Mutual Agreement Procedure (MAP) provisions in OECD and UN-styled tax treaties do not mandate that the disputes arising from the application of the treaty provisions actually be settled. These clauses merely require that the two tax authorities use their best endeavours.
For some tax payers this ‘toothless’ provision has seen their claims in such a long queue that hope of a resolution in their lifespan is generally regarded as remote.
In many other cases however, the mutuality of interests in resolving such impasses often leads to a resolution. Indeed, without such a commitment it seems unlikely that the over 2,000 tax treaties would exist.
Both the OECD and the UN have proposed the introduction of binding arbitration in their model tax treaties. Indeed, It is only because India vetoed the idea that such a provision was not included in the latest iteration of the OECD Model text.
However, although arbitration is not in the UN or the OECD model texts, for a number of countries binding arbitration is increasingly becoming part of their policy and practice of tax diplomacy.
In the case of the Netherlands, one by-product of that state’s programme of tax treaty renegotiations with developing states ( which is supposed to be about adding anti-abuse clauses,) has been the insertion of binding arbitration clauses in several of its amended treaties with African countries.
For other countries like the UK, Italy, Switzerland, Jersey and Canada where binding arbitration clauses have been included in their treaties with developing countries, OECD-style provisions are more commonly inserted, although the UN-styled arbitration is generally as viewed as better for developing countries.
Regardless however, of whether the UN or OECD text is used, in both cases arbitration can be triggered by either party.
In light of this shift to mandatory and binding settlement of treaty-based, tax disputes, developing countries may wish to revisit the practices and policies which inform their conduct of tax diplomacy, with a view of incorporating these 13 practical guide-lines:
- Before concluding new tax treaties or re-negotiating existing ones, developing countries should ensure that their domestic laws and international legal obligations are consistent with their obligations under tax agreements;
- Developing countries should ensure that their relevant public officials are aware generally of their country’s tax obligations ;
- Formal dispute prevention and management systems established by developing countries should include training about the state’s tax treaty obligations, review proposed, and where applicable, existing measures for compliance with tax arbitration ; consider an early warning system; and coordination of management systems to manage such tax treaty disputes preferably by a designated department;
- Counsel experienced international tax and and arbitration should be consulted in treaty drafting to ensure the treaty language takes into account best practices and relevant cases interpreting tax treaty provisions on arbitration.
- When a developing country receives an informal notice of dispute from a foreign tax payer or its home state, it should take stock of the situation and assess the cost-benefit of a settlement if the dispute is susceptible to settlement;
- Developing countries should make a preliminary assessment of potential liability, considering also the systemic implications of a potential settlement;
- Developing countries may offer non-financial terms of settlement, which may be relevant to keeping the investor/tax-payer operating in the host country;
- Regardless whether or not there is a formal “cooling-off” period, developing countries should engage in preliminary discussions with the tax-payer/investor to learn about the background to the dispute and the source of their claims ;
- As tax-payer/ investor claims often involve multiple government entities, developing countries should ensure that all of their relevant entities are engaged in, or informed about, the process, and are effectively coordinated so that the defence in the arbitration represents the overall position of the developing country;
- Developing countries should be aware of the suitability of different legal representation models: in-house counsel, outside counsel or a combination of the two;
- In deciding case strategy, a developing country should also should consider if its position is tenable and/or consistent with its positions taken in past or other pending cases and if it is in line with the State’s policy objectives; and
- Developing countries should determine their media strategy as part of the overall case approach.