The statistics show the numbers of tax treaty disputes resolved under the double tax treaty mutual agreement procedure and the number of outstanding cases at the beginning and end of the year for over 65 jurisdictions, including the UK.
Tax treaties are agreements between governments designed to avoid double taxation for individuals or businesses operating in more than one country. The mutual agreement procedure (MAP) in tax treaties allows designated representatives from the governments of the contracting states to interact to resolve international tax disputes
The country with the highest number of MAP disputes, Germany, saw figures remaining broadly the same with 1180 unresolved cases at the end of 2016, compared to 1177 at the beginning of the year. The US saw a slight reduction in outstanding cases to 967 at the end of 2016 from 972 at the beginning of the year.
Across all jurisdictions the average time taken to resolve transfer pricing cases was 30 months and 17 months for other cases. For the UK it was 28 months for transfer pricing disputes but 55 months for other cases.
"The figures show that it is still taking too long to resolve double tax treaty disputes, with the OECD's 24 month target looking very optimistic," said Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.
“As more and more countries implement BEPS and other anti-avoidance measures, the risks of double taxation are increasing. It is particularly worrying to see a number of countries, including the UK, threatening unilateral new measures in relation to the digital economy. Now more than ever, countries need effective dispute resolution processes,” he said.
Improving the effectiveness and timeliness of dispute resolution mechanisms is the aim of Action 14 of the OECD's base erosion and profit shifting (BEPS) Action Plan. One of the Action 14 minimum standards requires jurisdictions to seek to resolve MAP cases within an average timeframe of 24 months. To monitor compliance with this, members of the Inclusive Framework on BEPS have committed to report their MAP statistics pursuant to an agreed reporting framework.
The global statistics show that over 85% of MAP disputes concluded in 2016 resolved the issue. Almost 60% of MAP cases closed were resolved with an agreement fully resolving the taxation not in accordance with the tax treaty and almost 20% of them were granted unilateral relief while almost 5% were resolved via a domestic remedy. However, 5% of the MAP cases closed were withdrawn by taxpayers and approximately 10% were not resolved for other reasons.
The UK's figure of 82% of disputes resolved was slightly lower than the global average with 61% of cases resolved with an agreement fully resolving double taxation, 9% resolved via domestic remedy and 2% of cases given unilateral relief. A further 7% of cases were resolved with an agreement that there was no tax, not in accordance with the treaty and in 3% of cases there was an agreement in accordance with the treaty partially eliminating double taxation. However, 2% of cases were withdrawn by taxpayers and a further 16% of cases were not resolved for other reasons.
"According to the statistics a significant number of disputes are not getting resolved. Unresolved disputes mean that taxpayers are suffering double taxation, which is not an acceptable result. The introduction of mandatory binding arbitration may improve the position, but it will be a number of years before this is reflected in the figures," Ian Hyde said.
MAP clauses in tax treaties unusually provide that tax authorities “shall endeavour” to resolve a MAP case by mutual agreement, but there is no stronger obligation to resolve a dispute.
Earlier this year over 70 countries signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, otherwise known as the Multilateral Instrument (MLI). This will enable over a thousand double tax treaties to be interpreted in a way that implements the OECD's BEPS recommendations relating to hybrid mismatches, treaty abuse, artificial avoidance of permanent establishments and improving dispute resolution.
As part of the MLI over 25 countries have agreed to mandatory binding arbitration to apply to some or all of their treaties. Mandatory binding arbitration would ensure that a double tax dispute between tax authorities was resolved, even if the two tax authorities could not reach agreement.
Each of the signatories needs to now ratify the MLI in accordance with their domestic law. The MLI itself comes into force three months after five countries have ratified it. So far it has been ratified by Austria and the Isle of Man. The UK intends to ratify it in the Finance Act 2018.
Once the MLI is in force, it will only come into force in relation to a particular treaty three months after both contracting states have ratified the MLI and chosen to apply its provisions to the relevant treaty. The provisions will then take effect from the beginning of the next calendar year or fiscal period.