DISSERTATION of Seminar Paper titled Arbitrability in International Taxation Submitted to

DISSERTATION
of Seminar Paper titled
Arbitrability in International Taxation
Submitted to:
Dr. Shobalata Udapudi
Professor of Law,
Gujarat National Law University.

Submitted By:
Swetha Vadarevu13B147
Table of Contents
Sr. No.

Title
Page No.

1. Acknowledgment 2
2. Introduction 3
3. International Taxation and Dispute Resolution 12
4. International Taxation Arbitration 24
5. Understanding the nexus between International Commercial Arbitration and International Taxation 35
6. International Tax Arbitration on the Global Front 46
7. The Indian Scenario 55
8. Conclusion 59
9. Bibliography 63

Acknowledgment
I consider it a privilege to present this research article on the topic discussed herein under. First and foremost, I would like to express our sincere thankfulness to Mr. Bimal N. Patel, Esteemed Director, Gujarat National Law University, for providing me with an opportunity to venture out in the vast field of research and explore various contemporary issues that our country’s international taxation sector faces each day.

I would like to express our deepest gratitude to Dr. Shobhalata Udapudi Professor of Law, Gujarat National Law University, for her continuous support and guidance before and during the preparation of this research article.

It is indeed impossible to name each one of the people who helped me in collecting information and preparation of this project here. I thank all those colleagues, teachers, research scholars and experts who helped me compile this research article
Introduction
TITLE
A study on the working and availability of Alternative Dispute Resolution (ADR) Mechanisms to address matters concerning International Taxation, across the world.
RESEARCH PROBLEM
Most countries, in the past decade, have concluded and entered into numerous tax treaties in an attempt to deal with taxation issues such as double taxation and non-taxation of business entities. Despite of being a rather beneficial step for the economy of these states, such treaties, unfortunately, gave rise to an all new concern altogether. Most developing countries that adopted such treaties and entered into agreements are now having a hard time managing the prevalent tax environment in their jurisdiction, thereby giving rise to a high rate of unresolved tax disputes. It is necessary to take note of the fact that as a consequence of the recent globalization and evolution of the world economy, the international community deserves a better system to address disputes arising on account of commercial transactions, whether it is a matter pertaining to terms of the transaction or a government regulated aspect such as taxation. In any case, a backlog of cases and pending disputes benefits no one and rather adds to a state’s worries.
The international community, in order to address the issue of backlog of cases in several jurisdictions, has diverted its focus to alternative forms of dispute resolution. Such an attempt was sped up on account of the need for making their respective markets more investor- friendly, since the taxation regime of a state is an important factor of consideration for foreign entities looking for host states for their investment. Multinational enterprises have many choices as to where to invest, and the tax environment is a factor that may tip the scale in favor or against any country. They need to be assured that their resources are not going to be wasted on account of dealing with the threat of tax litigation. For instance, conflicts may arise due to multiple reasons including, differences in interpretation of a treaty, factual disagreements, lack of information, or even legal problems such as, differing domestic legislations. In order to successfully address these disputes, the tax administrations need to change. They need to be prepared to achieve a much more transparent and open model wherein the policies implemented in this light will be in consonance with international standards, keeping in mind the interests of investors.
An interesting way to achieve the same is to introduce an alternate dispute resolution mechanism rather than burdening the courts itself. Arbitration has been accepted as a mode of resolving disputes in the tax sector in the USA and the most countries of the European Union. These countries also need to take into account how to apply the international rules that emerged from OECD’s Base Erosion and Profit Shifting (BEPS) proposals in October 2015. Further, in order to specifically understand how ADR can be incorporated for tax disputes, one needs to look at the OECD’s Multilateral Convention. The Convention stipulates, under Article 25, the Mutual Agreement Procedure, commonly referred to as the MAP. The procedure prescribed suggests that parties must attempt to resolve disputes amicably by way of a mutual agreement of the suitable type. However, when the MAP followed cannot achieve its intended goal, the Convention mandates Arbitration.

Arbitration in international tax matters has become a burning issue in the present times, especially for economies in transition. This is because the higher inflow of foreign direct investment undoubtedly leads to an increase in cases where a DTC is applicable and, thus, more disputes arise. Data collected by the OECD and IBFD show that the number of MAP cases has almost doubled since 2006 and most of them are in the area of transfer pricing.
In 2013, the OECD launched the BEPS project in order to address the growing concerns of the public with regard to governments suffering substantial losses in terms of corporate tax revenue. Such losses were primarily incurred on account of planning aimed at shifting profits in ways that erode the taxable base, thereby, leading to domestic and international rules on the taxation of cross-border profits being broken. As a second step, the OECD issued an action plan detailing the topics that would be addressed and outlining the direction of the efforts in each particular case. Each topic was assigned a separate action and a schedule for completion.

The existing OECD MAP framework under Article 25 of the Model Tax Convention does not impose an obligation on parties to resolve disputes, thereby, largely undermining its significance. It essentially requires contracting states to “endeavor” to resolve disputes. Further, such a quasi- duty is triggered only in situations wherein the contracting state believes the claim to be justified and if it cannot otherwise resolve the taxpayer’s complaint. To make matters worse, there is no limitation period or time limit for resolution of these negotiations once the MAP clause is put into action. International tax disputes often remain outstanding and unresolved indefinitely under MAP, particularly where the views of the contracting states are diametrically opposed. In such circumstances, the taxpayer is invidiously “left in the dark” and may continue to suffer double taxation with no avenue for redress unless and until the respective contracting states resolve the matter.
It is interesting to note that Paragraph 5 of Article 25 of the OECD Model does provide for mandatory arbitration where MAP fails to resolve a dispute within a stipulated period of time. However, the provision is left redundant since the incorporation of arbitration into double taxation treaties (DTTs) under the OECD Model is discretionary. Consequently, in practice, arbitration is not commonly incorporated into DTTs internationally, largely due to the general perception that it involves ceding fiscal sovereignty.

International tax disputes are more prevalent today than ever before. As countries seek to defend their tax bases with increased vigor during the implementation of the OECD’s base erosion and profit shifting (BEPS) proposals, the number of disputes is likely only to increase. By adopting mandatory binding arbitration (MBA), the inefficient and ineffective mutual agreement procedure (MAP) can be transformed into a robust, “well-oiled” tax dispute resolution mechanism. The 2016 US Model Income Tax Convention contains a prototype MAP that incorporates MBA. This prototype should inform the development of MBA under the BEPS Action 15 multilateral instrument.

Apart from the primary decision by states whether to apply the arbitration provisions of Part IV of the BEPS Convention, there are at least 10 choices that states may make within it. If all 20 states that have shown interest in mandatory binding arbitration adopt Part IV, it will take some time to see whether workable arbitration mechanisms emerge between any two contracting states. Hence, it is safe to say that the result of how the entire policy would pan out can only be noted once states start taking measures in this regard.
Most experts believe that the compulsory invoking of arbitration or MBA would have an extremely positive impact on the efficiency of dispute resolution mechanisms in any contracting state that incorporates the same in its legal framework. The logic behind the same is very simple. It basically incentivizes early dispute resolution with mutual understanding rather than outsourcing the decision- making. MBA, in essence, provides for an efficient system for determination of disputes in a structured, unbiased and practical manner. These qualities are crucial to ensure that enterprises with cross-border operations are protected from concerns such as double- taxation, and to promote confidence and engagement among the business community in the evolving international tax landscape.

Therefore, in the larger picture, MBA would have a very significant role to play, even if it were to be invoked rarely.
RESEARCH OBJECTIVES
Analyse the working of different modes of Alternative Dispute Resolution (ADR) Mechanisms on the international front.

Study the evolution of taxation treaties and other international instruments dealing with taxation aspects.

Undertake a comparative study to examine the systems prevalent in other economies to deal with International Taxation.

Examine the Indian legislative framework for redressal of tax disputes on the domestic as well as the international front.

Suggest, if any, changes or amendments need to be brought to the prevalent system or introduce new elements altogether.

RESEARCH QUESTIONS
What is the significance of Alternative Dispute Resolution (ADR) mechanisms at an international level?
How did the branch of International Taxation evolve?
How do different jurisdictions across the world address International Tax concerns?
What is the legislative framework that is available in India to deal with Tax disputes – both domestic and international?
What is the conjunction does the international community establish between these two branches of law?
Whether Arbitration is genuinely the answer to the concerns raised with regard to international tax challenges?
Whether the introduction of such a system is feasible and in public interest?
What are the changes that the taxation regime in Indian must undertake in order to remain in sync with the international standards?
Whether the Indian framework can endure such introduction of new elements successfully?
RESEARCH HYPOTHESIS
A study on the feasibility of Arbitration for determining International Tax disputes.

Analysis of the Indian system of International taxation in comparison with other jurisdictions.
SCOPE
The research paper attempts to examine alternative dispute resolution mechanisms that can be incorporated and adopted to determine tax dipsutes at the international level. The analysis, here, would be restricted to the instruments enacted internationally to address these concerns and the way they have panned out in the recent times. Additionally, a comparative analysis of dispute resolution mechanisms in our countries including USA and other European states will be undertaken. For this purpose, the research relies primarily on the legislative framework in such states alongwith the measures taken by them in terms of their global relations. The research, further, studies the scenario in India and the manner in which the same can be improved in order to be in sync with the rapid globalisation and evolution of the world economy.
RESEARCH METHODOLOGY
The current research is a purely doctrinal study. The research method is analytical and applied in nature. The dissertation follows inductive reasoning. The research is based on primary and secondary sources. International treaties and conventions form the primary source of this dissertation. Secondary sources of this dissertation constitute scholarly commentaries by jurists, journals, books, web resources, policy papers, etc.

CHAPTERIZATION
CHAPTER 1: Introduction
This chapter introduces the central theme of the thesis, wherein it provides a background to the concept of international tax arbitration. The chapter would explain the preliminary reasons behind the conception of the idea and would essentially narrate the research statement and its purpose. It would further, stipulate an outline with regard to the progression of the chapters in the thesis in a brief manner. Summarily, this chapter serves as a preface to the entire thesis.
CHAPTER 2: International Taxation and Dispute Resolution
Dispute resolution under international tax treaties is becoming increasingly relevant. Globalization of economic activities has led to an increase in scope for international dispute resolution. International arbitration, mediation, conciliation as well as traditional cross border litigation proceedings are now relatively common. One subset of international disputes that has not received much attention, however, is the resolution of international tax disputes. This chapter tends to draw attention to this very aspect and explain the same in detail. It essentially deals with the types of disputes that arise in terms of International Taxation.
CHAPTER 3: International Taxation Arbitration
Over time the OECD has developed administrative mechanisms to tackle this problem, by introducing a mutual agreement procedure (MAP) into article 25 of the OECD model convention.1 Nevertheless, taxpayers called for stronger procedures and, thus, a provision on tax treaty arbitration was introduced in 2008. The OECD’s most recent initiative regarding Article 25 is Action Plan 14 of the base erosion and profit-shifting action plan, which aims to increase the effectiveness of the MAP and move toward mandatory arbitration. This chapter addresses developments in this particular sphere.
CHAPTER 4: Understanding the nexus between International Commercial Arbitration and International Taxation
This chapter, firstly, provides for an explanation as to the working of ADR mechanisms. It dvelves into the advantages that it offers alongwith explaining the feasiblity of these mechanisms over regular litigation and court- procedures. Each process is distinct and separate, having its own unique form, function and method of transforming a dispute.

