Wednesday, February 07, 2007

Time has come for Tax Treaty Arbitration

Following up on a previous post from April 2006, the OECD released a final report entitled “Improving the Resolution of Tax Treaty Disputes”.

The report includes in the first place a proposal to add to Art. 25 of the OECD Model Tax Convention an arbitration process to deal with unresolved issues that prevent competent authorities from reaching a mutual agreement. In addition, the report includes a revised version to the Commentary on Art. 25, ultimately designed to enhance the effectiveness of the mutual agreement procedure.

According to the report, the changes to the OECD Model were approved on 30 January 2007 by the OECD Committee on Fiscal Affairs (CFA) and will be included in the forthcoming 2008 update to the Model. The OECD countries have then finally agreed to modify the OECD Model by including the possibility of arbitration in cross-border disputes unresolved for more than two years. In that regard, the OECD will add the following new paragraph 5 to Art. 25:

“5. Where,

a) under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of this Convention, and

b) the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the presentation of the case to the competent authority of the other Contracting State,

any unresolved issues arising from the case shall be submitted to arbitration if the person so requests. These unresolved issues shall not, however, be submitted to arbitration if a decision on these issues has already been rendered by a court or administrative tribunal of either State. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph."

Although OECD also includes a detailed sample form of agreement to be used as a basis for the binding arbitration process, the OECD apparently leaves to the contracting parties the possibility to specify themselves the general approach and mechanics of the arbitration process.

For example, the OECD apparently suggests the use of the “independent opinion” approach, whereby arbitrators would be presented with the facts and arguments by the parties based on the applicable law, and would then reach their own independent decision, which would be based on a written, reasoned analysis of the facts involved and applicable legal sources. Nevertheless, the OECD also recognizes other approaches such as the "last best offer” or “final offer” approach, whereby each competent authority is required to give to the arbitral panel a proposed resolution of the issue involved and the arbitral panel would choose between the two proposals which were presented to it. This latter approach was recently included in the arbitration provision of the US-Germany protocol. Find below an extract from such provision:

“g) Each of the Contracting States will be permitted to submit, within 90 days of the appointment of the Chair of the arbitration board, a Proposed Resolution describing the proposed disposition of the specific monetary amounts of income, expense or taxation at issue in the case, and a supporting Position Paper, for consideration by the arbitration board.
h) The arbitration board will deliver a determination in writing to the Contracting States within nine months of the appointment of its Chair. The board will adopt as its determination one of the Proposed Resolutions submitted by the Contracting

Last but not least, allow me to add to the previous list of 10 must read BOOKS AND ARTICLES on the subject, the winner of the 2006 Mitchell B Carroll Prize, Dr Zvi D. Altman. His thesis entitled “Dispute Resolution under Tax Treaties” is a fascinating trip into the limits of the available mechanisms for the resolution of tax treaty-related disputes and the challenges of establishing a new international organization with links to domestic judicial networks. Definitely a must read or have to any international tax library.



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