Effective cross-border tax dispute management between domestic, EU and international legal frameworks*
|Abstract The paper highlights certain area in which dispute arises in international tax arena and the mechanism that are in place for effective dispute management. An attempt has been made to provide 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, status of Mutual agreement proceedings in comparison to national court proceedings has been analyzed. The paper ends up laying down some open questions and some 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 that proper attention is given to their international ramifications. This is a potentially daunting prospect, 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 dispute 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 effective dispute resolution framework in place to promote a stable tax regime. Effective disputes management can be carried out through –
- Domestic measures (usually through relevant provisions in domestic tax laws)
- International measures (usually through relevant provisions in tax treaties)
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  conflicts of source,  conflicts of allocation,  conflicts of characterization,  conflicts on the interpretation of facts or treaty provisions,  and conflicts concerning the interpretation of domestic law. These conflicts can take the different forms of country-country, country-country-taxpayer or country-taxpayer conflicts.
Article 25 of the OECD Model convention (‘OECD MC’) is designed to address broadly following three forms of dispute.
- issues involving particular taxpayer grievances regarding the specific application of the treaty;
- issues involving general difficulties and doubts between the competent authorities as to the interpretation or application of the treaty not essentially associated with a particular taxpayer;
- issues dealing with the elimination of double taxation in cases not otherwise dealt within the treaty.
Pertinent to mention, that Para 9 of Article 25 of the OECD MC commentary recognizes following disputes that may arise in the international context :
- issues relating to the attribution of profits to a permanent establishment under paragraph 2 of Article 7;
- issues relating to the taxation in the State of the payer — in case of a special relationship between the payer and the beneficial owner — of the excess part of interest and royalties, under the provisions of Article 9, paragraph 6 of Article 11 or paragraph 4 of Article 12;
- cases of application of legislation dealing with thin capitalisation when the State of the debtor company has treated interest as dividends, in so far as such treatment is based on clauses of a convention corresponding for example to Article 9 or paragraph 6 of Article 11;
- cases where lack of information as to the taxpayer’s actual situation has led to misapplication of the Convention, especially regarding the determination of residence (paragraph 2 of Article 4);
- issues relating to the existence of a permanent establishment (Article 5), or the temporary nature of the services performed by an employee (paragraph 2 of Article 15).
Some of the other areas of international tax disputes can be :
- Double taxation that could arise from a transfer pricing adjustment: It occurs when a taxpayer is subject to additional tax in one country because of a transfer pricing adjustment (maybe concerning intangibles, location savings, other intercompany adjustments etc.) to the price of goods or services transferred to or from a related party in the other country
- Analysis of the claim of the treaty benefits i.e. the beneficial provisions of the tax treaty (make available, royalty/ interest/ capital gain)
- Other interpretational issues
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.However, there are several other methods 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’) |
Joint audits/ Simultaneous audits
Domestic litigation/ National courts International courts
Pertinent to mentioned several states are taking various pro-active measure to manage disputes, however, for this paper those are not discussed in detail. Some of them include Pre-filing Agreement Program (PFA) & Fast track settlement system in the United State, Early assessment and resolution mechanism/ Fast intensive triage in Australia etc.
However, for this paper focuses more on dispute management mechanism that is discussed at the international level. Below mentioned table describes some of the methods of international tax dispute management is greater detail :
|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 no requirement for the competent authorities to come to a formal agreement as to a resolution; they ‘shall endeavor’ to, but may not actually, come to any resolution. |
Some of the benefits of the MAP process :
An efficient and flexible mechanism in the application
Calls for cooperation between CA of two jurisdictions
States don’t lose sovereign immunity by agreeing to MAP
Some of the drawbacks of the MAP process :
The process takes too long to complete
Lack of taxpayer participation in the negotiation stages
There may be no specified procedures to suspend the collection of tax demand or the accrual of interest pending resolution of the mutual agreement procedure. However, practice concerning these varies from jurisdiction to jurisdiction.
Hence, one question often arises is ‘Is there a requirement to change/ modify the existing procedures of MAP?’ Also, Action Plan 14 published by OECD recognized the need to strengthen the effectiveness and efficiency of tax treaties provided MAP process.