The chapter then proceeds to throw light on the Evolution of International Taxation as a body of law. Since World War I, the International Taxation system has been recognized, leading to the development of international economy and tax systems, which in turn gave rise to tax competitiveness amongst states. Countries compete with each other to attract foreign investment. The idea of this chapter is to throw some light on this process of development of international tax systems, which also reuqires addressing the ill effects of international tax competition while looking into its positive impact at the same time. Summarily, this chapter of the thesis looks into several dimensions of International Taxation to understand its progression.

CHAPTER 5: International Tax Arbitration on the Global Front
This chapter analyzes the legislative framework existing in other countries in order to draw a comparison between those systems and the one existing in India. Further, it would cover suggestions regarding ways of incorporating similar processes that would be suitable to the current Indian set- up. This chapter also highlights the fact that while most countries face their fair share of problems in respect of tax matters, it would be advisable for all such states, including India, to review their established systems and make amendments to the same by borrowing from frameworks of other jurisdictions.
CHAPTER 6: The Indian Scenario
India has witnessed an adversarial system in tax dispute resolution which has hindered its growth due to several issues such as procedural complications, expensesn involved and the general delays seen in the process to unfold. This issue gains further importance when attention is diverted to the amount of revenues locked up in disputes, which can actually be settled amicably. This chapter tends to focus on the aspect described above, that is, the tax system prevalent in India in the present times and its impact.
CHAPTER 7: Conclusion
This thesis is intended to shed some light on international tax dispute resolution. This chapter, in essence, concludes an analysis of the existing arbitration rules and suggestions for how they can be improved. In addition to summarising the notions put forth during course of the preceding chapters, it also suggests that the Indian set- up requires to adopt policies from other jurisdictions to make its own markets much more investor- friendly.
LITERATURE REVIEW
Apart from the aforementioned sources, there are numerous news articles online which provide the core information with regard to recent happenings and events related to the International Tax sector. Most of the literature taken into account for the completion of the thesis will be in the form of articles or contributions made by professionals engaged in this field on a regualr basis. Along with ancilliary sources of study, the thesis primarily derives its essence from publications of experts in the field of International Taxation.
Firstly, the article titled ‘Interstate Arbitration in International Tax Disputes’ by Prof. Ilias Bantekas offers an insight into the rise in interstate alternative dispute resolution (ADR) mechanisms, such as joint tax vetoes and mutual agreement procedures, as well as investor–state tax related arbitration, are the chief reasons for the decline of interstate arbitration (or other forms of adjudication) in tax matters. The article argues that interstate arbitration is envisaged, apart from energy pipeline agreements, as a residual dispute settlement mechanism, but the relative success of ADR has limited interstate arbitration to a limited set of contexts and cases.

Further, Jasmin Kollmann and team, in their work ‘Arbitration in International Tax Matters’ have explained the mechanisms in place for international tax disputes redressal along with making certain recommendations in order to facilitate fruitous implementation of the same. The team undertakes this analysis while reviewing the January 19-20 workshop on the mutual agreement procedure and arbitration as tools for dispute resolution hosted by the Global Tax Policy Center at the Vienna University of Economics and Business.

In addition, the work of Sarah Nowland in the Hastings International and Comparitive Law Review, not only explains the working of dispute resoution in international tax matters, but also draws a comparitive study to understand the systems prevalent in different jurisdictions. A similar analysis on the subject of international tax is noted in the work of Prof. Charles Irish called ‘Private and Public Dispute Resolution inInternational Taxation’. It also provides for a rather interesting take in this regard by explaining the kinds of disputes that are likely to arise when international tax operates.

The above mentioned articles or writings do not form an exhaustive list and the thesis in itself is the product of an extensive study of multiple sources in the form of news articles, publications by scholars and experts in the corresponding fields, debates engaged in for policy making, and others.

InTERNATIONAL TAXATION AND DISPUTE RESOLUTION
Countries around the world, in the interest of their citizens, have developed methods of mitigating instances of taxation issues such as tax avoidance or double taxation. One of these methods was the introduction of tax treaties or conventions wherein the contracting nations negotiate and that contain rules on who can tax and what can be taxed and so on.
It is necessary to understand that a majority of the disputes tend to arise when taxpayers claims regarding their respective concerns were not in line with the any convention. The world economy has seen extensive advancement in the past few decades thereby leading to every state inching towards making itself a more viable market each day. Consequently, nations have ventured into the arena of double taxation avoidance agreements more than ever, and hence created a new branch of law altogether.
The problem mostly lies in the interpretation of various provisions of these treaties. Most tax treaties, on a global level, are modeled based on 3 Model Conventions, namely, the OECD Model convention, the UN Model convention and the US Model convention. All 3 Conventions may treat various incomes differently; nonetheless, the principles stipulated within are usually on similar lines if not identical. International taxation is more or less a part of International law in the sense that treaties entered into by various nations are analogous to each other, which calls for a certain degree of uniformity. On most occasions, the provisions in most treaties are even worded in an exactly congruent manner. Notwithstanding this, as has always been with International law, the sovereignty of States allowing them to adjudicate on disputes within their territory in their own Courts has come in the way of this uniformity.
To term it in an undemanding fashion, Courts are interpreting similar provisions with similar phraseology all over the world in dissimilar fashion. Thus, there is no uniformity in interpretation of tax treaties and thus, no conclusive, accepted body for international tax jurisprudence as such. The major problem in this is that Courts, on a global level, have different attitudes towards law and interpretation of statutes and this varies from territory to territory. Interpretation of tax treaties is incidental to normal adjudication for courts and interpretation varies from system to system i.e. common law systems and civil law systems. A tax treaty transcend national law and, become international law, and there are no single body like the ICJ to deal specifically with international tax cases and hence, there is no uniformity as such in tax jurisprudence.

Although the tax treaties entered into by the respective nations deal with the question of allocation of taxing rights in most cases, the more pressing issue arises when a taxpayer is unhappy with the application of the treaty on his income. It is important to note that owing to a person’s residence, which provides for a person’s territorial nexus with a State, all disputes in relation to his income can be resolved in the domestic courts or tribunals via the various mechanisms provided for under the domestic law. Since international Tax Law is essentially a branch of International Law, there is always the possibility of disparity in the treatment of income in both jurisdictions concerned, especially since Courts in different jurisdictions are prone to interpret provisions in different way. In this light, it becomes necessary that in addition to the multitude of remedies offered to the taxpayer via the domestic courts, a more neutral remedy be provided.
International tax disputes arise in two general contexts. The first is probably the most common dispute and involves a taxpayer or taxpayers on one side and the government or governments on the other side. In these disputes, the government typically claims taxes are owed and the taxpayer resists the imposition of taxes. The second type of dispute involves two or more government arguing over the allocation of tax revenues derived from trade and investment transactions between their territories. In the second type of dispute, private taxpayers may have little or no direct role, although they may play important roles in attempting to influence the positions of governments in the intergovernmental negotiations. In both types of disputes, the amounts involved usually are very substantial and reach hundreds of millions or even billions of US dollars.
The following section throws light on some of the most significant tax issues that arise on the international front along with focussing on the specific forms of dispute that are mostly often faced by the members of the international community.
International Tax Issues
Double Taxation
The United States imposes taxes on its residents based a worldwide income scheme which means that “all income from whatever source derived.” Another system popular in other jurisdictions is wherein the government “imposes similar residence-based income taxation on residents and source-based income taxation on foreigners.” At the point when a citizen’s income is liable to assess in both the United States and another nation, there is a danger of twofold tax collection. Such a cover of different assessment frameworks represents the danger of disheartening universal business and venture interests. Nations are attempting to take care of this issue by arranging new expense traditions with the expectation that they can fix such inconsistencies.

Tax Conventions
Tax conventions are bilateral treaties that are negotiated directly between two countries. These conventions seek to ease some of the double taxation issues by defining terms, apportioning income, and setting up objective tests for certain jurisdictional issues. Tax conventions include specific provisions to provide individuals and companies with greater certainty regarding their tax liability and to decrease the risk of double or unnecessary taxation. They serve numerous economic and political purposes as well for the reason that the conventions represent discussions between countries about how they will treat overseas enterprises. For a taxpayer, however, a tax treaty is not worth much unless the treaty also contains provisions for the elimination of double taxation when there is a conflict between the two states as to the taxability of a certain item of income. States at present include Mutual Agreement Procedures (MAP) in their tax conventions to handle these conflicts.
Mutual Agreement Procedure in Tax Conventions
A mutual tax convention provision that deals with these conflicts is the Mutual Agreement Procedure (MAP). MAP is included in many tax conventions, and is generally non-binding and voluntary in nature. MAP allows a taxpayer who is disturbed by an apparent misapplication of a tax treaty by one of the treaty party countries to request a designated official – called a competent authority – to engage in efforts to resolve the issue directly with the counter party’s designated competent authority. The competent authorities then meet as national representatives from each contracting country to try to reach a mutual arrangement on the appropriate tax treatment for the taxpayer.
Types of Disputes in International Tax
Disputes Between Taxpayers and the Government
International tax disputes flanked between taxpayers and the government can be divided into two categories: disputes in which the taxpayers prerogative of international double taxation and disputes, that could effect in double non-taxation.

Under the elementary jurisdictional rules of international taxation, most countries with an income tax impose that tax on the global income of resident persons and business enterprises under the residence principle, but they also tax foreign individuals and non-resident business enterprises on income that arises within their territory under the source principle. As a consequence, the fundamental structure of international taxation anticipates the jeopardy of double taxation as the countries involved in international business frequently impose their taxes on the global income of their residents and the domestic source income of foreigners. As double taxation of international income flows would destroy a significant amount of international business and investment, it is not surprising that many of the international tax rules are intended at reducing the risk of double taxation.

Of all the international tax disputes, the encountered issues involve transfer- pricing controversies. This is particularly so with the globally integrated economy where so many transfers of goods, services and intangible property are between parent holdings and subsidiaries or between other affiliated businesses. “Transfer pricing” refers to the price charged on transfers of goods, services and intangible property between related entities. The spirit of transfer prices is that they are set not by the market place, but are within the option of the multinational corporations.

It is generally accepted that transfer- pricing controversies are one of the most common and serious issues facing multinational businesses and at any given time a majority of the large multinational corporations are involved in extensive transfer pricing disputes around the world. Despite the enormous efforts at establishing standardization in transfer pricing rules, the issues unavoidably are so multipart and reliant on subjective variables that transfer pricing disputes continued to be a serious tax controversy faced by the multinational corporation. Illustration 1 illustrates how Am Corp, a MNC, could become involved in an international tax dispute related to transfer pricing.

Example 1
In 2008, Am Corp authorized licenses and copyrights to Taiwan Sub, Am Corp’s wholly owned subsidiary in Taiwan. As per the agreement, Taiwan Sub consented to pay royalties of US$10 million every year. In the year 2009, as indicated by the authorized licensing agreement, Taiwan Sub paid Am Corp US$10 million. In 2010, on auditing Taiwan Sub’s income tax account that represents 2009, Taiwan’s National Tax Administration verified that the royalties paid by Taiwan Sub to Am Corp were over the amount so agreed and that the such royalties in 2009 ought to have been just US$4 million. Accordingly, in figuring Taiwan Sub’s Taiwan pay assess liabilities, Taiwan’s National Tax Administration prohibited US$6 million of Taiwan Sub’s tax derivation for the royalties paid to Am Corp.

