Mandatory binding arbitration—is this a pathway to a more efficient map?

Mandatory binding arbitration—is this a pathway to a more efficient map? The Organisation for Economic Cooperation and Development (OECD) has recently been exploring ways to improve dispute resolution mechanisms in the realm of international tax, notably through the use of binding mandatory arbitration as part of the Mutual Agreement Procedure (MAP) Article in Double Tax Agreements. This article seeks to examine whether binding mandatory arbitration would provide an effective mechanism for resolving international tax disputes. It investigates policy concerns with mandatory arbitration, especially sovereignty issues, access to mandatory arbitration and its scope, as well as the interface between MAP arbitration and domestic remedies. The possibility of deferring time limits on arbitration, the appropriateness of the ‘last-best-offer’ or baseball arbitration approach versus the ‘independent opinion’ approach and contentious issues surrounding the appointment of arbitrators will be considered, along with recent developments in arbitration processes. ‘Arbitration of taxation disputes is attractive and effective, presenting significant advantages to businesses and governments… Arbitration always reaches a conclusion, provides for impartial determinations with proper taxpayer participation and applies law rather than expediency. The process is orderly, predictable and transparent.’1 1. INTRODUCTION Utilizing arbitration as a tax treaty mechanism for resolving disputes is not a new phenomenon. As far back as 1928, the League of Nations published a draft Model Treaty which provided for an amicable settlement of disputes by a technical body appointed for this purpose, with additional recourse being provided to any arbitral or judicial feature selected by the Contracting States, including reference to the Permanent Court of International Justice.2 However, the use of arbitration as an alternative approach to resolving international tax disputes, including transfer pricing disputes, between a taxpayer and a revenue authority has recently received new impetus through the publication by the Organisation for Economic Cooperation and Development (OECD) of a Public Discussion Draft Make Dispute Resolution Mechanisms More Effective3 (OECD Discussion Draft), as part of its Base Erosion and Profit Shifting (BEPS) Action Plan.4 The OECD Discussion Draft has acknowledged the need to improve dispute resolution mechanisms, ‘especially at a time when the number of disputes has increased’5, and with the work on BEPS being likely to further increase the number of treaty disputes. It is significant that the latest OECD report on MAP statistics has revealed that at the end of 2013, there were 4566 open MAP cases in OECD member countries in ending inventory, representing a 12.1 per cent increase compared to the 2012 reporting period, and a startling 94.1 per cent increase compared to the 2006 reporting period (MAP cases involving two OECD member countries are double-counted in this total).6 There can consequently be no doubt that dispute resolution processes require urgent attention and improvement. Experts acknowledge that: ‘Arbitration provisions should be expected to increase the timeliness of the MAP procedure and reduce case inventories, but OECD member countries have continued to show a certain hesitance in adopting arbitration provisions.’7 2. BINDING MANDATORY ARBITRATION—A DIVISIVE ISSUE Although utilizing arbitration as a tax treaty mechanism for resolving disputes is not a new phenomenon, it has long been a divisive issue. When the MAP was discussed at the 35th Congress of the International Fiscal Association in Berlin in 1981, it was the object of extensive criticism. The catalogue of failings of the procedure included that it was generally protracted and unwieldy, in many cases no agreement was ever reached between the Contracting States, and taxpayers not only received no special legal protection, but could not compel either the initiation of the procedure or the elimination of taxation contrary to the treaty. They had no right to be heard or be involved in proceedings, and had no right to be informed of, or demand substantiation of the decision reached. There was no obligation to publish an agreement, and the resolution of the problem could be held up at the procedural barriers of national tax law, as implementation of any MAP decision was frequently left to national tax law in the Contracting States.8 Then, as now, the MAP was not working effectively as a dispute resolution mechanism, and one of the suggestions for improvement was the inclusion of a formal arbitration procedure. The results were illuminating: the National Reporters for one country, Sweden,9 declared their unqualified support for a formal arbitration procedure, while further advocates were to be found in seven other countries, including Great Britain. The National Reporters for a further three countries supported the concept with reservations, while those from the five remaining countries completely rejected the idea,10 resulting in support from one half of the countries represented, and hesitation or rejection from the other half. The General Report concluded that: ‘Although there has long been a call for the creation of arbitration procedure or an international court for tax matters, the opposition against the establishment of the required institutions is probably still too strong.’11 The intervening 34 years have seen enormous strides towards a wider acceptance of mandatory binding arbitration. Perhaps the greatest indication of a sea-change in attitudes is that the three countries which originally had reservations about arbitration, namely Australia, France and the Netherlands, and the five countries that formerly rejected this concept, namely Austria, Belgium, Canada, Japan, and Norway, have now all endorsed mandatory binding arbitration, either in subsequent Double Tax Agreements (DTAs), and/or by acceding to the EU Arbitration Convention.12 Back in 1984, the OECD Committee on Fiscal Affairs (CFA) examined the MAP and found that ‘Overall, MNEs consider that owing to the protracted nature of this procedure and the risks involved, most enterprises look at the mutual agreement procedure only as a last resort.’13 Although the possibility of mandatory corresponding adjustments subject to arbitration was examined, the Committee concluded that there would have to be a great deal of international consideration and cooperation if a satisfactory system in which a large number of countries could participate were set up.14 At the time they believed there was no obvious and urgent need for an arbitration process,15 and the CFA was concerned that it would involve an unprecedented surrender of fiscal sovereignty, especially as some Member countries had made it clear that they would find such a scheme unacceptable for that very reason.16 Consequently the Committee did not ‘for the time being, recommend a compulsory arbitration process for the resolution of disputes between tax authorities’.17 While the OECD CFA was sanguine about there being any pressing need for arbitration, taxpayers were increasingly feeling the strain of an ineffective dispute resolution procedure. In 2001 a Global Transfer Pricing Survey revealed that multinational enterprises (MNEs) had so little faith in the MAP, they sought competent authority relief for double taxation in only 27 per cent of cases, resulting in double taxation in over 70 per cent of such situations.18 Reasons for not seeking MAP relief included that the process was ‘too expensive’ or ‘took too long’. Evaluating these lacklustre results, the comment was made that ‘This re-emphasizes the need for governments and intergovernmental agencies to explore binding and swift arbitration processes to supplant the MAP’.19 That same year David R Tillinghast also highlighted the clear need for arbitration of disputes arising under income tax treaties: … from the point of view of the taxpayer, the results of many competent authority proceedings seem rather arbitrary – resembling a simple horsetrade (an unprincipled compromise) more than a reasoned application of the treaty provisions. There is always a fear of being a sacrificial lamb when two competent authorities have several cases to be resolved at the same time. Added to this is the fact that the competent authority proceedings in many cases are long, drawn-out affairs, involving not only expense but uncertainty over an extended period of time.20 As the need to improve controversy management became more apparent, the OECD embarked on a major review of the dispute resolution process in 2003. In its Draft Progress Report published in 2004,21 the CFA acknowledged that both the private sector and governments had an important stake in improved dispute resolution techniques, noting that the possibility of unresolved tax treaty disputes could distort patterns of trade and investment and lead to increased administrative and compliance costs, while ‘all governments lose when unresolved tax disputes inhibit effective administration’.22 The CFA’s joint working group solicited information from OECD Member countries, held consultations with the private sector and received input from non-OECD economies in the context of the Global Forum on Taxation before concluding that it was clear that the MAP process would be improved if there was a mandatory requirement that, under certain circumstances, an unresolved case must be submitted to supplementary dispute resolution procedures.23 Follow-up work resulted in the publication of proposals to supplement the MAP process with a mandatory arbitration clause,24 public consultations, and a draft update of Article 25 of the OECD Model Tax Convention on Income and Capital (OECD Model Convention) containing a new arbitration clause and commentary.25 The ultimate outcome was the adoption of a new Article 25(5), providing for the mandatory arbitration of unresolved issues in the course of a MAP where competent authorities are unable to reach agreement within two years.26 Hailed as ‘the most important change made to the OECD Model since the Model was first released in various drafts published between 1958 and 1963’,27 this change was swiftly followed by a corresponding change in the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model Convention) in 2011. Article 25 of the UN Model Convention now contains an optional arbitration provision. Does this mean that the problem of unresolved tax treaty disputes is a thing of the past? While the introduction of these arbitration provisions might have been expected to expedite the MAP and have a positive effect on case inventories, binding mandatory arbitration continues to be a divisive issue, with only 17 per cent of the treaties and protocols concluded by OECD member countries between 2005 and 2012 including arbitration provisions.28 In 2014, it was reported that 158 DTAs include an arbitration clause, but given the total number of agreements worldwide, approximately 3000, this is a rather limited number—just over five per cent.29 These arbitration provisions have done little to alleviate the growing inventory of MAP cases, which is reaching unprecedented levels.30 The OECD recently stated in its BEPS Action Plan that work to improve the effectiveness of the MAP would be an important complement to the work on BEPS issues, ensuring certainty and predictability for business. It was therefore undertaking to examine and address obstacles that prevent countries from solving treaty-based disputes under the MAP. Consideration would be given to supplementing the existing MAP provisions with a binding and mandatory arbitration provision.31 To this end, the OECD Discussion Draft was released on 18 December 2014. This did not represent consensus views of the OECD’s CFA or its subsidiary bodies, but was intended to provide stakeholders with substantive proposals for analysis and comment.32 Once again, the OECD recognized that ‘there is no consensus on moving towards universal mandatory binding MAP’.33 3. CONTROVERSIAL ISSUES RELATING TO MANDATORY BINDING ARBITRATION 3.1 Policy concerns 3.1.1 National sovereignty The most contentious issue relating to the inclusion of mandatory binding arbitration under the MAP is the issue of national sovereignty, or the surrender of fiscal sovereignty that allegedly accompanies the resolution of disputes by arbitrators, rather than by the competent authorities of the nations involved in the tax controversy. This concept of fiscal sovereignty maintains there should never be any delegation or relinquishment of a country’s power and authority to tax. In this context arbitration has been described as ‘an anathema to governments because they are afraid that it will take taxation out of their control, and may therefore force them to allow credits or exemptions that, in their view, are unjustified’.34 While certain countries resist mandatory binding arbitration by insisting on complete state autonomy over tax matters, William W Park has pertinently argued that it is unclear why ‘tax should have special status in a world where arbitration of investment disputes is common’.35 He argues that ‘For years developing countries have been required to submit investment disputes to arbitration’ and that ‘this has been commended by multinationals as a more politically and procedurally neutral forum than host state courts’, while ‘Governments arbitrate expropriation disputes even when they implicate vital national interests such as natural resources and economic infrastructure’.36 He concludes that while the sovereignty argument implicitly refers to the protection of national security, this is ‘not likely to be injured by a decision that a royalty rate should be 6% rather than 7%, or that the price of a widget should be $1.50 rather than $1.75.’37 Michael C Durst and Robert E Culbertson concur with this ‘storm in a teacup’ approach: These disputes are not the stuff of which international drama is made. If there is any context in which the sovereignty issue should block the adoption of effective arbitration clauses with clear deadlines, it is not the context of double tax disputes and similar recurring factual issues arising under income tax treaties.38 The fact remains that the OECD currently faces the hurdle that several key countries will not consider the possibility of introducing mandatory binding arbitration. It would be too simplistic to categorize the debate as being between developing and developed countries, as many developing countries are reported to be agreeable to mandatory and binding arbitration, even though they may experience some practical difficulties in implementing it.39 When the UN Committee of Experts on International Cooperation in Tax Matters’ Subcommittee on Dispute Resolution issued their report on Arbitration in 2010, they reasoned that ‘a counterpart of sovereign independence is the capacity and the right of a State to limit its own sovereignty by treaties’,40 and that this limitation occurs in DTAs. Adopting the line of argument put forward earlier by Park, that investment promotion and protection agreements as well as social security agreements already provide for arbitration to solve disputes between Contracting States, the Subcommittee concluded that ‘sovereignty does not prevent States from agreeing in a tax convention to be bound by the decision of an arbitration board (private tax experts) where their competent authorities cannot reach an agreement on a tax issue’.41 It did, however, acknowledge tension between the arguments of those against arbitration, especially those seeking to shield their tax administration from external scrutiny42 and the arguments of those in favour of arbitration, that providing tax treaty certainty not only dovetails with national tax policy but also improves the general investment climate in both Contracting States.43 Michael Lennard, chief of the International Tax Cooperation section of the UN, has stated that arbitration would bring both benefits and burdens for developing countries, and has emphasized the importance of a balanced BEPS outcome on arbitration, where the focus is not entirely on certainty for taxpayers but also on fair outcomes ‘unaffected by inequalities in resources, skills and experience among those affected by the decisions’.44 In relation to ongoing resistance to mandatory binding arbitration, Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD, has said that progress needs to be made on the arbitration element of the BEPS Action Plan, but that some countries ‘have been very reluctant and have been hiding behind sovereignty’.45 Former competent authority and tax treaty negotiator for the Netherlands Government Hans Mooij has stated that ‘In China and Brazil… they're concerned that they will lose positions in arbitration which they now can afford to keep up because there's no one to punish for their errors’,46 while the comment has been made that India, for example, would struggle with such proposals because the federal structure is unsuitable—binding local authorities would be almost impossible for the central authorities in Delhi to keep up with.47 Louis Eduardo Schoueri of the University of São Paulo has acknowledged that not only Brazil but several Latin American countries have constitutional reservations against both the MAP and arbitration, alleging that they infringe the principle of legality. He has, however, argued that these concerns are unfounded, as the principle of legality is not affected, since the limits of tax jurisdiction are set forth in the tax treaty and the aim of the MAP and, by extension, arbitration, is merely to interpret this treaty.48 Nevertheless Nadja Dorothea Ruiz Euler, central administrator for international tax legal affairs, MAP Competent Authority, Mexico, has