PRIVATE AND PUBLIC DISPUTE RESOLUTION
IN INTERNATIONAL TAXATION
Charles R. Irish
ABSTRACT
An inevitable byproduct of the globalization of economic
activities has been the increased attention to international dispute
resolution. International arbitration, mediation, conciliation as
well as traditional cross border litigation proceedings are now
relatively common. One subset of international disputes that has
not received much attention, however, is the resolution of
international tax disputes.
This essay is intended to shed some light on international tax
dispute resolution. The essay is divided into three principal parts.
After this introduction,The first part describes how private and
public international tax disputes arise and explains briefly how
they are commonly resolved. The second major part of the essay
then focuses specifically on a relatively new area of international
tax dispute resolution: arbitration of international tax disputes.
The second part describes and compares the most important forms
of international tax dispute resolution arbitration now in use,
including specifically the EU’s arbitration rules, the OECD’s
Model Arbitration Rules, and the arbitration provisions included in
some of the more recent bilateral tax treaties to which the U.S. is a
party. The third part of the essay concludes with an analysis of the
 Senior Director, East Asian Legal Studies Center, Volkmn-Bascom Professor of Law (emeritus),
University of Wisconsin Law School, Madison, USA. The author can be reached at
CRIrish@wisc.edu.
existing arbitration rules and suggestions for how they can be
improved.
KEYWORDS:
Ⅰ. PRIVATE AND PUBLIC INTERNATIONAL TAX DISPUTES:
GENERALLY
A. The Nature of the Disputes
International tax disputes arise in two general contexts. The first is
probably the most common dispute and involves a taxpayer or taxpayers on
one side and the government or governments on the other side. In these
disputes, the government typically claims taxes are owed and the taxpayer
resists the imposition of taxes. The second type of dispute involves two or
more government arguing over the allocation of tax revenues derived from
trade and investment transactions between their territories. In the second
type of dispute, private taxpayers may have little or no direct role, although
they may play important roles in attempting to influence the positions of
governments in the intergovernmental negotiations. In both types of
disputes, the amounts involved usually are very substantial and reach
hundreds of millions or even billions of U.S. dollars.1
B. Disputes Between Taxpayers and the Government
International tax disputes between taxpayers and the government can
be divided into two categories: disputes in which the taxpayers claim there
is international double taxation and disputes which could result in double
non-taxation.
Under the basic jurisdictional rules of international taxation, most
countries with an income tax impose that tax on the global income of
resident individuals and business enterprises under the residence principle,
but they also tax foreign individuals and non-resident business enterprises
on income that arises within their territory under the source principle. As a
consequence, the fundamental structure of international taxation anticipates
the risk of double taxation as the countries involved in international
business often impose their taxes on the global income of their residents
and the domestic source income of foreigners. Because double taxation of
international income flows would kill off a great amount of international
business and investment, it is not surprising that many of the international
tax rules are aimed at reducing the risk of double taxation.
1
For the tax years 1989 to 2005, GlaxoSmithKline PLC, the British pharmaceuticals giant, agreed
to pay the U.S. IRS US$3.4 billion to settle a transfer pricing controversy. See Michael J. Mcintyre,
Comments on the OECD Proposal for Secret and Mandatory Arbitration of International Tax
Dsiputes, 7(9) FLA. TAX REV. 622 (2006), at footnote 10, quoting Robert Guy Matthews and
Jeanne Whalen: “Glaxo to Settle Tax Dispute With IRS Over U.S. Unit for $ 3.4 Billion”, Wall
Street Journal, Sept. 12, 2006 at A3.
Of all the international tax disputes, the most commonly encountered
problems involve transfer pricing controversies. This is especially so with
the globally integrated economy where so many transfers of goods, services
and intangible property are between parents and subsidiaries or between
other affiliated enterprises. “Transfer pricing” refers to the price charged on
transfers of goods, services and intangible property between related entities.
Thus, for example, if Am Corp is a U.S. based holding company with
subsidiary operations in the U.S., Taiwan, and several other jurisdictions,
the prices charged on transfers of anything of value among the subsidiaries
and between Am Corp and its subsidiaries would be transfer prices. The
essence of transfer prices is that they are set not by the market place, but
are within the discretion of the multinational enterprises.
It is generally accepted that transfer pricing controversies are one of
the most common and most serious issues facing multinational enterprises
and at any given time a majority of the largest multinational enterprises are
involved in very substantial transfer pricing disputes somewhere in the
world.2 Despite the enormous efforts at establishing uniformity in transfer
pricing rules,3 the issues inevitably are so complex and dependent on so
many subjective variables that transfer pricing disputes remain the most
serious tax controversies facing multinational enterprises. 4 Example 1
illustrates how Am Corp could become involved in an international tax
dispute related to transfer pricing.
Example 1
In 2008, Am Corp licensed patents and copyrights to
Taiwan Sub, Am Corp’s wholly owned subsidiary in Taiwan.
