TAX, SOCIETY & CULTURE

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Heyka on Tax Treaty Arbitration and A World Tax Court

Published Feb 22, 2017 - Follow author Allison Christians: - Permalink

Last fall I via twitter I shouted out two of my students who won the Tax Analysts Student Writing Competition, in the international category:

I posted about the first paper long ago but I inadvertently neglected to post the second.  Correcting that oversight, here it is, available at Tax Analysts: A World Tax Court: The Solution to Tax Treaty Arbitration, by Jake Heyka. Here is the brief abstract by TA:
Jake Heyka examines tax treaty arbitration standards while demonstrating that as a matter of fundamental justice, arbitration should be revamped. He proposes the creation of a world tax court.
Heyka begins by observing that "[t]he institution of international tax treaty arbitration (ITTA) is hotly debated in international business and tax law. While the process is helpful because it pressures governments to resolve contested tax decisions, opponents have called it 'secret and evil.'"
He then makes the provocative observation that "the use of ITTA ultimately frustrates the resolution of tax disputes and should be supplanted by a world tax court." In support of his proposal, Heyka lays out the history and critique of tax treaty arbitration (including by me) and concludes:
Standardizing ITTA will create some procedural certainty but does not guarantee consistent use of those procedures, allow the public to see whether the process is fair, or establish reliable precedent. As Lindencrona and Mattson suggested over 30 years ago, ITTA should be a stepping stone to what the world ultimately needs: a world tax court.
As radical as it may seem, the idea is not far-fetched. World courts exist in many commercial and noncommercial contexts, and those that deal with money rather than crime are followed by many countries and used quite often. Moreover, state authority is regularly ceded to resolve disputes between commercial parties in arbitration courts such as the Permanent Court of Arbitration in The Hague, the London Court of International Arbitration, and many other arbitration institutes. A world tax court would merely serve as a place to resolve tax disputes in a similar manner while sustaining the public nature of tax law.
While I am late to post it, Heyka's article remains timely as the inclusion of arbitration in the recently released MLI is sure to keep the issue front and center in international tax discourse. Congrats Jake, and sorry for the delay in posting your accomplishment.

Tagged as: arbitration governance institutions international law McGill OECD scholarship

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New US Model Income Tax Treaty: Now With Kill-Switches!

Published Feb 17, 2016 - Follow author Allison Christians: - Permalink

Treasury issued the new US Model Tax Treaty, via press release
​WASHINGTON - Today, the Treasury Department issued a newly revised U.S. Model Income Tax Convention (the “2016 Model”), which is the baseline text the Treasury Department uses when it negotiates tax treaties.  The U.S. Model Income Tax Convention was last updated in 2006.   
“The 2016 Model is the result of a concerted effort by the Treasury Department to further our policy commitment to provide relief from double taxation and ensure certainty and stability in the tax treatment of treaty residents,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack.  “The 2016 Model includes a number of provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance,” he added. 
Many of the 2016 Model updates reflect technical improvements developed in the context of bilateral tax treaty negotiations and do not represent substantive changes to the prior model.  The 2016 Model also includes a number of new provisions intended to more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.  For example, the 2016 Model does not reduce withholding taxes on payments of highly mobile income—income that taxpayers can easily shift around the globe through deductible payments such as royalties and interest—that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime.  In addition, a new article obligates the treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty’s original balance of negotiated benefits and the need for the treaty to reduce double taxation.  The 2016 Model also includes measures to reduce the tax benefits of corporate inversions.  Specifically, it denies reduced withholding taxes on U.S. source payments made by companies that engage in inversions to related foreign persons.   
The Treasury Department has been a strong proponent of facilitating the resolution of disputes between tax authorities regarding the application of tax treaties.  Accordingly, the 2016 Model contains rules requiring that such disputes be resolved through mandatory binding arbitration.  The “last best offer” approach to arbitration in the 2016 Model is substantively the same as the arbitration provision in four U.S. tax treaties in force and three U.S. tax treaties that are awaiting the advice and consent of the Senate.  
The 2016 Model reflects comments that the Treasury Department received in response to the proposed model treaty provisions it released on May 20, 2015.  The Treasury Department carefully considered all the comments it received and made a number of modifications to the proposed model treaty provisions in response to those comments.
The Treasury Department is preparing a detailed technical explanation of the 2016 Model, which it plans to release this spring.  The preamble to the 2016 Model invites comments regarding certain situations that should be addressed in the technical explanation for the so-called “active trade or business” test of Article 22 (Limitation on Benefits).  See the preamble page 5.  The deadline for public comments on this subject is April 18, 2016.
Highlights mine. There is much to be discussed in this of course and I will make no attempt to be comprehensive here, but I made a quick comparison doc that might be useful; download here. Just at first glance: can you spot the BEPS? Action 6 is plainly at work, and probably others.

