Allens online learning

Tax disputes series: binding arbitration of tax disputes

Webinar details

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Covered in this webinar:

  • Why taxpayers might choose arbitration over more traditional means of resolving tax disputes
  • Strategies for achieving successful arbitration of a tax dispute
  • How an arbitration is run
  • Overseas experiences

This session was recorded on Wednesday, 5 August 2020

CPD points

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Special note for WA lawyers – to satisfy the requirement for CPD in WA the viewing/activity must be completed within 12 months of the session date.

Core area: NSW/VIC/QLD Substantive Law | WA Substantive Law CA4 | 1 hour – 1 CPD point.


Martin Fry Good afternoon everybody, welcome. My name is Martin Fry, partner in the tax practice here at Allens, and welcome to the first of a series of webinars that we'll be running on frontline tax issues facing corporate taxpayers. Today we're focusing on arbitration of tax disputes under Australia's tax treaty network. We've got a panel here for you today and on behalf of the panel can I just say that we're very excited to be here with you today. We, the panel, all live in Melbourne and we need to take the excitement wherever we can get it. And today is pretty good. And might I also say on behalf of the panel that I'd like to acknowledge the traditional owners of the land on which we meet today.

Can I ask you to just bear with me for a few moments at the start, while I just run through some housekeeping for today's webinar. At the end of the session today, there'll be a CPD certificate posted to you. You'll see on your screen that there is a Q&A box. You're very welcome and you're encouraged to post your questions on that Q&A box, we see them here and we will be corralling those questions and directing them to the right person on the panel, and we'll either deal with those as we go or we'll deal with those at the end, depending on where we are at and what the question is we're addressing.

I'm told that if there are any technical issues with the way that your screen is appearing or behaving that you should refresh the screen which seems to be the standard tool for solving issues. On your screen you'll also see a resources list, you'll find at that spot on your screen the slide deck for today. You'll find the document that we've produced for you which really sets out the procedural details of the tax arbitration. There's a lot of detail in there, we won't get the opportunity to go through all those in detail here today, so that's a reference for you, it's a resource that you can have available for you at any time. If you'd like to share this webinar with any of your colleagues, you are very welcome to do so. At the end of this session, you'll receive an email from us thanking you for your attendance, and also providing you with the link to our Learning Portal. You can go to that link, you can access the webinar, you can access the article and you can forward that to your colleagues, and they can review the webinar as well so we encourage you to do that and we encourage you to post your questions throughout.

That's housekeeping. Just wanted to introduce to you the panel that we have here. We're joined here by Duncan Travis who is a partner in our litigation practice here at Allens. Duncan has a deep experience in both commercial and state-based arbitration, and he brings that particular expertise and experience to today's session. Hi Duncan. We're also joined by Monisha Sequeira, a Managing Associate in our litigation group. Many of the people on the webinar here today will be familiar with Monisha's happy disposition, broad smile. A number of you will also be familiar with her experience in tax disputes and transfer pricing disputes in particular, welcome Monisha.

Monisha Sequeira Thanks Martin.

Martin Fry And also, Tommy Ickeringill, a Senior Associate in our tax practice here and one of the rising stars of the practice with a particularly deep experience in transfer pricing disputes, and analysis both here and more recently, in the UK. So that's your panel, that's your resource, please post your questions, we'll go through the session and we'll keep an eye on the questions.

What you'll find with today's webinar is we're going to go through the topic of arbitration and tax disputes on five platforms. The first platform is we'll address 'why are we talking about arbitration now'? Why is it and how is it that it became an important part of the Australian tax landscape? Second platform is that we'll then have a look at what is arbitration under the treaty network? Where can you get it under the treaty network? Platform three there is a pathway from today to arbitration, and so at the third point, we're going to talk to you about and address: How do I get arbitration? How do I get there? What are the steps I need to go through to get there? Point number four, the predominant formal arbitration is what's called final offer arbitration, also known as baseball. We will then go through the particular nitty gritty of how a baseball arbitration happens. Unless you're familiar with the topic you'll be very surprised with what you hear there. Encourage you to the hang on for that, that part of the presentation because it's resolution and tax disputes like we've never seen before. Finally, we probably will have spent the webinar selling the virtues of arbitration and then at the end, the fifth platform is, I'll come along and talk about what can possibly go wrong. And I'm a lawyer, that's my role in life is to explain to people what can go wrong.

That's what we're going to do, five platforms, taxation of arbitration of tax and disputes. Pleased to have you. I'm going to hand over to Tom now to address the first topic, which is - how did we get here? Why are we talking about arbitration? Why is it an important part of the text landscape? Over to you Tom.

