Australian Financial Review
October28, 2002
An End To Tax Trouble, At The Double
Robert Briner argues that international tax disputes should be resolved through binding arbitration.
By Robert Briner
Australia and Britain have a unique opportunity this year. The two governments are in the early stages of negotiating a new tax treaty, the Double Taxation Convention, which draws the boundaries of entitlement, deciding which government gets the tax revenue from profits earned by companies with commitments in both countries.
From the perspective of international business, DTCs are very important. They're designed to prevent two or more governments claiming tax on the same profits. The problem is they do not always achieve this.
But an effective solution compulsory, binding arbitration is steadily gaining favour within the Organisation for Economic Co-operation and Development and among governments. Australia has an opportunity to demonstrate international leadership on the issue and put an end to the protracted squabbles that characterise traditional double-tax disputes.
Most bilateral tax conventions contain a mutual agreement procedure, which is designed to ensure an amicable approach to dispute resolution, bringing together the competent authorities from both sides to try to sort out the disagreement.
This procedure has undoubtedly provided many benefits to international business, and it's a good method of resolving instances of double taxation. But there are shortcomings, including delays and procedural conflicts.
The essence of the problem is that this process encourages, but does not require, the authorities to eliminate double taxation. It is possible that double taxation will remain even after the mutual agreement procedure has been applied.
One procedural concern is that taxpayers caught in the middle of a double tax dispute are often excluded from the deliberations.
So, while the taxpayer's primary concern may be that double taxation is prevented, they may not be neutral as to how this is achieved. To relegate the taxpayer to the status of a frustrated bystander is not the most inclusive method.
Worse still, some people argue that so-called competent authorities have been known to come to decisions that fail adequately to take into account national or treaty law.
Even if the final outcome is appropriate, delays can be very long and double taxation conventions establish no procedural rules or time limits for competent authority proceedings.
Binding and compulsory arbitration can eliminate or alleviate many of these concerns. Arbitration of taxation disputes is attractive and effective, presenting significant advantages to businesses and governments.
Arbitration always reaches a conclusion, provides for impartial determinations with proper taxpayer participation and applies law rather than expediency. The process is orderly, predictable and transparent.
World business tax experts have been urging governments to accept compulsory international arbitration to resolve cross-border tax disputes, particularly those arising from conflicting interpretation of double taxation conventions and divergences in the field of transfer pricing.
While arbitration in tax matters is not yet widely adopted, there has been a slow but steady movement towards its use, in bilateral agreements and in wider contexts.
In 1990, the states of the then European Community concluded a convention providing for the use of arbitration in international taxation disputes over transfer pricing. More recently, the OECD established a working party with the mandate to improve the dispute resolution mechanism under double taxation conventions.
The Taxation Commission of the International Chamber of Commerce recommends that compulsory and binding arbitration in international tax disputes should be adopted wherever possible.
The use of arbitration to solve taxation disputes will not only lead to cost-effective and equitable resolution of tax controversies, but also the enhancement of global economic growth and development through elimination of unintended instances of double taxation.
Australia is the fourth-largest investor into Britain, and Britain is the second-largest into Australia. The good relations enjoyed between the two countries provide an excellent occasion for a profitable experiment that will speed up adoption, internationally, of a common-sense solution to a perennial problem.
Robert Briner is president of the International Chamber of Commerce's court of arbitration.
Copyright 2002 John Fairfax Publications Pty Ltd
