More on Binding Arbitration of Tax Treaty Disputes: Issues and
Anomalies Under the Newly-Negotiated Protocol with France
By David R. Tillinghast,
Esq.
Baker & McKenzie LLP, New York, NY
To the provisions in the recent Belgian Treaty, the German
Protocol, and the Canadian Protocol for the binding arbitration of tax
treaty disputes (now all in force but yet to be applied), we can now
add the provision in the newly-negotiated Protocol with France. While
there are substantial similarities among the agreements in force,
there are also a considerable number of differences, and the French
Protocol will add to these.
First, let's look at similarities. Like the three previous
agreements, the French Protocol contemplates a “baseball”
or “best offer” arbitration procedure following rules
which, with one important exception to be discussed below, are the
same as in the three other agreements. Like the others, the French
agreement gives the taxpayer the option to accept or reject the
arbitral award, while making the award binding on the Competent
Authorities if the taxpayer accepts it. The rules for making the
award, for enforcing it, and for assuring confidentiality are
essentially the same.
The range of issues subject to arbitral review differs. Under the
German Protocol, these are limited to issues arising under Article 4
(as it relates to the residence of an individual); Article 5,
Permanent Establishment; Article 7, business profits; Article 9,
associated enterprises (transfer pricing); and Article 12, royalties.
The range under the Canadian Protocol is quite similar, but with a
much narrower range of royalty issues included. The Belgian Treaty
does not limit the range of issues subject to arbitration. In this
respect the French Protocol resembles the Belgian Treaty. Like the
other agreements, it also provides that an issue will not be
arbitrated if the Competent Authorities agree that it is not
“suitable for arbitration.” (Article 26(5)(b) of the
Treaty, as revised by Article X of the Protocol.)
A serious deficiency in the French Protocol, or more precisely in
the accompanying Memorandum of Understanding, is in the procedure for
the nomination of arbitrators. As in the earlier agreements, each
Competent Authority is directed to name one arbitrator, and the two so
named are instructed to agree upon a Chair. If within 60 days they
cannot agree, they are “regarded as dismissed” and the
Competent Authorities then name two new arbitrators, who are
presumably supposed to agree on a Chair. However, this is not
expressly stated; no time period is specified for reaching agreement;
and if the new appointees cannot agree, there is no provision for
resolution of the deadlock. The three earlier agreements provide that
in the case of such a deadlock, the Chair will be appointed by an
official of the Centre for Tax Policy Administration of the OECD. The
failure to include such a rule in the French Protocol leaves open the
possibility that a recalcitrant Competent Authority can effectively
torpedo an arbitration by simply naming arbitrators who will not agree
upon the identity of the Chair.
A positive, though somewhat flawed, innovation in the French
Protocol is a provision which contemplates that the taxpayer will be
permitted to submit to the arbitrators a Position Paper like those
submitted by the Competent Authorities, which form the basis for the
arbitrators' consideration of the case. Memorandum of Understanding,
¶ (h). In this connection, see my commentary,
“Taxpayer Participation in Mandatory Arbitration Under the New
German and Canadian Protocols and Belgian Treaty,” 38 Tax
Mgmt. Int'l J. 581 (11/9/07).
While this represents a big step forward, and should be adopted for
use under the three earlier agreements by appropriate amendment of the
Memoranda of Understanding or Notes exchanged by the Competent
Authorities thereunder, some bugs need to be worked out. As the
provision now stands, the taxpayer's Position Paper is to be submitted
within 90 days of the appointment of the Chair, which is only 30 days
later than the dates on which the Competent Authorities must submit
their Position Papers, but before they are required to submit their
Reply Submissions. While it is provided that the arbitrators will
forward the taxpayer's Position Paper to the Competent Authorities,
there is no indication that the taxpayer will have access to the
Position Papers submitted by the Competent Authorities. (Even if it
had access, giving the taxpayer only thirty days to review them and
submit a Position Paper seems much too tight a schedule.)
In addition, the taxpayer is apparently not permitted to present to
the arbitrators a Proposed Resolution which is different from those
submitted by the Competent Authorities, since the Memorandum of
Understanding continues to specify that the arbitration panel must
adopt one or the other of the Proposed Resolutions submitted by the
Competent Authorities. Memorandum of Understanding,
¶ (i).
From the beginning, it has been obvious that, in contemplating
arbitration, the Competent Authorities have taken care to see that the
proceedings remain under their sole control. The procedures which are
contemplated by the agreements which the United States has entered
into are a far cry from the procedures followed in analogous
arbitration proceedings, such as arbitration of investment or
commercial disputes, in which the affected private party or parties
play an active role. There is merit in giving the affected taxpayer
the ability to make a meaningful contribution to the resolution of the
dispute. If the Competent Authorities have got it wrong, it will only
increase the number of successful outcomes if the taxpayer can
effectively persuade the arbitrators that this is so and why. It would
be preferable, therefore, if the taxpayer could be afforded access to
the Proposed Resolutions submitted by the Competent Authorities and
have the ability to submit a different Proposed Resolution which could
be adopted by the arbitral panel.
Procedurally, the Competent Authorities are the ones involved in
initiating the arbitration. However, the arbitration will not occur
unless and until the taxpayer and the other “concerned
persons” (if any) submit the agreements not to disclose, which
are contemplated by Article 26(6)(d) of the Treaty (as revised by
Article X of the Protocol). Presumably, these agreements must be
delivered in writing to the two Competent Authorities.
Meeting this requirement could, of course, substantially delay the
commencement of the proceeding (and if the taxpayer wants to block
arbitration it can do so by simply never submitting the agreement,
although it is hard to see when this would be in the taxpayer's
interest). Assuming that at least one of the Competent Authorities and
the taxpayer are anxious to get on with the arbitration, they will
make it a point to get the required agreements in place before the
standard two-year period (prior to commencement of arbitration) runs
and assure that they are delivered to the other Competent Authority as
well.
The deadline for the submission by the taxpayer of a Position Paper
is tied to the date on which the Chair of the arbitral panel is
appointed. The taxpayer will not ab initio know when this
occurs, so it will be necessary for the Competent Authorities (or one
of them) to notify it of the event. Given the shortness of time given
for the submission by the taxpayer, such notification needs to be
given promptly.
This commentary also will appear in the March 2009 issue of
the Tax Management International Journal. For more information,
in the Tax Management Portfolios, see Cole, Venuti, Gordon and Croker,
940 T.M., Income Tax Treaties -- Administrative and Competent
Authority, and in Tax Practice Series, see ¶7140, U.S. Income
Tax Treaties.
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