My current interest is in what I am calling the new "kill-switch" provisions, the special tax regime (art 3, 11, 12, 21, 22) and subsequent law changes (art 28) provisions alluded to in the bold highlighted text above. I'm working on a paper on this subject and will have more analysis soon.



Tagged as: international law soft law tax policy treaties US

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Caterpillar v Comm'r and the Rule of Law in International Tax

Published Aug 06, 2013 - Follow author Allison Christians: - Permalink

James P. Fuller has an interesting summary of the recently-filed Caterpillar case in his latest U.S. Tax Review [gated], in which he laments the competent authority breakdown and argues that the case would have been better off going to treaty-based arbitration, rather than to domestic judicial decision-making channels. I disagree with this conclusion because, given the structure of tax treaty arbitration today, it would--at best--provide a remedy for only one taxpayer at great cost, while the judicial route potentially creates rule of law upon which all can rely. If competent authority arbitration were instead to create a publicly viewable resolution, I could agree with Fuller because what is needed is (1) a multilateral solution to a multilateral problem and (2) a solution with precedent-making force.

Per Fuller:

Caterpillar Inc. has petitioned the Tax Court for a redetermination of income tax deficiencies that resulted from the IRS's allocation of royalty income to it from its Belgium and French subsidiaries. 
While the case was only recently docketed and has not yet been decided, I thought it worth discussing the case as it results from a breakdown in the competent authority process. It is, of course, the very process that is designed to prevent the consequences faced by Caterpillar. There should be no need for the taxpayer to litigate in one country or the other when treaty relief is an available remedy and the countries involved can settle the issue between themselves. 
Following a 1990 reorganization that pushed management power, responsibility, and accountability to subsidiaries such as Caterpillar Belgium and Caterpillar France, the taxpayer entered into amended license agreements with those subsidiaries limiting the maximum royalty in any given year to each subsidiary's net income from the sale of Caterpillar products. Also, if the subsidiary suffered a post-effective-date net operating loss, it would pay no royalty for that year and could carry the loss forward as a negative adjustment to future years' income for purposes of the royalty calculation. 
... The IRS ... concluded that the relief-from-royalty provision in the Belgian and French license agreements did not comport with the arm's-length standard under section 482.
 Fuller points out that there are "several Tax Court cases that permitted related-party license agreement provisions" like Caterpillar's, and as to which the IRS subsequently acquiesced. He goes on to discuss Caterpillar's attempt to obtain competent authority relief, which failed because the French and Belgian tax authorities disagreed with the US position, and US Appeals simply went along with the IRS decision despite these other rulings that would suggest reconsidering the issue, for litigation hazard purposes at minimum:
The Belgian and French tax authorities, having a thorough knowledge of the local operations of the Caterpillar subsidiaries in their respective countries, looked at the same facts that were addressed by the IRS exam team and found that Caterpillar's royalty limitation provision required no adjustment. Caterpillar subsequently had the adjustment reviewed in an IRS Appeals office proceeding. The IRS Appeals officer simply accepted the IRS exam team's economist's report. 
...it appears from Caterpillar's Tax Court petition that the IRS exam team's economist simply used that agreement as grounds for asserting that such a relief-from-royalties' provision is inappropriate, and not at arm's length.
Fuller notes the dual-bureaucracy created by two simultaneous review procedures, i.e., competent authority and internal appeals, and concludes that binding arbitration of the competent authority procedure, rather than resort to the US judiciary, would have been the better approach:
If the two countries' competent authority negotiators cannot reach an agreement, then there should be some form of compelled arbitration to bring about an agreement. Otherwise, the taxpayer is stuck in the middle. A taxpayer should not have to litigate its case in one country or the other (or both) simply because the U.S. competent authority negotiators could not reach an agreement with the foreign country's competent authority negotiators. This is especially true in a situation such as that faced by Caterpillar: The Tax Court has already held that such provisions are appropriate in related-party license agreements.
I appreciate Fuller's argument about the taxpayer's bind, but as I have noted before, if the case went the way of binding arbitration, in the long run the issue could potentially never be settled, since the decision in arbitration would be completely confidential and therefore not accessible or applicable to other taxpayers. That makes international tax dispute resolution much more expensive than it has to be, all because the powers that be have prioritized absolute taxpayer confidentiality over the rule of law. I think that is a miserable trade-off as well as being an unnecessary one: as this case shows, the taxpayer is willing to sacrifice some measure of its own confidentiality in order to get resolution in domestic law, so it is not clear why international law should be so different. (The arguments for difference are weak--see my analysis in the link above.)

