Cora O’Brien is the policy director for the Irish Tax Institute in Dublin.
This article is based on the author’s presentation to the International Conference on Taxpayer Rights, held earlier this year in Vienna. It is based on insights gathered from businesses, taxpayers, and tax professionals in Ireland and globally, but the views expressed are the author’s alone.
In this article, the author discusses the increase in double and multiple taxation of multinational enterprises, examines the problems with the existing framework for multijurisdictional dispute resolution, and looks at the potential for arbitration to help improve taxpayers’ experiences with dispute resolution processes.
Table of Contents
- The Rise in Multijurisdictional Tax Disputes
- Taxpayers and Dispute Resolution Processes
- Alternatives to Dispute Resolution
- The Future
Multinational enterprises face a daunting task when it comes to complying with and planning for cross-border taxation in a quickly evolving world. This article looks at the taxation of companies and the resolution of disputes, both today and in the future. More specifically, it focuses on the following issues:
the rise in instances of double and multiple taxation, together with the associated rise in tax disputes;
taxpayers’ experience with dispute resolution processes to date;
alternatives forms of dispute resolution; and
the multilateral instrument and the proposed EU Council directive on dispute resolution mechanisms.
The Rise in Multijurisdictional Tax Disputes
In 2016 the European Commission held a public consultation on improving double taxation dispute resolution mechanisms. During the impact assessment that followed, the commission confirmed that 91 percent of companies who responded to the consultation expect to encounter more cases of double taxation.
There are two main mechanisms for dealing with double taxation and multijurisdictional tax disputes: the mutual agreement procedure contained within double taxation agreements and arbitration (available in some DTAs or through the EU arbitration convention). At present, very few tax disputes reach the stage of arbitration, with the vast majority being handled through the MAP process.
Illustrating the rise in the number of disputes, OECD figures show that the number of unresolved MAP cases has grown by 163 percent since 2006 and that, as of the end of 2015, the backlog of MAP cases worldwide stood at over 6,000 cases.
The volume of disputes is on an upward trajectory, and that is true even before taking account of the effect that changes to the global tax rules will have on instances of multiple taxation. Most readers are aware of the uncertain tax landscape that multinational businesses face in the coming years. We are in the eye of a perfect storm — buffeted by the implementation of the OECD’s base erosion and profit-shifting project, the transformational effect of the transparency agenda, and the possibility of other major tax reforms such as U.S. tax reform, the EU’s Common Consolidated Corporate Tax Base (CCCTB), and the possible fallout on U.K. corporate tax policy from Brexit. And that is to say nothing of unilateral actions taken by some countries to deal with tax avoidance, such as the U.K. and Australian diverted profits taxes and the Australian multinational antiavoidance law.
The publication in October 2015 of the 15 BEPS actions by the OECD was a watershed moment in the global tax reform movement. But it was only the beginning of the actual reform process. These BEPS actions are now in the hands of national governments. Their efforts to implement BEPS create many of the challenges facing corporate taxpayers. To reach consensus, the OECD embedded a range of policy options into the BEPS actions. Together with the following issues, these options create a very complex global tax landscape over the next five years:
differing interpretations of the BEPS reports by different countries;
differing legislative and administrative processes for implementing the changes;
differing pace of change in different countries; and
differences in the order in which governments implement the changes.
Businesses are also dealing with the reality of tax transparency and the range of new reporting obligations that have been introduced: the OECD’s common reporting standard, country-by-country reporting (to tax authorities and perhaps, ultimately, in the public arena), the U.S. Foreign Account Tax Compliance Act, EU rules on exchange of information, the exchange of tax rulings, the use advance pricing agreements, and so forth. We face a future in which tax authorities globally will hold vast amounts of information from other tax authorities on taxpayers and that will undoubtedly place considerable pressure on those tax authorities to act based on this information. The general public wants more tax to be collected from multinational companies, in part because they know that revenue authorities now have greater knowledge of global profits.