For the year 2009, Am Corp properly reported royalty income of US$10 million that is first subject to Taiwan’s withholding tax on outbound royalty payments and then again in the U.S.A. Even though Am Corp is taxed in both Taiwan and the U.S., double taxation is avoided because Am Corp can claim the Taiwan withholding tax paid as a credit against its U.S. tax liability. However, because Taiwan Sub is now taxed in Taiwan on the US$6 million that was disallowed as deduction by the Taiwan’s National Tax Administration and Am Corp is taxed on royalty income of US$10 million, not US$4 million, the US$6 million is threatened with double income taxation because it is now being taxed in Taiwan in the hands of Taiwan Sub and it also is taxed in Taiwan and the U.S. in the hands of Am Corp.

Because of the prevalence of intra-firm transfers of goods, services and intangible property in international transactions and the very considerable difficulties associated with computing exact transfer prices, transfer pricing disputes arising under national income tax laws are the most frequent type of international tax dispute. A smaller amount, but still troublesome disputes arise from inconsistent characterizations of international remittances. Example 2 illustrates a circumstance that creates a threat of double taxation when the source country characterizes a remittance as interest income and the recipient country treats the remittance as services income.

Example 2
In 2009, U.S. Bank (“USB”) entered into an agreement to provide loan guarantees, lines of credits and other services for its British Banking Sub (“BBS”), its wholly owned subsidiary in London. In 2010, BBS paid USB US$12 million for the several services under the agreement. The UK Department of Inland Revenue determined that the US$12 million expenses were in the nature of interest, which has its source in the UK and hence is taxable to USB in the UK. The U.S. International Revenue Service, however, determined that the payments constituted services income and had their basis where the services were performed – in the U.S., not the UK.
In this case, USB would be taxed on the US$12 million payment in the UK and also taxable in the United States of America. Unlike the situation in Example 1, however, the U.S. would not allow USB to offset the UK tax through the U.S. foreign tax credit because the credit is only allowed for foreign source income, as determined under U.S. tax rules. Because the U.S. has decided that the payments were US source services income, no foreign tax credit would be available to eliminate the threat of double taxation.

Other less common instances creating threats of double taxation are:
•Conflicting determinations of the residency of taxpayers, such as where the U.S. asserts that a taxpayer is a resident of the U.S. while Canada claims that the taxpayer is a Canadian resident.

Different views on the status of a tax as an income tax that qualifies for the foreign tax credit (e.g., Brazil imposes a withholding tax on interest paid to U.S. lenders, but the U.S. determines that the tax is not properly characterized as an income tax and thus does not qualify for the U.S. foreign tax credit).

Inconsistent determinations on the legal status of a taxpayer as a conduit or pass-through entity (i.e., a partnership) or a separate entity (i.e., a traditional corporation).

The other category of international tax disputes involving private parties is where the controversy could result in double non-taxation. These cases are less common than double taxation controversies, but the budding importance of sovereign wealth funds and large pension funds as foreign investors makes these cases increasingly relevant. Example 3 illustrates one such case.

Example 3
TIAA-CREF is a large financial service provider in the US with resources of about US$400 billion. The pay of TIAA-CREF is absolved from payment of taxes in the U.S. since it is qualified under a tax exempted pension fund. Taiwan, in any case, has substantially more constrained tax exemptions for foreign establishments so TIAA-CREF’s interests in Taiwan are potentially subject to withholding taxes. TIAA-CREF may try to influence Taiwan’s National Tax Administration to extend tax exempt status to foreign pension funds and other exempted organizations where the origin country of the pension fund allows a reciprocal exemption for tax exempted Taiwanese pension fund with investment in that nation.
If this state of affairs arose between countries with a bilateral tax treaty, such as the U.S. and Denmark, TIAA-CREF would look to the Mutual Agreement Procedure (“MAP”) in the tax treaty to make use of the Competent Authority Procedure. Under Article 26 of the U.S./Danish Tax Treaty, TIAA-CREF would try to convince the U.S. Authorities to persuade the Danish counterpart that it is a qualified pension fund that fits within the definition in the U.S./Danish treaty. If the U.S. Competent Authority agrees to help TIAA-CREF and the Danish Competent Authority then agrees with the U.S. Competent Authority that TIAA-CREF is included within the definition of a qualified pension fund in the bilateral tax treaty, TIAA-CREF’s passive investment income from Denmark would be taxed in neither Denmark nor the United States of America.

Disputes Between Governments
International tax disputes among governments focus around the apportionment of tax revenues arose in the various territories. Most of the disputes take the form of bilateral negotiations that result in the successful conclusion of bilateral tax treaties, while others are understated and may even be so subtle that one side does not recognize that there is a controversy. Example 4 illustrates inter-governmental tax dialogs and Example 5 describes a subtle controversy.

Example 4
The United States Government is irregularly involved in negotiations in the aspects of International taxation treaty arising out of income arising from the Sub-Saharan African nation state. These issues in such treaty negotiations is the proportion of the source-based tax on royalties for patents, copyrights and trademarks used in one nation and is paid to business enterprises resident of the other country. That is to say, the negotiations will adopt the maximum rate of tax that the U.S. Government can levy on royalties paid by U.S. business enterprises to African counter-parts and, because the negotiations impose mutual responsibilities, the U.S. rate also will fix the maximum rate that the African Nation governments can execute on royalties paid by African business enterprises to U.S. business enterprises. Technologic flows between the United States and Sub-Saharan Africa Nations are not mutual, but as a replacement for U.S. enterprises to license expertise to Africa than for African enterprises to license technology to the U.S. As an outcome, royalties between the U.S. & Africa will stream to a great extent one-route from Africa to the U.S. so that if the source based withholding tax is set at zero percent the African governments will acquire for all intents and purposes no incomes from U.S./Africa technology flows and the U.S. will have the capacity to impose the full rate of its corporate duty (35% of net income) on the information exchanged in the form of technology. Whereas, if the source based withholding tax is set at 20%, the African governments will get 20% of the gross income from such technology transfer and the U.S. will have just the residuary income in the wake of permitting a credit for the African withholding taxes.
Example 5
In the 1990s, the United States implemented aggressive transfer pricing regulations with substantial punishments for non-compliances. Despite the fact that the U.S., Korean and numerous different national governments have received a point by point guidelines to decide exchange costs, actually, there is an incredibly abnormal state of vulnerability in many exchange costs. The mix of forceful exchange evaluating rules, serious punishments for rebelliousness, and an abnormal state of vulnerability about what was satisfactory caused multinational endeavors with tasks in the U.S. to alter their exchange costs so they limited the dangers of encounter with the U.S. charge experts. The outcome was that the multinational undertakings tended to exaggerate their U.S. pay, due to the more serious danger of review and extreme punishments, and downplay their salary in different purviews where the dangers of the review were lower and the punishments less cruel.
It is appropriate to note at this point any talk relating to sort of question prone to emerge with respect to part of the law would stay inadequate if the equivalent isn’t trailed by an understanding the methods of settling these debates. Consequently, the succeeding area centers around this very perspective.
Resolution of Disputes Between Taxpayers and the Government
International tax disputes between taxpayers and the governments are resolved either prospectively through advanced government rulings on the tax consequences of a proposed transaction, such as advanced pricing agreements (“APAs”), or after the fact through discussions with national tax authorities, under the mutual agreement procedures in bilateral tax treaties, and in a few occurrences through voluntary or binding arbitration also considered under the mutual agreement procedures in bilateral tax treaties.

Taiwan, the U.S., Korea, Japan, China and various other countries have procedures for the issuance of advanced pricing agreements (“APAs”) in transfer pricing controversies. In some cases, taxpayers are able to obtain APAs in transfer pricing cases involving both customs duties and taxes on their income accrued in the nation states. It is a common practice followed for bilateral or multilateral APAs to be concluded so a taxpayer is able to secure obligations on the tax penalties of future transactions from all concerned tax administrative authorities. For example, in June, 2009, the State Administration of Taxation of China (“SAT”) and the Danish Tax Authorities (“DTA”) completed negotiations for two bilateral advance pricing agreements involving a leading Danish technology company and two of its Chinese subsidiaries. The APAs, which covered almost all types of related party transactions, are the first of their kind between China and a European country.In 2011, China and Denmark concluded a third bilateral advanced pricing agreement, although Denmark remains the only European country to have APAs with China.

Illustration 1 involved two countries with a bilateral income tax treaty, such as the treaty between the U.S. and Republic of Korea, Am Corp could make use of the Mutual Agreement Procedure in Article 27 of that treaty. Under Article 27, the Korean and U.S. tax agencies are obligation to work together to resolve inconsistency arising out of the applications of the tax laws that effect in double taxation that is inconsistent with the Korea/U.S. tax treaty. Article 27 does not, however, impose a binding obligation on either the Korean National Tax Authorities or the United States Internal Revenue Service to reach an agreement that eliminates the risk of double taxation.
The mutual agreement procedures of lately concluded bilateral tax treaties contain provision for the compulsory arbitration. The European Union Arbitration Convention of 1995 has accepted arbitration as a solution for double taxation, which arises out of transfer pricing issues. An arbitration provision with a comprehensive scope is included in Article 25 of the 2008 OECD Model Income Tax Convention. Under Article 25(5), if the concerned authorities fail to resolve the issue submitted to them within two years, if any unresolved issues still remain unresolved must be submitted to arbitration if the taxpayers request it. Such kind arbitration regimes have been discussed in detail in the subsequent part of this paper.

Resolution of Disputes between governments
Certain nation governments have entered into the agreement for division of the tax-money accrued out of the taxation policy in pre-determined ratio. The Isle of Man and the United Kingdom Finance Ministry, for example, have a treaty that divides the revenues from value added taxes between the United Kingdom and the island. Bilateral income tax treaties have now assumed effective way of allocating revenues among the different countries. There are numerous numbers of tax treaties in effect around the world. The U.S., for example, has about 58 income tax treaties that affect tax relations with major economies in the world (except Taiwan). Republic of Korea also has an widespread tax treaty network with over 60 bilateral income tax treaties currently in force, including a moderately old treaty (1979) with the U.S. that has been the object of re-negotiation for quite a few times. Income tax treaties make available comprehensive rules on the taxable income that arises between the two contracting parties. These tax treaties are exhibited after the OECD model tax treaties and are designed to avoid the issue of the double taxation, primarily by limiting the taxing power of the source country to imposes taxes on income arising within the territorial jurisdiction. Further, requiring the status of residence to either grant a credit for the income arising out of the originating country or to exempt the proceeds subject to the origin-based exemption taxes.
At the point when governments have unilaterally embraced aggressive strategies to increase taxation share of expense incomes, for example, with the U.S. aggressive transfer pricing rules outlined in Example 5, different governments at times have reacted with their own aggressive, such as the Canadian Government presented its very own toughened transfer pricing principles to restrict the cases when organizations tilted their transfer prices towards the U.S.