stated that Mexico opposes arbitration on sovereignty grounds (although Mexico has seven tax treaties that contain an arbitration clause, none of those provisions have been enforced). Her reasoning echoes that of those arguing against mandatory binding arbitration in the UN Subcommittee on Dispute Resolution: Mexico is against allowing a third party that is not a competent authority to decide whether there is a double taxation problem. In her opinion, Mexico will eventually become more open to arbitration, but is currently reluctant to relinquish sovereignty.49 It should be borne in mind that other countries in Latin America are reported to be willing to consider tax treaty arbitration, as they already use arbitration to resolve domestic disputes.50 It is important to remember that developed countries in Europe and the USA previously made similar sovereignty arguments against treaty arbitration provisions.51 Carol Dunahoo, former US Competent Authority and Director, International (Large and Mid-Size Business) at the US Internal Revenue Service (IRS), has noted that the careful design and operation of arbitration provisions can overcome sovereignty concerns. She has referred to US arbitration provisions as being ‘an extension of the MAP process… basically a tiebreaker rule for the competent authorities’.52 The OECD Discussion Draft’s solution to the thorny issue of national sovereignty as an obstacle to mandatory binding arbitration is a disappointing one. It suggests that the OECD Commentary to the Model Tax Convention could be amended in order to increase country transparency in relation to their observations, reservations and positions in relation to mandatory arbitration, requiring them to take a formal position clarifying their objections.53 The author submits that this proposal does not go far enough to present an authentic and effective remedy. Countries are already openly declaring their objections to arbitration provisions on sovereignty grounds, so possibly ‘forcing’ countries to express their reservations does not take this issue much further. The last three decades have seen a steady move away from entrenched opposition to mandatory binding arbitration in both developed and developing countries. While the tension between opposing arguments remains, there appears to be a ‘growing acceptance that among the features of sovereignty is membership in a global community, that community means interconnectedness, and that isolated action in tax system design is neither possible nor desirable’.54 3.1.2 Restricting the scope of arbitration Would mandatory binding arbitration be more palatable to countries currently resistant to this dispute resolution procedure if access could be restricted to a specific range of MAP issues? One of the options the OECD is currently proposing is to allow only a limited number of topics to be subject to arbitration, on the basis that half a loaf is better than none, ie it would be better to encourage countries to adopt a MAP provision with limited scope for arbitration rather than no provision at all. Examples of possible restrictions include: provision for MAP arbitration only with respect to cases involving specific treaty articles; provision for MAP arbitration only in cases of actual double taxation; or exclusion from the scope of arbitration cases involving the application of treaty or domestic law anti-abuse rules.55 The question here is whether the compromise of having a larger number of countries subscribe to a fragmented version of mandatory binding arbitration would be worthwhile? The OECD Discussion Draft suggests amending the Commentary on Article 25 to include an alternative restricted MAP provision. The author submits that narrowing the scope of cases subject to arbitration would appear to be an uncharacteristically retrogressive step, given the pressing need to clear the growing inventory of MAP cases. The current OECD Commentary does not limit the scope of the MAP, but makes provision for States to only apply arbitration to a restricted range of cases, such as those involving issues which are primarily factual in nature,56 and the UN Model Convention, which likewise does not limit the scope of the MAP, contains a similar provision in its Commentary.57 It is therefore unclear why there is a need for further amendment. Restrictions on the scope of arbitration already exist in some DTAs, so the option provided by the OECD has historical precedence, if not innovation. A country’s approach with one treaty partner may be different to the approach taken with another treaty partner. For example, the Protocol amending the US’ DTA with Germany, signed in 2006, restricts arbitration to Articles 4, 5, 7, 9, and 12,58 unless the competent authorities agree that the particular case is not suitable for determination by arbitration. In addition, the competent authorities may, on an ad hoc basis, agree that binding arbitration shall be used in respect of any other matter to which Article 25 applies.59 The Protocol amending the DTA between the USA and Canada, signed the following year, involves similar restrictions in relation to arbitration—in fact the scope is even more limited with regard to the royalties article.60 However, three years later the IRS issued a Memorandum of Understanding (MOU) between the competent authorities of the USA and Belgium setting out the arbitration process pertaining to the DTA between these two countries. This provides that ‘arbitration is available in respect of any case where the competent authorities have endeavored but are unable to reach an agreement under Article 24 regarding the application of the Convention’.61 The MOU in relation to the DTA between the USA and France, signed that same year, states that there are no subject matter limits for arbitration, and binding arbitration will be used ‘unless the competent authorities agree that the particular case is not suitable for determination by arbitration’.62 Perhaps the USA felt more confident about broadening the scope of tax treaty arbitration in the later treaties once it had gained experience with the more restrictive arbitration provisions? The EU Arbitration Convention has a limited ambit, applying only to transfer pricing and permanent establishment disputes,63 but this fact has long been criticized as ‘unduly restrictive, as other issues can and do arise’.64 Park has commented that fiscal matters other than transfer pricing may arise between trading partners, giving the examples of disagreement about how a taxpayer’s residence should be determined, or whether payments should be characterized as royalties or services.65 In this context, Jérôme Monsenego has warned that a limitation to the scope of mandatory arbitration in tax treaties may raise complex issues in relation to the qualification of income, where a dispute may straddle two Articles of the DTA—one arbitrable and the other excluded from arbitration.66 Mary Bennett, who previously served as the Head of the Tax Treaty and Transfer Pricing Division at the OECD, and also served as the US Treasury’s Deputy International Tax Counsel, with responsibility for heading tax treaty negotiations with numerous countries, has recently objected to limits on the scope of the arbitration provision, stating ‘There is no principled basis on which you could say that one taxpayer losing a treaty benefit they are entitled to is more acceptable than somebody else’s loss of a benefit’.67 Tillinghast,68 Ellis,69 and Park70 all provide cogent arguments as to why mandatory binding arbitration should not be limited to cases of double taxation. Park explains that treaties may be violated even if national taxation does not lead to double taxation, for example ‘a treaty might eliminate withholding on royalties even though the domestic tax law at the taxpayer's residence provides a foreign tax credit that would soak up a withholding tax wrongfully withheld by the source country’.71 The exclusion of cases involving the application of treaty or domestic law anti-abuse rules from the scope of arbitration is a sensitive issue. Danielle Rolfes, international tax counsel with the US Treasury, has recently voiced concern that leaving general anti-abuse rules out of arbitration ‘poses too big a barrier to gaining access to MAP’72, effectively eviscerating access for taxpayers. The author submits that narrowing the scope of cases eligible for arbitration beyond what is currently provided in the Commentaries of both the OECD Model Tax Convention and the UN Model Convention is a step backwards rather than forwards.73 There can be pitfalls where domestic anti-abuse rules may be opaque—‘Like elephants and obscenity, the contours of legitimate taxation leave many fuzzy edges that frustrate rigorous discussion’74—and the question of which cases to exclude is likely to create uncertainty and delay. Although excluding anti-abuse rules from the sphere of arbitration might placate a few outlier jurisdictions, this exclusion runs counter to the OECD’s BEPS agenda position that it is ‘essential that countries consider innovative approaches to implement comprehensive solutions’.75 3.1.3 The interface between MAP arbitration and domestic remedies A third policy concern raised by the OECD Discussion Draft is the co-ordination of MAP arbitration and domestic legal remedies, with the aim being to avoid the risk of a conflict between the decision of a court and the decision of an arbitration panel.76 The interaction between the MAP and domestic legal proceedings has long been a divisive issue,77 and the possibility of MAP arbitration provides a further level of complexity. One of the main reasons for dissension here is the myriad of different national approaches to this issue, and the current OECD Model Convention Commentary deals with the various permutations available, as does the UN Model Convention Commentary.78 While the overarching principle appears to be that a person should not be allowed to pursue the arbitration process if the issues submitted to arbitration have already been resolved through the domestic litigation process of either State, some States require that unresolved issues between competent authorities may only be submitted to arbitration if domestic legal remedies are no longer available, whereas others allow the suspension of domestic remedies pending the outcome of the MAP arbitration. It is foreseeable that problems will arise where the domestic laws of the two Contracting States diverge in relation to the question of MAP arbitration. To complicate matters further, a mutual agreement between two competent authorities and a MAP arbitration may have different relationships with domestic tax procedures. For example, in Germany, ‘unlike a MAP, an arbitration proceeding is not just an internal matter between governments; it also directly affects the taxpayer’s rights and must therefore follow basic procedural rules’.79 The issue of sovereignty may also rear its head again as the arbitration issue is removed from the hands of national competent authorities, and some countries may be reluctant to accept that ‘the heavens will not fall if in a particular case the resolution of an issue is different from the resolution which would have been reached under domestic procedures’.80 The OECD Discussion Draft recommends the clarification of the coordination of MAP arbitration and domestic legal remedies, suggesting participating countries could commit to providing guidance on this interface, and that the Commentary on Article 25 could also be amended to provide greater clarity.81 While there can be no argument with increasing transparency and clarity in this area, the problem of accommodating a variety of differing, and potentially conflicting, approaches remains. This may be an area where the OECD may consider carrying out further work, to establish a ‘best practice’ guide in order to encourage uniformity and certainty in relation to arbitration controversies. 3.2 Practical concerns 3.2.1 Timing of arbitration disputes—should there be provision for deferral? The very first issue of practical concern mentioned by the OECD Discussion Draft relates to the timing of arbitration. Article 25(5)(b) of the OECD Model Convention provides that where the competent authorities are unable to reach agreement to resolve a case within two years following the initiation of the MAP case, the issue will be submitted to arbitration at the request of the taxpayer. The UN Model Convention contains a slightly different provision in its Article 25(alternative B)(5)(b), in that unresolved issues may be submitted to arbitration within three years of the initiation of the MAP case, and at the request of either competent authority, rather than at that of the taxpayer. The OECD Discussion Draft states that there may occasionally be circumstances in which initiating MAP arbitration may be premature, and that this ‘automatic referral may be an obstacle to the adoption of arbitration by some countries’.82 It suggests that where the competent authorities believe they will be able to reach a negotiated resolution, it may be appropriate to defer the initiation of MAP arbitration, for a defined (preferably short) period of time, and proposes the amendment of Article 25(5) to permit the competent authorities to mutually agree to defer the initiation of MAP arbitration under specific conditions.83 As outlined in the discussion above,84 over the past few decades one of the major concerns with submitting cases to the MAP has been the average time period for the resolution of tax disputes under the MAP, with reports of some cases taking ‘a staggering 10 to 15 years’85 to resolve. It is therefore curious that the OECD is suggesting placing additional power in the hands of competent authorities to defer or delay the resolution of disputes that they have been debating for two years. In effect, they are potentially providing for the removal of the taxpayer’s right to request arbitration, albeit for an additional defined time period. The author submits that this is a retrogressive step, especially in light of increasing MAP inventories worldwide. It is also not clear why the so-called ‘automatic’ referral to arbitration may be an obstacle to the adoption of arbitration by some countries, when in practice the referral may not be automatic. The OECD Model Convention Commentary already provides that as the request for arbitration can be made at any time after the two-year period begins, recourse to arbitration is ‘not automatic’.86 Not only is the person who presented the case given the option of waiting beyond the end of the two-year period (for example, in order to allow the competent authorities more time to resolve the case), but States are also free ‘to provide that, in certain circumstances, a longer period of time will be required before the request can be made’.87 Similarly, the UN Model Convention provides that recourse to arbitration is not automatic, with the competent authority being able to wait beyond the end of the three-year time period, or to simply not pursue the case, and the States are likewise able to provide that a longer period of time is needed before the request can be made.88 It would appear that provision exists in the current OECD Commentary for a deferral, and any additional amendment to Article 25(5) would not only be superfluous, but would make the OECD appear overly anxious to appease recalcitrant countries with unnecessary concessions. Furthermore, the EU Arbitration Convention has received criticism for allowing delays to its procedure, especially in respect of timelines for the establishment of an advisory commission to deal with the dispute. Negative comments have been made regarding the disadvantages of delays in arbitration to taxpayers, to the effect that EU Member States are allowed ‘to factually stall the advisory commission’s establishment’89, and that this ‘essentially gives each country brakes to halt the process indefinitely’.90 In light of this criticism, it would perhaps not be wise for the OECD to open a new avenue for extensive delays to the arbitration process. 