Arbitration under Tax Treaties

Transcription

1 Arbitration under Tax Treaties International Fiscal Association India Branch Northern Region Chapter Delhi 11 February 2012 Marcus Desax Walder Wyss Ltd.

2 Overview of presentation The need for tax treaty arbitration Genesis of tax treaty arbitration Legal nature of tax treaty arbitration under the OECD Model Convention (2008) Procedure of tax treaty arbitration under OECD Sample Mutual Agreement on Arbitration Appraisal of tax treaty arbitration Personal final remark 2

3 The need for tax treaty arbitration 3

4 The problem with tax treaties While they contain substantive rules they lack compulsory rules of enforcement. 4

5 Drawbacks of Mutual Agreement Procedure under tax treaties (MAP) Avoidance of double taxation not guaranteed. No active involvement of the taxpayer. Opaque decision making process. Length of procedure. 5

6 The need for tax treaty arbitration Tax treaty arbitration supported by: International Chamber of Commerce (ICC), Commission on Taxation International Fiscal Association (IFA) various legal writers various Governments 6

7 Genesis of tax treaty arbitration 7

8 Genesis of tax treaty arbitration 2008 amendment of OECD Model Tax Convention providing for arbitration supplementary to MAP 30 January 2007: OECD Committee on Fiscal Affairs published Report Improving the Resolution of Tax Treaty Disputes. 17 July 2008: OECD Council adopted new paragraph 5 of Article 25 Model Convention, amended the Commentary to Article 25 and provided a Sample Mutual Agreement on Arbitration. 8

9 Genesis of tax treaty arbitration 3 November 2011: United Nations Committee of Experts on International Cooperation in Tax Matters adopted an update of UN Model Double Taxation Convention between Developed and Developing Countries providing, among others: for mandatory binding arbitration (for countries wishing so) when a dispute cannot be resolved under the usual Mutual Agreement Procedure. 9

10 Legal nature of tax treaty arbitration under the OECD Model Convention (2008) 10

11 New paragraph 5 of Article 25 OECD Model Convention (2008) Where, under paragraph 1, a person has presented a case to the competent authority of a Contracting State and 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 any person directly affected by the case is still entitled, under the domestic law of either State, to have courts or administrative tribunals of that State decide the same issues or if a decision on the same issues has already been rendered by such a court or administrative tribunal. The arbitration 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. 11

12 Tax treaty arbitration Supplement to MAP, not an independant judicial remedy. Consequence: Arbitrators do not decide the case, rather, only the issues submitted to them. Eventually, the competent authorities decide the case on the basis of the arbitrators determination and close the MAP. Tax treaty arbitration differs from international commercial arbitration and from arbitration under bilateral investment treaties ( BITs ). Tax arbitration is mandatory, no prior authorization by competent authorities is needed. 12

13 Scope of the arbitration Distinction between issues and the case. Only unresolved issues are submitted to arbitration. Hence, pending the arbitration, competent authorities can always reconsider and decide unresolved issues. Only issues of actual cases may be submitted to arbitration. 13

14 Extent and limitations of the taxpayer s procedural status Locus standi to initiate arbitration two years after launch of MAP. No taxpayer involvement in selection of arbitrators; they being appointed by the competent authorities. The Chair is appointed by mutual agreement of the competent authorities or, failing them, designated by the appointing authority. No right of the taxpayer to arbitration in the event of serious violation involving significant penalties. 14

15 Relationship between tax treaty arbitration and domestic remedies When initiating arbitration, taxpayer must certify that no court decision has been rendered on these issues. If these remedies are still, available, they must be suspended. If taxpayer rejects the determiniation by the arbitrators, he may pursue domestic remedies. 15

16 Procedure of tax treaty arbitration under OECD Sample Mutual Agreement on Arbitration 16

17 The taxpayer s process At the earliest two years after start of MAP, taxpayer may initiate arbitration. Request in writing filed with one competent authority accompanied by statement that no court decision has been rendered. 17

18 The competent authorities process Within three months after receipt of the request for arbitration, the competet authorities shall agree on issues to be decided and communicate the Terms of Reference to the taxpayer. Within three months after issuance of the Terms of Refernce or four months after receipt of request for arbitration, each competent authority shall appoint an arbitrator. If one arbitrator is not appointed, the taxpayer may request the OECD Director of Tax Policy and Administration to make appointment. Within two months after their appointment, the arbitrators shall designate the Chair, failing them and upon request by the taxpayer, the OECD Director of Tax Policy and Administration. The competent authorities may agree on streamlined arbitration. 18

19 The arbitrators process The arbitrators do not decide the case, only the issues submitted to them by the competent authorities. Preliminary issues already decided by the competent authorities are binding on arbitrators. The arbitrators have access to all information necessary to decide the issues, including confidential one. 19

20 Participation of the taxpayer The taxpayer may present his views in writing and, with the permission of the arbitrators, orally. 20

21 Decision-making process Decision to be rendered within six months after declaration by the Chair that he has received all necessary information. Decision are taken by majority vote. Unless stated otherwise in the Terms of Reference, decision shall be motivated in writing and, with the permission of the taxpayer, may be published in redacted form. Within six months after communication of the decision, competent authorities shall reach mutual agreement on the case. 21

22 Appraisal of tax treaty arbitration 22

23 Advantages of tax treaty arbitration Tax treaty arbitration does away with the generally recognized drawbacks of MAP: In contrast to MAP, arbitration always avoids actual double taxation. Taxpayer is actively involved in the process. The shaping of tax treaty arbitration as supplementing MAP avoids concerns in some countries that tax treaty arbitration may not be compatible with sovereignty. 23

24 Personal final remark 24

25 Personal final remark «The hope may be expressed that India will insert an arbitration clause in its newly negotiated double taxation avoidance agreements.» 25

26 Marcus Desax Marcus Desax, Partner Dr. iur., M.C.L., Attorney at Law Direct line