Policy statement
Arbitration in International Tax Matters
Bilateral Convention Article
Commission
on Taxation
The Commission
on Taxation of the ICC prepared a Policy Statement concerning Arbitration in
Tax Matters dated 3 May 2000 (the "ICC Policy Statement"). In order
to assist in the implementation of arbitration in tax matters in conformity
with the guidelines established in the ICC Policy Statement, the Commission
has prepared a model article, which could be adopted in bilateral taxation conventions.
This draft Article is designed
having regard to the OECD Model Convention for the Avoidance of Double Taxation
with Respect to Taxes on Income and on Capital (the "OECD Model").
It could, with appropriate modifications, be adopted in bilateral tax conventions
based on other models.
Some bilateral conventions
contain very brief arbitration provisions that do not reflect many of the guidelines
referred to in the ICC Policy Statement. This draft proposes a somewhat more
expansive article to accommodate those guidelines.
Following the draft Article
is a commentary that raises a number of issues for further consideration, including
matters not fully resolved in the draft, and notes some possible variations
or alternatives to the provisions in the draft Article. The commentary also
briefly notes the relationship between the draft and provisions found in certain
agreements, including in particular the EC Convention on the Elimination of
Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises
(the "EC Convention") and some United States bilateral tax conventions.
Article 25A - Arbitration
1) If a case has been presented
to either competent authority under paragraph 1 of Article 25, the case shall
be submitted to an arbitration board according to the provisions of this Article
at the request of the person who presented the case (in this Article referred
to as the "taxpayer") if the competent authority to which the case
was presented has not either itself or by mutual agreement with the competent
authority of the other Contracting State arrived at a solution within two years
of the date on which the case was so presented or if the taxpayer considers
that the solution which has been arrived at is not in accordance with the Convention.
2) A request for arbitration
must be made by the taxpayer in writing within one year after the two year time
limit referred to in paragraph 1 to the competent authority to which the case
was presented and the request must include the taxpayer's agreement to be bound
by the decision of the arbitration board.
3) The two-year time limit
referred to in paragraph 1 shall be extended in the following circumstances:
a) The two-year limit may be waived by mutual agreement among the competent
authorities, the taxpayer and any associated enterprises the profits of which
are relevant in determining that double taxation may have resulted (the taxpayer
and such other enterprises being referred to in this Article as the "affected
taxpayers").
b) If the case has also been submitted to a competent court or tribunal in either
Contracting State, the two-year time limit shall be computed from the date on
which a final judgment has been rendered and all delays for appeal therefrom
have expired, or the date upon which the parties to such proceeding have definitively
abandoned it.
4) The competent authorities shall establish an arbitration board for each specific
case in the following manner:
a) An arbitration board shall consist of not less than three members. Each competent
authority shall appoint the same number of members and these members shall agree
on the appointment of the final member.
b) All the members of the arbitration board must be appointed within three months
from the date on which the request for arbitration was made.
5) The competent authorities
may agree on and instruct the arbitration board regarding specific rules of
procedure not inconsistent with this Article. Otherwise, the arbitration board
shall establish its own rules of procedure consistent with generally accepted
principles of international arbitration.
6) The arbitration board
shall be provided with information as follows:
a) Notwithstanding Article 26 (Exchange of Information), the competent authorities
shall release to the arbitration board such information as is necessary for
carrying out the arbitration procedure.
b) The arbitration board may require the affected taxpayers to produce information
but subject to the limitations on production applicable under the domestic law
applicable to them.
c) Arbitration board members (and their staffs) upon their appointment must
agree in writing to abide by and be subject to the most restrictive confidentiality
and disclosure provisions of both Contracting States and the Convention.
7) The affected taxpayers
and their representatives shall be afforded the opportunity to submit relevant
information, to present their oral or written arguments to the arbitration board
and to respond to arguments or evidence submitted by the Contracting States,
in accordance with the applicable procedural rules.
8) The taxpayer may, at
any time, conclusively terminate the arbitration by notice to the arbitration
board.
9) The arbitration board
shall decide each specific case as follows:
a) The decision shall be made on the basis of the Convention, having regard
to the domestic laws of the Contracting States and the principles of international
law, with a view to eliminating double taxation.
b) The arbitration board shall adopt its opinion by simple majority.
c) The arbitration board shall deliver its opinion not more than one year from
the date on which the matter was referred to it.
d) The arbitration board will provide to the competent a
uthorities and to the
affected taxpayers an explanation of its decision.
10) The decision of the
arbitration board in a particular case shall be binding on both Contracting
States and the taxpayer who presented the case to the competent authority, solely
with respect to that case.