3.2.2 The appointment of arbitrators The OECD Discussion Draft considers the issue of the appointment of arbitrators as an obstacle to countries adopting mandatory binding arbitration. It expresses the concern that limited guidance as well as a lack of experience with the appointment of arbitrators may make some countries hesitant to adopt MAP arbitration.91 Currently there is no standard set of guidelines for the appointment of MAP arbitrators. However, the OECD refers to the criteria used in existing agreements and models, which in general appear to provide that such individuals: (i) should have significant experience in cross-border tax matters, preferably in allocation matters; (ii) should be of a judicial temperament (i.e. neutral, decisive, respectful and composed), though not necessarily have experience as a judge or arbitrator; and (iii) should be impartial and independent vis-à-vis the Contracting States and the affected taxpayer(s) at the time they accept appointment (as well as for the duration of the arbitration proceeding and a reasonable period of time thereafter).92 In order to overcome reluctance to embrace arbitration on the grounds of a lack of arbitrator guidelines, the OECD Discussion Draft proposes that participating countries could agree to develop and publish mutually agreed criteria for the appointment and qualifications of arbitrators. These criteria could be included in the text of the arbitration provision itself, and/or in competent authority agreements pertaining to the arbitration in advance of any MAP arbitration. An additional option may be for participating countries to develop a standardized declaration to be executed by arbitrators, in order to ensure the impartiality and independence of prospective arbitrators. The appointment of arbitrators is a sensitive and divisive issue, with experts recognizing that in designing a tax treaty arbitration regime, few aspects are more important than the process for choosing the arbitrators: ‘Just as in real estate the three key elements are “location, location, location,” so in arbitration the applicable trinity is “arbitrator, arbitrator, arbitrator.”’93 The current Article 25 Commentary to the OECD Model Convention contains a sample form for a Mutual Agreement on Arbitration in an Annex. This form refers to the selection of arbitrators as well as their eligibility for appointment. The recommendation is that the competent authorities involved in the MAP controversy should, within a specified time period, each appoint one arbitrator, and within two months of the latter appointment, the arbitrators so appointed will appoint a third arbitrator who will function as Chair.94 There is also provision for a streamlined arbitration process, with a sole arbitrator presiding.95 In relation to the eligibility of arbitrators, the Annex currently provides that ‘Any person, including a government official of a Contracting State, may be appointed as an arbitrator, unless that person has been involved in prior stages of the case that results in the arbitration process.’96 Thus the sample Mutual Agreement on Arbitration also raises a number of contentious issues which need to be addressed. The OECD Discussion Draft utilizes the criterion of experience as a preliminary qualification (with a ‘judicial temperament’ as a secondary stipulation). It is illuminating to see the variety of ideas on the experience that an arbitrator should, or should not, have, when looking at comments from arbitration experts as well as from stakeholder responses to this issue. While the traditional call for the arbitration tribunal to be ideally constituted by ‘individuals with substantial experience in the area of tax, whether as lawyers, accountants or economists’,97 and certainly by individuals with arbitration experience,98 would appear to be irrefutable, the OECD refers to experience as a judge or arbitrator as not being necessary, as long as the appointee is ‘of judicial temperament’, being ‘neutral, decisive, respectful and composed’. It would be useful to know exactly how these admirable character traits would be evaluated by the OECD, or by another institution. The approach referred to by the OECD can be contrasted with that of Park, who provides cogent reasons for the vital necessity of having at least one arbitration tribunal panel member with experience in arbitration: Arbitration raises difficult procedural questions that may determine the success or failure of the enterprise, and which in a legally heterogeneous world often have no universally accepted answer. Consequently, at least one member of the tribunal must possess experience in conducting arbitration. When millions of dollars are at issue, few countries or taxpayers will want the proverbial “pig in the poke” of procedural amateurism. Particularly if arbitrators have discretion to design flexible methods appropriate to each case, someone on the tribunal must have experience addressing the key procedural matters on which national practices differ.99 The author agrees that having at least one experienced arbitrator on the arbitration panel is a necessity, not a luxury, especially as establishing confidence in the smooth functioning of the arbitration process is essential to overcome both national and taxpayer reservations. Speaking at a workshop on the MAP and arbitration as tools for dispute resolution,100 Ricardo Escobar (Universidad de Chile) suggested that the arbitration award should be rendered by tax specialists experienced in common law and civil law. However, he rather surprisingly added that ‘specialists who are not familiar with tax law could be appointed upon certain conditions since they are perceived as trustworthy’.101 Since the entire MAP arbitration process would centre on cross-border international tax issues, it would be interesting to know what those conditions would be (and also why specialists are perceived as being trustworthy per se). This view can be contrasted with the stakeholder proposition of a minimum of 10 years of substantive, high level experience in transfer pricing in government and/or the private sector for potential arbitrators, with candidates additionally having an advanced degree in law, economics, accounting, finance, or business.102 The suggestion has also been made that the OECD should not only develop selection criteria, but also create a global pool of potential arbitrators, from which tax authorities would be encouraged to draw.103 Clearly the focus of business is on utilizing experienced and relevantly qualified arbitrators. The final criteria for arbitrators referred to by the OECD are impartiality and independence, in relation to the Contracting States and to the taxpayer seeking mandatory binding arbitration, not only at the time they accept the appointment, but also during arbitration proceedings and for a reasonable time thereafter. This requirement underscores the necessity for monitoring arbitrator behaviour over a period of time. The emphasis on arbitrator impartiality and independence in the prevailing literature on arbitration stands in sharp contrast with the sample form for a Mutual Agreement on Arbitration in the OECD Model Convention Commentary referred to above, which allows any person, including a government official of a Contracting State, to be appointed by a competent authority as an arbitrator unless they have previously been involved in that same case. At the public consultation before Article 25(5) and the Annex containing the sample form was introduced into the OECD Model Convention, this provision was severely criticized as constituting ‘a violation of the universally accepted principle of international arbitration that the arbitrators should be neutral and independent from the parties who have appointed them’.104 The argument put forward by the OECD at that time, that such government official arbitrators would be familiar with the issues, was seen not to outweigh the very serious disadvantage of having arbitrators that are not independent from the parties.105 The author submits that the perception of bias flowing from this provision does little to inspire confidence in the arbitration process as a whole, and should be removed. There should be a general rule that no government officials or taxpayer employees or consultants should qualify as arbitrators,106 and a stakeholder has commented that it might be a good idea to ensure that former government officials cannot become arbitrators in matters involving their former employer within five years of the termination of such employment.107 The OECD Discussion Draft suggests that prospective arbitrators be required to disclose any potential conflicts of interest in a standardized declaration to be developed by participating countries.108 Such conflicts could involve personal, financial or national affiliations which could give rise to implications of bias. In relation to developing countries, Michael Lennard has postulated that: One of the great concerns in investment treaty arbitration is that there are not enough transfer pricing experts from developing countries who could and would be chosen to arbitrate such matters. The point is not that developed country experts would always side with developed countries and MNEs, but rather that an understanding of developing countries and their perspectives and a developing country background may better equip an arbitrator to appreciate where a developing country competent authority is coming from.109 Lennard suggests that there may be an inherent unconscious bias, or simply a lack of experience in looking at arbitration from a developing country’s point of view, on the part of arbitrators from developed countries. In this instance the OECD has taken care to seek input from developing countries (more than 85 low- and middle-income countries have participated in the BEPS consultation process).110 It has also involved two OECD accession countries (Colombia and Latvia) and eight G20 countries which are not part of the OECD in the consultation process: China, India, Brazil, Russia, South Africa, Indonesia, Argentina, and Saudi Arabia. It has thus sought insights on BEPS issues, such as mandatory binding arbitration, from beyond its 34 OECD Member country base, which is mostly made up of developed countries. However, despite this bipartisan consultation, the perception of bias may not necessarily be solved by simply seeking arbitrators from the developing world, as: Even where there are arbitrators from the developing world, there may be a suspicion that they have become ‘part of the machine’ and will best serve the interests of the countries (mainly developed) most likely to conduct arbitrations in the foreseeable future or taxpayers most likely to seek their counsel in transfer pricing cases.111 The International Chamber of Commerce (ICC) has commented in relation to the appointment of arbitrators that a well-established and worldwide network of experts in both developed and developing countries is crucial, while emphasizing that it already has a network in place to propose and nominate experts as potential arbitrators through its International Centre for ADR.112 While this may be a potential network for the OECD to tap into, it is possible that competent authorities may consider the ICC as being too heavily influenced by the private sector. On the other hand, Park’s maxim that ‘If arbitrators must be completely sanitized from all possible external influences on their decisions, only the most naive or incompetent would be available’113 may be particularly apposite here. Another question raised by the OECD’s sample Mutual Agreement on Arbitration is: who should be responsible for appointing arbitrators to a MAP case? Marcus Desax and Marc Veit postulate that given the nature of tax treaty arbitration as a procedure between Contracting States, it is not objectionable that arbitrators are appointed by the competent authorities only, without the involvement of the taxpayer.114 They pragmatically conclude that another solution would be cumbersome, and unlikely to appeal to tax administrations. Conversely, Park asserts that taxpayer input into the selection of arbitrators has long been common practice in the international arbitral process, as ‘By vetting a proposed arbitrator, the party may feel more comfortable that the case will be decided by someone who is skilled, fair and perhaps even smart’.115 By balancing arbitrator selection between the competent authorities and the taxpayer, each side can ensure that arbitrators will be free from doctrinal predispositions that would adversely affect its case. The Tax Executives Institute (TEI) also supports taxpayer involvement in the arbitrator selection process to vet the qualifications of any potential candidates and have a say in their selection, along with each Competent Authority. In the author’s opinion, allowing taxpayer input into the arbitrator selection process creates a level playing field, which assists in ensuring the independence and impartiality of arbitrators, lending credence to the entire process. A final point to consider on the appointment of arbitrators is the constitution of the arbitration panel. The sample Mutual Agreement on Arbitration refers to three arbitrators, or a sole arbitrator under a streamlined procedure. While a sole arbitrator may be suitable where a case relates to primarily factual issues, such as the determination of an arm’s length transfer price, it may be less suitable for other matters, such as the characterization of income.116 A single arbitrator will normally be cheaper and pose fewer scheduling problems, and may be appropriate where smaller amounts are at stake, but a three-member arbitration tribunal ensures for a more rigorous decision-making process, and ‘arbitrators can generally be expected to be more careful if they must justify their conclusions in deliberations with others’.117 Certainly highly controversial, complex arbitration disputes should ideally be deliberated by multiple arbitrators with a diversity of qualifications, training and experience, rather than by a single individual who may, according to Tillinghast ‘turn out to have unexpectedly idiosyncratic ideas on a particular subject.’118 As the appointment of arbitrators will play a pivotal role in the widespread acceptance of mandatory binding arbitration, the author recommends that the OECD draw on established expertise in this area to guide the drafting of guidelines that will be acceptable to both developing and developed countries. 3.2.3 Form of process for decision The OECD Discussion Draft explains that there are two principal approaches to decision-making in the arbitration process. There is the “conventional” or “independent opinion” approach, strongly resembling a judicial proceeding, where the arbitrators reach an independent decision based on applicable law, typically in the form of a written reasoned analysis. This approach is favoured by the EU Arbitration Convention and in the OECD’s sample Mutual Agreement on Arbitration. The other format is the ‘last best offer’ or ‘final offer’ approach, colloquially referred to as ‘baseball arbitration’, and utilized in a number of DTAs, notably by the USA. It is also the approach preferred in the UN Model Convention.119 Here each competent authority submits a proposed resolution to the arbitration panel, together with a position paper explaining the rationale. The panel must then adopt one of these proposed resolutions, but its determination does not state a rationale and has no precedential value.120 The OECD suggested that participating countries could develop additional guidance as to which of these two options should be the default approach (listing their respective advantages and disadvantages), and requested stakeholder comment on the preferred approach.121 Once again there is scope for dissent in relation to mandatory binding arbitration, with the OECD and the EU Arbitration Convention favouring the independent opinion approach, while the UN and the USA favour the baseball approach. Which is the best approach? The baseball approach would appear to have the overwhelming support of business. The advantage of the independent opinion approach would be its precedential value, providing guidance for other taxpayers with similar issues. However, it is seen to encourage more adversarial positions, while: A clear advantage of baseball arbitration is the incentive it gives to the competent authorities to avoid extreme or non-justified interpretations of a tax treaty, since the lack of convincing arguments supporting a particular interpretation of a tax treaty is likely to encourage the arbitrators to choose the position of the other country.122 Thus baseball arbitration appears to force the competent authorities to take a reasonable and realistic approach, perhaps bearing in mind the need for their countries to do business together in the future. It appears to be geared to obtaining a prompt resolution of disputes, minimizing the costs of engaging the arbitration panel. However, it also has its drawbacks, having no substantive or precedential value, and importantly, ‘it may not completely eliminate double taxation, if neither of the two solutions proposed by the competent authorities does so.’123 There are clearly advantages and disadvantages to both approaches, but the author believes that it is not necessary to adopt a single default approach that would be applicable in each case. A strategy of flexibility, allowing a choice by the parties involved, has much to recommend it. Where speed is of the essence, the baseball approach may be most suitable, whereas if the case is complex and it would be valuable to establish a precedent, the independent opinion approach may offer the best possible outcome. 