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

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

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

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

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

There was unanimous support for the introduction of an MBA procedure, with 100% of respondents saying this was either ‘necessary’ or ‘desirable’. UK corporate respondents considered this to be an essential safeguard, with either the state or the taxpayer competent to shout for arbitration Discover More.

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

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

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

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

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

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

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

Minimum standards are also needed to reduce the period taken to address disputes, with multitudinous respondents calling for a set deadline to prevent delays and the employ of apparently deliberate delaying tactics on the piece of the tax authorities,

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

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

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

Finally, the ICC UK proposed that taxpayers should be competent to participate independently in both the MAP and MBA processes. They should possess an independent proper to shout for a dispute to be resolved through MBA, and be competent to participate formally in the arbitration process.

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

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

Ian Hyde is a tax litigation expert