11) Costs for the arbitration
proceedingswill be borne in the following manner:
a) Each Contracting State shall bear the cost of remuneration for the member(s)
appointed by it, as well as for its representation in the proceedings.
b) The affected taxpayers shall bear the cost of their representation in the
proceedings.
c) All other costs of the arbitration board shall be shared equally between
the Contracting States.
d) The arbitration board may decide on a different allocation of costs.
12) The competent authorities
may agree to modify or supplement the procedures governing the arbitration board
as set out in this Article; however, they shall continue to be bound by the
general principles established herein.
13) Each Contracting State
shall implement the conclusions of the arbitration board notwithstanding any
other provision of domestic law, including otherwise applicable time limits.
Commentary to Draft Article 25.1
Paragraph 1
This paragraph defines the nature of cases which may give rise to arbitration,
prescribes the delay allowed to the competent authorities before arbitration
may be requested, establishes that arbitration is compulsory and sets out the
taxpayer's right of initiative.
· Trigger event
Paragraph 1 is framed to complement the mutual agreement provision set forth
in Article 25 of the OECD Model. The event which gives rise to a potential submission
to arbitration is that the competent authority has not either itself or by mutual
agreement with the other competent authority arrived at an appropriate solution
to a matter presented under Article 25. The EU Convention speaks only of failure
to reach an agreement but this paragraph follows the language of Article 25(2)
of the OECD Model, which contemplates both unilateral and bilateral relief.
Arbitration may be invoked
if the competent authorities fail to agree or, if they do agree, the taxpayer
considers that the agreement is not in accordance with the convention. This
is broader than the EU Convention, which mandates arbitration only where the
competent authorities fail to reach an agreement that eliminates double taxation
with respect to Article 9 issues.
· Time delay
The ICC Policy Statement emphasizes the importance of establishing a strict
timetable. Generally, the possibility of arbitration should exist where the
mutual agreement procedure has not yielded an appropriate solution within a
prescribed period. A two-year limitation has been suggested in paragraph 1,
the same as is adopted in the EU Convention and a number of bilateral conventions
(e.g., France-Germany). A three-year period was adopted in the recent Germany-Austria
convention.
Other aspects of the timetable for arbitration are addressed in paragraphs 2,
4(c) and 9(c).
· Compulsory arbitration
One of the fundamental guidelines established in the ICC Policy Statement is
that arbitration should be compulsory. This is reflected by the mandatory language
of paragraph 1.
· Right of initiative
Paragraph 1 provides that arbitration may be required where the taxpayer considers
that an appropriate solution has not been reached. It was suggested in the ICC
Policy Statement that other affected taxpayers (such as the associated person
in the case of an Article 9 adjustment) should be permitted to request arbitration.
This suggestion has not been retained in the draft Article. It would entail
a number of complex procedural provisions. Furthermore, it is not obvious that
a taxpayer who did not institute competent authority consideration under Article
25 should be afforded the right of initiative. The matter requires, however,
further consideration.
· Exclusion for domestic law
Some conventions, notably a number of U.S. conventions, include a provision
that excludes arbitration if the matter concerns the tax policy or domestic
tax law of either Contracting State. This exclusion is not found in the EU Convention
and has not been adopted.
It should be clear that
the arbitration board interprets and applies the convention and does not make
decisions regarding domestic law or tax policy as such. However, such domestic
law or tax policy might well be taken into account in construing or applying
the convention. There is, therefore, concern that the exclusion could create
confusion or uncertainty as to the scope and jurisdiction of the arbitration
board.
If such an exclusion is
included in the article, it should be limited to cases that concern exclusively
the tax policy or domestic law of a Contracting State and supplemented by a
provision in paragraph 8 that would prohibit the arbitration board from making
a decision on such tax policy or domestic law. In this way, a case would not
be excluded from arbitration merely because it might be considered to include
an element of domestic law, but the arbitration board would not have the power
to decide the specific issue of domestic law.
Paragraph 2
Where the conditions of paragraph 1 are met, the taxpayer may request arbitration.
Paragraph 2 establishes that such a request must be made within one year following
the expiry of the two-year period allowed to the competent authorities for arriving
at a solution. In addition, the taxpayer's right to initiate arbitration is
conditioned on a written agreement to be bound by the results of the arbitration.
This requirement is found in most bilateral conventions. See also paragraph
10, which confirms that the arbitration decision is binding on the taxpayer.
Paragraph 3
This paragraph contemplates two circumstances in which the two-year time limit
stipulated in paragraph 1 shall be extended.
· Mutual agreement
Subparagraph (a) is similar to Article 7(4) of the EU Convention, requiring
the agreement of both competent authorities and the affected taxpayers.
