Mandatory Arbitration within Tax Treaties: A Need for a Coherent International Standard

Abstract

As businesses expand operations globally, the threat of double taxation on income earned becomes a significant concern. The current Mutual Agreement Procedures (MAP) within the tax treaties frequently fail to provide equitable relief, exposing taxpayers to uncertain outcomes. The uncertainty causes compliance considerations under FAS 109, Accounting for Income Taxes and FIN 48, Accounting for Uncertainty in Income Taxes. In July 2008, the OECD Model Tax Convention began including a mandatory arbitration provision for taxpayers failing to reach agreement under MAP. The U.S. Model, while beginning to shift towards including non-binding arbitration in some of the later treaties, still relies on the voluntary MAP proceedings for resolution of disagreements. Data provided by the U.S. Treasury indicated that a wide range of taxpayer income covered by the U.S. treaties failed to receive partial or full relief from double taxation. The movement towards international accounting standards under IFRS provides the impetus to develop a universal procedure for avoiding double taxation. The U.S. should consider adopting the OECD Model Tax Convention for all tax treaties to remove the uncertainty of double taxation and promote international trade.

Keywords: Tax Treaties, Arbitration, Double Taxation, OECD