4. CONCLUSION The inclusion of binding mandatory arbitration under the MAP Article of tax treaties has long been a divisive issue, and the OECD Discussion Draft lists numerous obstacles that currently stand in the way of its widespread adoption, despite it clearly being a pathway to a more efficient MAP. These obstacles appear disheartening, and may even suggest a ‘stalemate’ atmosphere with little progress being made, as the OECD has referred to the lack of consensus on moving towards universal mandatory binding MAP arbitration as a reason to fall back on complementary solutions.124 This discouraging outlook may not reflect the true state of affairs in respect of arbitration. While the United Kingdom has long been an advocate of arbitration (the very first tax treaty to include a provision for referral of disputes to a third-party tribunal was signed in 1926 by the United Kingdom and the Irish Free State125), it has recently signed a Protocol to its DTA with Japan, a country long opposed to arbitration, which establishes a new mandatory arbitration process.126 A mere eight years ago it was reported that ‘none of Japan’s tax treaties has a provision for arbitration’.127 The new Protocol now provides for a taxpayer to request mandatory binding arbitration where a case has not been resolved by consultation between the competent authorities of the two countries within two years. It sets out rules for the establishment of a three member arbitration panel, with the arbitrators being required to have expertise or experience in international tax matters. In contrast to the OECD sample Mutual Agreement on Arbitration, the Protocol clearly specifies that no arbitrator shall be an employee of the tax authority of either Contracting State.128 A few years ago Andrew Dawson, head of the Tax Treaty Team, UK Revenue and Customs, remarked that ‘Tax treaty policy is always moving on’ and that ‘Arbitration will become another way in which tax treaties serve to remove barriers to crossborder economic activity’.129 There is clearly a move towards accepting mandatory binding arbitration, even by countries which were against this process only a few years ago. Further hope for this process can be gleaned from a comment made by Grace Perez-Navarro, deputy director of the OECD’s Centre for Tax Policy and Administration earlier this year, that the OECD is more ‘favorably disposed toward mandatory binding arbitration than a recent discussion draft on dispute resolution indicates’.130 She predicted that, in the next phase of work on Action 14, those countries that are interested in arbitration will come together and ‘develop a solid proposal on moving forward on arbitration’.131 Significantly, on 11 June 2015 the G-7 leaders issued the following statement:  … we will strive to improve existing international information networks and cross-border cooperation on tax matters, including through a commitment to establish binding mandatory arbitration in order to ensure that the risk of double taxation does not act as a barrier to cross-border trade and investment. We support work done on binding arbitration as part of the BEPS project and we encourage others to join us in this important endeavour.’132 Former competent authorities are also coming forward to encourage the move towards mandatory binding arbitration, with the erstwhile Netherlands negotiator warning that ‘Once BEPS is over it will be very unlikely that there will be another political opening for tax treaty arbitration in the next 10 to 15 years or so. So the momentum is now’.133 Business leaders agree: ‘We all seek a sense of justice when it gets to resolving double taxation. But neither treaties nor taxes are about fairness. Arbitration holds that promise, however.’134 The text of this article was presented at the Society of Legal Scholars annual conference at York University, United Kingdom, in September 2015. 1 Robert Briner, ‘An End To Tax Trouble, At The Double’ Australian Financial Review (28 October 2002). 2 League of Nations Double Taxation and Tax Evasion Report presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion, Publications of the League of Nations II. Economic and Financial 1928.II.49., Geneva, October 1928. 3 OECD BEPS Action 14: Make Dispute Resolutions More Effective 18 December 2014–16 January 2015. 4 OECD Action Plan on Base Erosion and Profit Shifting July 2013. 5 OECD Discussion Draft (n 3) para 4. 6 OECD Mutual Agreement Procedure Statistics for 2013 <http://www.oecd.org/ctp/dispute/oecd-releases-2013-mutual-agreement-procedure-statistics.htm> last accessed 24 August 2015. 7 Marlies de Ruiter and Edward Barrett, ‘OECD Work on the Resolution of International Tax Disputes’ [June 2012] World Commerce Review 28, 29. 8 Karl Koch, ‘Mutual Agreement-Procedure and Practice’ (1981), 66a Cahiers de droit fiscal international, General Report to the IFA Congress, 94, 100. 9 Two of the three National Reporters for Sweden were Gustaf Lindencrona and Nils Mattson, the authors of Arbitration in Taxation (Kluwer, Deventer, The Netherlands 1981). 10 Koch (n 8)125 IX. Formal arbitration procedure ‘The National Reporters for Sweden have declared their unqualified support for a formal arbitration procedure. Further advocates of this are to be found in the Federal Republic of Germany, France, Great Britain, Greece, Portugal, Switzerland, and the USA (excluding the US revenue authorities).’ 11 ibid. 12 See: Convention Between Australia And New Zealand For The Avoidance Of Double Taxation With Respect To Taxes On Income And Fringe Benefits And The Prevention Of Fiscal Evasion (Paris, 26 June 2009) Entry into force: 19 March 2010, art 25(6); Convention between Australia and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income, with Protocol (Sydney, 30 July 2013) Entry into force: 14 October 2014, art 24(5); Convention Between The Government Of The United States Of America And The Government Of The French Republic For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And Capital (Washington, 31 August 1994) Entry into force: 30 December 1995, art 26(5); The EU Arbitration Convention (EC Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, 90/436/EEC), which provides for binding mandatory arbitration, was concluded by the states of the then European Community in 1990, came into effect on 1 January 1995, after being ratified by the 12 Member States of the European Union in 1994. At the time, the 12 EC Member States were Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. On 21 December 1995, the new EU Member States, Austria, Finland, and Sweden also accessed the Convention. On 25 May 1999, EU Member States agreed on a protocol to extend the convention’s running period with another five-year term, which is automatically renewed for another five years at the end of each term (unless an EU Member State objects thereto). The protocol was ratified, and the EU Arbitration Convention re-entered into force on 1 November 2004 and continues to remain in force. The 5th Protocol to the Convention Between Canada and the United States of America with Respect to Taxes on Income and Capital, (Chelsea, 21 September 2007) Entry into Force: 15 December 2008, Article 21 introduced mandatory arbitration for residents of Canada or the USA who face potential double taxation that is not resolved by negotiation between the Canadian and the US competent authorities. Japan has recently changed its stance on tax treaty arbitration, and now has arbitration provisions in its treaties with Hong Kong, entering into force in August 2011, with the Netherlands, entering into force in December 2011, with Portugal, entering into force July 2013, with New Zealand, entering into force in October 2013, with Sweden, entering into force in October 2014 and with the United Kingdom, entering into force in December 2014. Japan signed a tax treaty with the USA in January 2013 that provides for arbitration, but the treaty has yet to enter into force—See Kevin A Bell, ‘Japanese Official Describes “Regular” Meetings with U.S. Competent Authority’ (2015) 23 Tax Management Transfer Pricing Report 1364. Convention Between The United Kingdom Of Great Britain And Northern Ireland And The Kingdom Of Norway For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And On Capital Gains (14 March 2013) Entry into Force: 17 December 2013, art 27(5). Norway also eventually ratified the EU Arbitration Convention. 13 OECD, Transfer Pricing and Multinational Enterprises: Three taxation issues, Paris 1984, Chapter III para 38. 14 ibid para 53. 15 ibid para 54. 16 ibid para 55. 17 ibid para 63. 18 Ernst & Young Transfer Pricing 2001 Global Survey Practices, Perceptions and Trends in 22 Countries, November 2001, Figure 22 – Transactions – Outcomes of Examinations. 19 ibid, Impact of Competent Authority and Risk of Double Tax, 24. 20 David R Tillinghast, ‘Issues in the Implementation of the Arbitration of Disputes Arising under Income Tax Treaties’ (2002) 56 Bulletin for International Fiscal Documentation 90, 91. 21 OECD Report Improving the Process for Resolving International Tax Disputes, version released for public comment on 27 July 2004. 22 ibid, para 7. 23 ibid, para 132. 24 OECD, Public discussion draft on proposals for improving mechanisms for the resolution of tax treaty disputes, February 2006. 25 OECD, Improving the resolution of tax treaty disputes, (Report adopted by the Committee on Fiscal Affairs on 30 January 2007) February 2007. 26 OECD Articles of the Model Convention with Respect to Taxes on Income and on Capital [as they read on 17 July 2008], art 25(5). 27 Hugh Ault and Jacques Sasseville, ‘2008 OECD Model: The New Arbitration Provision’ (2009) Bulletin for International Taxation 208, 208. 28 De Ruiter and Barrett (n 7) 29. 29 HM Pit, ‘Arbitration under the OECD Model Convention: Follow-up under Double Tax Conventions: An Evaluation’ (2014) 42 Intertax 445, 466. 30 OECD Mutual Agreement Procedure Statistics (n 6). 31 OECD Action Plan on Base Erosion (n 4) ACTION 14 Make dispute resolution mechanisms more effective 23. 32 OECD Discussion Draft (n 3) para 6. 33 ibid, para 3. 34 Maarten J Ellis, ‘Issues in the Implementation of the Arbitration of Disputes Arising under Income Tax Treaties – Response to David Tillinghast’ (2002) 56 Bulletin – Tax Treaty Monitor 100,100. 35 William W Park, ‘Income Tax Treaty Arbitration’ (2002) 31 Tax Management International Journal 219. 36 ibid. 37 ibid. 38 Michael C Durst and Robert E Culbertson, ‘Arbitration to Resolve Difficult Double Taxation Disputes: The U.S. and its Trading Partners Should Seize the Moment’ King and Spalding (26 July 2000). 39 Joe Stanley-Smith, ‘OECD Looking for a Way Forward on Arbitration’ International Tax Review (16 March 2015) 4. 40 UN Committee of Experts on International Cooperation in Tax Matters, Report by the Subcommittee on Dispute Resolution: Arbitration as an Additional Mechanism to Improve the Mutual Agreement Procedure, Geneva 6 October 2010, para 19. 41 ibid, para 20. 42 ibid, para 21: ‘The interests of States can better be safeguarded if their tax administration can be scrutinised only by their administrative or judicial courts or by their competent authorities.’ 43 ibid, para 22. 44 Michael Lennard, ‘TP Arbitration for Developing Countries: Benefits and Burdens’ (2013) 24 International Tax Review 19. 45 Pascal Saint-Amans, quoted in Stanley-Smith (n 39). 46 ibid. 47 ibid. 48 Louis Eduardo Schoueri, University of São Paulo, quoted in Jasmin Kollmann and others, ‘Arbitration in International Tax Matters’ Tax Notes International (30 March 2015) 1189, 1191. 49 Nadja Dorothea Ruiz Euler, quoted in Kristen A Parillo, ‘Competent Authorities Debate Sovereignty and Arbitration’ Tax Notes (15 December 2014) 1224, 1224. 50 Hans Mooij quoted in Stanley-Smith (n 39). 51 In 2001 Prof Maarten J Ellis noted that ‘The last few years we have noticed an obsession of European governments with defending their taxing sovereignty’, above (n 34) 100; See the comments of John Staples, former US IRS official, in Kevin A Bell, ‘Treaty Arbitration Finds Favor in U.K., U.S.’ Tax Notes International (19 February 2007) 635. 52 Carol Dunahoo quoted in Parillo, above (n 49) 1224. The baseball approach to arbitration is examined below at Section 3.2.3 (Form of Process for Decision). 53 OECD Discussion Draft (n 3) para 42, Option 22 – Policy issues: Increase transparency with respect to MAP arbitration. 54 Allison Christians, ‘Sovereignty, Taxation, and Social Contract’ University of Wisconsin Law School, Legal Studies Research Paper Series Paper No 1063, August 2008, 43. 55 OECD Discussion Draft (n 3) para 45, Option 23 – Policy issues: Tailor the scope of MAP arbitration. 56 OECD Model Convention, art 25 Commentary, para 66. 57 UN Model Convention, art 25 Commentary, para 66. 58 Art 4(Residence) (but only insofar as it relates to the residence of a natural person), art 5 (Permanent Establishment), art 7 (Business Profits), art 9 (Associated Enterprises), art 12 (Royalties). 59 Protocol Amending the Convention between The USA and The Federal Republic of Germany for The Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, presented for signature in Berlin, Germany on 1 June 2006, art XVI para 22. 60 Technical Explanation Of The Protocol Done At Chelsea On 21 September 2007 Amending The Convention Between The USA And Canada With Respect To Taxes On Income And On Capital Done At Washington On 26 September 1980, As Amended By The Protocols Done On 14 June 1983, 28 March 1994, 17 March 1995, And 29 July 1997, art 21. 61 IRS Internal Revenue Bulletin: 2009-24, 15 June 2009 Announcement 2009-43, Belgian Arbitration Memorandum of Understanding Announcement 1. Cases Eligible for Arbitration, a. 62 Memorandum of Understanding regarding the 13 January 2009 signing of the protocol to the US–France income tax convention. 63 See above (n 12) art 1. 64 See International Chamber of Commerce Policy statement Arbitration in international tax matters Commission on Taxation, 3 May 2000. 65 Park (n 35). 66 Jérôme Monsenego, ‘Designing Arbitration Provisions in Tax Treaties: Reflections Based on the US Experience’ (2014) 42 Intertax 163,168. 67 Mary Bennett quoted in ‘The Hesitation in Adopting Mandatory Binding Arbitration’ Tax Notes International (6 July 2015) 15, 16. 68 Above (n 20) 95. 69 Above (n 34) 101. 70 Above (n 35). 71 ibid. 72 Dolores W Gregory, ‘U.S. Exploring Multilateral Instrument to Expand Arbitration Network, Rolfes Says’ (2015) 23 Tax Management Transfer Pricing Report 1443. 73 Para 26 of the OECD Model Convention art 25 Commentary and para 26 of the UN Model Convention, art 25 Commentary provide that in the absence of a special provision, there is no general rule denying perceived abusive situations going to the mutual agreement procedure. 74 William W Park, ‘Arbitrability and Tax’ in L Mistelis and S Brekoulakis (eds), Arbitrability: International & Comparative Perspectives (Kluwer Law International, The Netherlands 2009) ch 10, 10–21. 75 OECD Addressing Base Erosion and Profit Shifting 12 February 2013, Executive Summary, 8. 76 OECD Discussion Draft (n 3) para 44. 77 Koch (n 8) IV. Procedural aspects of the initiation of mutual agreement procedure in the narrower sense, 7. Interaction between mutual agreement procedure and domestic legal proceedings. 78 OECD Model Convention, art 25 Commentary paras 76–82; UN Model Convention art 25 Commentary paras 76–82. 79 Peter H Dehnen and Silke Bacht, ‘Compatibility of the Recent OECD Proposals with Germany’s Tax Dispute Resolution Mechanism’ [November 2006] Bulletin for International Fiscal Documentation 463, 468. 80 David R Tillinghast, ‘The Choice of Issues to be Submitted to Arbitrary [sic] under Income Tax Conventions’ (1994) 4 Intertax 159, 163. 81 OECD Discussion Draft (n 3) Option 25 – Policy issues: Clarify the co-ordination of MAP arbitration and domestic legal remedies. 82 ibid, para 47. 83 ibid, Option 26 – Practical issues: Amend Article 25(5) to permit the deferral of MAP arbitration in appropriate circumstances. 84 See: 2. Binding Mandatory Arbitration – A Divisive Issue. 85 Ernst & Young, ‘Transfer Pricing 1999 Global Survey: Practices, Perceptions, and Trends’ Tax Notes Special Report (22 November 1999) 1073, 1084. 86 OECD Model Convention, art 25 Commentary para 70. 87 ibid. 88 UN Model Convention art 25 (Alternative B) Commentary para 70. 89 HM Pit, ‘Improving the Arbitration Procedure under the EU Arbitration Convention (1)’ (2015-1) EC Tax Review 19. 90 Marie Sapirie, ‘News Analysis: The Case for Optimism about Mandatory Arbitration’ Worldwide Tax Daily (14 July 2015). 91 OECD Discussion Draft (n 3) para 48. 92 ibid. 93 Park (n 35). 94 OECD Model Convention, art 25 Commentary, Annex, Sample Mutual Agreement on Arbitration, para 5. Selection of arbitrators. 95 ibid para 6. Streamlined arbitration process. 96 ibid para 7. Eligibility and appointment of arbitrators. 97 Park (n 35). 98 ibid. 99 ibid. 100 Workshop held at the Vienna University of Economics and Business by the Global Tax Policy Centre headed by Jeffrey Owens of the Institute for headed by Jeffrey Owens of the Institute for Austrian and International Tax Law on 19–20 January 2015. 101 Ricardo Escobar, quoted in Kollmann and others (n 48) 1192. 102 OECD Comments received on Public Discussion Draft BEPS Action 14: Make Dispute Resolutions More Effective (OECD Comments) 19 January 2015, Alix Partners, 10. 103 ibid. 104 Marcus Desax and Mark Veit, ‘Arbitration of Tax Treaty Disputes: The OECD Proposal’ (2007) 23 Arbitration International 405, 420. Arbitration of 105 ibid. 106 See Park (n 35). 107 OECD Comments (n 102) FIDAL, 133. 108 OECD Discussion Draft, Option 27 – Practical issues: Appointment of arbitrators. 109 Michael Lennard, ‘Transfer Pricing Arbitration as an Option for Developing Countries’ (2014) 42 Intertax 179, 183. 110 OECD/G20 Base Erosion and Profit Shifting Project Information Brief 2014 Deliverables, 16 September 2014, 4. 111 Lennard (n 109) 184. 112 OECD Comments (n 102) 197. 113 WW Park, Arbitration of International Business Disputes (OUP, Oxford, 2006, 2nd edn, 2012) 62. 114 Desax and Veit (n 104) 420. 115 Park (n 113) 39. 116 See Desax and Veit (n 104) 423. 117 Park (n 35). 118 Tillinghast (n 20) 97. 119 See: UN Model Convention, Annex to the Commentary on para 5 of art 25 (Alternative B). 120 OECD Discussion Draft (n 3) para 50. 121 ibid, Option 29 – Practical issues: Default form of decision-making in MAP arbitration. 122 Monsenego (n 66) 166. 123 ibid. 124 OECD Discussion Draft (n 3) para 3. 125 See: The Agreement Between the British Government and the Government of the Irish Free State in Respect of Double Taxation Tax (14 April 1926), art 7. 126 Protocol Amending the Convention between Japan and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed 17 December 2013. The Protocol entered into force on 12 December 2014. 127 Kiyoshi Nakayama, ‘Resolution of Tax Disputes in Japan’ [September/October 2007] Bulletin for International Taxation 459, 463. 128 Protocol Amending (n 126) art 13. 129 Andrew Dawson, quoted in Bell (n 51) 631. 130 Grace Perez-Navarro, quoted in Dolores W Gregory, ‘Binding Arbitration Not Off the Table, OECD Official Says, Predicting More Work’ Transfer Pricing Report News Archive 13 February 2015. 131 ibid. 132 G-7 Germany Leaders’ Declaration G7 Summit, 7–8 June 2015, Schloss Elmau, 4. 133 Hans Mooij, quoted in Stanley-Smith (n 39). 134 Monique van Herksen, quoted in ‘Arbitration on transfer pricing is increasing’ TP Week (22 September 2008). © The Author 2015. Published by Oxford University Press on behalf of the London Court of International Arbitration. All rights reserved. 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Mandatory binding arbitration—is this a pathway to a more efficient map?

