proper attention to their international ramifications. This prospect is potentially daunting since multiple, possibly interacting, tax systems are involved.
Overtime, there has been an increase in the disputes and the nuances surrounding the interaction of domestic tax laws provisions with the tax treaty provisions. The concern for increasing disputes was even acknowledged by G-20 while giving attention to the topic of tax certainty in its work, where improving international tax disputes is noted as a major element.
With a potential increase in the level of disputes, it becomes essential to analyze how they can be avoided or resolved efficiently by recourse to various dispute resolution management techniques; hence, it is important to have an effective dispute resolution framework in place to promote a stable tax regime. Effective disputes management can be carried out through –
2. Glimpse of certain areas of disputes in the international tax arena
Often, various types of conflict arise in the application of tax treaties, such as [1] conflicts of source, [2] conflicts of allocation, [3] conflicts of characterization, [4] conflicts on the interpretation of facts or treaty provisions, [5] and conflicts concerning the interpretation of domestic law.[6] These conflicts can take different forms country-country, country-country-taxpayer or country-taxpayer conflicts.
Article 25 of the OECD Model Convention (‘OECD MC’) is designed to address broadly the following three forms of dispute.
Pertinent to mention that Para 9 of Article 25 of the OECD MC[7] commentary recognizes the following disputes that may arise in the international context :
Some of the other areas of international tax disputes can be :
3. Mechanism of dispute management
The legal basis of the current international tax treaty dispute resolution system is found in the specific treaty provision, i.e. article 25 of the OECD and UN Model Tax Convention.[8] However, several other methods are discussed in domestic tax law or international tax context for effective dispute management. The table below highlights various dispute management techniques.
| Dispute Avoidance | Safe harbours Multilateral Advance Pricing Agreements (APA) Unilateral APA Pre-audit settlement International Compliance Assurance Programme (ICAP’s) |
| Dispute resolution | Mutual Agreement Procedures (‘MAP’) Arbitration Mediation Joint audits/ Simultaneous audits Domestic litigation/ National courts International courts |
| Method | Description |
| Mutual Agreement Procedures | The MAP is a well-established means through which competent authority (CA) discusses cross-border taxation of certain transactions or situations intending to coordinate their approach to resolving disputes. However, there is no requirement for the competent authorities to come to a formal agreement as to a resolution; they ‘shall endeavour’[9] to, but may not actually, come to any resolution.
Some of the benefits of the MAP process : Some of the drawbacks of the MAP process : Hence, one question often arises ‘Is there a requirement to change/ modify the existing procedures of MAP?’ Also, Action Plan 14[10], published by OECD, recognized the need to strengthen the effectiveness and efficiency of tax treaties provided MAP process. |
| Advance Pricing Agreements | An APA[11] is an agreement between a taxpayer and the tax authority determining the Transfer Pricing methodology for pricing the taxpayer’s international transactions for future years. As per OECD transfer pricing guidelines, ‘An APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for determining the transfer pricing for those transactions over a fixed period of time’.
An APA can be one of the following types – Some of the benefits of the APA process: Some of the drawbacks of the APA process : Hence, some of the factors that should be considered while applying for APA include cost and time analysis, withdrawal process, eligibility criteria, critical assumptions etc. Further, the APA procedure should: Be strengthened to ensure the process doesn’t result in a situation where the procedure is finalized based on a limited or unrealistic range of assumptions. Allow jurisdictions to obtain external expert input where necessary (especially in respect of certain industries/ operations and where the agreement relates to segmented business operations) |
| Arbitration | Arbitration is a supplementary dispute resolution mechanism whereby CAs may refer unresolved issues in a MAP process to an independent third party, which conducts an arbitral process and arrives at a decision, which is communicated to the CAs (usually found as an additional paragraph in Article 25[14] of tax treaties). The Arbitration decision is typically binding on the CAs.
