Episode Transcript
[00:00:00] Speaker A: Foreign.
And welcome to our podcast series A and M Tax Tax Policy Updates, where we bring you insights into the latest developments in global tax policy and controversy matters. This is Lucy Sauvage. I'm a senior director in the tax risk and dispute management practice of A and M, based out of Manchester, England. I've been working in the field of tax dispute resolution for 20 years, helping businesses of all sectors and sizes managing controversy matters with the tax authorities.
And I'm joined today by Craig Aspinall.
[00:00:32] Speaker B: Hello everyone. I'm a director in the same team as Lucy and I've been working in this field for nearly 18 years.
[00:00:38] Speaker A: So in today's podcast we'll be looking at the existing international tax dispute resolution architecture and how this is evolving with both the development of the OECD's mechanisms alongside the United nations emerging framework.
So, Craig, global tax dispute resolution is at a bit of a crossroads, isn't it?
[00:00:56] Speaker B: Yes, it certainly is. Let's just set the scene. In recent years, global tax disputes have exploded in both complexity and importance.
These days, companies operate across more countries and digital markets than ever before. And with digitalisation and the post BEPS environment, tax rules globally are in flux and tax authorities generally are becoming more aggressive.
That combination means more risk of cross border tax disputes and companies could face double taxation or contradictory tax assessments.
[00:01:27] Speaker A: And that's simply unsustainable in the global economy. This is the reason effective dispute resolution is so crucial now, right?
[00:01:33] Speaker B: Yeah, exactly right. Unresolved international tax disputes mean significant financial uncertainty. So if you're an in house tax director, you need to know if you'll ultimately get relief from double tax or if profits will be eaten up by multiple countries. Tax claims, certainty and timeliness in resolving disputes can have huge impact on a company's effective tax rate and even where it chooses to invest.
[00:01:58] Speaker A: Maybe we should take a step back a moment and look at how international tax dispute resolution mechanisms have evolved over time.
[00:02:05] Speaker B: Yeah, that's a good idea. And it's interesting to see actually how far we've come. So for decades the main tool was the mutual agreement procedure, or map, built into the majority of bilateral tax treaties.
[00:02:17] Speaker A: Exactly. MAP is like the workhorse of cross border Dispute resolution. It dates back to early tax treaties and was codified in models like the OECD model tax convention. Under a typical map, when a multinational finds it's being taxed on the same income by two countries, it can ask each country's competent authority to negotiate a solution that eliminates double taxation.
[00:02:37] Speaker B: Yeah, and initially this was pretty informal and Simply just two tax authorities sitting down to work it out. And often this approach worked. But as cross border transactions multiplied in volume and complexity, MAP cases ballooned. And at the end of 2024 there were 6,146 open cases. And they started taking far too long, sometimes dragging on for years without a resolution.
So the OECD's BEPS Action 14 was about making MAP more effective and timely.
It introduced peer monitoring of countries, MAP performance and optional adoption of binding arbitration for unresolved MAP cases via the 2016 Multilateral Instrument.
And yet it did lead to progress. Many countries boosted their MAP teams and started resolving cases faster. However, the timing is still an issue, right?
[00:03:30] Speaker A: In fact, the average time taken to resolve a transfer pricing MAP case is nearly 31 months, with other cases averaging around two years. And from a CFO's perspective, that's an eternity. Profits are stuck, possibly double tax, and it's hard to plan around that. So time remains a key issue. And there are other significant issues that remain. With the BEPS for action 14. System consistency is the second main issue. The OECD led processes are often seen as dominated by rich nations, with developing countries having only limited input and with much less resource to implement action implement actions. And this creates an imbalance.
Many developing countries have very few tax treaties compared to the rich nations. So when a tax dispute arises with another country and there's no treaty, they have no formal process to resolve it. So there's still a risk of impasses. Some cases just don't get solved if the two sides can't agree, leaving you potentially stuck with double taxation unless you go to the domestic courts.
[00:04:22] Speaker B: Yeah, and that leads us to a third issue, which is a lack of binding outcome. In many cases, MAP is ultimately diplomatic negotiation. So if it fails, there is no result. And that's why BEPS 14 introduced optional adoption of mandatory binding arbitration into the tax treaties as a backstop with arbitration clauses. If two countries cannot iron out a dispute via map, then they must accept an independent panel's decision. Now that's a huge development over the past 10 to 15 years. But not all countries accept the arbitration.
Whilst typically large advanced economies have embraced it to ensure timely outcomes, some countries, particularly those lower income ones, are uncomfortable committing to binding arbitration due to serenity concerns, or simply don't have the resources to engage in lengthy arbitration cases.
So many treaties still don't include it.