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Abstract

The Organisation for Economic Cooperation and Development (OECD) has recently been exploring ways to improve dispute resolution mechanisms in the realm of international tax, notably through the use of binding mandatory arbitration as part of the Mutual Agreement Procedure (MAP) Article in Double Tax Agreements. This article seeks to examine whether binding mandatory arbitration would provide an effective mechanism for resolving international tax disputes. It investigates policy concerns with mandatory arbitration, especially sovereignty issues, access to mandatory arbitration and its scope, as well as the interface between MAP arbitration and domestic remedies. The possibility of deferring time limits on arbitration, the appropriateness of the ‘last-best-offer’ or baseball arbitration approach versus the ‘independent opinion’ approach and contentious issues surrounding the appointment of arbitrators will be considered, along with recent developments in arbitration processes. ‘Arbitration of taxation disputes is attractive and effective, presenting significant advantages to businesses and governments… Arbitration always reaches a conclusion, provides for impartial determinations with proper taxpayer participation and applies law rather than expediency. The process is orderly, predictable and transparent.’1 1. INTRODUCTION Utilizing arbitration as a tax treaty mechanism for resolving disputes is not a new phenomenon. As far back as 1928, the League of Nations published a draft Model Treaty which provided for an amicable settlement of disputes by a technical body appointed for this purpose, with additional recourse being provided to any arbitral or judicial feature selected by the Contracting States, including reference to the Permanent Court of International Justice.2 However, the use of arbitration as an alternative approach to resolving international tax disputes, including transfer pricing disputes, between a taxpayer and a revenue authority has recently received new impetus through the publication by the Organisation for Economic Cooperation and Development (OECD) of a Public Discussion Draft Make Dispute Resolution Mechanisms More Effective3 (OECD Discussion Draft), as part of its Base Erosion and Profit Shifting (BEPS) Action Plan.4 The OECD Discussion Draft has acknowledged the need to improve dispute resolution mechanisms, ‘especially at a time when the number of disputes has increased’5, and with the work on BEPS being likely to further increase the number of treaty disputes. It is significant that the latest OECD report on MAP statistics has revealed that at the end of 2013, there were 4566 open MAP cases in OECD member countries in ending inventory, representing a 12.1 per cent increase compared to the 2012 reporting period, and a startling 94.1 per cent increase compared to the 2006 reporting period (MAP cases involving two OECD member countries are double-counted in this total).6 There can consequently be no doubt that dispute resolution processes require urgent attention and improvement. Experts acknowledge that: ‘Arbitration provisions should be expected to increase the timeliness of the MAP procedure and reduce case inventories, but OECD member countries have continued to show a certain hesitance in adopting arbitration provisions.’7 2. BINDING MANDATORY ARBITRATION—A DIVISIVE ISSUE Although utilizing arbitration as a tax treaty mechanism for resolving disputes is not a new phenomenon, it has long been a divisive issue. When the MAP was discussed at the 35th Congress of the International Fiscal Association in Berlin in 1981, it was the object of extensive criticism. The catalogue of failings of the procedure included that it was generally protracted and unwieldy, in many cases no agreement was ever reached between the Contracting States, and taxpayers not only received no special legal protection, but could not compel either the initiation of the procedure or the elimination of taxation contrary to the treaty. They had no right to be heard or be involved in proceedings, and had no right to be informed of, or demand substantiation of the decision reached. There was no obligation to publish an agreement, and the resolution of the problem could be held up at the procedural barriers of national tax law, as implementation of any MAP decision was frequently left to national tax law in the Contracting States.8 Then, as now, the MAP was not working effectively as a dispute resolution mechanism, and one of the suggestions for improvement was the inclusion of a formal arbitration procedure. The results were illuminating: the National Reporters for one country, Sweden,9 declared their unqualified support for a formal arbitration procedure, while further advocates were to be found in seven other countries, including Great Britain. The National Reporters for a further three countries supported the concept with reservations, while those from the five remaining countries completely rejected the idea,10 resulting in support from one half of the countries represented, and hesitation or rejection from the other half. The General Report concluded that: ‘Although there has long been a call for the creation of arbitration procedure or an international court for tax matters, the opposition against the establishment of the required institutions is probably still too strong.’11 The intervening 34 years have seen enormous strides towards a wider acceptance of mandatory binding arbitration. Perhaps the greatest indication of a sea-change in attitudes is that the three countries which originally had reservations about arbitration, namely Australia, France and the Netherlands, and the five countries that formerly rejected this concept, namely Austria, Belgium, Canada, Japan, and Norway, have now all endorsed mandatory binding arbitration, either in subsequent Double Tax Agreements (DTAs), and/or by acceding to the EU Arbitration Convention.12 Back in 1984, the OECD Committee on Fiscal Affairs (CFA) examined the MAP and found that ‘Overall, MNEs consider that owing to the protracted nature of this procedure and the risks involved, most enterprises look at the mutual agreement procedure only as a last resort.’13 Although the possibility of mandatory corresponding adjustments subject to arbitration was examined, the Committee concluded that there would have to be a great deal of international consideration and cooperation if a satisfactory system in which a large number of countries could participate were set up.14 At the time they believed there was no obvious and urgent need for an arbitration process,15 and the CFA was concerned that it would involve an unprecedented surrender of fiscal sovereignty, especially as some Member countries had made it clear that they would find such a scheme unacceptable for that very reason.16 Consequently the Committee did not ‘for the time being, recommend a compulsory arbitration process for the resolution of disputes between tax authorities’.17 While the OECD CFA was sanguine about there being any pressing need for arbitration, taxpayers were increasingly feeling the strain of an ineffective dispute resolution procedure. In 2001 a Global Transfer Pricing Survey revealed that multinational enterprises (MNEs) had so little faith in the MAP, they sought competent authority relief for double taxation in only 27 per cent of cases, resulting in double taxation in over 70 per cent of such situations.18 Reasons for not seeking MAP relief included that the process was ‘too expensive’ or ‘took too long’. Evaluating these lacklustre results, the comment was made that ‘This re-emphasizes the need for governments and intergovernmental agencies to explore binding and swift arbitration processes to supplant the MAP’.19 That same year David R Tillinghast also highlighted the clear need for arbitration of disputes arising under income tax treaties: … from the point of view of the taxpayer, the results of many competent authority proceedings seem rather arbitrary – resembling a simple horsetrade (an unprincipled compromise) more than a reasoned application of the treaty provisions. There is always a fear of being a sacrificial lamb when two competent authorities have several cases to be resolved at the same time. Added to this is the fact that the competent authority proceedings in many cases are long, drawn-out affairs, involving not only expense but uncertainty over an extended period of time.20 As the need to improve controversy management became more apparent, the OECD embarked on a major review of the dispute resolution process in 2003. In its Draft Progress Report published in 2004,21 the CFA acknowledged that both the private sector and governments had an important stake in improved dispute resolution techniques, noting that the possibility of unresolved tax treaty disputes could distort patterns of trade and investment and lead to increased administrative and compliance costs, while ‘all governments lose when unresolved tax disputes inhibit effective administration’.22 The CFA’s joint working group solicited information from OECD Member countries, held consultations with the private sector and received input from non-OECD economies in the context of the Global Forum on Taxation before concluding that it was clear that the MAP process would be improved if there was a mandatory requirement that, under certain circumstances, an unresolved case must be submitted to supplementary dispute resolution procedures.23 Follow-up work resulted in the publication of proposals to supplement the MAP process with a mandatory arbitration clause,24 public consultations, and a draft update of Article 25 of the OECD Model Tax Convention on Income and Capital (OECD Model Convention) containing a new arbitration clause and commentary.25 The ultimate outcome was the adoption of a new Article 25(5), providing for the mandatory arbitration of unresolved issues in the course of a MAP where competent authorities are unable to reach agreement within two years.26 Hailed as ‘the most important change made to the OECD Model since the Model was first released in various drafts published between 1958 and 1963’,27 this change was swiftly followed by a corresponding change in the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model Convention) in 2011. Article 25 of the UN Model Convention now contains an optional arbitration provision. Does this mean that the problem of unresolved tax treaty disputes is a thing of the past? While the introduction of these arbitration provisions might have been expected to expedite the MAP and have a positive effect on case inventories, binding mandatory arbitration continues to be a divisive issue, with only 17 per cent of the treaties and protocols concluded by OECD member countries between 2005 and 2012 including arbitration provisions.28 In 2014, it was reported that 158 DTAs include an arbitration clause, but given the total number of agreements worldwide, approximately 3000, this is a rather limited number—just over five per cent.29 These arbitration provisions have done little to alleviate the growing inventory of MAP cases, which is reaching unprecedented levels.30 The OECD recently stated in its BEPS Action Plan that work to improve the effectiveness of the MAP would be an important complement to the work on BEPS issues, ensuring certainty and predictability for business. It was therefore undertaking to examine and address obstacles that prevent countries from solving treaty-based disputes under the MAP. Consideration would be given to supplementing the existing MAP provisions with a binding and mandatory arbitration provision.31 To this end, the OECD Discussion Draft was released on 18 December 2014. This did not represent consensus views of the OECD’s CFA or its subsidiary bodies, but was intended to provide stakeholders with substantive proposals for analysis and comment.32 Once again, the OECD recognized that ‘there is no consensus on moving towards universal mandatory binding MAP’.33 3. CONTROVERSIAL ISSUES RELATING TO MANDATORY BINDING ARBITRATION 3.1 Policy concerns 3.1.1 National sovereignty The most contentious issue relating to the inclusion of mandatory binding arbitration under the MAP is the issue of national sovereignty, or the surrender of fiscal sovereignty that allegedly accompanies the resolution of disputes by arbitrators, rather than by the competent authorities of the nations involved in the tax controversy. This concept of fiscal sovereignty maintains there should never be any delegation or relinquishment of a country’s power and authority to tax. In this context arbitration has been described as ‘an anathema to governments because they are afraid that it will take taxation out of their control, and may therefore force them to allow credits or exemptions that, in their view, are unjustified’.34 While certain countries resist mandatory binding arbitration by insisting on complete state autonomy over tax matters, William W Park has pertinently argued that it is unclear why ‘tax should have special status in a world where arbitration of investment disputes is common’.35 He argues that ‘For years developing countries have been required to submit investment disputes to arbitration’ and that ‘this has been commended by multinationals as a more politically and procedurally neutral forum than host state courts’, while ‘Governments arbitrate expropriation disputes even when they implicate vital national interests such as natural resources and economic infrastructure’.36 He concludes that while the sovereignty argument implicitly refers to the protection of national security, this is ‘not likely to be injured by a decision that a royalty rate should be 6% rather than 7%, or that the price of a widget should be $1.50 rather than $1.75.’37 Michael C Durst and Robert E Culbertson concur with this ‘storm in a teacup’ approach: These disputes are not the stuff of which international drama is made. If there is any context in which the sovereignty issue should block the adoption of effective arbitration clauses with clear deadlines, it is not the context of double tax disputes and similar recurring factual issues arising under income tax treaties.38 The fact remains that the OECD currently faces the hurdle that several key countries will not consider the possibility of introducing mandatory binding arbitration. It would be too simplistic to categorize the debate as being between developing and developed countries, as many developing countries are reported to be agreeable to mandatory and binding arbitration, even though they may experience some practical difficulties in implementing it.39 When the UN Committee of Experts on International Cooperation in Tax Matters’ Subcommittee on Dispute Resolution issued their report on Arbitration in 2010, they reasoned that ‘a counterpart of sovereign independence is the capacity and the right of a State to limit its own sovereignty by treaties’,40 and that this limitation occurs in DTAs. Adopting the line of argument put forward earlier by Park, that investment promotion and protection agreements as well as social security agreements already provide for arbitration to solve disputes between Contracting States, the Subcommittee concluded that ‘sovereignty does not prevent States from agreeing in a tax convention to be bound by the decision of an arbitration board (private tax experts) where their competent authorities cannot reach an agreement on a tax issue’.41 It did, however, acknowledge tension between the arguments of those against arbitration, especially those seeking to shield their tax administration from external scrutiny42 and the arguments of those in favour of arbitration, that providing tax treaty certainty not only dovetails with national tax policy but also improves the general investment climate in both Contracting States.43 Michael Lennard, chief of the International Tax Cooperation section of the UN, has stated that arbitration would bring both benefits and burdens for developing countries, and has emphasized the importance of a balanced BEPS outcome on arbitration, where the focus is not entirely on certainty for taxpayers but also on fair outcomes ‘unaffected by inequalities in resources, skills and experience among those affected by the decisions’.44 In relation to ongoing resistance to mandatory binding arbitration, Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD, has said that progress needs to be made on the arbitration element of the BEPS Action Plan, but that some countries ‘have been very reluctant and have been hiding behind sovereignty’.45 Former competent authority and tax treaty negotiator for the Netherlands Government Hans Mooij has stated that ‘In China and Brazil… they're concerned that they will lose positions in arbitration which they now can afford to keep up because there's no one to punish for their errors’,46 while the comment has been made that India, for example, would struggle with such proposals because the federal structure is unsuitable—binding local authorities would be almost impossible for the central authorities in Delhi to keep up with.47 Louis Eduardo Schoueri of the University of São Paulo has acknowledged that not only Brazil but several Latin American countries have constitutional reservations against both the MAP and arbitration, alleging that they infringe the principle of legality. He has, however, argued that these concerns are unfounded, as the principle of legality is not affected, since the limits of tax jurisdiction are set forth in the tax treaty and the aim of the MAP and, by extension, arbitration, is merely to interpret this treaty.48 Nevertheless Nadja Dorothea Ruiz Euler, central administrator for international tax legal affairs, MAP Competent Authority, Mexico, has stated that Mexico opposes arbitration on sovereignty grounds (although Mexico has seven tax