Under the licensing agreement, Taiwan Sub agreed to pay
royalties of US$10 million per year. In the year 2009, according
to the licensing agreement, Taiwan Sub paid Am Corp US$10
million. In 2010, on reviewing Taiwan Sub’s income tax
accounts for 2009, Taiwan’s National Tax Administration
determined that the royalties paid by Taiwan Sub to Am Corp
were excessive and that the proper amount of royalties in 2009
should have been only US$4 million. As a result, in computing
Taiwan Sub’s Taiwan income tax liabilities, Taiwan’s National
2
See OECD, TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX
ADMINISTRATIONS (2010).[pincite]
3
The OECD and the UN both have developed extensive guidelines for the computation of transfer
prices in international business. See, e.g., id. Most major economies, including Taiwan and the U.S.,
have their own transfer pricing rules that mirror or are similar to the OECD or UN Guidelines.
4
Yitzhak Hadari, Compulsory Arbitration in International Transfer Pricing and Other Double
Taxation Disputes, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1483621 (last
visited Oct. 20, 2011). [Please kindly provide the cited material.]
Tax Administration disallowed US$6 million of Taiwan Sub’s
tax deduction for the royalties paid to Am Corp.
For the year 2009, Am Corp properly reported royalty
income of US$10 million that is first subject to Taiwan’s
withholding tax on outbound royalty payments and then again
in the U.S.. Even though Am Corp is taxed in both Taiwan and
the U.S., double taxation is avoided because Am Corp can claim
the Taiwan withholding tax paid as a credit against its U.S. tax
liability. However, because Taiwan Sub is now taxed in Taiwan
on the US$6 million that was disallowed as deduction by the
Taiwan’s National Tax Administration and Am Corp is taxed on
royalty income of US$10 million, not US$4 million, the US$6
million is threatened with double income taxation because it is
now being taxed in Taiwan in the hands of Taiwan Sub and it
also is taxed in Taiwan and the U.S. in the hands of Am Corp.
Because of the prevalence of intra-firm transfers of goods, services and
intangible property in international transactions and the very considerable
difficulties associated with computing accurate transfer prices, transfer
pricing disputes arising under national income tax laws are the most
frequent type of international tax dispute. Less common, but still
troublesome disputes arise from inconsistent characterizations of
international remittances. Example 2 illustrates a situation that creates a
threat of double taxation when the source country characterizes a
remittance as interest income and the recipient country treats the remittance
as services income.
Example 2
In 2009, U.S. Bank (“USB”) entered into an agreement to
provide loan guarantees, lines of credits and other services for
its British Banking Sub (“BBS”), its wholly owned subsidiary
in London. In 2010, BBS paid USB US$12 million for the
various services under the agreement. The UK Department of
Inland Revenue determined that the US$12 million payments
were in the nature of interest, which has its source in the UK
and hence is taxable to USB in the UK. The U.S. International
Revenue Service, however, determined that the payments
constituted services income and had their source where the
services were performed – in the U.S., not the UK.
In this case, USB would be taxed on the US$12 million
payment in the UK and also taxable in the U.S.. Unlike the
situation in Example 1, however, the U.S. would not allow USB
to offset the UK tax through the U.S. foreign tax credit because
the credit is only allowed for foreign source income, as
determined under U.S. tax rules. Because the U.S. has
concluded that the payments were US source services income,
no foreign tax credit would be available to eliminate the threat
of double taxation.
Other less common instances creating threats of double taxation are:
Conflicting determinations of the residency of taxpayers, such as where
the U.S. asserts that a taxpayer is a resident of the U.S. while Canada
claims that the taxpayer is a Canadian resident.
 Inconsistent determinations on the legal status of a taxpayer as a
conduit or pass-through entity (i.e., a partnership) or a separate entity
(i.e., a traditional corporation).
 Different views on the status of a tax as an income tax that qualifies for
the foreign tax credit (e.g., Brazil imposes a withholding tax on interest
paid to U.S. lenders, but the U.S. determines that the tax is not properly
characterized as an income tax and thus does not qualify for the U.S.
foreign tax credit).
The other category of international tax disputes involving private
parties is where the controversy could result in double non-taxation. These
cases are less common than double taxation controversies, but the growing
importance of sovereign wealth funds and large pension funds as foreign
investors makes these cases increasingly relevant. Example 3 illustrates one
such case.

Example 3
TIAA-CREF is one of the largest financial services
companies in the US with assets of about US$400 billion. The
income of TIAA-CREF is tax exempt in the U.S. because it is
qualified as a tax exempt pension fund. Taiwan, however, has
much more limited tax exemptions for foreign institutions so
TIAA-CREF’s investments in Taiwan are potentially subject to
withholding taxes. TIAA-CREF may seek to persuade Taiwan’s
National Tax Administration to extend tax exempt status to
foreign pension funds and other exempt institutions where the
home country of the pension funds grants a reciprocal
exemption for tax exempt Taiwanese pension funds with
investments in that country.5
5
The U.S. tax law is actually generous in unconditionally granting tax exempt status to sovereign
wealth funds and other governmental entities irrespective of the tax treatment of U.S. sovereign
wealth funds and governmental entities in the other countries. See Internal Revenue Code of 1986,
§892.
If this situation arose between countries with a bilateral
income tax treaty, such as the U.S. and Denmark, TIAA-CREF
would look to the Mutual Agreement Procedure (“MAP”) in the
tax treaty to make use of the Competent Authority Procedure.