The competent authority route, which (by being duplicative as in this case) already increases costs for producing the rule of law, would only be exacerbated by arbitration, because Caterpillar's problem would be perfectly preserved for another day, another taxpayer, and another expensive litigation involving multiple parties and governments.

Therein lies the conundrum for international tax law in the current status quo: either we can get taxpayer-specific outcomes but no rule of law (arbitration) or we can get unilateral rule of law but no international resolution (domestic appeals). I am not sure which to prefer, since both are bad for international tax law.

Accordingly, I am glad to see the Caterpillar case go forward in a forum which is open to public view and that, if not settled in the interim, then becomes a part of the body of law, creating more certainty for taxpayers going forward. However, I am unhappy that the forum is unilateral and potentially preserves an unsolvable problem for the taxpayer if the Court agrees with the US position, since France and Belgium will not be consulted in the process and can be expected to continue to disagree with the IRS view of things.

As a result, I can only agree with Fuller that the better route would be bilateral/multilateral decision-making via arbitration if that decision-making is, like internal judicial decision-making, open and accessible to public view.

Tagged as: arbitration rule of law Tax law tax policy treaties u.s.

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WTO Trade disputes "from the inside"

Published Jan 25, 2013 - Follow author Allison Christians: - Permalink

This will be an interesting talk:
Appellate Body Member Tom Graham will be giving a talk at Hofstra on Feb. 6 entitled "It Sure Looks Different From the Inside: Deciding International Trade Disputes at the WTO". The title sounds promising, and from what I understand he will talk a bit about the use of the Vienna Convention by the AB in its decision-making.  He is not likely to be as forthcoming as, say, Justice Scalia, but he may say some interesting things nonetheless.
I don't see anything about live feed, too bad. I would have like to hear what he had to say--WTO decision-making is of interest to those of us keeping an eye on arbitration in tax treaties.  

Tagged as: conference rule of law WTO

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India revives tax on Vodafone

Published Jan 06, 2013 - Follow author Allison Christians: - Permalink

The headline reads "Government revives Rs 14,000 crore tax demand on Vodafone; company may go for arbitration." Crore = $10 million, so that's 140 billion rupees, which converts to about USD $2.6 billion, up a bit from the original $2.5 billion sought by India's tax authority last year, to account for "delayed payment".