treaties that contain an arbitration clause, none of those provisions have been enforced). Her reasoning echoes that of those arguing against mandatory binding arbitration in the UN Subcommittee on Dispute Resolution: Mexico is against allowing a third party that is not a competent authority to decide whether there is a double taxation problem. In her opinion, Mexico will eventually become more open to arbitration, but is currently reluctant to relinquish sovereignty.49 It should be borne in mind that other countries in Latin America are reported to be willing to consider tax treaty arbitration, as they already use arbitration to resolve domestic disputes.50 It is important to remember that developed countries in Europe and the USA previously made similar sovereignty arguments against treaty arbitration provisions.51 Carol Dunahoo, former US Competent Authority and Director, International (Large and Mid-Size Business) at the US Internal Revenue Service (IRS), has noted that the careful design and operation of arbitration provisions can overcome sovereignty concerns. She has referred to US arbitration provisions as being ‘an extension of the MAP process… basically a tiebreaker rule for the competent authorities’.52 The OECD Discussion Draft’s solution to the thorny issue of national sovereignty as an obstacle to mandatory binding arbitration is a disappointing one. It suggests that the OECD Commentary to the Model Tax Convention could be amended in order to increase country transparency in relation to their observations, reservations and positions in relation to mandatory arbitration, requiring them to take a formal position clarifying their objections.53 The author submits that this proposal does not go far enough to present an authentic and effective remedy. Countries are already openly declaring their objections to arbitration provisions on sovereignty grounds, so possibly ‘forcing’ countries to express their reservations does not take this issue much further. The last three decades have seen a steady move away from entrenched opposition to mandatory binding arbitration in both developed and developing countries. While the tension between opposing arguments remains, there appears to be a ‘growing acceptance that among the features of sovereignty is membership in a global community, that community means interconnectedness, and that isolated action in tax system design is neither possible nor desirable’.54 3.1.2 Restricting the scope of arbitration Would mandatory binding arbitration be more palatable to countries currently resistant to this dispute resolution procedure if access could be restricted to a specific range of MAP issues? One of the options the OECD is currently proposing is to allow only a limited number of topics to be subject to arbitration, on the basis that half a loaf is better than none, ie it would be better to encourage countries to adopt a MAP provision with limited scope for arbitration rather than no provision at all. Examples of possible restrictions include: provision for MAP arbitration only with respect to cases involving specific treaty articles; provision for MAP arbitration only in cases of actual double taxation; or exclusion from the scope of arbitration cases involving the application of treaty or domestic law anti-abuse rules.55 The question here is whether the compromise of having a larger number of countries subscribe to a fragmented version of mandatory binding arbitration would be worthwhile? The OECD Discussion Draft suggests amending the Commentary on Article 25 to include an alternative restricted MAP provision. The author submits that narrowing the scope of cases subject to arbitration would appear to be an uncharacteristically retrogressive step, given the pressing need to clear the growing inventory of MAP cases. The current OECD Commentary does not limit the scope of the MAP, but makes provision for States to only apply arbitration to a restricted range of cases, such as those involving issues which are primarily factual in nature,56 and the UN Model Convention, which likewise does not limit the scope of the MAP, contains a similar provision in its Commentary.57 It is therefore unclear why there is a need for further amendment. Restrictions on the scope of arbitration already exist in some DTAs, so the option provided by the OECD has historical precedence, if not innovation. A country’s approach with one treaty partner may be different to the approach taken with another treaty partner. For example, the Protocol amending the US’ DTA with Germany, signed in 2006, restricts arbitration to Articles 4, 5, 7, 9, and 12,58 unless the competent authorities agree that the particular case is not suitable for determination by arbitration. In addition, the competent authorities may, on an ad hoc basis, agree that binding arbitration shall be used in respect of any other matter to which Article 25 applies.59 The Protocol amending the DTA between the USA and Canada, signed the following year, involves similar restrictions in relation to arbitration—in fact the scope is even more limited with regard to the royalties article.60 However, three years later the IRS issued a Memorandum of Understanding (MOU) between the competent authorities of the USA and Belgium setting out the arbitration process pertaining to the DTA between these two countries. This provides that ‘arbitration is available in respect of any case where the competent authorities have endeavored but are unable to reach an agreement under Article 24 regarding the application of the Convention’.61 The MOU in relation to the DTA between the USA and France, signed that same year, states that there are no subject matter limits for arbitration, and binding arbitration will be used ‘unless the competent authorities agree that the particular case is not suitable for determination by arbitration’.62 Perhaps the USA felt more confident about broadening the scope of tax treaty arbitration in the later treaties once it had gained experience with the more restrictive arbitration provisions? The EU Arbitration Convention has a limited ambit, applying only to transfer pricing and permanent establishment disputes,63 but this fact has long been criticized as ‘unduly restrictive, as other issues can and do arise’.64 Park has commented that fiscal matters other than transfer pricing may arise between trading partners, giving the examples of disagreement about how a taxpayer’s residence should be determined, or whether payments should be characterized as royalties or services.65 In this context, Jérôme Monsenego has warned that a limitation to the scope of mandatory arbitration in tax treaties may raise complex issues in relation to the qualification of income, where a dispute may straddle two Articles of the DTA—one arbitrable and the other excluded from arbitration.66 Mary Bennett, who previously served as the Head of the Tax Treaty and Transfer Pricing Division at the OECD, and also served as the US Treasury’s Deputy International Tax Counsel, with responsibility for heading tax treaty negotiations with numerous countries, has recently objected to limits on the scope of the arbitration provision, stating ‘There is no principled basis on which you could say that one taxpayer losing a treaty benefit they are entitled to is more acceptable than somebody else’s loss of a benefit’.67 Tillinghast,68 Ellis,69 and Park70 all provide cogent arguments as to why mandatory binding arbitration should not be limited to cases of double taxation. Park explains that treaties may be violated even if national taxation does not lead to double taxation, for example ‘a treaty might eliminate withholding on royalties even though the domestic tax law at the taxpayer's residence provides a foreign tax credit that would soak up a withholding tax wrongfully withheld by the source country’.71 The exclusion of cases involving the application of treaty or domestic law anti-abuse rules from the scope of arbitration is a sensitive issue. Danielle Rolfes, international tax counsel with the US Treasury, has recently voiced concern that leaving general anti-abuse rules out of arbitration ‘poses too big a barrier to gaining access to MAP’72, effectively eviscerating access for taxpayers. The author submits that narrowing the scope of cases eligible for arbitration beyond what is currently provided in the Commentaries of both the OECD Model Tax Convention and the UN Model Convention is a step backwards rather than forwards.73 There can be pitfalls where domestic anti-abuse rules may be opaque—‘Like elephants and obscenity, the contours of legitimate taxation leave many fuzzy edges that frustrate rigorous discussion’74—and the question of which cases to exclude is likely to create uncertainty and delay. Although excluding anti-abuse rules from the sphere of arbitration might placate a few outlier jurisdictions, this exclusion runs counter to the OECD’s BEPS agenda position that it is ‘essential that countries consider innovative approaches to implement comprehensive solutions’.75 3.1.3 The interface between MAP arbitration and domestic remedies A third policy concern raised by the OECD Discussion Draft is the co-ordination of MAP arbitration and domestic legal remedies, with the aim being to avoid the risk of a conflict between the decision of a court and the decision of an arbitration panel.76 The interaction between the MAP and domestic legal proceedings has long been a divisive issue,77 and the possibility of MAP arbitration provides a further level of complexity. One of the main reasons for dissension here is the myriad of different national approaches to this issue, and the current OECD Model Convention Commentary deals with the various permutations available, as does the UN Model Convention Commentary.78 While the overarching principle appears to be that a person should not be allowed to pursue the arbitration process if the issues submitted to arbitration have already been resolved through the domestic litigation process of either State, some States require that unresolved issues between competent authorities may only be submitted to arbitration if domestic legal remedies are no longer available, whereas others allow the suspension of domestic remedies pending the outcome of the MAP arbitration. It is foreseeable that problems will arise where the domestic laws of the two Contracting States diverge in relation to the question of MAP arbitration. To complicate matters further, a mutual agreement between two competent authorities and a MAP arbitration may have different relationships with domestic tax procedures. For example, in Germany, ‘unlike a MAP, an arbitration proceeding is not just an internal matter between governments; it also directly affects the taxpayer’s rights and must therefore follow basic procedural rules’.79 The issue of sovereignty may also rear its head again as the arbitration issue is removed from the hands of national competent authorities, and some countries may be reluctant to accept that ‘the heavens will not fall if in a particular case the resolution of an issue is different from the resolution which would have been reached under domestic procedures’.80 The OECD Discussion Draft recommends the clarification of the coordination of MAP arbitration and domestic legal remedies, suggesting participating countries could commit to providing guidance on this interface, and that the Commentary on Article 25 could also be amended to provide greater clarity.81 While there can be no argument with increasing transparency and clarity in this area, the problem of accommodating a variety of differing, and potentially conflicting, approaches remains. This may be an area where the OECD may consider carrying out further work, to establish a ‘best practice’ guide in order to encourage uniformity and certainty in relation to arbitration controversies. 3.2 Practical concerns 3.2.1 Timing of arbitration disputes—should there be provision for deferral? The very first issue of practical concern mentioned by the OECD Discussion Draft relates to the timing of arbitration. Article 25(5)(b) of the OECD Model Convention provides that where the competent authorities are unable to reach agreement to resolve a case within two years following the initiation of the MAP case, the issue will be submitted to arbitration at the request of the taxpayer. The UN Model Convention contains a slightly different provision in its Article 25(alternative B)(5)(b), in that unresolved issues may be submitted to arbitration within three years of the initiation of the MAP case, and at the request of either competent authority, rather than at that of the taxpayer. The OECD Discussion Draft states that there may occasionally be circumstances in which initiating MAP arbitration may be premature, and that this ‘automatic referral may be an obstacle to the adoption of arbitration by some countries’.82 It suggests that where the competent authorities believe they will be able to reach a negotiated resolution, it may be appropriate to defer the initiation of MAP arbitration, for a defined (preferably short) period of time, and proposes the amendment of Article 25(5) to permit the competent authorities to mutually agree to defer the initiation of MAP arbitration under specific conditions.83 As outlined in the discussion above,84 over the past few decades one of the major concerns with submitting cases to the MAP has been the average time period for the resolution of tax disputes under the MAP, with reports of some cases taking ‘a staggering 10 to 15 years’85 to resolve. It is therefore curious that the OECD is suggesting placing additional power in the hands of competent authorities to defer or delay the resolution of disputes that they have been debating for two years. In effect, they are potentially providing for the removal of the taxpayer’s right to request arbitration, albeit for an additional defined time period. The author submits that this is a retrogressive step, especially in light of increasing MAP inventories worldwide. It is also not clear why the so-called ‘automatic’ referral to arbitration may be an obstacle to the adoption of arbitration by some countries, when in practice the referral may not be automatic. The OECD Model Convention Commentary already provides that as the request for arbitration can be made at any time after the two-year period begins, recourse to arbitration is ‘not automatic’.86 Not only is the person who presented the case given the option of waiting beyond the end of the two-year period (for example, in order to allow the competent authorities more time to resolve the case), but States are also free ‘to provide that, in certain circumstances, a longer period of time will be required before the request can be made’.87 Similarly, the UN Model Convention provides that recourse to arbitration is not automatic, with the competent authority being able to wait beyond the end of the three-year time period, or to simply not pursue the case, and the States are likewise able to provide that a longer period of time is needed before the request can be made.88 It would appear that provision exists in the current OECD Commentary for a deferral, and any additional amendment to Article 25(5) would not only be superfluous, but would make the OECD appear overly anxious to appease recalcitrant countries with unnecessary concessions. Furthermore, the EU Arbitration Convention has received criticism for allowing delays to its procedure, especially in respect of timelines for the establishment of an advisory commission to deal with the dispute. Negative comments have been made regarding the disadvantages of delays in arbitration to taxpayers, to the effect that EU Member States are allowed ‘to factually stall the advisory commission’s establishment’89, and that this ‘essentially gives each country brakes to halt the process indefinitely’.90 In light of this criticism, it would perhaps not be wise for the OECD to open a new avenue for extensive delays to the arbitration process. 