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International arbitration for tax disputes

Nov 25 2012 18:09
Washington - The United States is undefeated in the nearly two years since it began settling corporate tax disputes with Canada through a winner-takes-all process popularly known as baseball arbitration.

Tax lawyers and accountants in both countries said the US Internal Revenue Service had won three of the binding decisions and Canada none. They said the IRS had collected a significant sum of money, possibly in excess of $100m.

Launched in December 2010, the arbitrations follow the rules for resolving salary disputes between Major League Baseball players and their teams. In the tax game, however, the companies forced to pay and the payments remain confidential.

The United States has had similar agreements with France since 2004 and Belgium and Germany from 2006, but no cases involving them have gone to baseball arbitration, the tax experts said.

Baseball arbitration plans are in pending tax treaties with Hungary, Luxembourg and Switzerland. Future treaties with the United Kingdom and Japan may have the same provisions, tax experts said.

The arbitration process arises often in tax questions involving a multinational company's transfer pricing taxes, where two countries disagree over which of them should collect corporate taxes. The winning country gets the tax revenue. The loser goes home empty-handed.

Companies like the baseball arbitration provision because it lends certainty to their tax bills. Companies can request that countries go to arbitration if revenue agents cannot settle their tax disputes in two years.

Aiming too high?

The arbitration panels are made up of three experts, one chosen by each country and the third by the other two experts. Revenue agents from each country submit a tax bill number to the panel. The panel picks the number it thinks is closest to the right answer.

Tax experts on both sides said Canada had lost all three disputes because it was trying to hit home runs - seeking too much in taxes during arbitration.

"Canada has lost three in a row," said Dale Hill, a former manager of Canada's cross-border tax negotiations with the United States and a partner with Gowling Lafleur Henderson LLP in Ottawa. "Maybe Canada has been more aggressive," Hill said.

David Rosenbloom, a Washington, DC-based US tax lawyer at Caplin & Drysdale, said: "The Canadian Revenue Agency has developed over the years a habit of taking really extreme and unwarranted positions. It's almost as though they're unaware arbitration is in the treaty."

Richard McAlonan, who directs the IRS negotiating program, told Reuters t his month that the agency had resolved a "handful" of the cases. He declined further comment.

The Canadian Revenue Agency said in a statement that it prefers to resolve its tax disputes with the United States "at the negotiating table". Going to arbitration "would be the last resort", the CRA said. It declined to comment on the cases, citing confidentiality rules in the treaty.

Canada's losses may mean its revenue agents will be more cautious in tax negotiations with the United States. The countries negotiate 75 to 100 cases a year, Hill said. "It's going to get tougher for Canada to negotiate," he said.

Treaties pending

The tax treaties with Hungary, Luxembourg and Switzerland passed the US Senate Foreign Relations Committee in 2011. But Republican Senator Rand Paul has so far prevented all three treaties from going before the full Senate.

A spokesperson for Paul could not be reached for comment. Paul has previously objected to the treaties' provisions that require more sharing of US taxpayer information.

New treaty arbitration provisions with Switzerland and the UK would especially benefit the pharmaceutical industry, while auto companies would appreciate the provision in a Japanese treaty, said Lorraine Eden, a professor at Texas A&M University.

Companies in both sectors have a lot of transfer pricing tax uncertainty and can face double taxation if unable to force countries into binding arbitration, she said.

UK-based GlaxoSmithKline reached a $3.4bn transfer pricing settlement with t he IRS in 2006. But the UK did not accept the US settlement, and Glaxo faced UK taxes on the same profits, Eden said.

"Would they like the opportunity to go to binding arbitration and settle this? Absolutely," Eden said.

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