INternational Taxation Arbitration
With the end goal to manage these cases, impose traditions incorporate a Mutual Agreement Procedure (MAP) where government assigned able experts from every country meet and concede to a game-plan that should be attempted for tending to these worries.
As the number of cases submitted to MAP expanded, issues were uncovered in the MAP procedure. The three basic issues were: (1) the timeframe it took equipped experts to concur; (2) skilful specialists did not generally achieve a choice, and (3) citizens were not engaged with the procedure.
The initial two issues have been best tended to by the ongoing incorporation of compulsory restricting assertion arrangements inside the MAP. In the United States, in any case, just four out of more than sixty duty traditions incorporate obligatory restricting mediation arrangements. Conflicting mediation gauges exist over the rest of the arranged and model expense traditions.
The third issue, absence of citizen contribution, presently can’t seem to be settled. As this paper proposes, a few global business assertion principles ought to be connected in assessment mediation. Gathering inclusion in business mediation question is a key component of its boundless utilize and accomplishment at debate goals. It pursues that citizen inclusion in worldwide duty discretion procedures will have a comparable impact.
Most MAP assertion arrangements in assessment traditions were produced for the sole motivation behind “settling” MAP so there would be fewer occasions of twofold tax collection. The issues with the MAP, be that as it may, reflect worries after some time administration, assention between able experts, and absence of citizen association. At the point when seen with regards to these interests, charge assertion improvement appears to parallel a portion of the objectives of universal business intervention.
The drafters of intervention statements in global assessment traditions will profit by looking to the set up universal business mediation (ICA) frameworks for direction. An examination of the four United States compulsory restricting assertion (MBA) arrangements with regards to imperative ICA issues, the shortcomings of the present global expense intervention (ITA) framework can be progressed. A superior framework implies fewer examples of twofold tax assessment, more citizen movement in the worldwide market, and more generally speaking expense income for government utilize.
Including assertion arrangements in global expense, settlements must not be seen only from the point of view of tending to issues emerging out of the MAP, yet should likewise be considered as a different debate goals system inside and out. Consideration of these arrangements demonstrates the augmentation of the private segment’s mediation accomplishment into an administration commanded zone. Actually, this is the regular consequence of a continuous movement from private gathering private gathering discretion (ICA) to state-nationals of different states (ICSID mediation), to the state-state assertion (ITA).
In light of the previously mentioned, it is basic to expound on the essentials and working of the MAP as an arrangement of question redressal, following which one can endeavour to dissect the issues that raise in its execution.

Mutual Agreement Procedure (MAP) explained
Despite the presence of local remedies, tax treaties themselves contain whole exclusive solution for taxpayers in form of the Mutual Agreement Procedure (hereinafter referred to as MAP), provided for under Article 25 of the Model Conventions and can also be measured as a neutral method of tax treaty dispute resolution. It would be ideal to first discuss the classic MAP model and, then move on to the amended version introduced by OECD.
The MAP is started in line with any taxpayer who has issues with respect to his taxable income has not been exhausted as per the arrangements of the treaty. In this way, regardless of whether there is no double-folded taxation, any taxpayer who feels that the income has been burdened in a way that isn’t allowed by the provisions contained could use the MAP process. Besides, take note of that the MAP is given notwithstanding the different local remedies accessible to the aggrieved party and that he could use such remedies concurrently. Under the MAP, the citizen delivers his case to the ‘concerned competent authority’ of the State in which he or it is residing. In the event that the authority is satisfied with the veracity of the case and infers that it cannot remedy the grievance, it calls the taxpayer to present the case to the authorities of the other Contracting State. According to the arrangement, they will ‘endeavor’ to resolve the dispute When an issue has been settled, if the taxpayer acknowledges such choice, it will be implemented regardless of any limitation that is set by domestic law.
Although there is no infallible interpretation that can be ascribed to this expression, what is apparent is that, the only obligation placed upon the competent authorities is to negotiate and use the best of their abilities to resolve the problem.There are various apparent drawbacks in the classical system.
Firstly, there is no fixed duration in which this procedure is to be completed in. Thus, the process many involve undue delay, which might result in a large amount of expenditure for the taxpayer (in the form of legal fees etc.)
Secondly, even if the dispute is resolved, since the competent authorities are parties to the procedure and as the taxpayer is not involved, it may result in an unfavorable solution. Thus, one of the biggest drawbacks of this system is the lack of natural justice in its implementation, since the taxpayer receives no opportunity to present his case or defend himself based on any document that is used against him.
Lastly, as mentioned above, there is no guarantee of the dispute being resolved.
Moreover, many taxpayers opt out of the system owing to the lack of transparency in the decision making process, as there is no compulsion on the authorities to give legally reasoned decisions and thus, faced a lot of criticisms also.
Hence, the OECD has started a working mechanism to inspect the viability of mutual understanding methodology, which additionally managed the evaluation of alternative dispute redressal system. After far-reaching comprehensive consultation, research and interview with different stakeholders involved, the OECD amended the provisions, in 2008, which enhanced the MAP framework by including required mandatory arbitration inside its ambit.
Arbitration under the 2008 OECD Model
Many experts have considered Arbitration as the most ideal response to the issue of resolution of international assessment debate. Arbitration has long been the favored question resolution component for economic-based agreements, for example, Bilateral Investment Treaties (BITs), the North American Free Trade Agreement (NAFTA) and the Vienna Convention on the International Sale of Goods. This comparison is suitable as despite the fact that territories, for example, international assessment, trade, and investment have their own watertight compartments, these regions work at advancing cross-outskirt economic action.
In 2003, the International Fiscal Association additionally discharged a model treaty article managing arbitration alongside a Memorandum of Understanding for usage of the equivalent. Preceding 2008, the OECD display received the position that compulsory arbitration would superfluously lower the jurisdictional power over the fiscal question. Nonetheless, inferable from the deficiencies of the MAP framework as has been called attention to before, the 2008 variant of the OECD model included required intervention inside its ambit by including section 5.
Paragraph 5 provides that in cases ‘where a person has presented an application to the competent authority of a Contacting State on the basis that the tax imposed by either of the Contracting States have resulted in that person being taxed in a way that is not in accordance with the provisions of the convention and where the competent authorities are unable to resolve the case within two years from its presentation to the competent authority of the other Contacting State, any unresolved issues shall be submitted to arbitration if the person so requests. Hence, the term ‘shall’ denote the mandatory nature of the arbitration provision, while it remains voluntary as it is activated only upon request.’
Unlike arbitrations under other treaties, like Bilateral Investment Treaties (BITs), it is a supplementary remedy in tax treaties, in addition to the MAP procedure. In tax treaty arbitration, the arbitrators do not decide the case as such, but only on the issues presented to them. Eventually the determination of the case is in the hands of the competent authorities, who have to close the MAP.

It is appropriate to take note that since unresolved issues are submitted to arbitration, notwithstanding pending arbitration proceedings, the concerned authority can form its own resolution, in this manner repudiating the authority of the arbitral board. The taxpayer isn’t associated with the appointment of the board either as this is again a duty of the authorities. Nonetheless, if the panel allows, the taxpayer can make submissions either written or oral, and in line with the principles of natural justice. It is pertinent to note that if the preliminary issues have been decided by the authorities, the same are binding on the arbitral panel.
Along these lines, basically, charge arrangement assertion gets rid of the for the most part perceived confinements of the MAP framework. Rather than the MAP, the assertion procedure is more compelling in dodging twofold tax collection and includes more citizen interest.
In light of the data and clarification gave hereinabove, one can value the hugeness of the presentation of the MAP in universal tax assessment law. In any case, comprehend that the framework is imperfect; and the equivalent were summarily featured in the previous segments of this paper. Notwithstanding the equivalent, probably the most noteworthy imperfections that specialists have featured are tended to beneath.
Limitations in the MAP framework
MAP Agreement Can Take a Long Time
MAP provisions do not establish time limits under which competent authorities must reach a decision. Consequently, there is no incentive for authorities to come to a timely agreement. This “failure of the international tax system to resolve double taxation issues within reasonable time frames not only imposes economic costs directly on both business and governments, but also tends to diminish confidence within the business community in the ability of the international economic system to resolve even routine intergovernmental issues”. IRS data show that from 1995 through 2004, the time it took to resolve a conflict through MAP increased from 20 to 30 months. European data show during the 1990s, MAP resolution took an average of 18 months, and sometimes took up to two years. The OECD’s most recent statistics show that in 2010 it took 27.3 months on average to complete MAP between OECD countries.
Competent Authorities need not mandatorily reach a decision
Currently, MAP provisions contain a major flaw, as they do not require competent authorities to agree on any final resolution. Sometimes competent authorities “become entrenched in inconsistent positions that each genuinely believes to be superior”. Before arbitration was introduced into MAP, as discussed below, there were no incentive for competent authorities to agree, thereby resolving the dispute and finishing MAP. In fact, data from the United States Treasury and the Internal Revenue Service (IRS) show out of all the claims submitted to MAP, “a wide range of taxpayer income…. received partial or no relief” because the competent authorities did not reach a conclusion. The most recent statistics from the OECD show 3,328 open MAP cases at the end of 2010, a 41.5% increase from 2006. This “empirical evidence shows that the current MAP procedures without arbitration clauses are not accomplishing their goal of removing double taxation based upon tax treaty provisions.”
The non- involvement of Taxpayers
Currently, a taxpayer who protests double taxation surrenders his claim to his state’s competent authorities to argue on his behalf in the MAP proceedings. After MAP begins, the “affected taxpayers are normally excluded from the competent authority deliberations or, in any event, have no official or guaranteed status in such deliberations.” Some tax scholars find it “unreasonable and unnecessary” that the taxpayer, “despite being the principal stakeholder and at risk to double taxation, has no official means of direct participation.” Additionally, taxpayers don’t always trust their competent authority to represent their interests behind closed doors. For example, the competent authority of the United States is the IRS whom many taxpayers see as an adversary. Current mandatory binding arbitration clauses do not give the taxpayer a central role in the resolution of his own tax issue. When writing future arbitration clauses into tax conventions, states should look to the high degree of party involvement in the international commercial arbitration dispute resolution structure and give the taxpayer a bigger role.

There are other issues that emphasize the flaws in the ‘Competent Authority Procedure’ and therefore require attention for amendment. For instance, the procedural rules followed by the competent authorities differ significantly from those applicable to domestic examination and appeals. In addition, even if the competent authorities agree to eliminate double taxation, the taxpayer may not be neutral as to how this is achieved. The competent authority decision may not conform to national or treaty law, and may be influenced by extraneous factors such as other pending competent authority cases.

The abovementioned drawbacks are dealt with further along with providing plausible solutions in ensuing sections of the paper.
The significance of Mandatory and Binding Arbitration in MAP
Arbitration was initially introduced in order to fix the problems caused due to the lengthy MAP process, lack of tax- payers’ involvement, failure on part of the competent authority etc. The issue with the existing system is that Arbitration has merely become a supplement to MAP since, in most tax conventions, arbitration does not exist outside of MAP and cannot be engaged in without first invoking the MAP procedure. Arbitration was initially included in MAP because increasingly overwhelmed and underfunded governments were not able to resolve even the simplest double taxation disputes in a timely fashion. Multinational businesses were forced to wait two years or more in some cases. Multinational businesses were forced to wait two years or more in some cases. The following points substantiate why mandatory and binding arbitration would serve as an effective solution.