3.2.2 The appointment of arbitrators The OECD Discussion Draft considers the issue of the appointment of arbitrators as an obstacle to countries adopting mandatory binding arbitration. It expresses the concern that limited guidance as well as a lack of experience with the appointment of arbitrators may make some countries hesitant to adopt MAP arbitration.91 Currently there is no standard set of guidelines for the appointment of MAP arbitrators. However, the OECD refers to the criteria used in existing agreements and models, which in general appear to provide that such individuals: (i) should have significant experience in cross-border tax matters, preferably in allocation matters; (ii) should be of a judicial temperament (i.e. neutral, decisive, respectful and composed), though not necessarily have experience as a judge or arbitrator; and (iii) should be impartial and independent vis-à-vis the Contracting States and the affected taxpayer(s) at the time they accept appointment (as well as for the duration of the arbitration proceeding and a reasonable period of time thereafter).92 In order to overcome reluctance to embrace arbitration on the grounds of a lack of arbitrator guidelines, the OECD Discussion Draft proposes that participating countries could agree to develop and publish mutually agreed criteria for the appointment and qualifications of arbitrators. These criteria could be included in the text of the arbitration provision itself, and/or in competent authority agreements pertaining to the arbitration in advance of any MAP arbitration. An additional option may be for participating countries to develop a standardized declaration to be executed by arbitrators, in order to ensure the impartiality and independence of prospective arbitrators. The appointment of arbitrators is a sensitive and divisive issue, with experts recognizing that in designing a tax treaty arbitration regime, few aspects are more important than the process for choosing the arbitrators: ‘Just as in real estate the three key elements are “location, location, location,” so in arbitration the applicable trinity is “arbitrator, arbitrator, arbitrator.”’93 The current Article 25 Commentary to the OECD Model Convention contains a sample form for a Mutual Agreement on Arbitration in an Annex. This form refers to the selection of arbitrators as well as their eligibility for appointment. The recommendation is that the competent authorities involved in the MAP controversy should, within a specified time period, each appoint one arbitrator, and within two months of the latter appointment, the arbitrators so appointed will appoint a third arbitrator who will function as Chair.94 There is also provision for a streamlined arbitration process, with a sole arbitrator presiding.95 In relation to the eligibility of arbitrators, the Annex currently provides that ‘Any person, including a government official of a Contracting State, may be appointed as an arbitrator, unless that person has been involved in prior stages of the case that results in the arbitration process.’96 Thus the sample Mutual Agreement on Arbitration also raises a number of contentious issues which need to be addressed. The OECD Discussion Draft utilizes the criterion of experience as a preliminary qualification (with a ‘judicial temperament’ as a secondary stipulation). It is illuminating to see the variety of ideas on the experience that an arbitrator should, or should not, have, when looking at comments from arbitration experts as well as from stakeholder responses to this issue. While the traditional call for the arbitration tribunal to be ideally constituted by ‘individuals with substantial experience in the area of tax, whether as lawyers, accountants or economists’,97 and certainly by individuals with arbitration experience,98 would appear to be irrefutable, the OECD refers to experience as a judge or arbitrator as not being necessary, as long as the appointee is ‘of judicial temperament’, being ‘neutral, decisive, respectful and composed’. It would be useful to know exactly how these admirable character traits would be evaluated by the OECD, or by another institution. The approach referred to by the OECD can be contrasted with that of Park, who provides cogent reasons for the vital necessity of having at least one arbitration tribunal panel member with experience in arbitration: Arbitration raises difficult procedural questions that may determine the success or failure of the enterprise, and which in a legally heterogeneous world often have no universally accepted answer. Consequently, at least one member of the tribunal must possess experience in conducting arbitration. When millions of dollars are at issue, few countries or taxpayers will want the proverbial “pig in the poke” of procedural amateurism. Particularly if arbitrators have discretion to design flexible methods appropriate to each case, someone on the tribunal must have experience addressing the key procedural matters on which national practices differ.99 The author agrees that having at least one experienced arbitrator on the arbitration panel is a necessity, not a luxury, especially as establishing confidence in the smooth functioning of the arbitration process is essential to overcome both national and taxpayer reservations. Speaking at a workshop on the MAP and arbitration as tools for dispute resolution,100 Ricardo Escobar (Universidad de Chile) suggested that the arbitration award should be rendered by tax specialists experienced in common law and civil law. However, he rather surprisingly added that ‘specialists who are not familiar with tax law could be appointed upon certain conditions since they are perceived as trustworthy’.101 Since the entire MAP arbitration process would centre on cross-border international tax issues, it would be interesting to know what those conditions would be (and also why specialists are perceived as being trustworthy per se). This view can be contrasted with the stakeholder proposition of a minimum of 10 years of substantive, high level experience in transfer pricing in government and/or the private sector for potential arbitrators, with candidates additionally having an advanced degree in law, economics, accounting, finance, or business.102 The suggestion has also been made that the OECD should not only develop selection criteria, but also create a global pool of potential arbitrators, from which tax authorities would be encouraged to draw.103 Clearly the focus of business is on utilizing experienced and relevantly qualified arbitrators. The final criteria for arbitrators referred to by the OECD are impartiality and independence, in relation to the Contracting States and to the taxpayer seeking mandatory binding arbitration, not only at the time they accept the appointment, but also during arbitration proceedings and for a reasonable time thereafter. This requirement underscores the necessity for monitoring arbitrator behaviour over a period of time. The emphasis on arbitrator impartiality and independence in the prevailing literature on arbitration stands in sharp contrast with the sample form for a Mutual Agreement on Arbitration in the OECD Model Convention Commentary referred to above, which allows any person, including a government official of a Contracting State, to be appointed by a competent authority as an arbitrator unless they have previously been involved in that same case. At the public consultation before Article 25(5) and the Annex containing the sample form was introduced into the OECD Model Convention, this provision was severely criticized as constituting ‘a violation of the universally accepted principle of international arbitration that the arbitrators should be neutral and independent from the parties who have appointed them’.104 The argument put forward by the OECD at that time, that such government official arbitrators would be familiar with the issues, was seen not to outweigh the very serious disadvantage of having arbitrators that are not independent from the parties.105 The author submits that the perception of bias flowing from this provision does little to inspire confidence in the arbitration process as a whole, and should be removed. There should be a general rule that no government officials or taxpayer employees or consultants should qualify as arbitrators,106 and a stakeholder has commented that it might be a good idea to ensure that former government officials cannot become arbitrators in matters involving their former employer within five years of the termination of such employment.107 The OECD Discussion Draft suggests that prospective arbitrators be required to disclose any potential conflicts of interest in a standardized declaration to be developed by participating countries.108 Such conflicts could involve personal, financial or national affiliations which could give rise to implications of bias. In relation to developing countries, Michael Lennard has postulated that: One of the great concerns in investment treaty arbitration is that there are not enough transfer pricing experts from developing countries who could and would be chosen to arbitrate such matters. The point is not that developed country experts would always side with developed countries and MNEs, but rather that an understanding of developing countries and their perspectives and a developing country background may better equip an arbitrator to appreciate where a developing country competent authority is coming from.109 Lennard suggests that there may be an inherent unconscious bias, or simply a lack of experience in looking at arbitration from a developing country’s point of view, on the part of arbitrators from developed countries. In this instance the OECD has taken care to seek input from developing countries (more than 85 low- and middle-income countries have participated in the BEPS consultation process).110 It has also involved two OECD accession countries (Colombia and Latvia) and eight G20 countries which are not part of the OECD in the consultation process: China, India, Brazil, Russia, South Africa, Indonesia, Argentina, and Saudi Arabia. It has thus sought insights on BEPS issues, such as mandatory binding arbitration, from beyond its 34 OECD Member country base, which is mostly made up of developed countries. However, despite this bipartisan consultation, the perception of bias may not necessarily be solved by simply seeking arbitrators from the developing world, as: Even where there are arbitrators from the developing world, there may be a suspicion that they have become ‘part of the machine’ and will best serve the interests of the countries (mainly developed) most likely to conduct arbitrations in the foreseeable future or taxpayers most likely to seek their counsel in transfer pricing cases.111 The International Chamber of Commerce (ICC) has commented in relation to the appointment of arbitrators that a well-established and worldwide network of experts in both developed and developing countries is crucial, while emphasizing that it already has a network in place to propose and nominate experts as potential arbitrators through its International Centre for ADR.112 While this may be a potential network for the OECD to tap into, it is possible that competent authorities may consider the ICC as being too heavily influenced by the private sector. On the other hand, Park’s maxim that ‘If arbitrators must be completely sanitized from all possible external influences on their decisions, only the most naive or incompetent would be available’113 may be particularly apposite here. Another question raised by the OECD’s sample Mutual Agreement on Arbitration is: who should be responsible for appointing arbitrators to a MAP case? Marcus Desax and Marc Veit postulate that given the nature of tax treaty arbitration as a procedure between Contracting States, it is not objectionable that arbitrators are appointed by the competent authorities only, without the involvement of the taxpayer.114 They pragmatically conclude that another solution would be cumbersome, and unlikely to appeal to tax administrations. Conversely, Park asserts that taxpayer input into the selection of arbitrators has long been common practice in the international arbitral process, as ‘By vetting a proposed arbitrator, the party may feel more comfortable that the case will be decided by someone who is skilled, fair and perhaps even smart’.115 By balancing arbitrator selection between the competent authorities and the taxpayer, each side can ensure that arbitrators will be free from doctrinal predispositions that would adversely affect its case. The Tax Executives Institute (TEI) also supports taxpayer involvement in the arbitrator selection process to vet the qualifications of any potential candidates and have a say in their selection, along with each Competent Authority. In the author’s opinion, allowing taxpayer input into the arbitrator selection process creates a level playing field, which assists in ensuring the independence and impartiality of arbitrators, lending credence to the entire process. A final point to consider on the appointment of arbitrators is the constitution of the arbitration panel. The sample Mutual Agreement on Arbitration refers to three arbitrators, or a sole arbitrator under a streamlined procedure. While a sole arbitrator may be suitable where a case relates to primarily factual issues, such as the determination of an arm’s length transfer price, it may be less suitable for other matters, such as the characterization of income.116 A single arbitrator will normally be cheaper and pose fewer scheduling problems, and may be appropriate where smaller amounts are at stake, but a three-member arbitration tribunal ensures for a more rigorous decision-making process, and ‘arbitrators can generally be expected to be more careful if they must justify their conclusions in deliberations with others’.117 Certainly highly controversial, complex arbitration disputes should ideally be deliberated by multiple arbitrators with a diversity of qualifications, training and experience, rather than by a single individual who may, according to Tillinghast ‘turn out to have unexpectedly idiosyncratic ideas on a particular subject.’118 As the appointment of arbitrators will play a pivotal role in the widespread acceptance of mandatory binding arbitration, the author recommends that the OECD draw on established expertise in this area to guide the drafting of guidelines that will be acceptable to both developing and developed countries. 3.2.3 Form of process for decision The OECD Discussion Draft explains that there are two principal approaches to decision-making in the arbitration process. There is the “conventional” or “independent opinion” approach, strongly resembling a judicial proceeding, where the arbitrators reach an independent decision based on applicable law, typically in the form of a written reasoned analysis. This approach is favoured by the EU Arbitration Convention and in the OECD’s sample Mutual Agreement on Arbitration. The other format is the ‘last best offer’ or ‘final offer’ approach, colloquially referred to as ‘baseball arbitration’, and utilized in a number of DTAs, notably by the USA. It is also the approach preferred in the UN Model Convention.119 Here each competent authority submits a proposed resolution to the arbitration panel, together with a position paper explaining the rationale. The panel must then adopt one of these proposed resolutions, but its determination does not state a rationale and has no precedential value.120 The OECD suggested that participating countries could develop additional guidance as to which of these two options should be the default approach (listing their respective advantages and disadvantages), and requested stakeholder comment on the preferred approach.121 Once again there is scope for dissent in relation to mandatory binding arbitration, with the OECD and the EU Arbitration Convention favouring the independent opinion approach, while the UN and the USA favour the baseball approach. Which is the best approach? The baseball approach would appear to have the overwhelming support of business. The advantage of the independent opinion approach would be its precedential value, providing guidance for other taxpayers with similar issues. However, it is seen to encourage more adversarial positions, while: A clear advantage of baseball arbitration is the incentive it gives to the competent authorities to avoid extreme or non-justified interpretations of a tax treaty, since the lack of convincing arguments supporting a particular interpretation of a tax treaty is likely to encourage the arbitrators to choose the position of the other country.122 Thus baseball arbitration appears to force the competent authorities to take a reasonable and realistic approach, perhaps bearing in mind the need for their countries to do business together in the future. It appears to be geared to obtaining a prompt resolution of disputes, minimizing the costs of engaging the arbitration panel. However, it also has its drawbacks, having no substantive or precedential value, and importantly, ‘it may not completely eliminate double taxation, if neither of the two solutions proposed by the competent authorities does so.’123 There are clearly advantages and disadvantages to both approaches, but the author believes that it is not necessary to adopt a single default approach that would be applicable in each case. A strategy of flexibility, allowing a choice by the parties involved, has much to recommend it. Where speed is of the essence, the baseball approach may be most suitable, whereas if the case is complex and it would be valuable to establish a precedent, the independent opinion approach may offer the best possible outcome. 4. CONCLUSION The inclusion of binding mandatory arbitration under the MAP Article of tax treaties has long been a divisive issue, and the OECD Discussion Draft lists numerous obstacles that currently stand in the way of its widespread adoption, despite it clearly being a pathway to a more efficient MAP. These obstacles appear disheartening, and may even suggest a ‘stalemate’ atmosphere with little progress being made, as the OECD has referred to the lack of consensus on moving towards universal mandatory binding MAP arbitration as a reason to fall back on complementary solutions.124 This discouraging outlook may not reflect the true state of affairs in respect of arbitration. While the United Kingdom has long been an advocate of arbitration (the very first tax treaty to include a provision for referral of disputes to a third-party tribunal was signed in 1926 by the United Kingdom and the Irish Free State125), it has recently signed a Protocol to its DTA with Japan, a country long opposed to arbitration, which establishes a new mandatory arbitration process.126 A mere eight years ago it was reported that ‘none of Japan’s tax treaties has a provision for arbitration’.127 The new Protocol now provides for a taxpayer to request mandatory binding arbitration where a case has not been resolved by consultation between the competent authorities of the two countries within two years. It sets out rules for the establishment of a three member arbitration panel, with the arbitrators being required to have expertise or experience in international tax matters. In contrast to the OECD sample Mutual Agreement on Arbitration, the Protocol clearly specifies that no arbitrator shall be an employee of the tax authority of either Contracting State.128 A few years ago Andrew Dawson, head of the Tax Treaty Team, UK Revenue and Customs, remarked that ‘Tax treaty policy is always moving on’ and that ‘Arbitration will become another way in which tax treaties serve to remove barriers to crossborder economic activity’.129 There is clearly a move towards accepting mandatory binding arbitration, even by countries which were against this process only a few years ago. Further hope for this process can be gleaned from a comment made by Grace Perez-Navarro, deputy director of the OECD’s Centre for Tax Policy and Administration earlier this year, that the OECD is more ‘favorably disposed toward mandatory binding arbitration than a recent discussion draft on dispute resolution indicates’.130 She predicted that, in the next phase of work on Action 14, those countries that are interested in arbitration will come together and ‘develop a solid proposal on moving forward on arbitration’.131 Significantly, on 11 June 2015 the G-7 leaders issued the following statement:  … we will strive to improve existing international information networks and cross-border cooperation on tax matters, including through a commitment to establish binding mandatory arbitration in order to ensure that the risk of double taxation does not act as a barrier to cross-border trade and investment. We support work done on binding arbitration as part of the BEPS project and we encourage others to join us in this important endeavour.’132 Former competent authorities are also coming forward to encourage the move towards mandatory binding arbitration, with the erstwhile Netherlands negotiator warning that ‘Once BEPS is over it will be very unlikely that there will be another political opening for tax treaty arbitration in the next 10 to 15 years or so. So the momentum is now’.133 Business leaders agree: ‘We all seek a sense of justice when it gets to resolving double taxation. But neither treaties nor taxes are about fairness. Arbitration holds that promise, however.’134 The text of this article was presented at the Society of Legal Scholars annual conference at York University, United Kingdom, in September 2015. 