Meanwhile, the tax states keep rising the number and complexity of disputes arising in tandem with global business.
So you have pressure to enhance dispute resolution beyond what bilateral treaties can do now. That's why we're now seeing new multilateral approaches like the ones under Pillar one and Pillar two, as well as discussions at the United Nations.
Let's break these down and compare them.
[00:05:38] Speaker A: Sure.
Let's start with the OECD's Pillar 1. Even though Pillar 1 implementation has stalled, its dispute model is really interesting. By design, it's multilateral. A single Multinational could have 20 or 30 countries involved in deciding how profits are split.
So without coordination, that would mean a messy web of overlapping disputes. So effective dispute resolution isn't optional, it is fundamental.
[00:06:01] Speaker B: Yeah, exactly. Right. And the solution for amount A is pretty groundbreaking. So instead of multiple bilateral maps, there's a coordinated multilateral process.
In practice, a company files one amount A return with a lead tax authority which shares it with all relevant countries for a joint review.
[00:06:20] Speaker A: So rather than separate disputes, everyone's reviewing the same position together?
[00:06:24] Speaker B: Yeah, that's the goal. There's a stepped process.
So first the lead authority reviews and proposes outcomes. If disagreements remain, it goes to an advisory review panel made up of officials from affected countries to try and reach consensus. Now, if that still doesn't work, it escalates to a determination panel, which is effectively arbitration, which delivers a binding decision crucially, and this is crucial, that final step, and ensures closure.
[00:06:53] Speaker A: It's elegant, it's complex, but it's also politically sensitive. The extra layers give countries, especially the developing ones, more input before binding decisions are imposed.
[00:07:02] Speaker B: Yeah, practically, if it works, it's a big win for multinationals. One coordinate process replaces dozens of parallel audits, and this is far more manageable, even if it still may be time consuming.
[00:07:16] Speaker A: So Pillar two poses a different scenario for disputes. Unlike Pillar one, it's being rolled out country by country through domestic law, following the OECD's GLOBE model.
So it's a common approach, not a single multilateral system. And companies are already saying the dispute framework feels unclear and is still evolving.
[00:07:33] Speaker B: Yeah, exactly. Now, it's early days, so most countries only started implementing it in 2024 and 2025.
There's no bespoke dispute mechanism like pillar one. The hope is that consistent rules reduce disagreements, but in reality, different interpretations are inevitable, which still creates the risk of double taxation or mismatches.
[00:07:54] Speaker A: And that's the concern. And the OECD recognises this. There's talk of solutions, maybe a new multilateral agreement adopting MAP or even using the International Compliance Assurance Program for coordination, but nothing's finalised yet.
[00:08:08] Speaker B: And this leaves in house tax teams in a bit of limbo. So on one hand there's a single rule set, but on the other, if disputes arise, you're back to existing routes. So maps, domestic appeals, or whatever new processes emerge. If Pillar 2 triggers a stack of multi country disputes, the need for an effective framework will become pretty urgent.
[00:08:29] Speaker A: Now let's talk about the United Nations Tax Committee's draft convention on International Tax Corporation. So this is a new ongoing development, not an established system yet, but likely to influence the future.
Craig, do you want to outline how the UN's approach is shaping up in terms of dispute resolution?
[00:08:45] Speaker B: Sure.
So the UN's process is about creating a framework convention on international tax cooperation.
It's partly driven by a desire for a more inclusive global forum where developing countries have an equal say compared to the OECD led approach.
And when it comes to dispute resolution, the UN is discussing a dedicated protocol on dispute prevention and resolution as part of the convention.
Early drafts indicate a focus on a menu of options. So rather than imposing a one size fits all like mandatory arbitration, they're exploring various avenues from dispute prevention tools like advanced pricing agreements and advanced rulings to joint audits to multiple forms of dispute settlement, including MAP mediation, conciliation and arbitration.
[00:09:32] Speaker A: But a key difference is optionality. Right? My understanding is the UN likely won't force every country into mandatory arbitration. They're mindful of the sovereignty and capacity issues.
[00:09:41] Speaker B: Yeah, exactly.
And in fact, some delegates in the UN negotiations, especially from the Africa bloc, have explicitly opposed mandatory binding arbitration.
They feel it could infringe on their taxing rights and that multinationals may actually have the upper hand in arbitration due to resources and expertise.
So the UN might let countries opt in or out of certain dispute mechanisms under its convention.
[00:10:05] Speaker A: However, from a business perspective, we prefer certainty, and that's what binding arbitration provides if MAP fails. So if some countries opt out, a dispute might still end up unresolved.
