Research in Brief

Issue 14 December 2016

Improving International Tax

Dispute Settlement
Summary of Working Paper 55 by Sol Picciotto
What are international tax
disputes?
The growth of disputes
Since 2006, the number of new MAP cases
“ The aim
should be
Formally, international tax disputes has doubled, and the number outstanding to minimise
are between the tax authorities of two has more than doubled. Cases are taking
longer to resolve. It seems that most cases
conflicts by
different countries. They result from
differing interpretations of the provisions concern the allocation of profits of TNCs making the rules
of a tax treaty between the two countries. among different taxing jurisdictions. A easier to apply
However, they mainly affect taxpayers with
cross-border economic activities, usually
treaty between EU states has, since 1995,
required transfer pricing cases which remain
and clearer.
”
transnational corporations (TNCs). unresolved after two years to be referred to a
Commission of experts and representatives
Tax treaties are normally incorporated into
of each tax authority. The Commission
domestic law. So taxpayers can go to court
produces a reasoned opinion. This can only
if they disagree with how a treaty rule is
applied. But tax treaties also give them the be published with the agreement of the
right to complain to the competent authority parties to the dispute. No such opinion has
in the relevant national tax administration. ever been published, and in fact less than
The competent authority is obliged either half a dozen cases have ever been referred
to resolve the issue, or, under the mutual to a Commission. The main effect has
agreement procedure (MAP), to consult with been to pressurise competent authorities to
the competent authority of the treaty partner. resolve cases within the two year deadline.

Under the MAP, the competent authorities Ten years ago, the US introduced a different
must ‘endeavour’ to solve the problem – but form of arbitration, for cases with Canada
are not obliged to do so. The MAP is totally and Germany, also for disputes unresolved
secret. Even the existence of a claim is within two years. Under this ‘baseball’
not made public. Tax advisers prefer the or ‘short-form’ procedure, the arbitrators
MAP over court cases, which generally cannot give their own independent opinion,
are public. But they complain that the MAP but must choose between the last best
takes too long, and does not guarantee offers tabled by the parties in dispute. The
an outcome. They have long urged that decisions must not be published, or even
unresolved disputes should go to binding cited in later cases. Around ten arbitrations
third party arbitration. have taken place.

International Centre for Tax and Development [Link]

 Research in Brief Issue 14 December 2016

Neither of these procedures has slowed contrast, Brazil, which uses fixed transfer Further reading
the growth of cases or the time taken to pricing margins, easy to administer but Picciotto, Sol (2016),
resolve them. Arbitration has been included considered unorthodox by the OECD, has ‘International Tax Disputes:
Between Supranational
in the OECD model convention (2007) experienced little litigation and few MAP Administration and
and as an option in the UN model (2011). claims. Adjudication’, ICTD Working
Over 200 actual treaties, including some Paper 55. Brighton: August
The G20/OECD project on base erosion and
with developing countries, now have some Credits
profit shifting (BEPS) recommended that
version of arbitration. A key issue is who This paper was written
national tax officials dealing with the MAP by Sol Picciotto. Sol
can trigger arbitration. Under four of the
should be separate from frontline tax audit Picciotto has taught at
developing country treaties the taxpayer
staff and give autonomous decisions. This the universities of Dar es
can compel arbitration if the competent Salaam (1964–68), Warwick
is difficult for tax authorities that are already
authorities cannot agree, as in the OECD (1968–1992) and Lancaster
under-resourced, especially in developing (1992–2007), where he is
model. The other treaties require the countries. The proposals are designed to now emeritus professor. He
consent of either one or both competent strengthen the international community of is the author of International
authorities. However, developing countries specialists in the MAP. It includes the private
Business Taxation (1992)
and Regulating Global
have had few MAP cases, and most have sector tax advisers, many of whom are Corporate Capitalism
rejected compulsory arbitration. Their former public officials, and is dominated by (2011), several co-authored
experience with international investment experts from OECD countries. Arbitrators books, and numerous
arbitrations, some of which have involved articles on international
are drawn from this community, and would economic and business
tax matters, has been discouraging. reject interpretations that it considers law and regulation, as
unorthodox. Monitoring through peer review well as state theory. He is
Causes and solutions would reinforce this culture, and secrecy
coordinator of the BEPS
Monitoring Group and
Most disputes concern the allocation of would be retained, despite public suspicions a Senior Fellow of the
profits of TNCs, and the growth in disputes about cosy deals. ICTD with which he has
has occurred as enforcement of transfer conducted research on
international tax.
pricing rules has strengthened. Developing A better way forward The ICTD is funded with UK
countries have been introducing transfer The aim should be to minimise conflicts by aid from the UK Government
pricing rules and are now improving making the rules easier to apply and clearer. and by the Norwegian
enforcement. So TNCs fear there will be The MAP should be used to agree general Government; however, the
views expressed herein
more disputes. This fear may be justified, interpretations that can be published, do not necessarily reflect
since the OECD Transfer Pricing Guidelines dealing not only with taxpayer claims of the UK and Norwegian
are complex and do not provide clarity. double taxation, but also issues of double Governments’ official
They require tax officials to identify the policies. Readers are
non-taxation, which are especially important encouraged to quote
functions performed by each part of the in this period of change. The Framework and reproduce material
TNC, by analysing its business model. This Agreement between India and the US was from the series. In return,
requires specialised knowledge and involves ICTD requests due
successful, but could have had a greater
acknowledgment and quotes
discretionary and subjective judgements. impact if it had been published. to be referenced as above.
© ICTD 2016
India saw a rapid rise in disputes after Furthermore, publication of the outcomes of
it introduced transfer pricing regulations actual MAP cases would provide guidance
based on the OECD Guidelines in 2001. for other taxpayers, help ensure that like
By 2012 it had a backlog of over 3,000 tax cases are treated alike, and reassure a
tribunal cases. India does not publish MAP wider public that decisions are fair. Reforms
data, but a conflict between the US and should aim to allocate the profits of TNC
Indian competent authorities became public, groups based on clear and quantifiable
leading to the replacement of the Indian factors that reflect the actual economic
official in 2013. In January 2015 the two activities and value created in each country.
competent authorities signed a Framework This would both reduce the number of
Agreement intended to facilitate resolution conflicts and ensure that the disputes
of some 200 cases. A year later a statement that do occur can be adjudicated in a
said that about half had been resolved. In transparent, fair and consistent manner.

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