Arbitration Use in International Tax Treaties

Arbitration Use in International Tax Treaties

While arbitration has traditionally been considered primarily an instrument to resolve private sector commercial disputes, it has been gaining ground with certain public sector institutions as well. In recent years, there has been explosive growth in the use of contract, bilateral, and multilateral treaty-grounded arbitration to settle investment disputes between private entities and host governments. Now, for the first time, the United States has ratified bilateral tax treaties with Belgium and Germany containing specialized arbitration provisions. This Commentary, written by international arbitrator and business lawyer Paul E. Mason, with co-authors Robert Feinschreiber, a tax authority and practitioner, and Margaret Kent, an international tax attorney, discusses the use of arbitration under the United States' tax treaties with Belgium and Germany and offers relevant practice guidelines.
 
The authors write: A taxpayer that wants to take advantage of the U.S. Mutual Agreement Process requires the taxpayer to ask the IRS for assistance and collaboration. In essence, the mutual agreement process means that the U.S. Competent Authority raises issues with the Competent Authority of the treaty partner and attempts to resolve their disputes. A number of taxpayers are unwilling to make this move, in substantial part because the taxpayer views the IRS as an adversary, especially when the taxpayer might be going to great lengths to avoid giving its true intentions and plans to the IRS and when the taxpayer’s dispute with IRS is ongoing.
 
Taxpayers and their counsel are excluded from the Mutual Agreement process. Suspicions abound as to what truly goes on in these behind-closed-doors sessions. Taxpayers and their counsel suspect that large businesses receive more favored treatment than do smaller businesses and that competent authorities trade off issues rather than analyze them fully. Congress does not require a report from the Competent Authority, which, if provided by the Competent Authority, could very well show that much of the taxpayers’ fears are unfounded.
 
The rapid growth of the Advance Pricing Agreement process is due in large measure to the negative taxpayer views toward the Mutual Agreement process. Taxpayers can apply to the IRS to set up an advance pricing agreement, which can be unilateral – with the IRS only – or bilateral – including the U.S.’s treaty partners. Congress requires that the IRS annually report aggregate APA results.