Under Article 26 of the U.S./Danish Tax Treaty, TIAA-CREF
would try to persuade the U.S. Competent Authority (a
bureaucrat within the U.S. Treasury) to persuade the Danish
Competent Authority that it is a qualified pension fund that fits
within the definition in the U.S./Danish income tax treaty. If the
U.S. Competent Authority agrees to help TIAA-CREF and the
Danish Competent Authority then agrees with the U.S.
Competent Authority that TIAA-CREF is included within the
definition of a qualified pension fund in the bilateral tax treaty,
TIAA-CREF’s passive investment income from Denmark
would be taxed in neither Denmark nor the U.S..
C. Disputes Between Governments
International tax disputes between governments center on the
allocation of tax revenues between the various territories. Most of the
disputes take the form of bilateral negotiations that result in the conclusion
of bilateral tax treaties, while others are more subtle and may even be so
subtle that one side does not understand that there is a controversy.
Example 4 illustrates intergovernmental tax negotiations and Example 5
describes a subtle controversy.
Example 4
The U.S. Government is sporadically involved in income
tax treaty negotiations with Sub-Saharan African countries. 6
One of the issues in the tax treaty negotiations is the rate of the
source based withholding tax on royalties for patents,
copyrights and trademarks used in one country and paid to
enterprises resident in the other country. In other words, the
negotiations will decide the maximum rate of tax that the U.S.
Government can impose on royalties paid by U.S. enterprises to
African enterprises and, because the negotiations impose
reciprocal obligations, the U.S. rate also will determine the
maximum rate that the African governments can impose on
royalties paid by African enterprises to U.S. enterprises.
Technological flows between the U.S. and Sub-Saharan Africa
6
Allison D. Christians, Tax Treaties for Investment and Aid to Sub-Saharan Africa, 71(2) BROOK.
L.REV. 639, 641 (2005).
are not reciprocal, but instead it is much more common for U.S.
enterprises to license technology to Africa than for African
enterprises to license technology to the U.S.. As a consequence,
royalties between the U.S. and Africa will flow largely one-way
from Africa to the U.S. so that if the source based withholding
tax is set at zero percent the African governments will obtain
virtually no revenues from U.S./Africa technology flows and
the U.S. will be able to impose the full rate of its corporate tax
(35% of net income) on the technology flows. On the other
hand, if the source based withholding tax is set at 20%, the
African governments will receive 20% of the gross income from
the technology flows and the U.S. will have only the residue
revenues after allowing a credit for the African withholding
taxes.7
Example 5
In the 1990s, the U.S. adopted aggressive transfer pricing
rules with heavy penalties for non-compliance. Even though the
U.S., Korean and many other governments have adopted
detailed rules to determine transfer prices, the reality is that
there is an exceptionally high level of uncertainty in many
transfer prices. The combination of aggressive transfer pricing
rules, severe penalties for non-compliance, and a high level of
uncertainty about what was acceptable caused multinational
enterprises with operations in the U.S. to adjust their transfer
prices so that they minimized the risks of confrontation with the
U.S. tax authorities. The result was that the multinational
enterprises tended to overstate their U.S. income, because of the
greater risk of audit and severe penalties, and understate their
income in other jurisdictions where the risks of audit were
lower and the penalties less harsh.8
Ⅱ. RESOLUTION OF INTERNATIONAL TAX DISPUTES: AN
OVERVIEW
A. Resolution of Disputes Between Taxpayers and the Government
7
For a more detailed discussion of this problem, see Charles R. Irish, International Double
Taxation Agreements and Income Texation at Source, 23(2) INT’L & COMP. L.Q. 292
(1974).[material][pincite]
8
For a more detailed discussion of this problem, see Charles R. Irish, The Other Harmful Tax
Competition, 24 TAX NOTES INT’L 901 (2001).[material][pincite]
International tax disputes between taxpayers and the governments are
resolved either prospectively through advanced government rulings on the
tax consequences of a proposed transaction, most notably advanced pricing
agreements (“APAs”), or after the fact through negotiations with national
tax authorities, under the mutual agreement procedures in bilateral tax
treaties, and in a few instances through voluntary or binding arbitration also
under the mutual agreement procedures in bilateral tax treaties.
Taiwan, the U.S., Korea, Japan, China and many other countries have
procedures for the issuance of advanced pricing agreements (“APAs”) in
transfer pricing controversies.9 In some cases, taxpayers are able to obtain
APAs in transfer pricing cases involving both customs duties and income
taxes. 10 It also is very common for bilateral or multilateral APAs to be
concluded so a taxpayer is able to secure commitments on the tax
consequences of future transactions from all interested tax
administrations.11 For example, in June, 2009, the State Administration of
Taxation of China (“SAT”) and the Danish Tax Authorities (“DTA”)
completed negotiations for two bilateral advance pricing agreements
involving a leading Danish technology company and two of its Chinese
subsidiaries. The APAs, which covered almost all types of related party
transactions, are the first of their kind between China and a European
country. 12 In 2011, China and Denmark concluded a third bilateral
advanced pricing agreement, although Denmark remains the only European
country to have APAs with China.13
International tax disputes not settled in advance through APAs or other
advance rulings typically begin with negotiations with national tax
authorities. In Example 1 above, Am Corp would complain to the Taiwan
National Tax Administration that, because US$6 million was disallowed as
a deduction for Taiwan Sub, it should only be taxed in Taiwan on US$4
million. Am Corp would make the same argument to the US Internal
Revenue Service. If the Taiwan National Tax Administration and the US
9
Deloitte, Strategy Matrix for Global Transfer Pricing: Planning for Methods, Documentation,
Penalties
and
Other
Issues
2008,
available
at
http://www.iasplus.com/dttpubs/0807transferpricing.pdf (last visited Oct. 20, 2011).
