12 Oct 2015
Preparing for Epochal Change
in
International Taxation:
Developing a Consensus for Dispute Resolution
Cym H. Lowell
International Chamber of Commerce, Taxation Commission
McDermott Will & Emery LLP
Institute for Austrian and International Tax Law
Wirtschafts University, Vienna, Austria
12-13 October 2015
We met in January as an interdisciplinary group sharing belief that the international tax
world is undergoing epochal change from the perspective of all stakeholders. The underlying
elements are well known to this group, including:

Dispute over the historic Residence vs. Source treaty and transfer pricing (“TP”)
models

Collection of revenue from international business for all Countries

BEPS generated by G-8, G-20 and OECD

Competition between Countries for tax base – e.g., U.K. and Australia, EU “state
aid” and so on

Developing/source Country desire to address their own perceived needs

United Nations (“UN”) Secretariat focus on dispute resolution

Needs of international financing organizations

Civil society perspectives

Multinational enterprise (“MNE”) need to: (i) adapt global effective tax rate
planning to existing and evolving tax regimes of Countries (“Alternative Regimes”);
and (ii) anticipate means of handling disputes to minimize incidence of double
taxation
Each of these elements standing alone could pose problems from the standpoint of any
individual stakeholder. From a collective standpoint, they pose serious risk to all parties.
Predictability is an essential element cross-border trade, foreign direct investment and economic
growth (“Economic Foundation”). These elements undermine predictability for all stakeholders.
The simple reality is that risks of: (i) interruption of fiscal policies for Countries; and (ii) double
taxation for MNEs are increasing, both of which negatively impact Economic Foundation.
The net effect of these evolving elements is likely to be about as follows:

Countries: devotion of additional resources to tax base protection.
o All Countries desperately seek tax revenue from business operations
perceived to occur within their borders. Each Country needs the ability to
efficiently challenge tax planning that it believes provides insufficient tax
revenue for its fisc, including situations involving so-called double nontaxation. Inefficient dispute resolution processes slow down the ability to
resolve such challenges

MNEs: focus on effective tax rate planning to take maximum advantage of Available
Regimes to minimize taxation and dangers of double taxation.
o The nature of the BEPS process, involving a loss of predictability, provides
stark encouragement for MNEs to take the most aggressive possible
approaches, using the Available Regimes then seeing what happens in other
countries and ultimate availability of dispute resolution processes)
In short, predictability of tax base results is a serious issue to Countries and MNEs alike.
The only realistic antidote would be to make a dependable and independent treaty-based dispute
resolution process designed to accommodate the needs of all stakeholders.
Inclusion of arbitration in both the OECD and UN model income tax treaties, and successful
implementation by a few Countries, provides a base for such a process. In the broader, non-tax
government and commercial world, successful evolution of arbitration and alternative dispute
resolution (“ADR”) has taken place.1 As with any such evolution, there have been positive and
negative experiences for both Countries and private parties. In the realm of international taxation,
this evolutionary process is in beginning stages. It is important that all stakeholders in the tax world
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Interestingly, the ICC started the tax treaty process in 1924. In its final report in 1926, as the League of
Nations was taking over the process, the ICC dispute resolution proposal was a default 50:50 split if the Countries in
question could not reach agreement. The history is developed from the archives in Wells & Lowell, “Income Tax Treaty
Policy in the 21st Century: Residence vs. Source,” 10 Columbia J.of Int’l Tax’n 1 (Feb. 2014), reprinted in 10 Int’l
Tax’n 181 (India March 2014). International arbitration has grown significantly in a variety of contexts since 1923 with
the establishment of the ICC International Court of Arbitration. As will be noted below, ICC believes that many of the
same obstacles existed generations ago with respect to arbitration in non-tax areas.
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explore potential means of utilizing learning from experience in non-tax contexts to develop
processes to provide relief from the pressures evolving in the world of international taxation. As an
emblematic means of distinguishing our international tax context from others, the evolutionary
dispute resolution process could be referred to as International Taxation Dispute Resolution Process
(“ITDRP”), as developed in the UN “Secretariat Paper on Alternative Dispute Resolution in
Taxation released on 8 October 2015. Utilization of terms such as arbitration and ADR are intended
to refer to: (i) experience in contexts other than international taxation; or (ii) the existing provisions
in model treaties or bilateral arrangements between Countries.
A.
ICC Dispute Resolution Commentary: January 2015
In our January 2015 meeting here at Wirtschafts University, attendees, as a group, began a
process of developing means of finding consensus for a way forward to successfully build upon that
base. In order for an ITDRP process to be meaningful for MNEs and Countries alike, it must be
embraced by as large a body as possible. For example, acceptance by unanimous action of the UN
membership would provide a solid foundation for predictability in this context, facilitating
Economic Foundation.
Within the ICC, we believe that experience with arbitration and ADR in the non-tax world
can provide building blocks of optimism for ITDRP in the international tax world. In January, ICC
proposed to undertake a comprehensive study of how hurdles facing ITDRP can be overcome based
on ICC’s experience as a leading arbitral/ADR institution in non-tax areas. It was hoped that this
could provide useful guidance to forge a path forward with ITDRP. In this regard, we
identified the following elements as key for developing successful arbitration programmes:

Develop a thorough understanding of the obstacles to be overcome (including
observations about sovereignty, cost, independence of arbitrators, control of
process, scope creep, confidentiality, transparency and so on)

Identify the common objectives of the parties involved

Study the experience of successful alternative dispute resolution mechanism in
other areas

Outline a proposed approach that deals with the obstacles to arbitration’s use for
tax disputes, e.g. transparency versus confidentiality

Develop broad consensus for the proposed approach
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
Implementation with an institution having broad experience in administering
cases through dispute resolution mechanisms in other contexts
B.
OECD Action 14 Final Report
In early October, the OECD released its final deliverables with respect to BEPS, including
Action 14. The essence of its report follows (emphasis added with underscoring):
Eliminating opportunities for cross-border tax avoidance and evasion and the effective
and efficient prevention of double taxation are critical to building an international tax
system that supports economic growth and a resilient global economy. Countries
agree that the introduction of [BEPS] . . . measures . . . should not lead to unnecessary
uncertainty for compliant taxpayers and to unintended double taxation. Improving
dispute resolution mechanisms is therefore an integral component of the work on
BEPS issues.
Article 25 of the OECD Model Tax Convention (OECD, 2014) provides [the MAP
process] . . . independent from the ordinary legal remedies available under domestic
law . . . .
The measures developed under Action 14 . . . aim to strengthen the effectiveness and
efficiency of the MAP process. They aim to minimise the risks of uncertainty and
unintended double taxation by ensuring the consistent and proper implementation of
tax treaties, including the effective and timely resolution of disputes regarding their
interpretation or application through the mutual agreement procedure. These
measures are underpinned by a strong political commitment to the effective and
timely resolution of disputes through the mutual agreement procedure and to further
progress to rapidly resolve disputes.
Through the adoption of this Report, countries have agreed to important changes in their
approach to dispute resolution, in particular by having developed a minimum standard
with respect to the resolution of treaty-related disputes, committed to its rapid
implementation and agreed to ensure its effective implementation through the
establishment of a robust peer-based monitoring mechanism that will report regularly
through the Committee on Fiscal Affairs to the G20. The minimum standard will:
• Ensure that treaty obligations related to the mutual agreement procedure are fully
implemented in good faith and that MAP cases are resolved in a timely manner;
• Ensure the implementation of administrative processes that promote the prevention and
timely resolution of treaty-related disputes; and
• Ensure that taxpayers can access the MAP when eligible.
The minimum standard is complemented by a set of best practices [which are interesting
and appropriate to facilitate MAP process resolution, though they are largely
precatory in nature like the initial discussion draft; how they will be implemented and
monitored will remain to be seen]. The monitoring of the implementation of the
minimum standard will be carried out pursuant to[: (i)] detailed terms of reference
and an assessment methodology to be developed in the context of the OECD/G20
BEPS Project in 2016. In addition . . . the following countries have declared their
commitment to provide for mandatory binding MAP arbitration in their bilateral tax
treaties as a mechanism to guarantee that treaty-related disputes will be resolved
within a specified timeframe: Australia, Austria, Belgium, Canada, France, Germany,
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Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland,
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Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States.
This represents a major step forward as together these countries were involved in
more than 90 percent of outstanding MAP cases at the end of 2013, as reported to the
OECD.
Initial review of Action 14 suggests that it is intended to outline a normal OECD approach
of model treaty guidelines and monitoring. This is a well-travelled path. Of course, it is the only
path OECD has in the absence of capacity to actually administer a process on a global basis
(probably beyond its charter). In addition, whether an OECD-led process will be acceptable to a
broad range of developing countries is an issue to be addressed.
When the OECD final Action 14 comments are read in conjunction with the UN Secretariat
paper, to be discussed during our Vienna meeting, it appears that there is a natural link. The OECD
paper establishes a framework for ITDRP within the treaty MAP process, including eventual
guidelines and monitoring.
The UN paper seems to picks up at this point in terms of framing the need for a neutral
administrator.
There is then a third leg for an effective ITDRP stool, which is development of an
organization with broad experience in non-tax areas of dispute resolution to actually facilitate and
administer a process.
Needless to say, there are many elements of this proclamation to be addressed in the overall dispute
resolution process, including the following:
1.
Will this “monitoring” process be more successful than prior OECD declarations?
a.
Will business have a role in this process?
b.
How long a period will such a monitoring process require to be realistically
of benefit in reducing MAP backlogs and resolutions?
2.
3.
How will the “minimum standards” actually be designed and implemented?
a.
Same questions about business and timing.
b.
Will they ever be more than precatory best practice statements?
What about all of the other countries which have not signed on to mandatory
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arbitration in treaties?
4.
Will there be an actual process to be supervised and administered (beyond the realm
of academic and theoretical)?
a.
Will the OECD be such a party?
(i)
Would this be acceptable to the broad range of developing countries
that must be included in any comprehensive process?
b.
If not, what global entity can perform these roles?
(i)
UN or other respected entity
(ii)
Perhaps to assume the role of administrator, supervising a respected
group with extensive experience in developing, administering and
expanding successful program in non-tax areas?
5.
C.
Will such processes be included in a multilateral instrument?
ICC Dispute Resolution Commentary: Interim
The ICC salutes the need for enhanced taxation dispute resolution mechanisms as a priority
for the global business community. ICC strongly believes that more effective dispute resolution –
providing much needed increased legal certainty and predictability for all stakeholders – is of the
utmost importance for enhancing Economic Foundation.
Conflicts in international tax law that lead to disputes find their origin in a variety of causes.
Today, businesses are delivering their products/services via increasingly diversified processes,
producing an international division of labour. The more complex and fragmented business models
become, the more the risk of tax disputes arises – especially with regard to transfer pricing.
It is apparent that following the BEPS project, the number of cases in which conflicting tax
claims are raised will increase due to tightening tax legislation and inevitable differences in
interpretation leading to opportunities for MNEs in the Available Regimes.
Furthermore, from the perspective of the BRICs and several source/developing Countries,
there is currently an imbalance in the allocation of taxing rights under existing model treaty and TP
guidelines. It is noted that there are differences with regards to the approaches taken by the UN and
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OECD Models. Source Countries are eager to redistribute the current allocation of taxation among
Countries to get a bigger piece of the tax cake.
Further to the above, ICC believes that enhanced ITDRP will be vital to ensure the threat of
rising international tax disputes is contained. However many Countries have raised concerns with
the use of any type of ADR mechanisms for international tax purposes. Specifically, a variety of
elements are often raised with regard to the use of arbitration/ADR in the international tax context:

How to control the costs: explaining policies of ICC to minimize costs and
means by which parties can do so

Transparency, confidentiality, secrecy: discussing various means utilized to
achieve the transparency goals in various contexts, which provide flexibility
to adapt appropriate arrangements in the taxation context

Enforceability: addressing means by which needs in tax area could be
addressed

Sovereignty: this objection has long been satisfactorily addressed in
arbitration procedures, otherwise there would be no such thing as
international law

Inexperience of developing countries, independence of arbitrators and their
selection within an arbitral institution: these issues have been addressed as
the ADR world has evolved to include over 150 states ratifying the 1958
New York and 1966 ICSID conventions

Procedural models for tax treaty arbitration: interplay with domestic
remedies and due process during the arbitration

Parallelism in domestic remedies and due process: experience in the design
of procedural mechanics from public and private international law

Arbitrability of taxes: lessons to be derived from experience to date, including
from tax cases in investment arbitration and experience from the Canada-U.S.
treaty arbitration process (which probably reflects the largest body of arbitral
experience in transfer pricing cases)
In order to address the dynamics in each of these issues, the ICC Commission on Taxation
has reached out to ICC Commission on Arbitration and ADR to create further understanding on
how these issues might be addressed in and relate to dispute resolution in non-taxation contexts.
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Building on ICC’s decades of experience in arbitration, this work will gather the insights of
ICC dispute resolution experts and may offer potential guidance for the debate on enhanced ITDRP.
D.
Going Forward
ICC stands ready to assist the global dispute resolution process as it evolves in the future.
Respectfully submitted
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