The report says "The company could initiate arbitration before international tribunals under the India-Netherlands Bilateral Investment Protection Agreement"--but this was already done early last year, in anticipation of the reassertion of the tax.  In connection with its filing, Vodafone stated:

"The dispute arises from the retrospective tax legislation proposed by the Indian government which, if enacted, would have serious consequences for a wide range of Indian and international businesses, as well as direct and negative consequences for Vodafone."
I wondered at the time about the oddity that Vodafone could draw India into a dispute resolution with the Netherlands in respect of a law that is not yet passed, but noted that apparently once invoked, the BIT automatically provides for dispute resolution.

The latest is merely an assertion by the Indian tax authority, so it remains to be seen whether Vodafone will seek another victory from the Indian courts (challenging the reassessment) or from the BIT (challenging the retroactive law as a breach of fair & equitable treatment to foreign investors).

Tagged as: India Tax law transfer pricing

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Another paper on arbitration-as-law

Published Dec 19, 2012 - Follow author Allison Christians: - Permalink

There seems to be a surge of articles on arbitration-as-law lately: the latest, Judging Lite: How Arbitrators Use and Create Precedent, involves empirical research involving hundreds of US arbitration award records, and it provides some interesting insights.  The article was reviewed on jotwell, excerpt:
...The criticisms include the concern that widespread arbitration mandates will lead to a privatization of public law, with arbitrators that are not bound by public law authorities producing awards of no precedential value. 
...Mark Weidemaier worked from [various databases of arbitration awards].  He analyzed these awards to gauge the extent to which arbitrators cited and engaged with precedent. 
Weidemaier, not surprisingly, found very little citation to precedent in securities awards because reasoned opinions accompanying those awards are extremely rare.  Among labor awards, 48.6% cited to at least one precedent, as did 66.7% of employment awards, and 71.8% of class action awards. 
...Weidemaier attributed the differences in types of authorities cited to the different nature of each type of arbitration.  Labor arbitration is concerned predominantly with interpreting and applying collective bargaining agreements and is frequently fact-based, making it more likely that arbitrators will not cite any precedent and more likely that when they do cite precedent, it will be other arbitration awards.  Employment awards are much more likely to be adjudicating statutory claims, resulting in arbitrators looking to judicial authority interpreting the statute.  Arbitral authority is far less relevant.  Class awards look more to judicial authority but many deal with whether class arbitration is permitted under the contract and, consequently, in Weidemaier’s view, they are more likely than employment awards to look to arbitral awards interpreting similar contracts.
... Candidly acknowledging many limitations to his study, Weidemaier found no evidence outside of securities arbitration that arbitrators were deciding cases in an ad hoc fashion.  Rather, he noted, the process has become highly legalized and arbitrators appear to be trying to follow the public law when it is at issue before them.  ... he suggests that judges discuss arbitral authority in their opinions, thereby providing valuable feedback to the arbitrator community.
Jotwell reviewer Martin Malin calls Weidermaier's article "required reading for all participants in the on-going debate over arbitration mandates." You can read his whole review here.



Tagged as: arbitration rule of law scholarship u.s.

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If arbitration acts like law, it should act like law

Published Dec 13, 2012 - Follow author Allison Christians: - Permalink

A paper recently posted on SSRN says investment treaty arbitration tribunals are facing pressure to conform to legal review standards since they are recognized as performing law-like functions. Required reading for anyone who wants to think about arbitration in tax treaties.

Anthea Roberts, The Next Battleground: Standards of Review in Investment Treaty Arbitration. Abstract:
We are witnessing growing calls by States, academics and NGOs for investment arbitral tribunals to recognize that they are engaged in a form of international judicial review and thus should adopt appropriate levels of deference when reviewing the legislative, executive and judicial acts of respondent States. Some draw on domestic public law comparisons, arguing that tribunals should adopt deferential standards of review when adjudicating upon governmental conduct. Others rely on international comparisons, invoking notions such as the margin of appreciation doctrine that some international courts adopt when reviewing State actions for conformity with international obligations. Whether and when investment treaty tribunals should adopt deferential standards of review represents the next battleground for those who conceptualize investment treaty arbitration as a form of global governance.



