Recent publications from the OECD and the European Commission suggest that Dispute Resolution is finally getting the attention it deserves.
BEPS Action 14 addresses the need for effective dispute resolution mechanisms to resolve disputes between tax authorities under the terms of relevant tax treaties. Given the changes to tax rules and interpretations emerging from the other BEPS actions, effective dispute resolution will be even more critical for taxpayers than it has been previously.
On 20 October 2016, the OECD issued a paper setting out the peer review process that is to be implemented to monitor tax authority minimum standards and best practices in resolving tax disputes. This was followed on 31 October 2016 by the initial schedule for these peer reviews, with the UK, US, Canada, Netherlands, Belgium and Switzerland in the first batch of reviews to commence in December 2016. Meanwhile the European Commission (EC) issued a report on 25 October 2016 outlining how dispute resolution could be made more effective within the EU.
Although the use of Mutual Agreement Procedures (MAP) in tax treaties is long-established, the process is often slow, inefficient, and in some cases, difficult for taxpayers to access. Most treaties’ MAP article merely requires the competent authorities of the respective tax authorities to endeavor to eliminate double taxation, but does not require them to do so, and does not allow for binding arbitration. Within the EU, the European Arbitration Convention does provide a mechanism for binding arbitration in intra-EU cases, but it has limitations in scope and effectiveness. More positively, some more recent tax treaties do include scope for binding arbitration (including several of the UK’s newer treaties).
The initial hope for Action 14 was agreement from all of the participating countries to mandatory binding arbitration. Disappointingly this has not proved possible, and while a significant number of countries have agreed to include binding arbitration in their treaties, the Action 14 report is limited to setting minimum standards and best practices for tax authorities in administering MAP, and providing a peer monitoring system to ensure compliance.
At the same time, the EC is seeking to widen the scope of the European Arbitration Convention, and make it more effective by giving taxpayers greater access. Historically, some European tax authorities have prevented taxpayers from accessing the Convention, by interpreting it in a limited manner. The proposed directive is intended to make such obstructive practices more difficult. Whilst the Arbitration Convention is expected to cease to apply to the UK following Brexit, it remains to be seen whether the outcome of Article 50 negotiations will see UK companies retaining some kind of access to arbitration with the remaining EU members.
Although a universal binding arbitration system would be preferable, the work of the OECD and EC, along with the increasing number of bilateral tax treaties with arbitration clauses, does at least provide some comfort to taxpayers that the inevitable increase in tax disputes following implementation of the various BEPS actions will be accompanied by increased access to effective dispute resolution.
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