Thomas Ickeringill Thanks Martin. So, in providing the historical context to this debate, it's first necessary to consider mutual agreement procedure or MAP. MAPs have long been available to taxpayers under the international tax treaty network where there is, or is likely to be, double tax. So for example, let's say the ATO has proposed a transfer pricing adjustment, the taxpayer may take its case to the competent authority of either jurisdiction. The two competent authorities or CAs themselves are often standalone departments within the tax administration, and are then expected to negotiate in good faith to resolve the dispute. Historically, there were two key defects of MAP. The first issue was the fact that MAP wasn't, and still is unable, to compel agreement. Although MAP has a reasonable track record of resolving routine transfer pricing disputes, it has never been able to compel the CA's to reach agreement. Therefore, particularly in complex or high profile taxation disputes, transfer pricing disputes in particular, MAP has never been a panacea to resolving double taxation. The second issue I wanted to talk about was the fact that in these very complex cases MAP sometimes results in inordinate delays and intransigent positions. So, even though the CA team is functionally separate from the audit team, there still remains an inherent desire on the part of the CA team, not to take a position that is fundamentally inconsistent with that of the audit team. CA's are likely to be influenced by both domestic practice and jurisprudence. And you know what that means is that it is sometimes very, very difficult for a CA to move away from entrenched domestic legal and economic positions. What that means is that the success of MAP, let alone the the speedy resolution of a dispute, could never really be guaranteed, particularly in highly controversial disputes. So in light of these and other defects, the taxpayer community loudly protested that MAP was inadequate to deal with the growth of double tax disputes. So these protests resulted in Betts action 14. The report that we can see here on the screen. And what this did is it addressed the question of international tax dispute mechanisms and specifically mandatory binding arbitration. We'll consider the form and nature of arbitration later in the webinar, but before I do, I'd like to turn to Duncan for comments on some of the key differences between international tax arbitration, and the arbitration of international disputes in a non-tax context. Duncan.

Duncan Travis Thanks Tom. One of the main differences is that in most international arbitration there are commercial disputes and they involve private parties, so this this type of arbitration is state versus state. And in particular, it doesn't involve the taxpayer, a private party. Now there are disputes between investors in state versus state arbitration where one of parties is private. The other is a state. But that's not the case here. Now of course, there are some arbitrations they're not that common that are between states, and most often those types of arbitrations have a reason in relation to the United Nations Convention on the laws of the sea, or on territorial matters. The other main difference is that in most international disputes involving arbitration, the arbitral tribunal considers both parties' cases and renders an award that represents their view of how the dispute should be concluded, whereas in many tax arbitrations of the nature that we're talking about today, and as Tom will discuss a bit later, the tribunal actually has the opportunity to select between the two parties' positions, the position presented by each of the states involved, without actually rendering an award in the traditional sense. So that's just a couple of differences for you to consider in the sense that you have a view of what arbitration is normally like; this really is quite a bit different. Back to you, Tom.

Thomas Ickeringill Thanks Duncan. Yeah, that is, that is quite interesting and quite different, I think, from the you know some of the nitty gritty that we'll be talking about today. When we look at tax arbitration in particular, you know, what is helpful just to provide a little bit more context is that in 2015, the OECD published its Action 14 report. And what this report recommended amongst a number of different things, is the incorporation of mandatory binding arbitration into a multilateral instrument. And what this instrument will do, the BMLI, is that it would grant the option to signatories to incorporate arbitration into their existing tax treaty network. The vast majority of provisions for arbitration have been made effective following the ratification of the MLA, but a small number have been negotiated by a separate bilateral negotiation, so Australia with Germany, Australia with Switzerland, for example, they have been incorporated through the amendments to the double taxation agreements, rather than with the amendments to the MLA.

Monisha Sequeira Thanks, Tom. As part of the historical context, we know that traditionally in Australia taxpayers have primarily dealt with complex tax disputes, using domestic remedies. So that would involve either negotiations with the ATO, oftentimes the audit team, or filing an appeal through the court system. So that's in the Federal Court or the Administrative Appeals Tribunal. So although MAP has existed for many years and Australian taxpayers have sometimes resorted to MAP, I think it is fair to say that our clients are increasingly considering MAP with the hope of a greater likelihood, for faster resolution, with a genuine threat of mandatory binding arbitration now on the table. So I'm sure you and Martin will discuss timing in the MAP, and the arbitration process. I think as a group we have to bear in mind that resolution through Australian domestic dispute resolution processes often takes years.