Uncertainty about the changing tax rules, combined with heightened pressure for revenue scrutiny, is widely expected to increase the number of tax disputes significantly. Likewise, the role that advance opinions and advance rulings from tax authorities once played in helping to provide some certainty for taxpayers may be changing. A tax opinion from one tax authority might now be exchanged with the tax authorities in many other countries. In this environment, some businesses are finding it more difficult to obtain an opinion from a tax authority and they may also question the continued benefit of such opinions if, once exchanged, they create added controversy and lead to misunderstandings with other tax authorities.
Taxpayers and Dispute Resolution Processes
As noted, the most commonly used dispute resolution process is the MAP available under DTAs. The MAP generally allows a taxpayer that is experiencing double taxation in contravention of a DTA to approach the competent authority in one country, which will then try to resolve the issue with the competent authority of the other country. The competent authorities are usually part of the tax authorities of the countries involved. The MAP process for resolving double taxation is thus carried out by the two countries that try to agree about their relative taxing rights over the taxpayer (the subject of the dispute).
For taxpayers, the most significant problem is that they are not actually party to the resolution process. The dispute is about the taxpayer, but the taxpayer cannot participate in the discussion. As one taxpayer told the author, “We open the envelopes, provide the information, and pay the bill.”
Because they are excluded from the process, the taxpayers are unable to view the resolution process — they provide the information requested by the competent authorities but cannot see how their cases are being framed or how the facts of the cases have been set out. Indeed, taxpayers that see documentation from a MAP case after the fact have been known to disagree with some of the facts and opinions presented about them, without having had a right of reply or other opportunity to correct the facts and opinions.
From the very beginning, the MAP process can cause difficulty for taxpayers in several important respects:
It may be unclear how taxpayers can go about accessing the MAP process in their countries, including who to approach and what information must be provided. Some countries provide better guidance than others on these procedural matters.
Although a taxpayer may request that two countries enter a MAP, there is no guarantee that the competent authorities will agree to do so, and a taxpayer cannot compel them to proceed with a MAP.
Some countries restrict the type of case that can be brought to a MAP.
There is no guarantee for a taxpayer that enters a MAP that there will be a definite outcome from the procedure. In the absence of binding arbitration, there is no obligation for the countries involved to reach agreement on the issue.
Often, there is no guarantee regarding how long it will take the competent authorities to arrive at an outcome. Competent authorities are likely to have many cases pending with the other jurisdiction at any one time and, at best, they may meet two or three times a year to discuss the matters.
There is very little certainty about how much the process will cost. This makes it difficult for the taxpayer to decide whether to enter into a MAP.
There is no guarantee that both competent authorities will actually implement the agreed outcome.
Because MAP cases are confidential, the taxpayer has no knowledge of other MAP decisions, including their fact patterns and how those decisions might affect their own cases.
The MAP process itself can produce added uncertainty. In some cases, the rules may provide a fixed timeline for the process to conclude (say two years), but, in practice, it is not always clear when this two-year clock begins and stops, particularly if there are repeated requests for information from the competent authority.
Taxpayers may also struggle to obtain the internal resources required to support a MAP claim. For example, the quantity of information requested may seem very broad in scope and disconnected from the issue at hand.1 Quite often the documentation sought by the competent authority will be held at multiple taxpayer sites and in multiple jurisdictions. Indeed, many of the taxpayer’s employees who were involved with the relevant issues may have long since left the company. These practical resource issues are particularly difficult when dealing with countries that have lookback periods for tax disputes of up to 10 years. In fact, many multinational companies feel compelled to plan for the longest possible lookback period across their global operations and maintain all potentially relevant records for this extended period.
Other concerns expressed anecdotally include the fear that information provided during the MAP process will be used by revenue authorities in future tax audits and the concern that some tax authorities may pressure the taxpayer to waive its right to enter a MAP in exchange for a reduced tax assessment. Some competent authorities also require the taxpayer to pay the disputed tax at the outset of the MAP process, even though tax on the same income may already have been paid to the other country, thereby crystallizing double taxation. Even when the disputed tax does not need to be paid upfront, the taxpayer may incur an interest charge on the unpaid tax, and this can be substantial.