|Advance Pricing Agreements||An APA 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 the determination of the transfer pricing for those transactions over a fixed period of time’. |
An APA can be one of the following types –
Unilateral APA is an APA that involves only the taxpayer and the tax authority of the country where the taxpayer is located
Bilateral APA is an APA that involves the taxpayer, associated enterprise (AE) of the taxpayer in the foreign country, tax authority of the country where the taxpayer is located and the foreign tax authority
Multilateral APA is an APA that involves the taxpayer, two or more AEs of the taxpayer in different foreign countries, tax authority of the country where the taxpayer is located and the tax authorities of AEs
Some of the benefits of the APA process:
Provides certainty for the tax outcome of covered transactions
May be regarded as simple and efficient mechanism in some jurisdictions
It supplements the traditional administrative, judicial, and treaty mechanisms for resolving transfer pricing issues
Some of the drawbacks of the APA process :
May require more resources to avoid the significant backlog in APA’s cases
Timely & costly process in some jurisdictions
Differences in covered years in various jurisdictions
Eligibility/ admissibility criteria of an APA request varies from jurisdiction to jurisdiction
Hence, some of the factors that should be considered while applying for APA includes 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 of tax treaties). The Arbitration decision is typically binding on the CAs. |
Effective means of resolution of dispute where CA cannot come to a conclusion in MAP
Less time consuming
Article 25(5) of the OECD Model subjects only the issues that arose based on Article 25(1) to the arbitration procedure, i.e., cases of taxation not in accordance with the provisions of the convention.
Lack of resources and maybe a costly processLack of transparency (limited Taxpayers’ Access to MAP Arbitration, non-publication of arbitral decisions )
(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 in arbitration must be taken care off for developing countries to have confidence in the process)
|Some other Alternative dispute resolution (ADR’s)|
|Mediation||Mediation is a voluntary process in which a neutral third party assists the parties in resolving their disputes through a series of joint sessions and private discussions. It is an effective way among alternative dispute resolutions. |
Pertinent to note, the UN Tax Sub Committee also identified the benefits of even ‘Nonbinding forms of Dispute Resolution’ (NBDR) by the use of Mediation, a concept which is catching up fast even amongst MNCs and countries involved in international trade.
|ICAP’s||ICAP is a relatively new procedure, operating relatively in an 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.|
Some of the other mechanism that may be considered –
- Private rulings system (involving procedure for an independent review of any rulings) – It is envisaged that this procedure is engaged prior to the end of a particular tax period and before a filing is made. The ruling requested could relate to one or more tax periods to the extent that the facts on which the ruling relate remain the same or within some predetermined level of safe-harbour, depending on the circumstances.
- Expert opinion/determination panel (binding or non-binding) – The panel of experts could have a purely consultative role, not make the relevant decision but provide advice to be taken into account by the competent authorities concerned. For independent review to be undertaken by an expert or for an expert opinion or determination panel to convened, it would be necessary for an inter-governmental organization to establish an expert accreditation process.
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 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 is 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 is highlighted below :
- CA’s exchanging position papers in advance and proactively fixing face-to-face meetings to resolve cases
- Matching of statistics to be presented before the FTA/ MAP forum for the purpose of peer review in ensuring that all filed cases are taken due consideration
- Deliberation to frame other mechanisms to deal with resolving tax disputes that could meet the interests of all stakeholders
- Further, time to time various statistics are also published by the OECD.
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–
- Article 16 of the MLI provides that the modified version of MAP will apply to treaties in place of, or in the absence of, MAP provisions. These include not allowing claims to be made to either state, but implementing a process whereby the state receiving the taxpayer’s notification will notify or consult with the other state if it does not consider the taxpayer’s case to be justified.
- Article 19 of the MLI sets out mandatory binding arbitration (MBA) where competent authorities are unable to reach an agreement under MAP. It is optional and will only apply to treaties where both states choose to apply it. States can choose to allow three years (rather than two years) for agreement to be reached under MAP before MBA is possible, and; can choose to exclude issues which have already been decided by a court. Also, States can choose which type of arbitration they want to adopt for their ‘covered agreements’.
5. MAP and national court judgements/ domestic appellate proceedings –
To depict how domestic dispute resolution process interacts with international dispute resolution process, in this section, a comparison has been made between MAP and domestic appellate proceedings on certain parameters. Further, it has been highlighted through country examples, how practices vary regarding the status of domestic appellate proceedings when taxpayer applies for MAP.
|Expected time frame||2-3 years||Various basis country practice|
|Taxpayers participation||The taxpayer 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, memorandum of understanding exists, to suspend the collection of demand till the MAP proceedings are concluded. However, practice varies from country to country.||Usually, stay of demand application needs to be filed to keep the demand in abeyance|
As per the OECD MC there should be no conﬂict between initiation of a MAP procedure and a national court procedure. However, practices vary, many states do not allow the use of both at the same time. The probable consequence of having both procedures open at the same time raises conﬂict in the ﬁnal conclusion (for ex – there can be a court decision in favour of the tax administration position and a MAP agreement in favour of the company). Below mentioned table highlights some of the country practices in this regard.
|France||If ﬁnal court decision comes before MAP is reached, the administrative guidelines state that in such situation MAP can still be initiated, but it should not be a less favorable outcome for the taxpayer than the court decision. Similar is the practice in Belgium (Circular Letter 2018/C/27)|
|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 proceeding are finalised|
|India||MAP and an administrative appeals process can run simultaneously. The taxpayer has even 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 taxpayer cannot seek relief under a MAP and domestic law at the same time. Canada does not, for instance, have a simultaneous appeals procedure. In general, the taxpayer may either initially pursue relief under the domestic appeal process or through the MAP|
|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. Some of the European Union measures for dispute resolution
The diagram below illustrates how disputes management works in the EU:
However, only EU Arbitration convention and Tax dispute resolution have been discussed briefly in this paper.