Thomas Ickeringill Yeah, thanks Monisha. That's certainly right, and the uncertainty of MAP and the lack of guaranteed outcome, let alone the, you know, the positive outcome that a taxpayer would be looking for. It often resulted in reluctance on the part of Australian taxpayers to pursue MAP with the rigor and even the enthusiasm that they might today. As you say, the prospect of tax certainty in a relatively short period of time, compared with many years of prolonged litigation defending a historical position, is potentially very attractive. Moving on to the effectiveness of MAP, and importantly, the impact that mandatory binding arbitration has had on MAP behaviour. This slide details our key findings. With the introduction of mandatory binding arbitration, commentators have suggested two hypotheses. First, that taxpayers are more willing to submit double tax disputes to MAP. And secondly, that more MAPs are being resolved within two years due to the threat of arbitration. In addressing the first of these hypotheses, we can see from the blue line in the table on the left, that there was an enormous upswing, you can see at 2015 and really in 2016 here. And in my view that upswing in 2016 is not really related to the introduction of mandatory binding arbitration. And this is because even though the OECD's arbitration recommendations were first made in 2015, many taxpayers, and even advisors, were sceptical of the OECD's ability to facilitate an MLI to give effect to these recommendations. It actually wasn't until 2017 that the MLI was signed, and not until more recently that the arbitration provisions became effective. The most plausible explanation for the spike in 2016, in my view, is that the OECD published the BEPS actions, eight to 10 reports which fundamentally rewrote much of its transfer pricing guidance. In other words, there are more MAP cases - not because of arbitration but because of more the transfer pricing disputes.

Monisha Sequeira That is really interesting Tom, thanks. Allens recently invited Professor David Rosenbloom to speak, and for those of you on the call that don't know Professor Rosenbloom, he's one of the doyens of international tax. He's acted in a number of tax arbitrations involving the United States in particular. He noted that the biggest success of mandatory binding arbitration has not been in the small number of actual arbitrations themselves that have taken place, but in the fact that the threat of arbitration has put pressure on competent authorities to settle longstanding disputes and to do so promptly. So he gave us the example of a US Belgium MAP case in which he's involved that had been unresolved for over seven years. So, once both countries signed up to engage in mandatory binding arbitration, the case settled within months, so is that now Tom, in your view what we can expect for mandatory binding arbitration?

Thomas Ickeringill Yeah, I think so. I think that's correct and look, that the primary benefit of arbitration as Professor Rosenbloom said, you know that the, the primary benefit is not arbitration per se but the threat of arbitration, and competent authorities represent their respective governments, and unless both competent authorities genuinely believe that they have strong prospects of success, or they have a strongly held policy position that they're wanting to protect, I'd expect arbitration to reduce the average MAP cycle to something less than two yearsBut in sort of addressing this second hypothesis by reference to actual data, rather than anecdotal evidence, I still think unfortunately it's a bit too early to tell. So if we continue looking at the graph here on the left, even though we can see that the average cycle time, represented by the purple line, has been under two years every year since 2015 ,it doesn't necessarily tell us all that much, and instead focusing on the inverse correlation between the blue line and the purple line, what that demonstrates, in my view, is that there are easy cases and there are hard cases. Easy MAP cases, hard MAP cases and when there's an influx of MAP applications, the average cycle time falls because the ATO is able to cycle through those easy cases quickly. But when MAP applications slow down, the average cycle time increases because the ATO is still trying to work through those harder cases. So that's not to say that the threat does not weigh upon the minds of tax administrations - I think it certainly does. It's just that the assertion is unable to be supported by the most recently produced data which we can see here is up to December 2018. As tax arbitration becomes more mainstream, Monisha, I'd expect an upswing in MAP inventory and a maintenance cycle time under the 24 months, and an increase in successful double tax relief outcomes that we can see here, represented by the blue pie in the pie chart on the right, in coming years.

Moving on to the next slide, we consider the jurisdiction with which Australia currently has international tax arbitration agreements. Some of our major trading partners can be seen on this list, including Germany, Japan, New Zealand, Singapore and the UK. As can be seen in blue, arbitration is generally able to be treated after two years as MAP, except, we can see here France is a little bit different. And, you know, that the standard procedure is final offer arbitration or baseball arbitration, rather than independent opinion arbitration. For those who haven't heard the term baseball arbitration before, just as an aside, it derives from the form of arbitration that baseball players and their clubs in the major league follow when there is a salary dispute. To summarize the difference here, baseball arbitration requires the two competent authorities to put their proposed resolutions to the arbitrators. And those arbitrators, they must select by majority, the more correct resolution, without giving reasons. Independent opinion arbitration, which is what we have in the case of Australia, Japan and Australia Malta, that's more akin to the traditional commercial arbitration that Duncan mentioned earlier, where the arbitrators are empowered, generally speaking, to come to their own decision, and more importantly to give reasons.

Duncan Travis And they will that's right, so it is a more traditional form and anyone who's practised in that area, you know, sees baseball arbitration as a bit of a surprising approach in some ways. Why do you think it's more popular than the more Orthodox form of independent opinion arbitration?

