Need for minimum standards and mandatory arbitration in BEPS dispute resolution

In its response to an OECD discussion draft on producing a multilateral instrument for resolving international tax disputes the International Chamber of Commerce UK (ICC UK) said that there should be an effective method for monitoring whether countries comply with minimum standards prescribed by the OECD  for resolving tax disputes under the mutual agreement procedure (MAP) to work alongside mandatory binding arbitration (MBA)

It said that peer-to-peer review mechanisms may not be sufficient to ensure that states resolve disputes quickly and efficiently enough.

The OECD recognises that implementation of its base erosion and profit shifting (BEPS) recommendations to prevent international tax avoidance by multinationals is likely to increase disputes between tax authorities over taxing rights and quantification of profits.  It has recommended that countries commit to minimum standards for timely resolution of disputes and 20 countries have agreed to work together to establish MBA provisions in their treaties.  

In order to inform its response to the OECD discussion draft, the ICC UK conducted a survey in partnership with Pinsent Masons, the law firm behind Out-Law.com, to identify practical problems that UK corporates have faced. The survey was conducted between April and June 2016, and asked UK corporates for their experiences in trying to resolve international tax disputes. It asked for feedback on the current MAP and on the arbitration processes that are in place between the countries that have agreed to mandatory arbitration.

The survey asked whether respondents agreed with the OECD proposal for an optional provision for an MBA procedure as part of the MAP, and for countries to commit to minimum standards for resolving disputes through the MAP. The standards proposed by the OECD include commitments to timely resolution and to ensuring that competent authorities have the authority and resources they need.

There was unanimous support for the introduction of an MBA procedure, with 100% of respondents saying this was either 'necessary' or 'desirable'. UK corporate respondents considered this to be an essential safeguard, with either the state or the taxpayer able to call for arbitration.

Proposed minimum standards are welcome, but these could be undermined without effective enforcement mechanisms in place, respondents said. Current compliance with MAP obligations is variable, as is the use of the manual on effective mutual agreement procedures.

While there is some good practice, the survey found that there are some country-specific barriers to proper use of the MAP process.

Several respondents reported problems in using the MAP or the EU arbitration convention (EUAC) in Italy, where complex interactions between Italian domestic processes and the MAP mean it is not possible to invoke the MAP while domestic processes for dispute resolution are in progress. However, once domestic processes had been completed, the MAP cannot be invoked on the basis that a decision made in the Italian courts is considered final, with the result that the MAP cannot be pursued. This contrasts with Spain, where domestic processes are paused when the MAP is invoked and are not resumed until the MAP has been completed.

It was also reported that MAP or EUAC settlements in Italy attract significantly higher penalties than would apply to a resolution through administrative processes. In practice, this means that resolution through the MAP is likely to be uneconomic compared to accepting a level of double taxation from a domestic administrative settlement.

German tax authorities have reportedly told taxpayers that an adjustment would be considerably greater if they make a claim to the MAP, and proposed contractual waivers that remove the right to use the MAP. This type of behaviour discourages the use of the MAP and is contrary to the EUAC code of conduct.

In contrast, the survey highlighted that UK corporates have found both Spain and the Netherlands more receptive to MAP applications, with fewer barriers imposed to prevent the MAP being invoked.

Some 90% of respondents wanted to be more involved in the dispute resolution process, with the right to participate formally in the arbitration process including the hearing before the arbitrator.

Minimum standards are also needed to reduce the time taken to address disputes, with many respondents calling for a set deadline to prevent delays and the use of apparently deliberate delaying tactics on the part of the tax authorities,

The ICC UK said that if the OECD and tax administrations can work together, they should be able to establish minimum standards and effective MAP processes that work alongside the MBA regime.

Compliance with both the minimum standards and the MBA procedure would then be vital to ensure that international tax disputes are resolved effectively and to the satisfaction of both states and the taxpayers, it said.

A proposed peer-to-peer mechanism may not be enough to encourage this, however, and the ICC UK said additional compliance mechanisms may be needed.

Finally, the ICC UK proposed that taxpayers should be able to participate independently in both the MAP and MBA processes. They should have an independent right to call for a dispute to be resolved through MBA, and be able to participate formally in the arbitration process.

The survey provided a clear indication of the current problems in the international dispute resolution process and shed light on how these weaknesses might be addressed.

Ultimately, with more robust minimum standards and an effective MBA procedure when disputes arise, contracting states will be encouraged to actively engage with taxpayers to reach a satisfactory and timely solution.

Ian Hyde is a tax litigation expert with Pinsent Masons, the law firm behind Out-Law.com.