Response to Length of MAP and Disagreement Between Competent Authorities
States introduced arbitration to MAP in order to decrease the “time taken for the competent authorities to settle the issues.” Introducing mandatory and binding arbitration clause into MAP kills two birds with one stone. Mandatory binding arbitration clauses require that an issue under MAP that is submitted to arbitration be decided in two years or less. The two year deadline provides an incentive for competent authorities to agree if they wish to retain their decision making power, while simultaneously limiting the time interested parties must wait for a solution. Many argue the primary benefit of arbitration is the implementation of an effective deadline, not the actual arbitration proceeding itself.
Countries want to maintain control over taxation standards because tax revenue is an integral part of government operations. By “setting a deadline for resolution of an issue by the competent authorities, after which the competent authorities would lose control over that issue, a compulsory arbitration rule can create an incentive for resolution of the issue by the countries involved.” Voluntary arbitration does not have the same effect since competent authorities do not have to submit to arbitration, and do not fear losing control. This is why the “conclusion by many in the business and the academic community is there needs to be a more forceful and definitive solution to tax treaty disputes, such as true mandatory binding arbitration.”
Response to Lack of Taxpayer Involvement
The current arbitration provisions in MAP still do not provide sufficient taxpayer involvement. It is important for taxpayers to be involved in resolution processes so they can be confident their interests are represented. Additionally, taxpayers are more likely to accept an arbitral decision if they are involved in the process. Some arbitration provisions allow the taxpayer limited input “as taxpayers need to ensure that they do all they can to help the competent authority that is trying to help them.”The OECD Model allows the taxpayer to present evidence to the arbitration panel. The EU Arbitration Convention also gives taxpayers “a far greater role in the arbitration proceedings.” The U.S. -France Tax Convention has an “explicit role for taxpayer submissions.” Other arbitration provisions provide a more informal role for taxpayer involvement, but the taxpayer “must remember that the arbitration board must choose one of the positions of the competent authorities.” This means the taxpayer “should not push for the adoption of a position unlikely to be adopted by the arbitration board” since it may result in “the arbiters choosing the position of the other competent authority.”
How does Mandatory and Binding Arbitration help in trouble- shooting
It is important to be precise when analyzing and writing about international tax arbitration (ITA) in the context of MAP. The adjectives modifying “arbitration” are game changers. As discussed above, mandatory arbitration provisions in MAP require disputes to submit to arbitration if not resolved by competent authorities within two years. The mandatory aspect of arbitration creates an effective deadline to competent authority negotiations. It also encourages a final resolution since countries want to retain control. In contrast, non- mandatory arbitration clauses do not require competent authorities to submit an issue to arbitration. It is significant that no MAP disputes under voluntary arbitration U.S. treaties have ever been subject to arbitration.

Non- mandatory arbitration provisions do not promote resolution; they provide no incentive motivating competent authorities to agree. Mandatory arbitration that is not binding is equally ineffective to promoting an efficient resolution to tax disputes under MAP. There are four U.S. tax conventions wherein; the arbitral award is “binding on the Contracting States.” This means that the arbitral decision “constitutes a resolution by mutual agreement … and will be binding on both competent authorities with respect to that case.” The problem, however, is that the taxpayer who brought his issue to MAP in the first place can still reject the resolution. Although most successful arbitration provisions in MAP are mandatory and “binding,” they can be improved by becoming binding on the competent authorities and the taxpayers.

Consequently, it would be reasonable to state that the concept of binding and compulsory arbitration has emerged as a requisite measure to tackle the weaknesses of MAP as a dispute resolution mechanism. Hence, an arbitral award reached, adopting an impartial, predictable and transparent process is sought for. Such an award is to ensure that there is adequate involvement on the taxpayer’s part and is the product of a system that applies the law rather than opt for compromise.
Understanding the nexus between International commercial Arbitration and international taxation
Brief Overview of International Commercial Arbitration
International commercial arbitration has become the generally acceptable method of resolving disputes between transnational contracting parties. Its success in the private sphere is primarily because these businesses wish to avoid the perceived uncertainty and unpredictability of foreign courts. Similar to the current increase in tax disputes being submitted to MAP, there was phase when the number of commercial disputes submitted to arbitration was enormous, hence, urging the development of the ICA system.

ICA provisions exist in many international agreements, conventions, and treaties and the rules for arbitral proceedings; also, tend to come from multiple sources. For example, the United Nationals Commission on International Trade Law (UNCITRAL) has promulgated rules and model laws for ICA. Another example would be the Federal Arbitration Act (FAA), in USA, which codifies arbitration rules and procedures. Similarly, numerous international, regional, and national arbitral institutions have been created to administer these and other ICA rules.

It is important to note that a majority of the success credited to ICA comes from the widespread and uniform acceptance of the Convention on the Recognition and Enforcement of Foreign Arbitral Award. The NY Convention ensures that signatories’ courts recognize agreements to arbitrate, and also recognize and enforce arbitral awards. One of the most significant purposes of the NY Convention being brought into effect was to ensure the efficacy of awards by limiting the grounds upon which a national court could refuse to recognize or enforce an award. Further, limiting the ability of domestic courts to set aside awards encourages parties to submit to arbitration because the potential award or the end result of the proceedings shall be binding.
ICA is now a widely accepted dispute resolution system, with issues being resolved constantly by the international community. There has been an “unparalleled proliferation of legislative acts devoted to international commercial arbitration, and at the same time arbitration rules and party stipulations have thickened with detail, and have become more discerning”. It is precisely these well-developed details ITA should look to for guidance. In the chapters to follow, important issues concerning ICA will be addressed, along with understanding how they have been dealt with on the international front by other jurisdictions, such as, in USA. It incorporates four tax conventions, in its legislative framework, that include mandatory binding arbitration as dispute resolution mechanism. Instead of looking at mandatory binding arbitration as a response or solution to MAP, we should look at how we can improve it based on the ICA model.
Issues concerning ICA and their relevance to International Taxation
Rationale behind the inception of ICA
The idea behind introducing a systematic approach in the form of ICA was to encourage international economic growth and development by facilitating businesses across the globe a platform for dispute redressal, that they have faith in along with the ability to control. Businesses have found this system rather appealing on account of its capacity to be structured and restructured as per their needs. Further, unlike courts, ICA is not tied down by procedure and substantive law in a restrictive manner and can often be tailored to meet the wishes of the involved parties, thereby leaving more room for a mutually acceptable compromise. Therefore, businesses are more likely to expand if given the opportunity to include an arbitration agreement in their contracts along with an assurance that the same would be enforced.
Similarly, International Taxation Arbitration (ITA) is meant to encourage taxpayers to participate in the worldwide economy. Arbitration with MAP is meant to eliminate or reduce double taxation in accordance with the tax conventions already agreed- upon. This would require the ITA to facilitate governments with a fair way to resolve their disputes when their countries are in a situation wherein they would both benefit by taxing the same person. Another important goal of ITA is to ensure that a taxpayer has definitive and certain knowledge of his tax liability. Since, arbitration can only be invoked only once MAP has been initiated, this becomes a significant aspect. By addressing both government and taxpayer needs, “tax treaty arbitration provides one hope for fiscal symmetry, thereby reducing the fiscal barriers to cross-border trade and investment.”
The ICC explicitly “recommends that compulsory and binding arbitration in international tax matters should be adopted in bilateral or multilateral tax conventions . . . based upon the broad experience of ICC in commercial arbitration, thereby leading to an expansion of range of disputes that can be resolved through arbitration.” The ICC believes that including mandatory binding arbitration in tax conventions is effective because it “always reaches a conclusion, provides for impartial determinations with proper taxpayer participation, and applies law rather than expediency.” 90 This recommendation is based on the ICC’s recognition of ICA success in the private sector. It is clear to the ICC that the goals of ITA reflect the goals of ICA, showing the usefulness of developing tax arbitration based on ICA models.
Arbitrability
The non- arbitrability of issues is usually based on certain public policy concerns in ICA, and includes the likes of disputes concerning antitrust, intellectual property, political embargoes, securities law and others. Taxation is a different type of public interest concern, but it still has public policy implications because it dictates the scope of services a government can provide. The foundation of taxation arbitrability was laid down by introducing mandatory binding arbitration into MAP clauses, despite of providing a limited scope to the same. For instance, USA tax conventions with Germany, Canada, and France limit the issues an arbitral board can decide “to a determination regarding the amount of income, expense, or tax reportable to the Contracting States.” Thus, not all taxation issues are arbitrable. Certain disputes are removed from arbitrator’s adjudicatory power, as well. It is significant to note that non- arbitrability is applicable to rights that cannot be freely disposed off by parties, i.e. these rights within a state’s control cannot be circumvented by parties using arbitration. A simple example would the embargo against Iraq by the UN Security Council.
Furthermore, a decision concerning the arbitrability of an issue is subject to change throughout the life of a dispute. For instance, an issue that was initially considered non- arbitrable at the beginning of a dispute was later amended wherein the court decided that the arbitrability of the same issue must be decided at the enforcement stage. Usually, there are 4 stages wherein arbitrability of a certain issue can be questioned, namely,
Enforcement of the arbitration agreement by a national court;
Determination of scope of arbitration by the arbitrators themselves;
An action to set aside the arbitral award in a court where arbitration takes place;
Enforcement of the arbitral award in the relevant country.
In context of ITA, the arbitrability is determined at the first stage of mandatory binding arbitration. For instance, the competent authorities, in this regard, must submit to arbitration is they cannot reach agreement within the stipulated period of time, i.e. two years. In the present scenario, the arbitration clause is part of MAP, thereby causing arbitrability to be unilaterally decided by competent authorities themselves. This leads to large amount of power being placed in their hands. If ITA evolves to look more like ICA, however, the competent authorities will not necessarily be able to opt out of arbitration, and arbitrability may be debated at the enforcement level as well.

Existence and Validity of an Agreement
Arbitration is essentially initiated due to the existence of an arbitration clause or because the parties mutually agreed to arbitrate. In most situations, one of the parties contests the validity an arbitration agreement and this issue particular issue with ICA corresponds to the controversial mandatory aspect of submitting MAP issues to arbitration. When courts are faced with such question regarding validity of an arbitration clause, they usually refer the parties to arbitration unless the agreement is null and void, inoperative or incapable of being performed, thereby setting up a very high standard for disposal. This indicates that the mandatory aspect of tax arbitration will be a successful measure to adopt. ICC supports this view and suggests that, “either state may initiate arbitration” and “the affected taxpayers should have the right of initiative in all cases, whether or not the competent authorities have agreed”. Furthermore, “arbitration should be compulsory, whether initiated at the instance of a contracting state or a taxpayer”.

Additionally, the ability of the competent authority to decide on the arbitrability of a tax issue can be compared to the unilateral power of the ICA arbitrators’ power to decide their own capacity to arbitrate. Therefore, the authorities in mandatory arbitration can apply such a principle similar to that of kompetenz- kompetenz to decide whether the same is truly mandatorily arbitrable. Furthermore, the final word on the issue of arbitral competence belongs to the courts, in ICA while on the other hand there is no appeal process available when the competent authorities decide that an issue is not suitable for arbitration. Therefore, in order to hold competent authorities accountable, ITA should give courts the final decision to arbitrate.