Thomas Ickeringill Yeah, thanks Duncan I think there are a couple of reasons for this. And I think first and foremost it facilitates a much faster resolution of the dispute. If arbitrators must decide between two resolutions and are not required to give reasons for their decision, the time and effort required in applying and drafting a reasoned legal opinion is substantially reduced. A second more fundamental reason is the belief that independent opinion arbitration may impinge upon tax sovereignty. A number of commentators have warned against international tax arbitrators becoming transnational judges, without the usual checks and balances that may exist in a finesse point and certainly we look at the labels on the right, we can see that there are a number of jurisdictions here, China, India, and so on, where that really is at the core of the concern.

Despite this, the most obvious criticism of independent opinion arbitration is that without requiring the arbitrators to give reasons, individual arbitrators are largely free from scrutiny. And although baseball arbitration is by far the most common form at the moment, time will tell whether baseball arbitration will continue to be the preferred form going into the future. But before I sort of move on to the next slide, it's important to note the positions of certain jurisdictions. On the right, you know, China and India, like I mentioned before, Indonesia, South Korea, Malaysia. At the moment, there are no arbitration provisions with these countries, and there's little to suggest that will change in the future. In addition, I think I just wanted to point out the US. So the position between Australia and the US is still unconfirmed. Whilst the US has binding arbitration provisions with a small number of other jurisdictions, including with Canada, arbitration with Australia is not yet on the cards so we will obviously continue to watch this space. Martin did you want to talk about this?

Martin Fry Yeah, thanks. Thanks Tom. So we've arrived at platform three. We've talked about the history. The context. We've talked about arbitration amongst our treaty network. Now we've arrived at point number three in the journey, which is okay, how do we get to arbitration? How do we get there? Well, the pathway or the gateway to arbitration is the mutual agreement procedure, the MAP. So in order to arrive at arbitration, you must trigger MAP. And you must let MAP run for two years. If, at the end of the two year period, competent authorities have been unable to arrive at a negotiated resolution, then the taxpayer is in the position to, to lodge a written request for arbitration to occur. Just want to pause here for a moment and think about context. When you are turning your mind to starting this process, so when you're turning your mind to pushing something into MAP, what you're doing is you're, you've got a dispute with, with the revenue authority. With the ATO, and you're thinking of pushing it into the MAP process.

Now, having a dispute means that you've got access to Australian domestic procedures. You might be in the objections phase, and so you might have soon-to-be crystallized rights to appeal. You might be in a statement of order position phase. So you might be expecting advantage assessments to which you would object. Those things give you rights to pursue domestic procedures, where the goal is to obtain a legally correct answer of your structure. That's what you get under the domestic procedures. MAP, though, once you trigger MAP, there are two possible outcomes. One is that the revenue authority, so the competent authorities, will agree a negotiated resolution. Now that's a negotiated resolution, it involves compromise by both sides and so that outcome might be of very little resemblance to what is the true and correct profit allocation of your cross border arrangement.

Second thing that might happen is that the MAP process might fail. And, and then you, you, you exercise your right to take it into arbitration, and in, in a baseball context, the two revenue, or the two component authorities, will put their proposals to the to the panel, and the panel will choose which one it wants to apply again. That might be of very little relationship to what is the correct profit allocation outcome under the law. So, that sounds a little scary, requires you to have, requires one to be prepared to take that step. But it's not necessarily a bad thing, because a long-dated intransigent dispute with, with the Australian Taxation Office, in that context, the relative speed and certainty of an arbitrated outcome can be more highly valued than the prospect of arriving at the legally correct result. It's also not to say that having triggered MAP you have foreclosed the possibility of achieving that legally correct result. It is acknowledged under the MLI that the taxpayer can turn its back on the outcome achieved at arbitration and can pursue, can pursue the domestic procedures. Now that's, that's got its difficulties, and we'll be talking about those, but it remains available to a taxpayer.

Monisha Sequeira So, Martin, in some cases, obviously the commissioner may not actually want to engage in MAP or arbitration. So how might the ATO actually frustrate a taxpayer's attempts to get access to mandatory binding arbitration?

Martin Fry Yep, thanks Monisha, so look it's been our experience that the question of frustration is a relevant one. It takes off as, in our experience is not really all that happy. If you know heavily contested dispute is not really all that happy to see the taxpayer take, take it out of the hands of the audit team and put it into the hands of a process which they might not ultimately control. So you have to be worried, or keep a wary eye on the ability of the ATO to frustrate your desire if you have it, your desire to, to commence the process and run the process through to arbitration.

At the end of this discussion, platform five is where I'll be wrapping up saying what are the things that can go wrong, and squarely I'll address there, the steps that can be taken by, by the ATO to frustrate your plans. Very happy to announce that we've had our first audience question. And please keep them coming. It goes to the question of whether the arbitrated outcome has any precedential value, and I'm happy to say that in Tom's discussion of platform four, he'll be addressing that very squarely. So thanks for that question.