- EU Arbitration Convention :
The EU Arbitration Convention only provides for the individual MAP complemented by a quasi-arbitration procedure, the procedure before the Advisory Commission, to be established according to the special provisions contained in the same convention. Relevant provision is (i) article 25(1)-(2) and (5) of the OECD Model and (ii) articles 6-14 of the EU Arbitration Convention.
Often in relation to EU Arbitration, it is argued that it is a watered-down compromise which the Commission had to accept in the wake of the Member States’ reluctance to waive their fiscal sovereignty in the transfer pricing field. Some of the issues concerning EU Arbitration convention includes –
- Convention lacks an overarching institution that supervises, monitors and ensures Member States’ compliance with the obligations put on them under the convention’s provisions
- Scope of the convention is limited to transfer pricing disputes only
- No timeline for the competent authority, to which the request for the initiation of these procedures was submitted, to decide on whether the request should be accepted and to initiate the process;
- There is no clear and uniform rule for determination of the start date of the two-year deadline for the MAP;
- No clear laid down rules about the operation of the arbitration procedure, such as on the appointment of members of an advisory commission or on what grounds an opinion should be given; and
- Lack of transparency (information on outcomes of the convention’s procedures are not published)
- Tax Dispute resolution directive :
With the Council’s adoption of the Directive on Tax Dispute Resolution Mechanisms on 10 October 2017, the resolution of tax disputes among the Member States entered a new phase. This Directive aims at improving existing dispute resolution mechanisms contained in these tax treaties and the EU Arbitration Convention. Based on this overall objective, the following specific objectives of the Directive can be identified: (1) Broadening the scope of application of the EU Arbitration Convention to all disputes concerning the application and interpretation of tax treaties between the Member States; (2) Ensuring legal certainty for taxpayers; (3) Ensuring effectiveness and efficiency; and (4) Ensuring transparency
7. Conclusion :
ponder upon may be –
- Is the existing dispute resolution mechanism being able to fulfil the objects for which they were implemented? Or is there a need to revisit the scope/ improve the governance mechanism?
- Is there a possibility of appeals procedure to be allowed or there is only option of either taking or leaving the decision of the competent authorities?
- The biggest concern with Arbitration is that of sovereignty. So, is there a need to devise some mechanisms reflecting sovereignty concerns (may be some form of private rulings, expert opinion etc.)?
- Will the formulation of some international tax forum for handing such cases help?
It seems that still a lot of research needs to be done to find concrete answers to various open questions.
However, if one were to think what an efficient mechanism should like? Then, the efficient mechanism should be such that it not only helps in 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 –
- It will be important for tax administrators to have a quick, simple, effective right to access information. it will also be important for taxpayers to know what facts and data have been relied upon by tax authorities and this information kept confidential from third parties and competitors.
- Multinational will want the opportunity for robust procedural rules to be available allowing for the determination of any dispute to be raised in respect of the underlying amount and any such enforcement and collection of the tax to follow the determination of any such dispute.
In all, the design of a satisfactory system of dispute resolution and a multilateral treaty will undoubtedly require more input and cooperation amongst all the stakeholders.
By Nupur Jalan
 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.
 Where under the domestic source rules of both countries either the income is domestically sourced, or is sourced in various locations.
 This is classic economic double taxation, where both countries impose tax on the same income without granting foreign tax relief.
 These are conflicts where the countries apply different treaty provisions on the same income-based on different domestic tax laws.
 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).
 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?
 Condensed Version, Model Tax Convention on Income and on Capital (2017), pg. 431-432.
 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.
 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)
 Profit Shifting, Making Dispute Resolution Mechanisms More Effective, Action 14 – 2015 Final Report (2016).
 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).
 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
 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.
 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)
 Though, Multilateral instrument (Article 19) to an extent is trying to take care off this
 Slaughter and May, Submission to Secretariat Proposal on ‘Unified Approach’ under Pillar one public consultation response, pg. 2-6
 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.
 Reference for this section has been drawn from IFA cashiers, General report, 2016 – Dispute resolution procedures in international tax matters
 H.M.Pit, ‘The Changed Landscape of Tax Dispute Resolution Within the EU : Consideration of the Directive on Tax Dispute’ (2019) 47 747.
 Resolution Mechanisms, ‘The Changed Landscape of Tax Dispute Resolution Within the EU : Consideration of the Directive on Tax Dispute’ (2019) 47 752
 Katerina Perrou, ‘Part IV : Summary and Conclusions Chapter 8 : Redesigning the International Tax Dispute Resolution Mechanism’ 1.