So one hope for the UN approach is that it will, as a minimum, encourage broader adoption and improved MAP processes and alternative mechanisms like mediation or joint audits. And maybe gradually build trust so more countries get comfortable with stronger commitments in the future.
[00:10:31] Speaker B: It's definitely an evolving picture if you compare the main routes. Traditional MAP and treaty arbitration are familiar and widely used. Yes, they work, but can be slow and tend to be bilateral, which makes multi country issues harder to resolve.
Arbitration helps where it's available, but coverage is still uneven.
Pillar one takes a different approach. It's designed to be multilateral with mandatory dispute resolution through panels.
That's a big step forward in tackling cross border issues. In one go. But it's complex and will mainly apply to the largest multinationals.
Pillar two is less developed from a disputes perspective.
It relies on countries applying the rules consistently, which may not always happen, and that creates uncertainty. And right now, now there is a noticeable gap in how tax disputes will be handled.
The UN Draft Convention is aiming for a more inclusive framework. It focuses on flexibility, dispute prevention, like APAs, and building tax authority capability.
But it's still evolving, so questions remain about how consistent and effective it will actually be in practice.
[00:11:39] Speaker A: Thanks, Craig. That really brings out the contrast.
[00:11:41] Speaker B: Yeah. And a key question to consider is if these frameworks advance, how might they coexist?
[00:11:48] Speaker A: I think we can foresee both potential synergies and frictions. The UN Convention could complement the current system by addressing gaps, particularly for multinationals operating in jurisdictions with no tax treaties or limited administrative capacity.
A multilateral UN dispute mechanism could offer a new route to resolve double taxation that would otherwise persist. It focuses on its focus on prevention through training, joint audits, Advanced warnings and data sharing could also reduce disputes over time, which aligns with the OECD objectives of tax certainty.
However, the coexistence of parallel OECD and UN systems risks added complexity. Businesses might need to navigate two sets of rules, processes and forums, depending on the countries involved.
This will bring increasing costs and uncertainty. There's also a risk of inconsistent outcomes, with the same issue potentially resolved differently under each framework, possibly undermining confidence.
A dual track system could encourage forum shopping with taxpayers or authorities seeking the most advantageous route. Without coordination. This may lead to a strategic use of procedures, further complicating dispute resolution and challenging consistency.
From an enforcement perspective, the OECD model's use of binding arbitration provides finality when negotiations fail. If the UN Mechanism relies more on non binding mediation, businesses may be concerned about enforceability and the lack of guaranteed outcomes.
And finally, maintaining two systems could increase compliance burdens, requiring engagement across multiple processes. That said, competition between frameworks could drive improvements, provided there is sufficient coordination to maintain consistency and enhance overall tax certainty.
So what should our listeners take away from all that?
[00:13:32] Speaker B: It's a good question. I think a number of things.
Firstly, I think stay informed and engaged in this policy space.
International tax rules are evolving quickly. Pillar two is taking effect now, and both Pillar one and the UN Convention might go live in the coming years.
And these will shape how you manage disputes in the future.
I'd say secondly, anticipation and prevention will be key.
The best dispute is actually the one you never have. So proactive measures like advanced pricing agreements advance rulings and cooperative compliance programmes should be on your radar.
These can prevent disputes or at least put you on a stronger footing if one arises.
Thirdly, I think understand the differences in the mechanisms. So for instance, if you're dealing with a dispute between countries that have an arbitration clause, you know you have an ultimate resolution if needed. But perhaps plan for the timeline and budget that arbitration entails.
If you're dealing with countries that don't have arbitration, you might need a backup plan. So maybe domestic litigation strategy or negotiating harder during map.
And finally, remember that resources matter.
Resolving international tax disputes can consume a lot of time and effort, so make sure that your team or your advisors have the right expertise and bandwidth. Whether it's MAP arbitration or navigating new processes like Pillar one's panels, some in house tax departments we see are now building internal tax controversy teams to handle these issues proactively.
[00:15:07] Speaker A: Agreed with all that. I mean, the bottom line is effective dispute resolution isn't just a technical tax issue, it's a strategic business issue. It's about protecting your company's value in an era when tax risks cross border more than ever. And our advice is follow these developments closely, engage with tax authorities and use all of the tools available for tax certainty.
Okay, so that brings us to the end of this podcast. Thank you for joining us today. We hope you found this discussion insightful.
[00:15:35] Speaker B: Stay with us as we continue this journey in our upcoming podcasts. Please also check out our monthly newsletter, which will bring you the latest key updates around selected editorial pieces from our global tax network.
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[00:15:54] Speaker A: And if you haven't done so yet, do subscribe to receive the newsletter directly in your inbox. Thank you.
[00:16:00] Speaker B: Thank you very much.