Choice of law
In ICA, parties tend to include a clause for choice of law specifying what law arbitrators should apply to the dispute. This usually covers, firstly, substantive law, that governs the overall contract, and secondly, the procedural law which governs the arbitration process. Interestingly, ITA does not have such lex arbitri problems because the two contracting countries, which are the only countries that will ever be involved in a tax dispute under their convention, agree upon the procedure. In an event where such a pre-planned procedure falls short, the competent authorities “may modify or supplement the … rules and procedures as necessary to more effectively implement the intent of paragraph 5 of Article 25 (mandatory binding arbitration in MAP) to eliminate double taxation.” Even without these issues, however, the substantive law chosen by countries and applied by arbitrators on the merits of the case is not always clear since ITA arbitrators are not allowed to report how they reached their decision.

Further, in MAP, competent authorities never disclose how or why they reached an agreement. Since mandatory binding arbitration is an extension of MAP, the arbitrators are also protected by this rule. Only two U.S. conventions with mandatory binding arbitration provisions specify applicable substantive law.

Since MAP arbitration decisions are never published, inclusion of the choice of substantive law may be unessential. Such an inclusion, however, would help ITA transparency and improve taxpayer use and trust of the system. The secrecy of MAP proceedings is justified by its non- precedential status. This may give rise to other issues such as lack of transparency, which may result in taxpayers being unwilling to submit their issue to MAP arbitration. Taxpayers need to trust that the decision about their tax liability was based on applicable and equitable law. To this end, the ICC suggests that the tax “arbitration decision should be based on law, including the domestic laws of the state parties to the arbitration, treaties, and international law. Even if all MAP arbitration clauses begin to include references to substantive law, there will be even more transparency and use of ITA if taxpayers are involved in the proceedings.
Conduct of the Arbitration proceedings
A major difference between ICA and ITA procedure is the concerned party’s ability to contribute to the arbitration. In ICA, one of the parties initiates arbitration, and then both parties present their case to the board. In ITA, however, a taxpayer brings an issue to his competent authority, and the authority then engages in MAP with the other country’s competent authority. If two years pass and the issue were submitted to arbitration under a mandatory binding arbitration clause, only the competent authorities are allowed input. It is interesting to note that the U.S.-France Tax Convention allows a taxpayer to consult with his advisors and provide input that may influence the final arbitral award. Nonetheless, the arbitration board constituted is limited to choosing one of the competent authority’s proposed resolutions. The question here is as to what purpose does the taxpayer’s input serves if it is different from what the competent authority presents. This is precisely where the significance of the taxpayer’s involvement is further highlighted. In fact, the ICC also suggests that, ITA be modified to reflect the ICA position that taxpayers “should be provided an opportunity to present their views, including the right to submit all relevant information and documentation, to present oral and written arguments … and to respond to arguments or evidence submitted by the states involved.”
NOTE: ADD A POINT- PROCEDURAL ASPECTS MISC. – FEES, DISCOVERY AND EVIDENCE, ARBITRATION BOARD, TERMINATION
Decision- making and Appeals
There exists a major difference between ICA and ITA when it comes to arbitral decisions, as well. In case of the former, the tribunal hears from both parties, applies an objective standard within the applicable law, and reaches a decision on the merits that can incorporate either sides’ position, or chooses a different course of action altogether. On the other hand, in case of ITA, the arbitral board is “not free to create its own conclusion”. The board must choose one of the proposed resolution papers each competent authority submits. This type of decision- making is called “baseball arbitration” because it is “similar to the process used in the United States by major league baseball and uses an approach whereby an arbitration board (made up of three arbitrators) may choose only the proposal of one side to the dispute.” In addition, the matter must be decided the case within the time allowed by the tax convention, by the board.

The baseball approach and time limits to arbitral decisions stem from the perspective that the ITA will improve MAP by providing yet another mechanism for forcing the competent authorities to come to a decision. Since one of the competent authority’s proposed resolutions will be chosen, there is “pressure on each competent authority to offer a reasonable resolution and therefore increases the likelihood that a compromise between the competent authorities will occur before an arbitral decision.” In this way, baseball arbitration is clearly meant to “fix” MAP by encouraging the competent authorities to reach an agreement, at which case the arbitration is terminated. This emphasis on reaching a settlement is mostly likely the reason the ITA procedures do not mention discovery, and why compensation is limited to only a few days.
Additionally, there is no appeal process in mandatory binding arbitration under MAP. The contracting states cannot appeal since they could have reached a different agreement at any time and cancelled the arbitration proceeding. The taxpayer cannot appeal, but he can reject the arbitration decision. If an arbitration decision is rejected, the issue cannot be re-submitted to MAP. Likewise, a party cannot appeal an ICA decision, but can challenge the award in the place of arbitration or in the country where enforcement is being sought. This is an area where the development of ITA should borrow from another area of law like ICA or ICSID.

Confidentiality
Confidentiality allows businesses to keep their dealings, trade secrets, or indiscretions hidden. In ICA, confidentiality applies to both the arbitration proceedings and the eventual award or decision if the parties expressly agree to confidentiality. This convergence with ICA methods is a good indication that taxpayers will submit their tax issues to arbitration. The only improvement for ITA would be to include taxpayers in the arbitration process. Emphasizing the importance of confidentiality in both ICA and ITA, the ICC states, “an essential characteristic” of an arbitration clause is that “the highest applicable standard (of confidentiality) should apply.”
Enforcement of arbitral awards
Arbitral awards, under ICA, are mostly final and binding in nature in order to avoid a drawn out appeals process. In most tax conventions as well, arbitration decisions are “binding” on the two contracting states, and thus represent a resolution of MAP. The problem in such matters is that each concerned party is free to accept or decline the resolution. Since the taxpayer is generally not involved in the arbitration proceedings, it seems unlikely that he will accept the resolution without question, especially if the resolution is to his detriment. If the taxpayer does not accept the resolution, the case cannot be resubmitted to MAP and remains unresolved, and the time and resources of all parties who were involved are wasted.
The general attitude toward mandatory binding arbitration in MAP is that it will never be used. Nonetheless, even if a matter goes to arbitration, the law and procedure to enforce an ITA decision is largely underdeveloped, to serve as an effective solution. Examining ITA through the lens of ICA demonstrates the importance of a decision being “binding” and “enforceable” in accomplishing ITA’s goals. Once again, the ICC recognizes this error from its experience in ICA, and suggests, “Arbitration should be binding (on) the affected states as well as the affected taxpayers.”
Miscellaneous
Parties tend to agree upon applicable procedural rules that fit their needs, in ICA. They can either opt for arbitration under the rules of an Arbitral Institution or can use an ad hoc procedure. Regardless, procedural rules must satisfy due process. Both parties must be subject to “equal treatment during the arbitral proceedings,” and “given equal opportunity to appear at hearings.” An integral part of this entire process is the formation of the arbitration board. A majority of the conventions provide for ad hoc formation of the board with few restrictions. Generally, competent authorities choose one member each from their respective countries, followed by which the selected members appoint the chairperson, who is from a third country. An example for the same would be the U.S.-Belgium Tax Convention. Such an ad hoc tribunal formation, in ITA, is capable of appointing independent arbitrators, but it would be easier if an arbitration institution were involved because institutions’ knowledge and experience would likely make formation of the board quicker, and would help the parties avoid confusion.
Another important aspect of arbitral proceedings is the fee involved. The cost comes from institutional fees, the price of the arbitrator’s time, getting to and carrying out the arbitration meetings, and other expenses. In ITA, the fees are shared equally between the contracting states. Further, the taxpayer is usually exempt from paying any expenses in the process, which should ideally serve as an incentive for bringing their issues to MAP. Summarily, no additional cost should be incurred in arbitrating a tax case, since it should be no more complicated than arbitrating complex commercial matters.
Additionally, discovery is a contested issue in ICA due to the tension between avoiding complicated procedures and establishing critical facts. When it comes to ICA, there are court decisions locking horns about whether district courts have the authority to compel discovery in arbitration tribunals. In ITA, however, the arbitrators choose between two submitted proposed resolutions and consider “additional information … only at its request.” The ICC proposes that the “production of evidence should be subject to the limitations on production available under the governing domestic law,” which goes back to the choice of law and seat of arbitration issues.
Lastly, it is significant to note that termination of arbitration proceedings is easier in ITA. In ICA, if the parties settle before the arbitration award is made, the proceedings can be terminated. Another instance permitting termination includes, withdrawal by claimant unless the respondent objects to the same the tribunal finds a legitimate interest in such an objection. Things work slightly differently in case of ITA wherein arbitration can be terminated by the arbitral board itself, or by the competent authorities, or by the taxpayer himself. The ICC, in this regard, recommends that ITA proceedings should only be terminated upon competent authority agreement, similar to a settlement in ICA, and upon request of the taxpayer. In fact, it strongly suggests that only the latter must have the right to discontinue the arbitration since the proceedings were begun at their behest.

In conclusion, ITA should be developed such that issues will be fully arbitrated if they get past MAP. It does not make sense to create a process that works best by not being used at all. Part of the success of ICA is based on the independent arbitration board’s decision that can be a compromise between party positions. The nature of ITA disputes in MAP clauses is different than a negotiable private deal because ultimately just one country will have the right to tax; however, if it were as easy as “choosing” one country, the arbitration process would not be the correct forum.

International Tax Arbitration on the global front
The implementation of Arbitration has been growing on the international front over the last few years successively. Initially, the arbitration provision was adopted in treaties involving States with a large amount of multi-lateral ties with each other like the United States- Canada treaty, the Australia-New Zealand treaty etc. This is in all probability because of the success of the provision depends on the negotiations between the respective competent authorities and where States have better ties, arbitration would remain more of a last resort.
In November 2011, United Nations Committee of Experts on International Cooperation in Tax Matters adopted an update of UN Model Double Taxation Convention providing for mandatory arbitration in cases where disputes are not resolved by the MAP procedure. This has brought the UN Model in line with the OECD model to the extent that there is no disparity in the dispute resolution procedure in treaties signed by the developing and developed nations. Thus, the implementation of the provision has become easier, owing to the establishment of a uniform standard.
Although the United States Model Convention does not contain an arbitration provision, several treaties entered into by the US in recent years have included a voluntary, mandatory, baseball-style arbitration provision. The American baseball arbitration system is where the two Contracting parties are asked to take opposing stands and where the arbitrator has to arrive at a decision based on one of these positions, leaving no real discretion to the arbitrator to go into the matter at hand. The US-Germany treaty and the US-Belgium treaty, entered into in the year 2006, contain similar provisions in the MAP article. The US-France treaty entered into in 2009 also contains this provision. Similarly, Japan has embraced the mandatory arbitration provision in several of its treaties. The mandatory arbitration provision has been included in the new Japan-Netherlands treaty and the Japan-Hong Kong entered into in 2010. Another prominent example is Article 25A of the new France-Germany treaty.
Although arbitration is becoming increasingly accepted as a method for resolution of international tax disputes, one may notice that the developing nations such as India still show a fair degree of reservation towards inculcating this provision in their tax treaties. Most developing nations feel secure harboring their investors and binding them by the Calvo doctrine, under which all disputes relating to an investor’s fiscal interests in the other State shall be dealt with by the courts of the source State. Thus, they are reluctant to relinquish their sovereignty by giving rights to a 3rd party arbitrator. Another reason why the arbitration provision has not been prominent in treaties involving developing nations is the lack of negotiation skills and business acumen in the competent authorities of these nations as compared to the developed nations. Since the arbitration provision gives all authority to the competent authority, developing nations are generally unwilling to introduce this provision. Another difficulty is the financial costs and burden placed on nations in the creation of a 3rd party arbitrator panel.
The EU Convention
The EU Arbitration Convention (“Arbitration Convention”), which first became effective in 1995, establishes a procedure to resolve disputes where double taxation occurs between related enterprises of different EU Member States as a result of a transfer pricing adjustment in one Member State. Article 7 of the Arbitration Convention provides that if the competent authorities of two members states fail to reach agreement on a transfer pricing dispute within two years after the complaint is first submitted to one of the competent authorities, they must establish an advisory commission that will deliver an opinion on eliminating the double taxation. The advisory commissions are composed of two representatives from the competent authorities of each party and an even number of experts and independent persons picked from a list of experts. The enterprises complaining about the transfer pricing adjustment have the right to make submissions and to appear during the arbitration process. The advisory commission then is obligated to give an opinion on the elimination of double taxation within six months of getting the case and the competent authorities have an additional six months to decide the case. If the competent authorities fail to decide the case within the additional six months, the opinion of the advisory commission prevails. The competent authorities may agree to publish the decision, but only if the affected enterprises agree to publication.