Alright, let's talk a little bit about mechanics. You've, you've got a dispute. You've become emotionally resigned to, to the, the benefits of, of arbitration and MAP, you know that there are risks but you know that there are protections as well. How do we get the ball rolling? Well, now a taxpayer can get the ball rolling by commencing the mutual agreement procedure where there is an action of a revenue authority thatwill result, that has resulted, will result or is likely to result in double taxation. Sorry, result in taxation not in accordance with the, with the double tax agreement. Typically, that'll be, well that's what we refer to as double taxation, here in our session today and typically that'll be in the nature of economic double taxation, which is where the same body of profits is being taxed both in Australia and in another jurisdiction. So that's your trigger point and action by the revenue authority that has resulted, will result or will likely, just be careful with your thresholds there, because they're different. Under the United States and United Kingdom treaty it's a 'will result'. Under Singapore, it's a 'likely to result'. What are we specifically talking about here? Well, in terms of ATO actions, an amended assessment. Yes. Clearly, there's an action which gives you the trigger to apply for that statement of order position. Yes, likely to result. If you're in a likely to result, that double tax agreements such as Singapore statement of audit position will be a sufficient trigger point for you. So, under most treaties there's a three-year time clock that your rights to apply for MAP expires after three years of the action causing the double taxation. And because there can be more than one action you need to choose which is the one that starts the clock running. Statement of audit position obviously occurs at a point of earlier than amended assessment.

The ATO takes the view that they take a concessional approach to this, that is to say that we'll take the later of those, of those events, so as to reduce the, the risk of the time clock running out. Another relevant ATO activity might be an information request or a risk review, know that, that won't be an action which gives you a trigger to apply from that. Just want to mention a couple of possible taxpayer actions. Might be a bit controversial,might be unusual, but a taxpayer, of course, may wish to request an amended assessment. If you're in that phase of an audit, and you really want to bring things on, then to request an amended assessment and for the commissioner to amend you would be an act which triggered the double taxation. Equally, on the other side, the taxpayer may wish to take a defensive action. It might be that you are engaged in a, in a process in your dispute resolution with the ATO which you wish to run for a bit further, you might have some faith that that's heading in the right direction. But you've got your eye on the, the time clock and you don't want that to time out.

Perfectly acceptable to lodge a protective application from that, to preserve your rights to enter the mutual agreement procedure and therefore also preserve ultimately a right to get to arbitration. ATO is not troubled by that and their public statements saying that they're comfortable to treat that protective application and hold it, to receive it and hold it in abeyance. So those are the triggers. Okay, so we've triggered MAP, using those steps. Just be careful of the transitional rules. Take Singapore, for example, there are five different scenarios, which are addressed by five different transitional rules, so just be careful there. Alright so we've triggered it, we've set the ball rolling. What does it look like? Well, the mutual agreement procedure is a, is a process whereby the two competent authorities are under a duty to negotiate to attempt to resolve the double taxation by mutual agreement. It's a duty to use their best endeavours to find resolution. It's not a duty to find agreement.

Monisha Sequeira Yeah. So, Martin, a case obviously we'll move into MAP after what's usually quite a long period of time where audit teams are locking horns. So, in your opinion, what would really motivate the Australian competent authority to deviate from an entrenched position that the, that its audit team has taken?

Martin Fry Yeah, that's a good question, something that I've been reflecting upon quite a bit, because of what, what, what is the agent for change. Why should they change? I guess, first thing is, look there's, the competent authorities take the job seriously. They are, they will come to the exercise with a genuine desire to, to attempt to resolve the double taxation. There is a recognition within the Australian revenue authority that economic double taxation is a barrier to economic growth. There's that. That'll obviously be most productive in the scenario of the easy disputes that Tom was referring to. I doubt it'll have a strong role to play in a situation where the cross-border arrangement is between the high tax in Australia and low tax, wherever. Whether it's high tax Australia, low tax Singapore, high tax Australia low tax somewhere else. Then the genuine desire to overcome the double taxation may be less pressing.

Second point would be, well just as Tom mentioned and you mentioned, the threat of arbitration may well be that which enables the revenue authorities to see the sense of a, of a preparedness to compromise and move away from the entrenched position of the audit team. Excuse me. Okay. So you've. I've just got a question here which, who applies, yep that's, we're going to get to that thankfully, happily we will get to that question that's just come in, which is excellent. Thank you. So you started the ball rolling. Revenue authorities have been negotiating and what does it look like for you the taxpayer? Well, it's not you, it's the competent authorities who are doing a negotiation, you are not running the show. You can, by agreement between the competent authorities, be present at negotiations for the purposes of information provision. But that will be only by exception, and by invitation. You as a taxpayer will obviously want to be proactive and keep in contact and in line and up to date with what the revenue authorities are managing and what they are working through, but you don't run it. And that's particularly important when you consider that.

