Tax treaties

Arbitration to be an option in cross-border tax disputes, OECD countries agree


07-Feb-2007 - OECD countries have agreed to broaden the mechanisms available to companies and individuals involved in cross-border disputes over taxation by introducing the possibility of arbitration if other attempts to resolve disagreements fail.

The decision is important both for companies investing outside their home country and for individuals living and working in more than one country. Cross-border tax disputes can arise when two states assert conflicting rights to tax an individual or company. As cross-border trade grows and more and more people work abroad, such disputes are likely to become more frequent. 

To address this prospect, the OECD’s Committee on Fiscal Affairs has agreed to modify the OECD Model Tax Convention, which serves as a basis for most negotiations between countries on tax matters, by including the possibility of arbitration in cross-border disputes if they remain unresolved for more than two years.

Details are contained in a report entitled “Improving the Resolution of Tax Treaty Disputes”, which addresses a number of issues relating to what is known as the “mutual agreement procedure”, or MAP, the mechanism provided by tax treaties to resolve disputes between the countries that sign these treaties. At the same time, the Committee has published on the OECD Internet site a web-based manual setting forth 25 best practices to help countries to improve the existing mechanisms for resolving disputes.

The MAP mechanism has worked well in the past, but in recent years both the number of cross-border disputes and the complexity of the cases involved have risen and unresolved issues have become more common. Failure to resolve cases may occur for various reasons, including disagreements on what constitutes a permanent establishment, on the interpretation of a treaty provision and on the valuation of intangibles or services.

Failure to resolve a case usually leads to double taxation, which can be a major impediment to cross-border activity. Within the European Union, the EU Arbitration Convention provides for arbitration of unresolved transfer pricing cases between EU countries. However, the new OECD arrangement is not restricted to transfer pricing issues and so is broader in scope.

Since its creation in 1960, the OECD has played a leading role in helping governments avoid friction over tax disputes through the development of a network of more than 2,500 bilateral tax treaties. Its new report follows more than three years of work, including extensive consultation with the business community and with non-OECD countries. The report also includes other features to facilitate resolution of tax disputes, including additional guidance on how the current mutual agreement procedure should work.

For further information, please contact Mary Bennett, Head of the OECD’s Tax Treaty, Transfer Pricing & Financial Transactions Division (tel. 33 1 4524 9490).