10
See http://www.pwccn.com/home/eng/tp_apa_cn_kr_jan2008.html (last visited Oct. 20, 2011).
[the link doesn’t exist]
11
See OECD, Guidelines for Conducting Advanced Pricing Arrangements Under the Mutual
Agreement
Procedure
(“MAP
APAs”),
available
at
http://www.oecd.org/dataoecd/10/10/38008392.pdf (last visited Oct. 20, 2011).
12
Price Waterhouse Coopers [hereinafter PWC], Pricing Knowledge Network, PKN Stop Press
China — China Concludes the Negotiations of the First European Bilateral Advance Pricing
Arrangement
with
Denmark,
available
at
http://www.publications.pwc.com/DisplayFile.aspx?Attachmentid=2292&Mailinstanceid=12074
(last visited Oct. 20, 2011).
13
PWC, PKN — Third Bilateral APA Concluded Between Denmark and China, available at
http://www.pwccn.com/webmedia/doc/634438150496233653_cn_dm_tp_apa_jun2011.pdf
(last
visited Oct. 20, 2011).
Internal Revenue Service do not agree to reduce Am Corp’s Taiwan source
income by the amount of Taiwan Sub’s disallowed deduction, Am Corp
would have to undertake negotiations with the Taiwan National Tax
Administration and the U.S. Internal Revenue Service. Given the absence
of formal diplomatic relations between Taiwan and the U.S. and the lack of
a bilateral income tax treaty, there is no formal mechanism for working
with both governments simultaneously, so Am Corp will have to undertake
cumbersome negotiations with both governments and provide its own
coordination between the two governments.
If Example 1 involved two countries with a bilateral income tax treaty,
such as the treaty between the U.S. and Korea,14 Am Corp could make use
of the Mutual Agreement Procedure in Article 27 of that treaty. 15 Under
Article 27, the Korean and U.S. tax agencies are obliged to work together
to resolve inconsistent applications of the tax laws that result in double
taxation that is inconsistent with the Korea/U.S. tax treaty. Article 27 does
not, however, impose a binding obligation on either the Korean National
Tax Service of the U.S. Internal Revenue Service to reach an agreement
eliminating the risk of double taxation.
The mutual agreement procedures in more recently concluded bilateral
tax treaties often contain mechanisms for compulsory arbitration. The
European Union arbitration convention of 1995 has adopted arbitration as a
solution for double taxation that arises due to transfer pricing disputes.16
An arbitration provision with a broader scope now is included in Article 25
of the 2008 OECD Model Income Tax Convention. Under Article 25(5), if
the competent authorities fail to resolve a controversy submitted to them
within two years, any unresolved issues must be submitted to arbitration if
the taxpayers request it.17 Recent amendments to bilateral tax treaties also
contain arbitration provisions for resolving tax disputes. Many of these
various arbitration regimes are discussed in greater detail in the next part of
this paper.
B. Resolution of Disputes Between Governments
In some cases, governments conclude specific revenue sharing
agreements. The Isle of Man and the UK Finance Ministry, for example,
have an agreement that divides the revenues from value added taxes
14
United States- Republic of Korea Income Tax Convention, available at
http://www.irs.gov/pub/irs-trty/korea.pdf (last visited Oct. 20, 2011).
15
Id.
16
Hadari, supra note 4, at 4.
17
OECD, Model Tax Convention on Income and on Capital (July 18, 2008), at 17, available at
http://www.oecd.org/dataoecd/14/32/41147804.pdf
between the UK and the island.18 Bilateral income tax treaties are, however,
the most common way of allocating revenues between governments. There
are hundreds of tax treaties in effect around the world. The U.S., for
example, has about 58 income tax treaties that affect tax relations with
most major economies in the world (except Taiwan).19 Korea also has an
extensive tax treaty network with over 60 bilateral income tax treaties
currently in force, including a relatively old treaty (1979) with the U.S. that
has been the object of renegotiation for several years.20 Income tax treaties
provide detailed rules on the taxation of income that arises between the two
contracting parties. Most of the tax treaties are modeled after the OECD
model income tax treaties21 and they are structured to avoid double taxation,
principally by limiting the power of the source country to imposes taxes on
income that arises within with their territory and then requiring the
residence to either grant a credit for the source based taxes or to exempt the
income subject to the source based withholding taxes.
