ICTD Working Paper 55

The proposals resulting from the G20/Organisation for Economic Cooperation and Development (OECD) project on Base Erosion and Profit Shifting (BEPS) include a drive for mandatory binding arbitration of international tax disputes, strongly supported by business. This issue should be considered in the context of the reasons for and nature of international tax disputes. The bulk of such conflicts concern ‘economic’ double taxation, resulting from divergent interpretations by different tax authorities of the standards for attributing profits to affiliates within a corporate group, so that the firm as a whole may be taxed on more than 100 per cent of its worldwide profit. Such divergences result from transfer pricing rules that treat the affiliates within a TNC group as if they were an independent entity dealing ‘at arm’s length’ with each other, and requiring subjective judgements by each tax authority on the profits attributable to each. Hence, it is not surprising that the number of such conflicts has grown steadily, especially in the past decade, as countries have applied the rules more vigorously. Arbitration has been advocated not because it can provide objective adjudication, but as a fall-back in order to pressurise tax authorities to resolve cases by negotiation rather than submitting to a third party decision. In fact, although binding arbitration has been available among European Union (EU) members as well as some other states since 1990, only a handful of the continually growing number of conflict cases have actually been referred to arbitration. The newer approach of ‘last best offer’ (LBO) arbitration, widely regarded as more successful, aims to pressurise tax authorities to give up positions that are likely to be considered unorthodox. The Mutual Agreement Procedure (MAP), including arbitration, is essentially a supranational administrative procedure for coordination of the application of international tax rules. Its improvement should form part of a wider process of reform of both the institutions and the substantive rules of international taxation. Read the 2-page brief version here.


Sol Picciotto

Sol is an emeritus professor at Lancaster University, a Senior Adviser of the Tax Justice Network, coordinator of the BEPS Monitoring Group, and a member of the UN Tax Committee's subcommittee on dispute resolution. As a Senior Fellow of the ICTD, his research focuses on the taxation of transnational corporations with special reference to developing countries.
Download (PDF)
Read the 2-page brief