If the nature of the double taxation arises because the Australian Taxation Office has issued the adjustment notice under the Australian transfer pricing rules, then the Australian competent authority makes it very clear in its public statements. It sees its role in life to persuade the other revenue authority of the correctness of Australia's position. So, Australian taxpayer, ATO is not your friend. They are not advocating for you, and you don't control how the other revenue authority advocates your case. And in that context, with a bunch of litigators on the, on the line here, let's talk about control, because in a domestic litigation context, you control your, the presentation of your case, largely you control the cadence of the case. You can control the timing, which gives you the opportunity to prepare your evidence within a certain cadence. But that's not the case when, when you are moving through the mutual agreement procedure.

Duncan Travis And Martin – as the taxpayer and as a litigator you know the giving up of control is obviously a very significant decision. Is the taxpayer faced with a binary choice? That is, if it's going to pursue a, pursue MAP and arbitration, does the taxpayer need to abandon domestic appeal proceedings?

Martin Fry Thanks Duncan. The provisions of the MLA make it clear that a taxpayer can turn its back on the arbitrated outcome. But in order for the taxpayer to do that, they need to keep alive their domestic appeal rights. If you're going to, if you want the option to turn your back on the arbitrated outcome and pursue the correct answer under Australian law, you need to keep those rights alive. And that introduces a couple of twists. When you apply, when you start, when you are set to get the ball rolling and you make your application for the mutual agreement procedure, the ATO's position is that, if you are also running domestic appeal proceedings, they will or will not suspend the MAP negotiations, and they'll adopt a case-by-case approach to that. So there's that and that's not a controllable position for you.

The other thing that, the other thing that's difficult in that context, is that the two-year time clock which you need to run before you can then lodge your application for the, for the arbitration, that two-year time clock will stop if a, if a competent authority has made the decision to suspend MAP while a domestic proceeding runs its course. So it's a very difficult issue, but it's one that needs to be managed carefully. We would encourage taxpayers to communicate with the ATO and get the objection process put on hold while there is a legitimate attempt to resolve the dispute through this avenue.

Okay, now we've, we've worked out how we can trigger MAP. We've worked out, we've talked about what does MAP look like for a taxpayer. We've identified that it needs to go for two years, you've arrived at the end of year two and there's no resolution; how do I then jump from there into arbitration? And hopefully I get, I get the easy question from the audience: whoapplies? Taxpayer applies. So it's a written request. It can be lodged once there has been an expiration of the two-year period. You need to carefully identify: when did that two-year period commence? The rules on that are quite tricky. And in this very busy tree on the slide we've tried to summarize those. But get into the detail of them because they are tricky. The commencement date really is a function of when the information has been provided. Once you've hit your two-year mark, taxpayer lodges an application. And there's, there's one more question. It's a little distracting isn't it, don't ever look at the questions, look at the screen, but this is a question which is directed to this topic so I'll address this now, rather than wait to the end. The question is: are we saying, turn your back on the arbitrated outcome? Do you mean the MAP outcome? We mean both. If you have preserved your domestic appeal rights, and there is a negotiated outcome under MAP, the taxpayer can, cannot accept that outcome and the MAP outcome will not be implemented. If you move to arbitration and there is an arbitrated outcome, the taxpayer can choose not to accept that. Maybe the question reflects the language that the more correct use of language is to say that the arbitration result is actually the final and implemented phase of the MAP, the mutual agreement procedure. If that's what the question is addressing, then yes, that's the correct terminology. So that's what we've done, we've, we've triggered the process, we've run through the negotiated process, we've arrived at year two and now we've triggered arbitration by lodging. The taxpayer's lodging its notice. That's why we turn now to Tom to talk about, or actually, how does it as a baseball work in practice?

Thomas Ickeringill Thanks Martin. So, as, as I discussed earlier in the webinar, there are two forms of tax arbitration. There's baseball arbitration and independent opinion arbitration. And given the overwhelming majority of Australia's tax treaty network uses baseball arbitration, that's what I'll be focusing on here. So going through this procedure. First, if MAP negotiations have not produced an outcome after a two-year period, or a three-year period in the case of France, the taxpayer may submit its case to either competent authority. And just addressing that audience question earlier, it can be either taxpayer. It can be the Australian taxpayer or it can be the taxpayer on the other side for the dispute to be adjudicated. Now secondly following the application, the two competent authorities have 60 days each to select a panellist, and the two panellists then have 60 days to select a third panellist, and that third panellist is the chair. Thirdly, the two competent authorities submit a proposed resolution to the panellists. To be clear, this proposed resolution is on the very specific question on the correct amount of tax, not a proposed resolution on each of the actual assertions that support the question of the correct amount of tax and this goes to an audience question. How likely is binding arbitration going to yield a nil double tax? Ultimately, it comes down to what the proposed resolutions are and what those proposed resolutions, put forward by the two competent authorities are. And, and the anticipation is that the nature of those proposed resolution would be in such a form that they address the issue of double taxation because that is the whole reason why the taxpayer has chosen to enter MAP, and then triggered the arbitration procedure.