When governments have unilaterally adopted aggressive tactics to gain
greater shares of tax revenues, such as with the U.S. aggressive transfer
pricing rules illustrated in Example 5, other governments sometimes have
responded with their own aggressive rules and practices so as to rebalance
allocation of revenues. Faced with the loss of revenues because of the U.S.
transfer pricing rules described in Example 5, for example, the Canadian
Government introduced its own tougher transfer pricing rules to limit the
instances when companies tilted their transfer prices towards the U.S..22
Ⅲ. INTERNATIONAL TAX ARBITRATION RULES
A. An Introduction to the Mutual Agreement Procedure
As mentioned above, the principal purpose of bilateral income tax
treaties is to allocate revenues from international business between two
countries. Included in the provisions of typical income tax treaties is an
article establishing a “Mutual Agreement Procedure” (“MAP”). The
purpose of MAP is to offer taxpayers a diplomatic remedy when they feel
that their tax consequences are not consistent with the terms of the tax
Andrew Bounds, Isle of Man Faces €50 million Pound Tax Clawback, FINANCIAL TIMES (U.S.
21, 2009, at 4.[Please kindly provide the cited material.]
19
Department of the Treasury, U.S. Tax Treaties, Publication 901 (Rev. April 2011), Cat. No.
46849F, at 55-56, available at http://www.irs.gov/pub/irs-pdf/p901.pdf (last visited Oct. 20, 2011).
20
Linex Systems, http://www.linexlegal.com/content.php?content_id=76581 (last visited Oct. 20,
2011).
21
OECD, OECD Model Tax Convention on Income and on Capital: An Overview of Available
Products, http://www.oecd.org/document/37/0,3343,en_2649_33747_1913957_1_1_1_1,00.html
(last visited Oct. 20, 201111).
22
Irish, supra note 8, at .[pincite]
18
EDITION), Oct.
treaty. Under the U.S. tax treaty with Korea, for example, if a U.S.
Corporation (“USC”) thinks that its operations in Korea are being taxed too
heavily, it may ask the U.S. Competent Authority to contact the Korean
Competent Authority to deal with its complaint. If the U.S. Competent
Authority determines that the claim of USC has merit, it will contact the
Korean Competent Authority and seek an adjustment to USC’s tax
accounts in Korea. If the Korean Competent Authority agrees with the U.S.
Competent Authority, an adjustment to USC’s Korean tax burden will
follow.
The key elements of the traditional MAP are as follows:
 The competent authority receiving the initial complaint is under no
obligation to accept the complaint. In the U.S., some courts have
refused to compel the U.S. Competent Authority to accept a complaint
apparently on the ground that the decision to accept a complaint is
within the complete discretion of the U.S. Competent Authority.23 In
other countries, however, the courts have referred taxpayers to the
mutual agreement procedure in lieu of domestic litigation.24
 Contacts under the MAP are purely between the governments. The
taxpayer raising the complaint is not a party to the negotiations and has
no right to appear or make submissions to the competent authorities.
 The government to government negotiations are confidential, even to
the taxpayer raising the complaint. Written documents exchanged
between the competent authorities also are not available to the taxpayer
involved.
 There generally are no specific time limits within which the competent
authorities have to act.
 There is no obligation on the part of either competent authority to reach
an agreement that avoids double taxation.25
 Except for the taxpayer making the complaint, the outcome of the
competent authority negotiations is confidential. The results are not
publicly reported.
B. The EU Arbitration Convention
23
Hadari, supra note 16, at 6.
Id. at 7, referring to a decision of the Israeli District Court.
25
A good illustration of competent authorities not reaching an agreement is a tax case involving the
noted musician Pierre Boulez. The issue in the case was whether certain payments received by
Pierre Boulez under a contract with CBS constituted royalties or compensation for personal
services. Had the payments been characterized as royalties, they would have been exempt from U.S.
tax. Had they been compensation for personal services, they would have been subject to U.S. tax.
Under the MAP of the U.S.-German tax treaty, the German competent authority concluded that
payments were royalties, while the American competent authority decided the payments were
compensation. The end result was that Boulexz was taxed twice on the income.
24
The EU Arbitration Convention (“Arbitration Convention”), which
first became effective in 1995, establishes a procedure to resolve disputes
where double taxation occurs between related enterprises of different EU
Member States as a result of a transfer pricing adjustment in one Member
State. Article 7 of the Arbitration Convention provides that if the
competent authorities of two members states fail to reach agreement on a
transfer pricing dispute within two years after the complaint is first
submitted to one of the competent authorities, they must establish an
advisory commission that will deliver an opinion on eliminating the double
taxation.26 The advisory commissions are composed of two representatives
from the competent authorities of each party and an even number of experts
and independent persons picked from a list of experts.27 The enterprises
complaining about the transfer pricing adjustment have the right to make
submissions and to appear during the arbitration process.28 The advisory
commission then is obligated to give an opinion on the elimination of
double taxation within six months of getting the case and the competent
authorities have an additional six months to decide the case. 29 If the
competent authorities fail to decide the case within the additional six
months, the opinion of the advisory commission prevails.30 The competent
authorities may agree to publish the decision, but only if the affected
enterprises agree to publication.31
The key elements of the EU Arbitration Convention are as follows:
 The convention only applies to transfer pricing controversies within
EU member states.
 The competent authorities are only obligated to accept a complaint if
they determine that the complaint is “well founded”32 and it is not clear
whether a competent authority’s refusal to accept a complaint is subject
to judicial review in the home country of the competent authority.