The key elements of the EU Arbitration Convention are as follows:
The convention only applies to transfer pricing controversies within EU member states.

The competent authorities are only obligated to accept a complaint if they determine that the complaint is “well founded” and it is not clear whether a competent authority’s refusal to accept a complaint is subject to judicial review in the home country of the competent authority.

Because each case is referred to and settled by international procedures, “irrespective of the remedies provided by the domestic laws of the Contracting States concerned,” the domestic and international procedures are not mutually exclusive and do not compete as the mutual agreement is only binding on the Contracting States, not on the national courts. The affected enterprises are therefore placed in a tactical position of having optional parallel proceedings. The enterprises can choose one or the other, or a combination of both. In the latter case, the enterprises can choose to call for the discontinuation of the international procedure if it is satisfied with the elimination of double taxation afforded by a decision of the national courts.During the initial stage when the negotiations are between the two competent authorities there is no indication that the enterprises have a right to be involved. Once the process moves into the arbitration phase, however, the enterprises have the right to make submissions and to appear before the advisory commission.

The two year time limit that triggers the arbitration process can be extended by mutual agreement of the competent authorities and with the agreement of the associated enterprises concerned.

The members of the advisory commission are obligated to treat the arbitration process as secret.

Unless the competent authorities reach an agreement within six month after the decision of the advisory commission, the decision of the advisory commission is binding on all parties. Some have suggested that the complainant, who is not technically a party in the MAP arbitration process, may choose not to accept the arbitration decision and instead litigate the issue in domestic courts.

Once a decision is rendered, the competent authorities may publish the decision but publication is permissible only if the affected enterprises agree.

The Income Tax Treaties in United States of America
The U.S. Model Income Tax Treaty does not include the option of arbitration to resolve international tax disputes. Nonetheless, some of the major treaties to which the U.S. is a party have been amended to add arbitration provisions to the MAP. The amendments to the U.S. tax treaties with Germany, Canada and Belgium offer good illustrations of the U.S. arbitration rules governing international tax disputes. The German protocol, which became effective in December, 2007, provides that arbitration is not fully mandatory in that the competent authorities by mutual agreement may decide not to arbitrate a particular matter. The protocol also provides for full secrecy of the proceedings and does not require the arbitrators to prepare a report. Instead, the arbitrators simply pick between the settlement proposals made by the two parties in what is known as “last best offer” or “baseball arbitration”. As with the results of traditional MAP proceeding, the outcome of the arbitration is disclosed only to the concerned taxpayer and its representatives, again under a requirement of confidentiality. Only enumerated issues, including transfer-pricing disputes, are subject to arbitration. The Canadian and Belgian arbitration provisions follow the German provisions in all material aspects.

The key elements of the arbitration provisions under U.S. treaties with Germany, Canada and Belgium are as follows:
In general, arbitration is mandatory if the competent authorities cannot reach agreement, but the competent still may mutually agree that a particular matter is not suitable for arbitration.

Arbitration is only available for disputes involving specific provisions of the underlying tax treaty, including transfer pricing disputes, but the competent authorities may agree to arbitrate any controversy covered by the traditional MAP.

When a complaint is accepted for arbitration, each competent authority is to appoint one arbitrator and the two arbitrators then are to appoint a third arbitrator who is to act as chair of the arbitration commission.

The arbitration process requires that each competent authority prepare a proposed resolution of the controversy, with the arbitration commission then selecting one of the proposed resolutions. In other words, the arbitration decision is reached using the last best offer method.

The arbitration decision is binding on the competent authorities. The complainants have the option whether to accept the arbitration decision of litigate the issue in domestic courts.

The fees and expenses of the arbitration process costs of the arbitration process are to be borne equally by the competent authorities.

The proceedings and the arbitration decision are to be regarded as confidential with no public disclosure.

The Draft Swedish- Germany Income Tax Treaty
Amidst opposition from other states to an arbitration procedure, Germany and Sweden drafted an income tax treaty, which included an arbitration clause.  Thus, in addition to the mechanism contemplated in the European Convention for the Peaceful Settlement of Disputes, the Contracting States have the option to agree to refer the dispute to a Court of Arbitration, whose decision will be binding between the Contracting States.

The contemplated Court of Arbitration is composed of judges of the courts of the Contracting States or of third countries or of international organizations and follows internationally recognised arbitral procedures.  Awards have to be based upon the treaties of the Contracting States and on general international law so that a decision ex aequo et bono is inadmissible.  The parties have the right to completely present their case and to propose their own motions.

Unfortunately, the use of the drafted arbitration clause is completely voluntary.  Much more would be achieved if the use of an arbitral procedure had been mandatory.   Moreover, the imposition of a time- limit within which the competent authorities have to reach a mutual agreement was desirable; their failure to agree within, say, a year, would have triggered an arbitration procedure.  Another perceived fault is the composition of the arbitral court of judges who do not have a reputation for international tax expertise.

The approach in the United Kingdom
In the recent times, as discussed herein above, private settlement of disputes has grown increasing popular in multiple jurisdictions, especially common law countries. This is even more so with respect to highly technical areas of law, where parties are likely to favor an informed resolution of disputes over one that is necessarily impartial; even as Courts continue to provide precedents on the basis of which dispute resolution can take place outside the courts.

Since the inception of the HMRC (Her Majesty’s Revenue and Customs) in 2005 in the United Kingdom, the government has focused primarily on making the tax system simple and accessible for the taxpayers. In furtherance of this policy, in February 2013, the HMRC has published the Taxpayers Charter setting out both the rights and the responsibilities of taxpayers in a single accessible document. This collaborative approach adopted by the HMRC also led to ADR finding its place in the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules of 2009 by which the first-tier tribunal is required to encourage the parties to consider ADR wherever appropriate.
The HMRC has adopted a risk based approach in pursuing tax avoidance rather than focusing on particular industries or tax jurisdictions, so as to be able to deal with the most complex tax risks efficiently, while at the same time improving its relationship with large businesses. This was codified in the Litigation and Settlement Strategy (LSS), 2007, which then revised in 2011, to provide guidance on resolution of disputes between taxpayers and the HMRC. Under the LSS, the HMRC is required to adopt a collaborative approach for dispute resolution in the most cost efficient manner possible. Hence, in case the HMRC is of the opinion that litigation may lead to a successful outcome, it will not seek to settle the dispute out of court for less than 100% of the tax payable and where the taxpayer is unwilling to concede during the ADR process- instead, it will attempt to resolve the dispute quickly and efficiently through litigation. On the other hand, low risk companies have been promised a light touch. Measures such as suspending all or parts of the penalties pending against taxpayers, where careless errors have been made by the taxpayers, on the condition that they comply with the conditions imposed by the HMRC points towards a system that encourages behavioral change and long term investment in improving accountability and compliance with the law as opposed to mere revenue generation. This, in essence, is the collaborative approach where the HMRC co-operates with the taxpayer in order to achieve compliance. Moreover, co-operative compliance has been stressed upon by the HMRC with respect to high- net worth individuals and large businesses.
Over the past decade, the UK judiciary has adopted a very forthcoming approach to ADR. Specific directions have been given to Courts, under Civil Procedure Rules, in order to encourage parties to use ADR procedures, to help parties settle their disputes in a fair manner, while not wasting of resources. In fact, Courts have often placed cost sanctions on parties for their unreasonable refusal to consider ADR mechanisms to settle disputes.

Interestingly, a formal pledge had once been published according to which various governmental departments and agencies of the UK committed to settle legal disputes through mediation or arbitration, in cases where both parties agreed to the same. Hence, litigation was to be kept as a last resort measure. In addition, under the, solicitors may be expected to educate their clients about the option of settling disputes through ADR mechanisms.
This approach of the HMRC in favor of the collaborative dispute resolution mechanism has been widely appreciated by experts and scholars in this field. The simplest reason for the same is the fact that ordinary litigation process causes inordinate expenses and delay. In fact, it is pertinent to note that parties often decline settlement until a much later stage when substantial costs have been incurred, which requires the adoption of ADR at the earliest possible stage, in order to avoid such losses.

In this context, the commentary to the LSS provides for ADR, mediation in particular, as a preferred mode for dispute resolution. Additionally, a Guidance Note to resolve tax disputes through ADR was also released by the HMRC. The said note, primarily, approves the following methods of ADR:
Facilitative mediation where an independent third party mediator offers no opinion but brings the two parties together; ?
Evaluative mediation, where the mediator may offer a view on the merits of the respective parties cases; and ?
Non-binding Neutral Evaluation where a neutral third party expert provides an opinion that is not binding.
In practice, facilitative mediation may be the more favored approach in pre-litigation settlement of tax disputes because evaluative mediation and neutral evaluation practically duplicate the role of courts and tribunals. In pursuance of this approach, the HMRC has, since 2011, conducted pilot projects for evaluating the benefits of implementing ADR in tax disputes. As part of these projects, an HMRC official unrelated to the particular dispute would as an independent mediator and would try and settle disputes. After implementation of the same in several projects, the HMRC has concluded that such projects have largely been a success with respect to individuals and small/medium enterprises.
Consequently, the average time involved in a dispute was seen to have reduced considerably and in majority of the cases, the dispute involved was seen to have been successfully resolved. In light of the above, it may be concluded that the UK has successfully created a system by which ADR techniques can be effectively implemented in a tax scenario.
The Indian Scenario
Although the Indian system has not yet completely embraced ADR for tax matters, there are a few initiatives taken by the Government to reduce the volume of pending tax disputes. Some of these initiatives have been discussed in this section.
Firstly, a taxpayer can obtain an advance ruling from the Authority for Advance Rulings (AAR) on a question of law or fact in relation to an international transaction, which has been undertaken, or is to be undertaken. The AAR is a quasi-judicial authority and is chaired by a retired judge of the Hon’ble Supreme Court of India. It primarily functions as an independent, third- party adjudicatory body.
The rulings made by the AAR are, at all times, binding on both the taxpayer as well as the revenue department. These rulings are applicable on a case-to-case basis and thereby do not carry any precedential value, however, they do have mild persuasive value when similar facts are encountered. The Income Tax Act mandates that all applications must be disposed of within six months from their filing, although procedural delays and administrative issues have extended timelines. Nonetheless, most advance ruling applications are disposed of with final order within one year from filing of the application. Where the taxpayer or the revenue authorities, is aggrieved with the ruling of the AAR, they can be challenged before the High Court by way of a writ petition, provided, there is error apparent on the face of the record.
The AAR has proven to be a very popular forum for non-resident taxpayers and taxpayers involved in international transactions. Taxpayers would prefer going to the AAR at the first instance owing to the following factors:
A legalistic determination is made by a judicial mind i.e. a retired Supreme Court judge.
The adversarial approach of the revenue department that is focused on increased tax collection is avoided.
The red- tape associated with regular procedure is avoided.
As opposed to 10-20 years if the regular procedure is followed, a binding ruling is generally obtained within 1 year.
However, the advance ruling process is also prima facie confrontational and suffers from several loopholes that are generally found in regular litigation process. Moreover, the AAR has seen a large backlog of cases owing to change in its composition and lack of administrative capacity to handle the volume of applications that are being filed, in the recent times. This would primarily be on account of the fact that an advance ruling can be applied for in case of both proposed and existing transactions. Thus, there has been opinion of late that the administrative process of the AAR needs an overhaul.

