Introduction to Arbitration of cross border tax issues – Taxbeech
At present, the Mutual Agreement Procedure (MAP) resolves the tax issues arising from cross-border tax. It has been successful in its attempts to resolve tax matters brought by taxpayers to the competent authorities. But as per the OECD MAP statistics 2020, it is a long-drawn process.
The tax treaty of Austria and Germany was the first to include the arbitration provisions under the MAP Article. Other countries then started supplementing the mutual agreement procedure provisions in their tax treaties with mandatory dispute settlement mechanisms such as ‘arbitration’.
They include these provisions in the MAP article of the Tax treaty that allow mandatory submission of unresolved MAP cases to arbitration for a decision binding for both countries.
Impact of BEPS on Arbitration
BEPS project aimed at preventing double non-taxation without creating double taxation. But as new provisions are in place, so does the influx of confusion and disputes.
We expect implementing BEPS measures will increase disputes, but Action Plan 14 ensures that systems are in place to provide taxpayers with an efficient, predictable, and transparent avenue for resolving disputes.
As emphasized under Action Point 14 of BEPS, the countries have agreed to the following changes in their approach to dispute resolution:
· Minimum standards for resolution of treaty-related disputes.
· Commitment to rapid implementation of the standards
· Establishment of a robust peer-based monitoring system.
Scope of Arbitration in UN Model Tax Treaty and OECD Model Tax Convention
The mandatory arbitration provision is part of the mutual agreement procedure. Arbitration is not available independently of MAP. It is a mechanism for resolving specific points within a case in the MAP. As arbitration is a part of the MAP, it is subject to all the limitations of the MAP.
OECD model tax convention added mandatory arbitration provisions in the year 2008 and the UN Model in the year 2011.
Difference in Arbitration provisions of UN Model and OECD Tax Convention
Arbitration under MLI
The Multilateral Instruments (MLI) provides an option to the tax jurisdiction to choose the mandatory binding arbitration provisions in its Covered tax agreements (CTA) or Part VI of the MLI.
Part VI of the MLI sets out the core provisions relating to arbitration and sets out detailed rules to ensure the process is in place for ensuring the smooth functioning of the arbitration process. In our next post, we will dwell deeper into it.