 Because each case is referred to and settled by international
procedures, “irrespective of the remedies provided by the domestic
laws of the Contracting States concerned,” the domestic and
international procedures are not mutually exclusive and do not compete
as the mutual agreement is only binding on the Contracting States, not
on the national courts. The affected enterprises are therefore placed in a
26
The Convention for the Elimination of Double Taxation in Connection with the Adjustment of
Profits
of
Associated
Enterprises,
art.
7,
available
at
http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:41990A0436:en:HTML (last visited Oct.
20, 2011).
27
Id. art. 9(1).
28
Id. art. 10(2).
29
Id. art. 12(1).
30
Id.
31
Id. art. 12(2).
32
Id. art. 6(2).





tactical position of having optional parallel proceedings. The
enterprises can choose one or the other, or a combination of both. In
the latter case, the enterprises can choose to call for the discontinuation
of the international procedure if it is satisfied with the elimination of
double taxation afforded by a decision of the national courts.33
During the initial stage when the negotiations are between the two
competent authorities there is no indication that the enterprises have a
right to be involved. Once the process moves into the arbitration phase,
however, the enterprises have the right to make submissions and to
appear before the advisory commission.
The two year time limit that triggers the arbitration process can be
extended by mutual agreement of the competent authorities and with
the agreement of the associated enterprises concerned.34
The members of the advisory commission are obligated to treat the
arbitration process as secret.
Unless the competent authorities reach an agreement within six month
after the decision of the advisory commission, the decision of the
advisory commission is binding on all parties. Some have suggested
that the complainant, who is not technically a party in the MAP
arbitration process, may choose not to accept the arbitration decision
and instead litigate the issue in domestic courts.35
Once a decision is rendered, the competent authorities may publish the
decision but publication is permissible only if the affected enterprises
agree.
C. The OECD Model Income Tax Convention
The OECD Fiscal Affairs Committee and its current successor the
Center for Tax Policy and Administration have undertaken extensive
studies of the role of tax treaties in avoiding double taxation and preventing
fiscal evasion. Among the most prominent outcomes of these studies are
various iterations of a model bilateral income tax convention. Most tax
treaties in force today strongly resemble these model conventions as they
have evolved over the years since the first model was published in 1958.
The 2008 OECD Model Income Tax Convention is the latest version of
the OECD models. Paragraphs 1 through 4 of Article 25 of that model
contain the traditional MAP as discussed above. Article 25, Paragraph 5
added arbitration as a new element to the MAP in the 2008 Model. Under
Article 25(5), if the competent authorities are unable to reach an agreement
33
Jean-Philippe Chetcuti, The EU Tax Arbitration Convention, at 6.6, http://www.interlawyer.com/lex-e-scripta/articles/eu-tax-arb-conv.htm#_Toc518052897 (last visited Oct. 20, 2011).
34
Id. at 7.4.
35
Hadari, supra note 4, at 7; Chetcuti, supra note 33.
to resolve the complaint within two years after it is submitted to them, any
unresolved issues are to be submitted to arbitration if the complainant so
requests. 36 The complainant requesting the arbitration can make written
submissions during the arbitration process and, with the assent of the
arbitrators, present his case orally during the arbitration proceedings.37 The
arbitration decision is binding on the competent authorities, although the
complainant can refuse to accept the decision and litigate the issue on local
courts.38 The arbitrators are treated as the authorized representatives of the
competent authorities and are subject to the same strict confidentiality
requirements as the competent authorities.39 The arbitration decision may
be published, but only with the consent of both competent authorities and
the complainant. Even then, only the basic elements of the decision should
be published and the name of the complainant should not be disclosed.40
Among the key features of the arbitration provisions in the 2008
OECD Model Income Tax Convention are the following:
 As under the traditional MAP, the competent authorities are only
obligated to accept a complaint if they determine that the complaint is
“well founded”.41 It has been suggested that in some jurisdictions the
decision of the competent authority to accept or reject a complaint may
be subject to judicial review, with the standard of review similar to that
applied to administrative decisions generally.42
 MAP Arbitration is generally available for any tax disputes that
involve the underlying tax treaty; it is not limited to the resolution of
transfer pricing disputes as under the EU Arbitration Convention.
 The complainant requesting the arbitration can make written
submissions during the arbitration process and, with the assent of the
arbitrators, present his case orally during the arbitration proceedings.43
 The arbitration process is an integral part of the MAP. As a result,
arbitration only is available when the competent authorities have left
unresolved issues. If the competent authorities have agreed on all of the
issues, arbitration is not allowed even if taxpayer disagrees with the
decision.44
 The OECD Model arbitration agreement takes as the starting point the
independent opinion approach to deciding a case. The OECD
36
Supra note 17, at 16.
OECD, The 2008 Update to the OECD Model Tax Convention, at 99, available at
http://www.oecd.org/dataoecd/20/34/41032078.pdf (last visited Oct. 20, 2011).
38
Supra note 17, at 16.
39
Supra note 37, at 105.
40
Id. at 108-09.
41
Supra note 17, art. 6(2).
42
Hadari, supra note 4, at 7.
43
Supra note 37.
44
Supra note 17, at 373.