Affected taxpayers are the taxpayer who presented the case and any associated
enterprises the profits of which are relevant in determining that there may
have been double taxation. However, since the scope of arbitration is broader
in this draft Article than in the EU Convention, further consideration is required
as to whether the agreement of such an associated enterprise should, indeed,
be required.
· Collateral proceedings
Extension is also provided (subparagraph (b)) in the event that collateral judicial
or administrative proceedings have been commenced. This rule is based on Article
7(1), paragraph 2 of the EU Convention. Such collateral proceedings are not
generally referred to in bilateral conventions, or in Article 25 of the OECD
Model. Article 7(3) of the EU Convention provides additional rules relating
to such proceedings.
Article 8 of the EU Convention
provides for an exception from arbitration
where judicial or administrative
proceedings have resulted in a final ruling that by reason of actions which
have given rise to the circumstances of the case any of the enterprises concerned
is liable to a serious penalty. If such a ruling is being sought, the competent
authorities are permitted to stay the arbitration proceedings. This provision
has not been included in the draft.
The matter of collateral
proceedings in general requires further consideration.
Paragraph 4
The next several paragraphs deal with the establishment of the arbitration board
and its procedure. The EU Convention and bilateral conventions provide different
rules, and different levels of detail, regarding the mechanics of arbitration.
With respect to the establishment
of the arbitration board, the EU Convention and some bilateral conventions (e.g.,
the Germany-United States Convention) provide for an arbitration board of at
least three members while other conventions fix the number of arbitrators at
three- (e.g., France-Germany). This draft Article opts for the flexibility of
the "at least three" solution. The draft does not reproduce the rather
more detailed procedural provisions found in the EU Convention concerning other
aspects of the establishment of the arbitration board, such as the identity
of arbitrators and the choice of the chairman.
The drafting of subparagraphs
(a) and (b) of paragraph 4 is based on the Germany-United States convention.
However, that convention also includes a final sentence that has not been retained:
"The competent authorities may issue further instructions regarding the
criteria for selecting the other member(s) of the arbitration board." This
sentence was not considered necessary given the other provisions of the draft
Article, in particular paragraphs 5 and 12.
Subparagraph (c) is based
on the France-Germany convention and reflects the guideline expressed in the
ICC Policy Statement that a timetable for the arbitration should be prescribed.
The specific choice of a three month delay requires further consideration. As
well, the precise mechanism of choosing arbitrators if they are not named within
this delay remains to be determined. The France-Germany convention contains
a reference to the Permanent Arbitration Court, which may not be appropriate
in the case of the draft Article.
Paragraph 5
This paragraph provides in general terms for a method whereby the rules of procedure
for the arbitration may be set, looking first to the competent authorities and,
absent direction from them, to the board itself. While it is based on the Germany-United
States and Mexico-United States conventions, those conventions also specify
that the competent authorities may stipulate certain specific matters that are
expressly prescribed in this draft, such as time limits. Therefore, this paragraph
5 includes language clarifying the precedence of procedural rules provided in
other paragraphs of the draft Article over any competent authority agreement
regarding procedure.
Paragraph 6
The arbitration board must obtain information in order to carry out the arbitration.
The ICC Policy Statement underscores the importance of preserving the confidentiality
of taxpayer information, reflected in this paragraph 6.
Subparagraph (a) provides
for the obtaining of information from the competent authorities. It is derived
from a provision common in the arbitration prov
isions of bilateral conventions.
However, those other provisions are normally facultative while subparagraph
(a) of the draft is mandatory. This seems appropriate since participation in
the arbitration by the Contracting States is also mandatory.
Subparagraph (b) provides
for the obtaining of information from taxpayers. It protects them against production
beyond the national requirements otherwise applicable.
Subparagraph (c) is based
on the Germany-United States and Mexico-United States conventions. It underscores
the importance of preserving confidentiality throughout the arbitration procedure.
The standard of confidentiality to be applied is the highest of the three potentially
applicable rules: those imposed by each of the two domestic legal systems and
by the Convention itself.
Paragraph 7
The ICC Policy Statement underscores the importance of taxpayers' rights of
representation before an arbitration board. Bilateral conventions, such as the
Germany-United States convention, as well as the EU Convention (Article 10),
provide somewhat more limited rights of representation than those set forth
in paragraph 7.
While subparagraph 6(b)
provides that affected taxpayers may be required to produce information, paragraph
7 provides them with a positive right to provide such information as they deem
appropriate, even if not requested by the arbitration board or the competent
authorities. In addition, affected taxpayers (defined in subparagraph 3(a))
are afforded a positive right to present oral and written arguments, and to
respond to arguments or evidence submitted by the Contracting States.