Advantages Disadvantages (Although it is questionable whether sovereignty and/or constitutionality would be a legal hurdle to tax treaty arbitration in countries, however, policy concerns such as evenhandedness[15]. in arbitration must be taken care of for developing countries to have confidence in the process) |
SOME OTHER ALTERNATIVE DISPUTE RESOLUTION MECHANISMS (ADRs)
| Mediation | ICAP is a relatively new procedure, operating relatively in only a small number of jurisdictions globally. However, given the programme operates with high levels of transparency and engagement with multinationals, consideration should be given to the many learnings obtained from the first ICAP pilot and the ICAP 2.0 design. The benefit of ICAP’s includes in particular, the time-limited approach to the procedure, tailoring of the procedure to the issues arising and engagement with multinationals throughout the procedure etc. |
| ICAP’s | ICAP is a relatively new procedure, operating relatively in only a few jurisdictions globally. However, given the programme operates with high levels of transparency and engagement with multinationals, consideration should be given to the many learnings obtained from the first ICAP pilot and the ICAP 2.0 design. The benefit of ICAPs includes, in particular, the time-limited approach to the procedure, tailoring of the procedure to the issues arising and engagement with multinationals throughout the procedure etc. |
Some of the other mechanisms that may be considered [16] –
4. Action Plan 14 and advancements in the dispute resolution process
The BEPS Action Plan 14 contained a commitment to address obstacles that prevented countries from resolving treaty-related disputes under Article 25. Further, the Action Plan lays down several minimum standards and best practices[17] to address treaty-related disputes. (Mainly, it aimed at increasing the efficiency/ effectiveness of MAP, including Timely resolution of MAP cases within 24 months, Peer review done from time to time etc.). The same is not discussed in detail in this paper; however, certain areas of progress pursuant to Action 14 are highlighted below :
For completeness perspective, relevant provisions of multilateral instruments (MLI) (since certain changes discussed in Action Plan 14 were brought through MLI) are also discussed in brief–
5. MAP and national court judgements/ domestic appellate proceedings –
In this section, a comparison has been made between MAP and domestic appellate proceedings on certain parameters to depict how the domestic dispute resolution process interacts with the international dispute resolution process. Further, it has been highlighted through country examples how practices vary regarding the status of domestic appellate proceedings when a taxpayer applies for MAP.
| Particulars | MAP | APPELLATE PROCEEDINGS |
| Expected time frame | 2-3 years | Different form of country practice |
| Taxpayers participation | The taxpayer is not allowed to participate in the discussion | The taxpayer is involved in the process |
| Nature of decision | Generally, the judgement under MAP is binding on the revenue. The taxpayer, however, has an option to not accept the MAP ruling and go by normal appellate procedures. However, practice varies from country to country. | The rulings are binding on the taxpayer though the taxpayer has the option to appeal before higher appellate authorities |
| Stay of demand | Generally, a memorandum of understanding exists to suspend the collection of demand till the MAP proceedings are concluded. However, practice varies from country to country. | Usually, a stay of demand application needs to be filed to keep the demand in abeyance |
| Country | Particulars |
| France | In Japan, taxpayers can simultaneously initiate both the administrative appeal procedure and the MAP but once the court decision is rendered, it is thought to be binding on the tax authority, and the tax authority is not able to enter into an agreement (with the competent authority in the other jurisdiction) that is contradictory to the judicial decision. |
| Netherlands | The Decree (IFZ 2008/248M) provides for the possibility of an early MAP. Hence, a taxpayer can request to postpone the decision in an appeal raised during the MAP period. Also, if the taxpayer is not satisfied with MAP outcome, postponed domestic appeal possibilities can be invoked again |
| Spain | Court procedure is suspended until MAP proceedings are finalised |
| India | MAP and an administrative appeals process can run simultaneously. The taxpayer even has the option of rejecting or accepting the MAP resolution. Once a taxpayer accepts the MAP resolution, he has to withdraw his appeal from the Court or Tribunal proceedings as the case may be |
| Mexico | If MAP is filed for, the period granted to issue a resolution in the administrative appeal related to the same controversy is suspended. The appeal is adjourned to avoid discrepancies between the judgment on the appeal and the ruling on the MAP. |
| Japan | In Japan, taxpayers can simultaneously initiate both the administrative appeal procedure and the MAP, but once the court decision is rendered, it is thought to be binding on the tax authority, and the tax authority is not able to enter into an agreement (with the competent authority in the other jurisdiction) that is contradictory to the judicial decision. |
| Canada | The Decree (IFZ 2008/248M) provides for the possibility of an early MAP. Hence, a taxpayer can request to postpone the decision in an appeal raised during the MAP period. Also, if the taxpayer is not satisfied with the MAP outcome, postponed domestic appeal possibilities can be invoked again. |
| UK | Tax authorities have stated their preference that the procedures do not run in parallel and for the MAP process to take priority while domestic proceedings are stayed. Where a case is presented and accepted for a MAP while domestic remedies are still available, the UK will generally require the taxpayer to suspend the domestic remedies or it will delay the MAP until these remedies are exhausted. |
6. Conclusion :
Some points to ponder upon may be –
Still, a lot of research still needs to be done to find concrete answers to various open questions.
