Potential Arbitration under MAP Cases

An increasing number of countries have included arbitration procedures in tax treaties to encourage competent authorities to resolve transfer pricing disputes in a timelier manner. The US, for example, currently has bilateral tax treaties with Belgium, Canada, France, Germany, Ireland, Italy, Mexico, the Netherlands and Switzerland that all include arbitration provisions. Its agreements with Belgium, Canada, France and Germany provide for baseball-style arbitration, which is an “all or nothing” process requiring the independent arbitration panel to select the complete proposal of only one country and to reject the other.

The prospect of binding arbitration has already begun to impact tax authority and taxpayer practices with respect to potential disputes:

• In July 2011, the IRS announced that it was combining its APA program with Competent Authority to form the Advanced Pricing and Mutual Agreement program (see Ceteris Transfer Pricing Times Volume VIII, Issue 9). IRS Transfer Pricing Director Sam Maruca has indicated that the biggest emerging issue facing the IRS is arbitration.
• Canada Revenue Agency (CRA) head of the International and Large Business Directorate, Lucie Bergevin, has stated that the arbitration provisions in the US-Canada treaty have resulted in more communication between the taxing authorities. She has witnessed an increase in the number of meetings and telephone conferences held between the US and Canada competent authority representatives, along with better monitoring of the deadlines for receipt of information requested from taxpayers involved in live cases.
• A recent survey was conducted by the BNA International Transfer Pricing Forum of leading tax practitioners within OECD countries. Practitioners from Canada believe that there is increasing incentive for Canadian and US officials to arrive at mutual agreement rather than leave the decision to an arbitration panel, which creates risk for both sides that the panel will reject either proposal. (See related article in Ceteris Transfer Pricing Times Volume VIII, Issue 1)
• H.M. Revenue and Customs Permanent Secretary for Tax David Harnett has indicated that although some countries have reported to the OECD that they are able to settle transfer pricing cases within 12 months, the average for all cases is 540 days. Harnett signaled that a report to be released by the OECD will probably recommend the use of alternative dispute resolution techniques earlier in the process for transfer pricing inquiries that have the potential to turn into lengthy disputes.

One potential downside is that APA programs may become more selective in the cases that they take on so as to avoid those which will be difficult to resolve within the period required to avoid arbitration. Transfer pricing specialists have noted that such a trend would be at odds with the original purpose of the APA program as an avenue where complex transfer pricing issues could be resolved in advance of an audit.

Source: Ceteris Transfer Pricing Times Volume VIII, Issue 10