1 Robert Briner, ‘An End To Tax Trouble, At The Double’ Australian Financial Review (28 October 2002). 2 League of Nations Double Taxation and Tax Evasion Report presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion, Publications of the League of Nations II. Economic and Financial 1928.II.49., Geneva, October 1928. 3 OECD BEPS Action 14: Make Dispute Resolutions More Effective 18 December 2014–16 January 2015. 4 OECD Action Plan on Base Erosion and Profit Shifting July 2013. 5 OECD Discussion Draft (n 3) para 4. 6 OECD Mutual Agreement Procedure Statistics for 2013 <http://www.oecd.org/ctp/dispute/oecd-releases-2013-mutual-agreement-procedure-statistics.htm> last accessed 24 August 2015. 7 Marlies de Ruiter and Edward Barrett, ‘OECD Work on the Resolution of International Tax Disputes’ [June 2012] World Commerce Review 28, 29. 8 Karl Koch, ‘Mutual Agreement-Procedure and Practice’ (1981), 66a Cahiers de droit fiscal international, General Report to the IFA Congress, 94, 100. 9 Two of the three National Reporters for Sweden were Gustaf Lindencrona and Nils Mattson, the authors of Arbitration in Taxation (Kluwer, Deventer, The Netherlands 1981). 10 Koch (n 8)125 IX. Formal arbitration procedure ‘The National Reporters for Sweden have declared their unqualified support for a formal arbitration procedure. Further advocates of this are to be found in the Federal Republic of Germany, France, Great Britain, Greece, Portugal, Switzerland, and the USA (excluding the US revenue authorities).’ 11 ibid. 12 See: Convention Between Australia And New Zealand For The Avoidance Of Double Taxation With Respect To Taxes On Income And Fringe Benefits And The Prevention Of Fiscal Evasion (Paris, 26 June 2009) Entry into force: 19 March 2010, art 25(6); Convention between Australia and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income, with Protocol (Sydney, 30 July 2013) Entry into force: 14 October 2014, art 24(5); Convention Between The Government Of The United States Of America And The Government Of The French Republic For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And Capital (Washington, 31 August 1994) Entry into force: 30 December 1995, art 26(5); The EU Arbitration Convention (EC Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, 90/436/EEC), which provides for binding mandatory arbitration, was concluded by the states of the then European Community in 1990, came into effect on 1 January 1995, after being ratified by the 12 Member States of the European Union in 1994. At the time, the 12 EC Member States were Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. On 21 December 1995, the new EU Member States, Austria, Finland, and Sweden also accessed the Convention. On 25 May 1999, EU Member States agreed on a protocol to extend the convention’s running period with another five-year term, which is automatically renewed for another five years at the end of each term (unless an EU Member State objects thereto). The protocol was ratified, and the EU Arbitration Convention re-entered into force on 1 November 2004 and continues to remain in force. The 5th Protocol to the Convention Between Canada and the United States of America with Respect to Taxes on Income and Capital, (Chelsea, 21 September 2007) Entry into Force: 15 December 2008, Article 21 introduced mandatory arbitration for residents of Canada or the USA who face potential double taxation that is not resolved by negotiation between the Canadian and the US competent authorities. Japan has recently changed its stance on tax treaty arbitration, and now has arbitration provisions in its treaties with Hong Kong, entering into force in August 2011, with the Netherlands, entering into force in December 2011, with Portugal, entering into force July 2013, with New Zealand, entering into force in October 2013, with Sweden, entering into force in October 2014 and with the United Kingdom, entering into force in December 2014. Japan signed a tax treaty with the USA in January 2013 that provides for arbitration, but the treaty has yet to enter into force—See Kevin A Bell, ‘Japanese Official Describes “Regular” Meetings with U.S. Competent Authority’ (2015) 23 Tax Management Transfer Pricing Report 1364. Convention Between The United Kingdom Of Great Britain And Northern Ireland And The Kingdom Of Norway For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And On Capital Gains (14 March 2013) Entry into Force: 17 December 2013, art 27(5). Norway also eventually ratified the EU Arbitration Convention. 13 OECD, Transfer Pricing and Multinational Enterprises: Three taxation issues, Paris 1984, Chapter III para 38. 14 ibid para 53. 15 ibid para 54. 16 ibid para 55. 17 ibid para 63. 18 Ernst & Young Transfer Pricing 2001 Global Survey Practices, Perceptions and Trends in 22 Countries, November 2001, Figure 22 – Transactions – Outcomes of Examinations. 19 ibid, Impact of Competent Authority and Risk of Double Tax, 24. 20 David R Tillinghast, ‘Issues in the Implementation of the Arbitration of Disputes Arising under Income Tax Treaties’ (2002) 56 Bulletin for International Fiscal Documentation 90, 91. 21 OECD Report Improving the Process for Resolving International Tax Disputes, version released for public comment on 27 July 2004. 22 ibid, para 7. 23 ibid, para 132. 24 OECD, Public discussion draft on proposals for improving mechanisms for the resolution of tax treaty disputes, February 2006. 25 OECD, Improving the resolution of tax treaty disputes, (Report adopted by the Committee on Fiscal Affairs on 30 January 2007) February 2007. 26 OECD Articles of the Model Convention with Respect to Taxes on Income and on Capital [as they read on 17 July 2008], art 25(5). 27 Hugh Ault and Jacques Sasseville, ‘2008 OECD Model: The New Arbitration Provision’ (2009) Bulletin for International Taxation 208, 208. 28 De Ruiter and Barrett (n 7) 29. 29 HM Pit, ‘Arbitration under the OECD Model Convention: Follow-up under Double Tax Conventions: An Evaluation’ (2014) 42 Intertax 445, 466. 30 OECD Mutual Agreement Procedure Statistics (n 6). 31 OECD Action Plan on Base Erosion (n 4) ACTION 14 Make dispute resolution mechanisms more effective 23. 32 OECD Discussion Draft (n 3) para 6. 33 ibid, para 3. 34 Maarten J Ellis, ‘Issues in the Implementation of the Arbitration of Disputes Arising under Income Tax Treaties – Response to David Tillinghast’ (2002) 56 Bulletin – Tax Treaty Monitor 100,100. 35 William W Park, ‘Income Tax Treaty Arbitration’ (2002) 31 Tax Management International Journal 219. 36 ibid. 37 ibid. 38 Michael C Durst and Robert E Culbertson, ‘Arbitration to Resolve Difficult Double Taxation Disputes: The U.S. and its Trading Partners Should Seize the Moment’ King and Spalding (26 July 2000). 39 Joe Stanley-Smith, ‘OECD Looking for a Way Forward on Arbitration’ International Tax Review (16 March 2015) 4. 40 UN Committee of Experts on International Cooperation in Tax Matters, Report by the Subcommittee on Dispute Resolution: Arbitration as an Additional Mechanism to Improve the Mutual Agreement Procedure, Geneva 6 October 2010, para 19. 41 ibid, para 20. 42 ibid, para 21: ‘The interests of States can better be safeguarded if their tax administration can be scrutinised only by their administrative or judicial courts or by their competent authorities.’ 43 ibid, para 22. 44 Michael Lennard, ‘TP Arbitration for Developing Countries: Benefits and Burdens’ (2013) 24 International Tax Review 19. 45 Pascal Saint-Amans, quoted in Stanley-Smith (n 39). 46 ibid. 47 ibid. 48 Louis Eduardo Schoueri, University of São Paulo, quoted in Jasmin Kollmann and others, ‘Arbitration in International Tax Matters’ Tax Notes International (30 March 2015) 1189, 1191. 49 Nadja Dorothea Ruiz Euler, quoted in Kristen A Parillo, ‘Competent Authorities Debate Sovereignty and Arbitration’ Tax Notes (15 December 2014) 1224, 1224. 50 Hans Mooij quoted in Stanley-Smith (n 39). 51 In 2001 Prof Maarten J Ellis noted that ‘The last few years we have noticed an obsession of European governments with defending their taxing sovereignty’, above (n 34) 100; See the comments of John Staples, former US IRS official, in Kevin A Bell, ‘Treaty Arbitration Finds Favor in U.K., U.S.’ Tax Notes International (19 February 2007) 635. 52 Carol Dunahoo quoted in Parillo, above (n 49) 1224. The baseball approach to arbitration is examined below at Section 3.2.3 (Form of Process for Decision). 53 OECD Discussion Draft (n 3) para 42, Option 22 – Policy issues: Increase transparency with respect to MAP arbitration. 54 Allison Christians, ‘Sovereignty, Taxation, and Social Contract’ University of Wisconsin Law School, Legal Studies Research Paper Series Paper No 1063, August 2008, 43. 55 OECD Discussion Draft (n 3) para 45, Option 23 – Policy issues: Tailor the scope of MAP arbitration. 56 OECD Model Convention, art 25 Commentary, para 66. 57 UN Model Convention, art 25 Commentary, para 66. 58 Art 4(Residence) (but only insofar as it relates to the residence of a natural person), art 5 (Permanent Establishment), art 7 (Business Profits), art 9 (Associated Enterprises), art 12 (Royalties). 59 Protocol Amending the Convention between The USA and The Federal Republic of Germany for The Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, presented for signature in Berlin, Germany on 1 June 2006, art XVI para 22. 60 Technical Explanation Of The Protocol Done At Chelsea On 21 September 2007 Amending The Convention Between The USA And Canada With Respect To Taxes On Income And On Capital Done At Washington On 26 September 1980, As Amended By The Protocols Done On 14 June 1983, 28 March 1994, 17 March 1995, And 29 July 1997, art 21. 61 IRS Internal Revenue Bulletin: 2009-24, 15 June 2009 Announcement 2009-43, Belgian Arbitration Memorandum of Understanding Announcement 1. Cases Eligible for Arbitration, a. 62 Memorandum of Understanding regarding the 13 January 2009 signing of the protocol to the US–France income tax convention. 63 See above (n 12) art 1. 64 See International Chamber of Commerce Policy statement Arbitration in international tax matters Commission on Taxation, 3 May 2000. 65 Park (n 35). 66 Jérôme Monsenego, ‘Designing Arbitration Provisions in Tax Treaties: Reflections Based on the US Experience’ (2014) 42 Intertax 163,168. 67 Mary Bennett quoted in ‘The Hesitation in Adopting Mandatory Binding Arbitration’ Tax Notes International (6 July 2015) 15, 16. 68 Above (n 20) 95. 69 Above (n 34) 101. 70 Above (n 35). 71 ibid. 72 Dolores W Gregory, ‘U.S. Exploring Multilateral Instrument to Expand Arbitration Network, Rolfes Says’ (2015) 23 Tax Management Transfer Pricing Report 1443. 73 Para 26 of the OECD Model Convention art 25 Commentary and para 26 of the UN Model Convention, art 25 Commentary provide that in the absence of a special provision, there is no general rule denying perceived abusive situations going to the mutual agreement procedure. 74 William W Park, ‘Arbitrability and Tax’ in L Mistelis and S Brekoulakis (eds), Arbitrability: International & Comparative Perspectives (Kluwer Law International, The Netherlands 2009) ch 10, 10–21. 75 OECD Addressing Base Erosion and Profit Shifting 12 February 2013, Executive Summary, 8. 76 OECD Discussion Draft (n 3) para 44. 77 Koch (n 8) IV. Procedural aspects of the initiation of mutual agreement procedure in the narrower sense, 7. Interaction between mutual agreement procedure and domestic legal proceedings. 78 OECD Model Convention, art 25 Commentary paras 76–82; UN Model Convention art 25 Commentary paras 76–82. 79 Peter H Dehnen and Silke Bacht, ‘Compatibility of the Recent OECD Proposals with Germany’s Tax Dispute Resolution Mechanism’ [November 2006] Bulletin for International Fiscal Documentation 463, 468. 80 David R Tillinghast, ‘The Choice of Issues to be Submitted to Arbitrary [sic] under Income Tax Conventions’ (1994) 4 Intertax 159, 163. 81 OECD Discussion Draft (n 3) Option 25 – Policy issues: Clarify the co-ordination of MAP arbitration and domestic legal remedies. 82 ibid, para 47. 83 ibid, Option 26 – Practical issues: Amend Article 25(5) to permit the deferral of MAP arbitration in appropriate circumstances. 84 See: 2. Binding Mandatory Arbitration – A Divisive Issue. 85 Ernst & Young, ‘Transfer Pricing 1999 Global Survey: Practices, Perceptions, and Trends’ Tax Notes Special Report (22 November 1999) 1073, 1084. 86 OECD Model Convention, art 25 Commentary para 70. 87 ibid. 88 UN Model Convention art 25 (Alternative B) Commentary para 70. 89 HM Pit, ‘Improving the Arbitration Procedure under the EU Arbitration Convention (1)’ (2015-1) EC Tax Review 19. 90 Marie Sapirie, ‘News Analysis: The Case for Optimism about Mandatory Arbitration’ Worldwide Tax Daily (14 July 2015). 91 OECD Discussion Draft (n 3) para 48. 92 ibid. 93 Park (n 35). 94 OECD Model Convention, art 25 Commentary, Annex, Sample Mutual Agreement on Arbitration, para 5. Selection of arbitrators. 95 ibid para 6. Streamlined arbitration process. 96 ibid para 7. Eligibility and appointment of arbitrators. 97 Park (n 35). 98 ibid. 99 ibid. 100 Workshop held at the Vienna University of Economics and Business by the Global Tax Policy Centre headed by Jeffrey Owens of the Institute for headed by Jeffrey Owens of the Institute for Austrian and International Tax Law on 19–20 January 2015. 101 Ricardo Escobar, quoted in Kollmann and others (n 48) 1192. 102 OECD Comments received on Public Discussion Draft BEPS Action 14: Make Dispute Resolutions More Effective (OECD Comments) 19 January 2015, Alix Partners, 10. 103 ibid. 104 Marcus Desax and Mark Veit, ‘Arbitration of Tax Treaty Disputes: The OECD Proposal’ (2007) 23 Arbitration International 405, 420. Arbitration of 105 ibid. 106 See Park (n 35). 107 OECD Comments (n 102) FIDAL, 133. 108 OECD Discussion Draft, Option 27 – Practical issues: Appointment of arbitrators. 109 Michael Lennard, ‘Transfer Pricing Arbitration as an Option for Developing Countries’ (2014) 42 Intertax 179, 183. 110 OECD/G20 Base Erosion and Profit Shifting Project Information Brief 2014 Deliverables, 16 September 2014, 4. 111 Lennard (n 109) 184. 112 OECD Comments (n 102) 197. 113 WW Park, Arbitration of International Business Disputes (OUP, Oxford, 2006, 2nd edn, 2012) 62. 114 Desax and Veit (n 104) 420. 115 Park (n 113) 39. 116 See Desax and Veit (n 104) 423. 117 Park (n 35). 118 Tillinghast (n 20) 97. 119 See: UN Model Convention, Annex to the Commentary on para 5 of art 25 (Alternative B). 120 OECD Discussion Draft (n 3) para 50. 121 ibid, Option 29 – Practical issues: Default form of decision-making in MAP arbitration. 122 Monsenego (n 66) 166. 123 ibid. 124 OECD Discussion Draft (n 3) para 3. 125 See: The Agreement Between the British Government and the Government of the Irish Free State in Respect of Double Taxation Tax (14 April 1926), art 7. 126 Protocol Amending the Convention between Japan and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed 17 December 2013. The Protocol entered into force on 12 December 2014. 127 Kiyoshi Nakayama, ‘Resolution of Tax Disputes in Japan’ [September/October 2007] Bulletin for International Taxation 459, 463. 128 Protocol Amending (n 126) art 13. 129 Andrew Dawson, quoted in Bell (n 51) 631. 130 Grace Perez-Navarro, quoted in Dolores W Gregory, ‘Binding Arbitration Not Off the Table, OECD Official Says, Predicting More Work’ Transfer Pricing Report News Archive 13 February 2015. 131 ibid. 132 G-7 Germany Leaders’ Declaration G7 Summit, 7–8 June 2015, Schloss Elmau, 4. 133 Hans Mooij, quoted in Stanley-Smith (n 39). 134 Monique van Herksen, quoted in ‘Arbitration on transfer pricing is increasing’ TP Week (22 September 2008). © The Author 2015. Published by Oxford University Press on behalf of the London Court of International Arbitration. All rights reserved. For Permissions, please email: journals.permissions@oup.com

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Arbitration InternationalOxford University Press

Published: Dec 14, 2015

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