Tagged as: arbitration institutions rule of law scholarship

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Are WTO dispute settlements "Law"?

Published Dec 01, 2012 - Follow author Allison Christians: - Permalink

From Simon Lester, yet another reminder for those studying tax treaty arbitration that the issues are many and difficult. When basic questions of enforceability can't be answered in an area of the law where things are fairly well developed and are subject to ongoing extensive public vetting and debate, it serves as a warning of what lies ahead for international tax dispute resolution. From the post:
There is some famous scholarly debate on whether WTO dispute settlement rulings are binding.  Here's a media take on it, from the CBC news (in the context of the Ontario feed-in-tariff case):  The World Trade Organization appears to have upheld a [discrimination] complaint against the Province of Ontario's green energy program. ...reports Monday suggest the affected parties have been notified of the [WTO]'s decision to side with the complainants...The WTO ruling is non-binding, meaning Ontario could simply ignore it and not face any monetary punishment. But such a move would likely be met with the implementation of tariffs against any Ontario-made goods in Japan and the EU.
Simon thinks the word "binding" does not tell us much if retaliatory tariffs could be imposed in the event Ontario ignored the ruling. Instead, he says "the key question is how effective the enforcement mechanism is."

I'd agree-it's equivalent to the maxim that "tax administration is tax policy." In international tax there is no doubt that the question is not the substance of standards, rules, or even norms, but rather what countries actually do, and that happens daily through hundreds and maybe thousands of completely opaque diplomatic interactions (competent authority agreements). Adding arbitration to this mix adds yet another layer of administration and enforcement mechanisms and all the attendant problems that go along with them.




Tagged as: arbitration international law rule of law tax policy transparency

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Arbitration and Jurisprudence in the Investment Treaty Regime

Published May 03, 2012 - Follow author Allison Christians: - Permalink

I'm not a true believer in tax treaty arbitration because I have read some of the literature on investment treaty arbitration that grapples with the many of jurisprudential issues we seem to be all but ignoring in tax.  Susan Franck's latest paper, Managing Expectations: Beyond Formal Adjudication, is a case in point.  It uses the "guidance and clarity on standards" gleaned from arbitration decisions to talk about the jurisprudence of the investment treaty regime, an approach that would be impossible in the international tax regime arbitration structure.  Here is the abstract:

The international investment system has depended heavily on international arbitration to provide guidance and clarification on the standards contained in international investment agreements. In order to assess the system realistically, this commentary discusses unpacking stakeholder expectations by recognizing where expectations may have been overly optimistic and thinking systematically about the mechanisms through which to capture and manage regulatory discretion. This article evaluates ideas expressed by Anne van Aaken and Bart Legum, which consider different ways to achieve regulatory and commercial balance, and offers a lens for thinking systematically about managing stakeholder expectations in the international investment system. A critical issue for international investment law relates to cognitive psychology and how to manage the expectations of differently situated stakeholders. This commentary explores different methods to managing stakeholder expectations and investment treaty conflict such as education and different doctrinal opportunities such as administrative law's model of formal and informal rule-making and adjudication. This commentary concludes that an evidence-based nuanced analysis allows consideration of specific dynamics about stakeholder objectives, enabling a more realistic assessment of the international investment regime.





Tagged as: international law rule of law scholarship soft law

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Putting Arbitration on the MAP

Published Apr 23, 2012 - Follow author Allison Christians: - Permalink

Tax Analysts has asked me to become a regular contributor to TNI with a column; my first installment is on the insertion of "arbitration" in the new UN Model treaty.  If you subscribe, you can find it here; here is a pdf.  I look at the new arbitration provision in the UN Model treaty, complain that this isn't really arbitration at all, and argue that countries should be very wary about signing on to this provision.

Tagged as: scholarship tax policy UN

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