Further, when a decision is ultimately rendered by the competent authorities, the taxpayer has the choice to either accept or reject the decision. The taxpayer does not have the right to receive a rationale for the decision nor have the decision altered in any way. This can result in the tax authorities and the taxpayer agreeing to disagree and the matter being closed without the double taxation being resolved.
Alternatives to Dispute Resolution
The challenging international tax environment, along with the inevitable rise in tax disputes that it brings, and the problems with the MAP are leading to a greater emphasis being placed on alternative arrangements that may help prevent disputes from arising in the first place. A detailed discussion of these alternatives is beyond the scope of this article. In brief, they include:
An increasing range of countries offer advance pricing agreements that can help reduce transfer pricing risk (the cause of many multijurisdictional disputes). APAs are a welcome development, but it often takes a long time to reach an agreement. Benchmark APAs can be helpful in appropriate circumstances. Multilateral APAs are available in theory, but they are very rare in practice because they are so complex and difficult to negotiate.
Commercially viable safe harbors are another mechanism for reducing transfer pricing risk in situations involving cost-based regimes such as support services. However, safe harbors are not available in all countries. When they are available, the safe harbor markups offered may be so high compared with the risk level of the activity that they are of no practical use to the taxpayer.
Cooperative compliance frameworks are available to larger taxpayers in some countries. When they are offered, these domestic tax frameworks encourage open dialogue based on trust between the taxpayer and the tax authority. While cooperative compliance can provide certainty for taxpayers, the tool’s scope is limited since it addresses only home country affairs.
The European Commission and the OECD recognize that disputes are on the rise and that steps need to be taken to address the problem. The OECD has stated that “countries recognize that the changes introduced by the BEPS project may lead to some uncertainty, and could, without action, increase double taxation and MAP disputes in the short term.”2
Likewise, the European Commission has recognized that “addressing . . . complex cross border arrangements through domestic rules creates significant additional risk of double taxation if new rules are not implemented in a harmonised way.”3
Mandatory binding arbitration regimes can act as an incentive for competent authorities to resolve disputes more effectively. On November 24, 2016, the OECD released the text of the multilateral instrument (MLI), which implements the tax treaty-related measures included in the BEPS action plan. The MLI enables countries to include mandatory binding treaty arbitration in their DTAs. It is an optional provision that applies only between countries that expressly choose to apply it in their bilateral DTAs. At the time of writing only 20 countries have opted into the MLI’s arbitration provision, but the hope is that this number will grow.
An arbitration convention has existed in the EU since the 1990s, but its scope has been somewhat limited and it has not been widely used by taxpayers. A proposal is being debated at the EU to improve the convention in many respects that are important to businesses operating in the EU. The proposed regime broadens the scope of cases that can be taken to arbitration; introduces strict time frames for competent authorities and taxpayers to resolve disputes; provides appeal routes to the national courts if specified actions are delayed; and contains an obligation to publish specific, limited information about decisions to increase the transparency of the regime for all taxpayers.
Smaller businesses, in particular, that are trying to expand into overseas markets do not have the resources or expertise to navigate expensive and uncertain dispute resolution processes when they incur double taxation — their only option is to absorb the cost. It is difficult for them and, indeed, for any taxpayer, to assert their rights with a tax authority when they know they will have to deal with that tax authority again, probably on a regular basis. Having effective processes in place is the only way to safeguard these rights and prevent disputes. Mandatory binding arbitration can play an important role, and it deserves the support of countries across the world.
To protect taxpayer rights, policymakers must invest more time and considerably more resources in improving multijurisdictional dispute resolution mechanisms for businesses operating across borders. Any lack of commitment to this effort will inevitably lead to delays in decision-making and cost businesses money. In short, taxpayers are calling for increased taxpayer involvement in multijurisdictional tax dispute resolution, more transparent processes, quicker and more decisive outcomes, and a greater investment of time and resources by competent authorities than they encounter today.
3 European Commission, “Impact Assessment Accompanying the Document Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union,” COM(2016) 686 final (Oct. 25, 2016).