37



recognizes, however, that use of other methods, such as the last best
offer method, may be suitable in some circumstances.45
The arbitration decision is binding on the competent authorities, but
apparently not on the taxpayer who can decline to accept the arbitration
decision and pursue the dispute in domestic courts.46
The costs of the arbitration process are borne by the competent
authorities, although any expenses incurred by the complainant in
making written submissions or oral presentations should be borne by
the complainant.47
Although an arbitration decisions under Article 25(5) is not intended to
serve as formal precedent, the OECD has recognized that having the
decision available to the public would make the process more
transparent and it might influence the course of subsequent disputes
and it could contribute to greater uniformity of tax law
administration.48 As a consequence, arbitration decisions under Article
25(5) may be published, but only if the complainant agrees. In addition,
if the decision is published, it should be done in such a fashion as to
maintain the confidentiality of the complainant.49
D. Dispute Resolution Under U.S. Income Tax Treaties
The U.S. Model Income Tax Treaty does not include the option of
arbitration to resolve international tax disputes.50 Nonetheless, some of the
major treaties to which the U.S. is a party have been amended to add
arbitration provisions to the MAP. The amendments to the U.S. tax treaties
with Germany, Canada and Belgium offer good illustrations of the U.S.
arbitration rules governing international tax disputes. The German protocol,
which became effective in December, 2007, provides that arbitration is not
fully mandatory in that the competent authorities by mutual agreement may
decide not to arbitrate a particular matter. The protocol also provides for
full secrecy of the proceedings and does not require the arbitrators to
prepare a report. Instead, the arbitrators simply pick between the settlement
proposals made by the two parties in what is known as “last best offer” or
“baseball arbitration”. As with the results of traditional MAP proceeding,
the outcome of the arbitration is disclosed only to the concerned taxpayer
and its representatives, again under a requirement of confidentiality. Only
45
Id. at 102.
Id. art. 25(5).
47
Supra note 37, at 99-100.
48
Id. at 108.
49
Id. at 109.
50
See United States Model Income Tax Convention of November 15, 2006, art. 25(5),
http://www.irs.gov/pub/irs-trty/model006.pdf (last visited Oct. 20, 2011).
46
enumerated issues, including transfer-pricing disputes, are subject to
arbitration. The Canadian and Belgian arbitration provisions follow the
German provisions in all material aspects.
The key elements of the arbitration provisions under U.S. treaties with
Germany, Canada and Belgium are as follows:51
 In general, arbitration is mandatory if the competent authorities cannot
reach agreement, but the competent still may mutually agree that a
particular matter is not suitable for arbitration.
 Arbitration is only available for disputes involving specific provisions
of the underlying tax treaty, including transfer pricing disputes, but the
competent authorities may agree to arbitrate any controversy covered
by the traditional MAP.
 When a complaint is accepted for arbitration, each competent authority
is to appoint one arbitrator and the two arbitrators then are to appoint a
third arbitrator who is to act as chair of the arbitration commission.
 The arbitration process requires that each competent authority prepare
a proposed resolution of the controversy, with the arbitration
commission then selecting one of the proposed resolutions. In other
words, the arbitration decision is reached using the last best offer
method.
 The arbitration decision is binding on the competent authorities. The
complainants have the option whether to accept the arbitration decision
of litigate the issue in domestic courts.
 The fees and expenses of the arbitration process costs of the arbitration
process are to be borne equally by the competent authorities.
51
The details of the arbitrations provisions in the U.S. treaties with Germany, Canada and Belgium
can be obtained form the following sources: Protocol Amending the U.S.-German Tax Treaty,
http://www.irs.gov/pub/irs-trty/germanprot06.pdf; id.,Technical Explanation of the U.S./German
Protocol [the last material cited is not as same as the present one.]; U.S./Germany Tax Treaty
Modified to Include Mandatory Arbitration in Certain Circumstances,
http://www.irs.gov/businesses/international/article/0,,id=181003,00.html; Protocol to U.S.-Canada
Tax Treaty 2007,
http://www.treasury.gov/resourcecenter/taxpolicy/treaties/Documents/CanadaProtocol07.pdf;
Technical Explanation of the U.S.-Canada Protocol, http://www.treasury.gov/resource-center/taxpolicy/treaties/Documents/tecanada08.pdf; Convention between the Government of the United
States of America and the Government of the Kingdom of Belgium for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income,
http://www.irs.gov/pub/irs-trty/belgiumtt06.pdf; 2006 Protocol to U.S.-Belgium Tax Treaty,
http://www.irs.gov/pub/irs-trty/belgiumprot06.pdf; 2007 Technical Explanation of the U.S.Belgium Tax Treaty, http://www.irs.gov/pub/irs-trty/belgiumte07.pdf; U.S.-Belgium Tax Treaty
Mutual Agreement Procedure Arbitration Processes Announcement on Arbitration 2009,
http://www.irs.gov/businesses/small/international/article/0,,id=205324,00.html; U.S.-Belgium Tax
Treaty
Arbitration
Guidelines
2009,
http://www.irs.gov/businesses/international/article/0,,id=209577,00.html (all sites last visited on
Oct. 20, 2011).

The proceedings and the arbitration decision are to be regarded as
confidential with no public disclosure.
