By: Diane Ring
On Sunday, international tax lawyers and advisers from private sector, government officials, tax representatives from international organizations, in-house counsel, and tax academics converged on the convention center in Madrid for the annual conference of the International Fiscal Association (IFA).
But we were not alone.
An adjacent exhibition hall hosted “Japan Weekend 2016” a celebration of Japanese anime and manga. I had no trouble finding my place – I was unlikely to confuse international tax lawyers with the costumed crowd that channeled Alice in Wonderland meets the Flash. Once the tax conference got underway, though, I began to contemplate similarities between the two events, in particular, the meaning and role of reality and its construction. . .
A number of major, contemporary international tax problems are described very differently by different players in the tax system, whether the topic is corporate inversions, double Irish Dutch sandwiches, or EU state aid rulings. For example, is the recent EU state aid ruling against Apple a legitimate exercise of EU competition authority against a multinational that secured an inappropriate advantage through a special tax deal, or is it an effort by the EU to retroactively re-write tax rules, override national law, and garner popular support for further tax reform? An observer trying to make sense of things can be left wondering just what version of tax reality is the most accurate. However, even less dramatic tax topics can generate disagreement over the underlying reality that best characterizes the subject, as was revealed in the first panel of the conference. This session examined dispute resolution mechanisms in international taxation. In brief, disputes arise in international tax when a taxpayer faces inconsistent treatment and possible double taxation in two different countries. The ideal outcome from such potential conflict is agreement among the parties as to the appropriate taxation of the taxpayer. Tax treaties provide an important mechanism for reaching agreement—the mutual agreement procedure (MAP). Thus, MAP became the focus of the morning discussion.
Under MAP, representatives of the two treaty partner jurisdictions engage in dialogue to resolve the tax dispute. Recently, dispute resolution, or more precisely, MAP, has generated significant concern. The volume of cases in MAP has risen and is expected to rise further given new developments in international tax. Countries have begun implementing regimes designed to prevent tax base erosion but which may increase the number of cases in which two countries seek to tax the same income of the same taxpayer. Taxpayers worry that tax authorities will not be able to effectively manage the caseload in MAP, leaving taxpayers the real losers.
So what was the focus of the panel on MAP? One theme running through the discussion was whether it was better to frame the topic as “issue resolution” rather than “dispute resolution.” The question was not mere word play—the hope was that a reframing (and rephrasing) would emphasize the parties’ commitment to ascertaining the appropriate tax treatment and de-emphasize the image of conflict, dispute, and a grab for taxes. But is this a wishful and overly optimistic vision of the dynamic among taxpayer and governments? I was less inclined to see this as reality and more likely to see it as aspirational. Perhaps though, it doesn’t matter what the reality is. The recommendations flowing from the re-imagining of “dispute resolution” as “issue resolution” included the pursuit of alternative dispute resolution mechanisms that could precede MAP and perhaps reduce the number of cases that reach the MAP stage.
Unfortunately, many of the options contemplated (for example, joint audits of a taxpayer by two countries, and advance agreements—such as APAs—pursuant to which the tax authority agrees in advance to the tax treatment of the taxpayer’s transaction) don’t really minimize the conflict or the burden of resolving the dispute. Few joint audits have been executed by countries due to timing, procedural, and coordination constraints. Even APAs, which are more widespread, are still resource intensive deployments of government tax personnel.
Perhaps the lack of inexpensive and easy alternatives to MAP is in part a reflection of the reality that at the core these are specific disputes with often significant stakes. We can, of course, still improve MAP and we can still aggressively pursue alternative mechanisms for arriving at appropriate tax treatment sooner and with less conflict. Furthermore, disputes are not uniform; some, at least, may be distinctly susceptible to resolution by another path. But where stakes are high, a quick, easy and inexpensive dispute resolution option may prove elusive. And, in some cases, it may seem like one person sees Alice in Wonderland while the other sees the Flash—constructions of reality that are so different it is hard to determine what is going on beneath. Maybe we are closer to being at the anime convention than we thought.