Mandatory Arbitration of International Tax Disputes: A Solution in Search of a Problem

This article is based on the author's S.J.D. thesis.Improving the resolution of international tax disputes has witnessed recent developments. The Organization of Economic Development and Cooperation (“OECD”) amended its Model Convention and Commentary to include mandatory and binding arbitration of tax disputes between two treaty countries that have been unsuccessful in resolving the disputes through negotiations between their tax authorities. The United States has amended its income tax treaties with Belgium, Canada, Germany and France to include mandatory and binding arbitration of unresolved tax disputes. These amendments are undoubtedly an important step toward improving the resolution of international tax disputes. Nevertheless, the Article argues that these amendments fail to achieve this goal. By their terms, the amendments enable countries to avoid the arbitration. There is a risk these amendments will damage previously existing resolution methods that have generally been successful. The arbitration, as currently proposed, can be used by taxpayers to achieve abusive and undesirable tax results. The Article argues that these amendments will not serve the two primary goals income tax treaties aim at achieving which are preventing double taxation as well as double nontaxation (i.e., escaping taxation).In Part one of the Article I present a brief overview of major contributions to the literature in this field. I set forth an evaluation methodology that focuses on two questions: First, does a mandatory arbitration provision fit in the overall network of tax treaties? Second, can the mandatory and binding arbitration provision actually resolve disputes? I argue that when we are able to answer positively to both questions, a recommendation to adopt such a provision will follow.In Part two I focus on the OECD proposal for mandatory and binding arbitration aimed at improving the resolution of international tax disputes. I conclude that under the current proposed structure, a negative answer to the above evaluation questions is more likely to be given than a positive one. I address certain policy issues related to the proposal, structural deficiencies embodied in it as well as possible negative consequences it may have. I conclude that the proposal should be reexamined.In Part three I examine the mandatory and binding arbitration provisions that were adopted recently in a few income tax treaties to which the United States is partner. I conclude that the United States expresses a position aimed at limiting the application of mandatory and binding arbitration.Part four is a summary of the work. I explain that I generally do not oppose the adoption of mandatory and binding arbitration. Nevertheless, I offer some considerations regarding the circumstances accompanying the application of the proposed provisions as well as their structure. I suggest that the proposals should be reexamined because they lack features that are major and crucial for successful mandatory and binding arbitration and because of the risk that they will negatively affect pre-existing dispute resolution mechanisms.

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