Paragraph 8
Paragraph 1 provides taxpayers with a right of initiative. Paragraph 8 provides
a right of termination of the arbitration by the initiating taxpayer, as suggested
in the ICC Policy Statement. No such provision appears in bilateral conventions
or the EU Convention.
Paragraph 9
This paragraph contains certain rules relating to the decisions of the arbitration
board.
Subparagraph (a) confirms,
in accordance with the ICC Policy Statement, that decisions should be based
on law. The arbitration board should decide the case of double taxation presented
with respect to the particular taxpayers, and not reflect "horse-trading"
between Contracting States or other extraneous considerations. No such provision
appears in bilateral conventions or the EU Convention.
Subparagraph (b) provides for decisions by simple majority, as in Article 11(2)
of the EU Convention. No such rule is found in US and some other bilateral conventions.
It could be considered unnecessary, a matter left to the general procedural
rule in paragraph 5.
Subparagraph (c) sets a
time limit on the arbitration, reflecting the concern expressed in the ICC Policy
Statement that the process should proceed in a timely manner. This subparagraph
is based on Article 11 of the EU Convention. The draft Article suggests a limit
of one year. While this could be considered short in complex fiscal arbitrations,
it was considered appropriate having regard to the fact-finding process which
will have already occurred in the mutual agreement procedure. It is intended
that the one-year period begin to run once the members of the arbitration board
have been chosen.
Subparagraph (d) provides
for a reasoned arbitration decision. The bilateral conventions that
contain
such a requirement refer to the explanation being provided to the competent
authorities only. Given the taxpayer's right of initiation and the enhanced
participation of affected taxpayers (as defined in subparagraph 3(a)) in the
arbitration, it is appropriate in this draft Article that the reasons be provided
to the affected taxpayers as well as to the competent authorities.
Paragraph 10
A fundamental recommendation in the ICC Policy Statement is that arbitration
decisions should be binding on the Contracting States. This is reflected in
paragraph 10. However, the draft Article has not retained the suggestion that
the decision be binding on affected taxpayers other than the taxpayer initiating
the arbitration. This matter requires further consideration, but it does not
seem appropriate for other taxpayers to be bound.
The draft Article states
that the decision is binding "solely" with respect to the particular
case. Some conventions (such as the Germany-United States convention) contain
an additional sentence regarding the weight to be given arbitration decisions
in other cases, to the following effect:
While the decision of the
arbitration board shall not have precedential effect, it is expected that such
decisions ordinarily will be taken into account in subsequent competent authority
cases involving the same taxpayer, affected taxpayers, the same issue(s), and
substantially similar facts, and may also be taken into account in other cases
where appropriate.
Such a sentence may be added
where countries consider it appropriate.
Paragraph 11
The treatment of costs set forth is based generally on the Germany-United States
and similar conventions. An alternative, simpler approach is to mandate an equal
sharing of costs, as provided in Article 11(3) of the EU Convention. Subparagraph
(b) is not contained in other models as taxpayer participation is not contemplated.
The Germany-United States
convention includes a rule that provides that the taxpayer may be required to
bear the costs of a Contracting State, and the taxpayer's agreement to bear
the costs is a prerequisite to arbitration. The draft Article does not retain
this provision. Instead, subparagraph (d) provides that the arbitration board
make a final determination as to costs.
Paragraph 12
This paragraph is intended to ensure that necessary modifications to the full
gamut of procedural rules set out in the draft Article may be agreed to by the
competent authorities without requiring a protocol to the convention. See, for
example, the German-United States convention and Article 11(2) of the EU Convention.
This complements the more limited right of the competent authorities to determine
arbitration procedure before the board, in paragraph 5.
Paragraph 13
An important issue in tax arbitration is the effectiveness and enforceability
of decisions of the arbitration board. This paragraph is based on the recommendations
in the ICC Policy Statement. No such provision is found in the US conventions
or the EU Convention. The implication of paragraph 13 is that the Contracting
States will take such steps as may be necessary, including changes to domestic
law, to implement the arbitration decision.
The EU Convention makes
provision for alternative action by the competent authorities, not necessarily
in accordance with the arbitration deci
sion, so long as it eliminates double
taxation. This has not been retained in the draft Article because it is contrary
to the guideline established in the ICC Policy Statement to the effect that
the double taxation should be eliminated applying legal principles.
No reference is made in
paragraph 13 to the payment of interest. It is appropriate that interest should
be paid if, under domestic law, this would be the case had the same action been
taken by the tax authorities of the Contracting State without regard to arbitration.
Document n° 180/455 Rev. 2
6 February 2002