So, the, the competent authority puts to the arbitral panel, the proposed resolution, as well as a position paper, and in this position paper the taxpayer, sorry, that the competent authority goes through all the factual assertions that need to be made to get to an outcome that is being proposed. And although that the competent authorities will, as Martin mentioned, negotiate these memoranda of understanding on specific procedural details, US arbitration experienced today indicates that it's largely a paper-based or email-based process: no hearings, no oral submissions, no cross examinations. It's almost entirely paper-based, which is quite, quite surprising and quite unusual and different.

Finally, the arbitral panel will decide by majority which of the two proposed resolutions they prefer. This decision is likely to be delivered by a teleconference or perhaps in this new world by Zoom. But there will be no reasoning attached to the delivery of a resolution. And again, you know, back to that audience question, we would certainly hope that it would ameliorate double taxation. It is important to note, at this point, though, that at any point up to the moment of arbitration, and even, technically, after the arbitration decision has been handed down, the two competent authorities may reach a resolution by way of mutual agreement. But if one of the competent authorities merely disagrees with the decision, and the other CA refuses to deviate from its position following the arbitration process, there's not really much it can do unless there is a material procedural defect that may invalidate the outcome.

Duncan Travis And Tom one of the great benefits of arbitration and one of the reasons why people look to using it, is that it's confidential; it's not in a public forum like a court. Of significance is confidentiality as a factor here.

Thomas Ickeringill Sure, so that the types of matters that end up in arbitration are by their very nature, likely to be highly contentious and relevant not just to the taxpayer at the centre of the dispute, but to a wider class of taxpayers. It's therefore important to know that the confidential, that the confidentiality obligations imposed upon all parties to an arbitration are particularly strict. In order to ensure that there is no ripple out effect from an important decision. It can be seen in this flowchart on the right that following the standard two-year period or three-year for France - following this period, a formal resolution at arbitration can arrive very, very quickly, and in ordinary circumstances based on the OECD Memorandum of Understanding template, an arbitral decision can actually be reached within 10 months, if not sooner.

Turning now to taxpayer considerations, a taxpayer's arbitration strategy needs to be determined not at the point of arbitration, or even during that, but prior to MAP. The reason for this is that taxpayers are not a party to MAP discussions. And as we've been talking about, unlikely to have a full role in the arbitration itself. So, some key points to consider include how invested the taxpayer is in the result of the MAP or arbitration. If the endgame and arbitrated outcome are broadly consistent with its position, or does the taxpayer just want to achieve tax certainty? And you know, how does it want the issues to be framed? So these and, you know, a variety of other points, go to the question of whether to pursue a passive or active engagement strategy. A passive approach, which would simply be responding to RFIs, to the satisfaction of competent authorities, that will assist the resolution of the dispute within the relevant timeframe. But it may not necessarily result in an outcome that is most aligned with the taxpayer's factual assertions. If the ultimate goal, however, is to achieve an arbitrated result that is broadly aligned with the taxpayers factual assertions, the taxpayer must work proactively with both competent authorities to frame the debate, and aid understanding. In such a case, the taxpayer will need to consider closely the types of evidence it seeks to gather and present in order to assist it in framing the debate in the way that it is looking for. The evidence may include industry insights, economist reports, detailed internal comparable data, detailed external comparable analyses, lay witness interviews, etc. Monisha, did you have a comment?

Monisha Sequeira Yeah, Tom, as Duncan and Martin were sort of discussing earlier, one of the key issues the taxpayer needs to consider, along with its advisors of course, is what does it do with the objections?I In order, does it want to preserve those rights to domestic resolution? So once the ATO does make an objections determination, the taxpayer must file an appeal in either the Federal Court or the AAT in order to preserve their appeal. So, in your chart, given that the MAP process or arbitration can end in a result that the taxpayer in effect doesn't like, one of the things that taxpayer really does have to consider as part of its strategy around objections, is what, along with its advisors, what is the strategy? What are we going to do if the objections are still pending? If they are determined, sort of, as a group, what are we going to do and what's the strategy going forward? So it's a very, very important consideration in order to preserve those domestic rights.

Thomas Ickeringill Yeah, thanks Monisha, that's certainly right. And, you know, following an arbitration decision, the competent authorities have a duty to implement the decision by way of mutual agreement. And you know, before we get to implementation, we need to consider how we get there. Now we can go through the nitty gritty, but I think in the, you know the interest of time, you know, we'll move forward to looking at the question of consequences. So, when we look at, you know what happens at the end of an arbitral process, you know that the OECD makes it clear that decisions of arbitration panels, whether independent opinion arbitration panels or baseball arbitration panels, do not have any precedential value on any court, future arbitral panel or tax administration. This, this goes to one of the earlier audience questions. You know, it goes back to the earlier point about countries fiercely wanting to protect their tax sovereignty. Hence the desire of most countries to avoid written decisions. Despite this, the decisions are likely to be influential in how the competent authorities resolve similar cases involving similar classes of taxpayer in the future, notwithstanding the strict confidentiality of arbitration proceedings in order to avoid a ripple-out effect, time will really tell whether a ripple-out effect, because in practice, has a result of changes in tax administration compliance behaviour. I think just in the interest of time, what we might do is move to potential pitfalls. Monisha did, did you want to make a comment here. To start off with?

