Improving Arbitration under Tax Treaties: Two Steps (in the Right Direction) are Better than One!

1. Improving Arbitration under Tax Treaties: Two Steps (in the Right Direction) are Better than One! Prof. Roland Ismer

2. Overview • Introduction • Mutual Agreement Procedure in Tax Treaties • Arbitration under Tax Treaties • Developing MAP and Arbitration into a Two-Step Procedure • Conclusion

3. A. Introduction

4. B. Mutual Agreement Procedure in Tax Treaties

5. Types of Mutual Agreement Procedures (MAPs) • specific case MAP under paras. 1 and 2 • interpretative mutual MAP under para. 3, first sentence • legislative MAP under para. 3, second sentence

6. The specific case MAP • Irrespective of domestic remedies • Provides additional protection for taxpayer • Competent authorities not obliged to reach agreement (“endeavour”) • Competent authorities may rely on equity considerations

7. Advantages of the specific case MAP • very flexible • considerable goodwill (“procédure amiable”) • can be very cheap for the taxpayer • significant institutional experience

8. Disadvantages (“far from perfect instrument”) • No guarantee for a just outcome • weak position of the taxpayer, who is not a party to the procedure • no obligation to reach an agreement • opacity of decision-making • rather time-comsuming

9. C. Tax Treaty Arbitration

10. Arbitration Clause • Mandatory arbitration • Introduced through Update 2008 • Requirements: • after two years of negotiations, competent authorities unable to reach mutual agreement covering all points in dispute • taxation has actually occurred • Request by person filing the application for the specific case MAP

11. Article 25 (5) OECD-MC as a significant improvement • Guarantee that dispute will be resolved • Reasonable time-frame • Rights of taxpayer safeguarded by possibility to refuse decision • However: • Taxpayer not a party to the proceedings • no guarantee of a just solution

12. Arbitration as part of the MAP, not distinct from it • not up to the taxpayer to decide whether the dispute was resolved • competent authorities in control during the entire course of arbitration procedure • Mutual agreement possible before decision by arbitrators (but not afterwards)

13. Implications for domestic remedies • Just as under an ordinary MAP: Irrespective of domestic remedies • Parallelism between MAP/Arbitration and domestic remedies • Requirement of prior waiver unconstitutional in some countries (among them Germany)

14. D. Developing MAP and Arbitration into a Two-Step Procedure

15. Possible Two-Step Procedure • Specific case MAP followed by mandatory arbitration • Taxpayer party to arbitration, but not to MAP • Mutual agreement blocks mandatory arbitration only if taxpayer agrees • Then parallel domestic court proceedings no longer necessary

16. Advantages of Two-Step Procedure • Best of two worlds: combines advantages of MAP with those of arbitration • Taxpayer protected through consent requirement • Avoids parallel proceedings and thus problems with respect to res iudicata; waiver acceptable where arbitration has sufficient traits of adjudication • Open for multilateral problems

17. Selected ProceduralRequirements • Choice of arbitrators guaranteeing their functional independence: personal qualification; personal position (judge!?!) • Unanimity principle for party autonomy • Taxpayer as party with identical procedural rights • Public scrutiny? • Reasoned and published awards? • Annulment procedures • Proceduralrulesandseatofarbitrationfixedbeforehand

18. E. Conclusion