E. Questions and Concerns About Tax Treaty Arbitration
The introduction of arbitration proceedings to resolve international tax
disputes between taxpayers and governments is generally regarded as a step
in the right direction. It certainly has been endorsed as an appropriate
reform by the OECD and the International Chamber of Commerce. The use
of last best offer or baseball arbitration rules to resolve controversies seems
especially noteworthy because it encourages both sides to adopt more
reasonable positions in controversies often fraught with great uncertainties.
The last best offer approach seems especially attractive for transfer pricing
cases because of the wide range of possibilities typically available as
defensible transfer prices.
There are, however, two major questions about the new tax arbitration
rules: (i) Are the traditional MAPs so deficient as to require the
introduction of a more formalized system of dispute resolution? and (ii)
Are the new tax arbitration rules designed to serve the public interest?
F. Is International Tax Arbitration Necessary?
Because of the secrecy surrounding the MAP generally, little is known
about its effectiveness. It appears that no study has been done on the
efficacy of the MAP process as currently implemented and such a study
would be difficult or impossible to conduct, given the confidentiality rules
embedded in the MAP practices.52 The arbitration provisions were added to
the OECD Model Tax Convention only after a great amount of study and
lobbying involving two major private sector institutions – the International
Fiscal Association (IFA) and the International Chamber of Commerce (ICC)
and there is no evidence that existing MAP processes were serious deficient.
The scant evidence that does exist suggests that there is not a
significant void waiting to be filled by the arbitration rules. The OECD
report explaining the proposed tax arbitration rules said that “in the rare
cases where the competent authorities are unable to reach agreement, the
unresolved issues will, at the request of the person who presented the case,
be resolved through an arbitration process.” 53 When the EU Arbitration
Convention was renewed in 2005, the EU reported that in the ten years
52
Allison Christians, Your Own Personal Tax Law: Dispute Resolution Under the OECD Model
Tax Convention, 17() WILLAMETTE J. INT’L L. & DISPUTE RES. 172, 180 (2009).[material]
53
OECD, Proposals for Improving Mechanisms for the Resolution of Tax Treaty Disputes, at 6, 45,
91, http://www.oecd.org/dataoecd/5/20/36054823.pdf (last visited Oct. 20, 2011).
since its inception the tax arbitration process had been used only twice with
a third case pending.54
So, there is a serious question about whether the tax arbitration process
is necessary. There also is the possibility that some modest measures, such
as allowing greater participation by taxpayers from the beginning of the
competent authority process, could remove any significant deficiencies in
the MAP processes.
G. Is International Tax Arbitration in the Public Interest?
An even more serious question is whether the new tax arbitration rules
are in the public interest. Those who have looked at this question with an
objective mind have suggested that the tax arbitration rules are better
designed to serve the international business community than serve the
public interest.55 The number one criticism of the tax arbitration process is
the secrecy surrounding it. Both the EU Arbitration Convention and the
OECD Model Income Tax Convention allow for limited publication of the
arbitration results, but even the barebones publication of the outcome can
be blocked by the taxpayers who initiated the competent authority
proceedings and it seems likely that taxpayers will often use this privilege
to block publication.
The result is that the international business community now can bypass
the domestic administrative and judicial procedures normally available for
resolving tax disputes and instead move into a secret forum outside the
scrutiny of the taxpaying public. This possibility seems like a bad idea for
at least three reasons:
 As the OECD itself has recognized, publication of the arbitration
decisions improves the transparency of the taxing process and may
influence the settlement or avoidance of future disputes. Allowing full
secrecy of the process means that the process will not be transparent
and the possibility of informal precedential value of the decisions will
be lost.
 Secrecy in the arbitration process creates the opportunity for corruption
or other improper influences by the taxpayers on the competent
authorities.
 The lack of transparency risks development of a two tiered tax system
where a limited group of taxpayers who communicate among
themselves have a better understanding of the dangers and the
loopholes in a particular tax system. In the 1970s, the confidentiality of
private letter rulings in the US was discontinued precisely because of
54
55
OECD Report.[material]
See, e.g., Christians, supra note 52, at172; Mcintyre, supra note 1,[pincite].
this reason – the confidentiality of the rulings enabled the U.S.
Treasury to adopt tax policies favorable to a particular industry
(principally the oil industry) well outside Congressional or public
oversight.
In defense of rigorous confidentiality is the fact that outcomes of most
arbitration cases are secret. But most arbitration cases involve private
parties dealing with issues of private controversies, which is very different
from the resolution of public tax issues with major revenue (and possibly
precedential) consequences.56
If the use of international tax arbitration is to continue, as appears
likely given the strong support of the international business community,
two adjustments need to be made. First, taxpayer participation in the
competent authority process should be allowed from the beginning of the
process. Second, the arbitration process and decisions should be made
public. Some have argued against greater participation by private parties
due to concerns that the private parties will overwhelm the competent
authorities. That certainly is a risk, especially where multinational
enterprises are working with tax administrations in smaller, less developed
countries, but the risk is likely to be minimized if the process itself is
subject to greater transparency. There also is the argument that
confidentiality is necessary to maintain business secrets of the taxpayers,
but in other areas, such as with private letter rulings in the U.S., the
confidentiality of sensitive business information is maintained even though
the tax issues involved in the ruling are discussed and resolved in a
relatively thorough fashion.
56
Id.
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