Monisha Sequeira Well, I'll just say Martin I think this really returns us to the original question that I asked, which was: what can the ATO do to frustrate a taxpayer's wish for an arbitrated outcome?

Martin Fry Thanks Monisha. Probably two, two risks here. I guess just reflecting while you were talking, there's probably, what can go wrong, there's probably three. One thing that can go wrong is that having handed this process over to the competent authorities you can get an answer that you don't like. And we've talked about your ability to pursue, to turn your back on that and pursue domestic proceedings. But what can the ATO, if you really want that, the speed and the certainty of the arbitrated outcome, what can the ATO do to frustrate your ability to achieve that. Two risks there, Part IVA and concurrent proceedings. Just focusing on Part IVA for a minute. So in the double tax agreement. Australia has reserved its position, the effect of which is that arbitration will not be available to the extent that the case involves an application of Part IVA. Tricky area there. I mean if you're looking at a situation where you've got the transfer pricing adjustment and then in the alternative, the commissioner's assessment, amended assessment is a applying a Part IVA case. So, the words to the extent, create some really difficult technical issues.

In theory you can run through a situation where there is a mutual agreement procedure on the profit allocation decision. And there can be an outcome. But there is still an ability for the ATO to pursue the Part IVA case. And in order for you to end up with the right result, you'll have to then defeat the Part IVA case in the domestic court. That's the theory. In reality, you'll find that the Australian competent authority will be very reluctant to even commence the MAP process or take that through its course in a scenario where there is a Part IVA case in the alternative, made more complicated by the fact that it might be that the facts upon which the ATO's Part IVA case are very different to the facts which support the profit allocation. Might also be that the Part IVA tax benefit, quantum of it, might be very different to the quantum of the profit allocation outcome. It's quite a difficult scenario. It's not one that actually we, we have a clear and clean answer to at this point in time.

And then the second risk which we have touched upon quite a bit here today, so I'll just mention it, is the risk of concurrent proceedings that can delay or potentially block your access to arbitration. Now the trigger point for that is your objection decision. So, that's the point that you need to focus on and manage very carefully, because once you get that objection decision you will inevitably be faced with the problem of having to lodge an appeal to protect your rights. I think. I think, I'm getting some messages here which are to say let's just wrap it up. Good idea Duncan, let's wrap it up. We've done full time, we've had, we've had a good, good run through of all the issues that we think are pressing. We'd be very happy to correspond with anybody attending here today. I'm just going to mention - don't forget the resources list. You can get access to the slide deck and get access to the technical paper. I was also going to mention, this is the first in a series of webinars that we're going to run through here in the Allens tax space, and our next one is on the 22nd of September, a point in time at which we here in Melbourne should really be focusing on, on the football but instead we're going to focus on, Deputy Commissioner Rebecca Sage will be in hot seat. And we'll be discussing the issues that she's running, and the focus areas for corporate tax. Right on 58 minutes to the hour and I'm going to thank, thank the panel I'm going to thank you Monisha for your contributions and Duncan, thank you. Tom also I'm going to thank you. Those in Melbourne who've been watching closely the restrictions will know that it's not possible in Melbourne to get a haircut after midnight tonight for six weeks, and I'm just looking at Tom's hair and thinking about what that's going to look like six weeks from today. I'm not encouraging you to get out there this afternoon and wait in the queue as I did yesterday, wait in the queue to get your COVID cut. Otherwise we might have to assemble this entire audience six weeks from today to see what …

Thomas Ickeringill Just to see what that looks like. Yeah, it will be quite long.

Martin Fry And you must be absolutely thrilled to be getting hair advice from a 52 year old so that's... I'm sure you're delighted about that so thanks everybody. We hope that this has been a good session for you. Don't forget that you'll get your CPD certificate shortly. And thank you for your attendance.

Monisha Sequeira And Martin really, this is just, Martin this is really just the start of a conversation about these issues, isn't it? So if people do have further questions beyond reading the material that we have available, you know, please feel free to reach out to us, our tax disputes team, because there's some really interesting strategic issues that we can discuss with you and your teams.

Martin Fry Yep. Thanks, Monisha. Stay well everybody.

Monisha Sequeira Thank you.

Duncan Travis Thank you, everyone.

Thomas Ickeringill Thank you.


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