However, if one were to think about what an efficient mechanism should be like? Then, the efficient mechanism should be such that it not only helps in the resolution of cross-border controversies in such a way as not only to prevent double taxation but also to resolve disputes timely and efficiently when they do arise.
Certain other points that should be considered are –
In all, the design of a satisfactory system of dispute resolution and a multilateral treaty will undoubtedly require more input and cooperation among all the stakeholders.
[1] Jacques Sasseville, “The Future of the OECD Model Convention”, in Wolfgang Gassner et al., eds., Die Zukunft des Internationalen Steuerrechts (1999), at 41, 48-54. See also Glenn Madere, “International Pricing: Allocation Guidelines and Relief from Double Taxation”, 10 Tex. Int’l L. J. 108, 124.
[2] Where under the domestic source rules of both countries, either the income is domestically sourced or is sourced in various locations.
[3] This is classic economic double taxation, where both countries impose a tax on the same income without granting foreign tax relief.
[4] These are conflicts where the countries apply different treaty provisions on the same income-based on different domestic tax laws.
[5] Special attention should be given to Art. 3(2) of the OECD Model Convention under which ‘any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State’. See also Sidney I. Roberts, ‘Avoiding Double Taxation – A Reorientation of the Role of Tax Treaties’, 18 The Tax Executive 7, 12-15 (1965).
[6] Example of one such issue can be what is ‘immovable property’ under the laws of the country of source for purposes of Article 6(2) of the OECD Model Income Tax Convention?
[7] Condensed Version, Model Tax Convention on Income and on Capital (2017), pg. 431-432.
[8] Article 25 sets out three different areas where mutual agreement procedures are generally used. The first area includes instances of ‘taxation not in accordance with the provisions of the Convention’ and is covered in paragraphs 1 and 2 of the Article. Procedures in this area are typically initiated by the taxpayer. The other two areas, which do not necessarily involve the taxpayer, are dealt with in paragraph 3 and involve questions of ‘interpretation or application of the Convention’ and the elimination of double taxation in cases not otherwise provided for in the Convention.
[9] This can be problematic as it means although the MAP process may have been initiated, the issue under dispute may never actually be resolved. Reference in this regard can be placed to cases such as Pierre Boulez (1984) 83 TC 584, and GlaxoSmith Kline (2006)
[10] Profit Shifting, Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Final Report (2016).
[11] APAs are the subject of extensive discussion in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter referred to as the “Transfer Pricing Guidelines”) in Chapter IV, Section F (pg. 214-224).
[12] In Australia, APAs will generally apply for three to five years, but arrangements for longer periods are available, as are renewals; in Mexico the response to an APA request should be valid for the year of the request, the previous one and the three following years; in Spain APAs are applicable for from four to six years; in the UK the term is likely to be for three to five years and perhaps the years during which it has taken time to reach agreement
[13] For ex. – China requires that annual amount of transaction proposed under APA should be above RMB 40 million, UK focuses on the complexity involved in the transaction of TP issue etc.
[14] Condensed Version, Model Tax Convention on Income and on Capital (2017), pg. 453-464. Also, the annex to the commentary on Article 25 includes a sample form of agreement that the competent authorities may use as a basis of mutual agreement to implement the arbitration process (it includes details of the application of the arbitration process including the timetable that should be followed)
[15] Though, Multilateral instrument (Article 19) to an extent is trying to take care off this
[16] Slaughter and May, Submission to Secretariat Proposal on ‘Unified Approach’ under Pillar one public consultation response, pg. 2-6
[17] Some of the best practices were inclusion of Article 9(2) to extend MAP to cover TP disputes, publication of Agreement reached under Article 25(3) on interpretational issues/ implementation of Bilateral APA/ suspension of the collection of MAP provisions etc.
[18] http://www.oecd.org/tax/dispute/
[19] Reference for this section has been drawn from IFA cashiers, General report, 2016 – Dispute resolution procedures in international tax matters
The views in all sections are personal views of the author.