In addition to the establishment of the AAR regime, other measures have also been taken, such as, the setting up of a Settlement Commission for settlement of undisclosed income, introduction of a special DRP for appeals involving transfer pricing disputes and the recent additions of advance pricing agreements, safe harbour rules, etc. that have all been incorporated in the ITA for the benefit of the taxpayer.
However, the failure of the originally much anticipated DRP in practice suggests that beneficial systems have classically been difficult to implement in India and a robust administrative mechanism needs to be put in place for any such system to succeed. Owing to this, although a system for advance pricing agreements has been put in place for more certainty in transfer pricing disputes, since no time period has been prescribed for the process and since revenue authorities with a traditionally confrontational mindset are involved in the team holding pre-filing consultations with the taxpayer for the process, it is to be seen whether this initiative will be successful in reducing the volume of transfer pricing disputes in practice.
Based on an understanding drawn from the preceding chapter, it would be reasonable to conclude that India needs to incorporate measures to improve its dispute resolution mechanism with respect to tax matters. At the most rudimentary level, India can take several lessons from other countries, especially in terms of tax administration. Considering the fact that it may be difficult to change the confrontational approach of the tax authorities, another practicable solution may be to enforce ‘baseball arbitration’ in India for disputes involving large demand. ‘Baseball arbitration’ evolves from mandatory arbitration clauses provided in Double Taxation Avoidance Agreements (DTAA) entered into by the USA for resolving disputes involving the DTAA where the respective tax authorities cannot negotiate a settlement. The process requires the competing parties to submit their respective position, and either of their submissions wins and the other loses. The biggest advantage that such an approach offers is the authorities generally modified their extreme stances and makes it more reasonable to increase the chances of a favorable decision. Generally, the arbitrators decide on the matter by choosing the side that is closest to the most appropriate answer. Such baseball style arbitrations have proven very successful and the US has successfully concluded several such proceedings with Canada in respect of DTAA disputes. Baseball arbitration with an independent arbitrator with an appropriate judicial background may be the most workable solution for transfer pricing disputes or disputes involving determination of the correct method for attribution of profits since the revenue authorities are prone to taking extreme stands in such cases which has led to tax leakage and protracted litigation.
Another solution that can work for the Indian tax regime would the adopting the approach from the UK tax framework, and incorporate the ‘co- operative compliance’ principle. Such a co-operative approach generally involves engaging with the taxpayers so as to understand shared interests, including the aversion of major tax risks so as to provide for cost-free resolution of disputes on both sides. It has generally guaranteed more certainty and is more likely to create a level-playing field between the taxpayers and the revenue authorities, as can be noted from the previous chapter. In light of the same, as detailed above, the HMRC has developed compliance risk management plans involving the study of risk involved in a particular case and a behavioral analysis of taxpayers so as to determine the exact approach to be adopted. Thus, a conducive approach developed by the HMRC by which they work towards applying soft skills and providing assurances to low-risk taxpayers have helped ensure greater compliance at this level.
A number of experts have suggested that mediation might be the way to go for improving the existing Indian system. However, adopting a mediation process where another revenue official, who is independent of the dispute at hand, may prove to be counter-productive. A simple way of understanding this would be by referring to the 12th Report of Law Commission of India released in 1958, where the Law Commission of India had suggested that the presence of the CIT(A) as the first appellate authority above the AO was inappropriate owing to the CIT(A) being directly under the control of the tax department. This was based on the principles of natural justice as accepted in Indian administrative law and more particularly, the maxim of Nemoiudex in causasua, which means that no person should be a judge in his own cause. It was suggested that the CIT(A) could be made independent placed under the control of the ITAT as a solution. Although the CIT(A) has been retained as an adjudicatory body as of date without any change, the attitude of the authorities today incites thought that the proposition needs to be revisited. It is pertinent to note that this deviation was made by India from global practice while creating the AAR since a revenue authority being given the power to adjudicate an advance ruling was seen to defeat its purpose.

Consequently, it would be reasonable to suggest that independent persons of legal or judicial background, as present in the case of the AAR, might be desirable as mediators so as to ensure that both parties are sufficiently educated about the legal issues involved in the matter before arriving at a settlement. Thus, as is present in mediation centers or Lok Adalats in India, an expert judicial mind giving guidance in tax mediation may go a long way towards solving India’s overload of tax disputes.

Conclusion
From the aspects discussed, here in above, in the preceding chapters, there are multiple significant conclusions that can be arrived at, not only with respect to the Indian framework but also regarding the global perspective. One of the most intriguing conclusions to arrive at would be the undeniable significance of Mandatory and Binding Arbitration for Tax disputes. Numerous experts, including the OECD, are of the opinion that a major result of MBA would be the incentive of easy and quicker resolution of disputes, which would reduce the outsourcing of decision- making and, therefore becoming a highly effective practice. This appears to be consistent with the US experience to date. Although the commitment to MBA at OECD level is a positive development, the success of OECD MBA as a tool to resolve international tax disputes will ultimately be determined by the form it adopts. For instance, the conclusive nature of ‘baseball style’ MBA focuses the contracting parties on resolution from commencement, thereby, encouraging them to adopt a more practical approach in disputes while preserving the inherent flexibility of the MAP. This format should also be more politically acceptable to states that view MBA with suspicion. MBA is inherently decisive and provides for the efficient determination of disputes in an impartial, practical and structured way. The certainty and efficiency achievable through MBA are vital to protect enterprises with cross-border operations from double taxation and to promote confidence and engagement among the business community in the evolving international tax landscape. The structure and format of OECD MBA should become more apparent over the coming months.

Another important advantage with arbitration of tax disputes would the facilitation of ease of doing business. The well-established process of ICA provides useful guidance for the development of ITA. The former is popular because it gives businesses flexibility and control when operating on a multinational level. These companies are more likely to invest and expand abroad if they know how potential disputes will be dealt with. Instead of being subject to unfamiliar foreign courts, the companies will submit to arbitration standards they themselves have agreed upon. Similarly, tax treaty arbitration meets the needs of multinational corporate groups seeking symmetrical treatment of income inclusions and deductions in different countries. Taxpayers are likely to submit to arbitration when litigation under the court system or in administrative tribunals remains an available but uncertain path, because they will want a neutral and familiar forum to determine their tax liability.
In fact, the need for familiarity and neutrality is heightened in the international tax environment. In ICA, the parties are generally private companies engaged in business. In ITA, the parties are nations, represented by their competent authorities. In an ITA situation, these multinational corporations meet to discuss the countries’ taxpayers, who had been subject to possible economic double taxation as a result of his multinational activities. The multinational’s position would be that of a stakeholder, willing to pay tax to either country, but not to both countries. There is no right or wrong way to reduce that taxpayer’s double taxation, but only more and less effective ways. Arbitration based on the following ICA model is the most effective because of its development and success in the areas discussed above. Since ICA via the private sector was evidently influential in bringing arbitration to tax treaties, it follows that we should look to ICA if we want to understand what arbitration is really about and to learn how to improve it.?This view has support in both the tax and arbitration fields.
Manal Corwin, the Treasury Department Assistant Secretary of International Tax Affairs told the Senate Committee on Foreign Relations that “based on our review of the U.S. experience with arbitration in other areas of the law… and overwhelming support of the business community, we concluded that mandatory binding arbitration as the final step in the competent authority process can be an effective and appropriate tool to facilitate mutual agreement under U.S. treaties.” The ICC had issued a statement encouraging governments to accept compulsory arbitration in international tax conflicts, based upon the broad experience of ICC in commercial arbitration. The ICC believes that mandatory binding arbitration accomplishes corresponding goals of the tax system and ICA, including not only the cost-effective and equitable resolution of tax controversies, but also the enhancement of global economic growth and development through elimination of unintended instances of double taxation. It further, recommended that compulsory and binding arbitration in international tax matters should be adopted in bilateral or multilateral tax conventions.

As discussed in earlier chapters, it is more useful to consider how the progress of ICA can be used as a template, instead of looking at ITA in the context of ‘fixing’ MAP. In the much successful arbitration under ICA and ICSID, arbitrators routinely address problems of taxation in the context of ordinary commercial contracts as well as claims by foreign investors brought against host states. It follows that arbitration of taxation issues is feasible and efficient, and will be as commonly utilized as arbitration in commercial and investment matters.
If the use of international tax arbitration is to continue, as appears likely given the strong support of the international business community, two adjustments need to be made. First, taxpayer participation in the competent authority process should be allowed from the beginning of the process. Second, the arbitration process and decisions should be made public. Some have argued against greater participation by private parties due to concerns that the private parties will overwhelm the competent authorities. That certainly is a risk, especially where multinational enterprises are working with tax administrations in smaller, less developed countries, but the risk is likely to be minimized if the process itself is subject to greater transparency. There also is the argument that confidentiality is necessary to maintain business secrets of the taxpayers, but in other areas, such as with private letter rulings in the U.S., the confidentiality of sensitive business information is maintained even though the tax issues involved in the ruling are discussed and resolved in a relatively thorough fashion.
It is interesting to note that while delivering his speech in relation to Budget 2013-14, Dr. P. Chidambaram had proposed the set-up of a tax administration reform commission to review the tax system at both legal and policy level so as to improve the efficiency of India’s tax administration system. Accordingly, the Indian Government had set up the TAR Commission for 18 months under the Chairmanship of Dr. Parthasarathy Shome. The Terms of Reference of the TAR Commission include among other things:
Review of the existing mechanism for, processes involved in and organizational structure of the tax administration in India;
Review of existing compliance mechanism so as to explore methods to improve tax- payer compliance;
Review of existing mechanism for tax dispute resolution so as to reduce compliance time and costs.
In light of this, since the TAR Commission is going to be working towards improvement of the tax administration and tax dispute resolution systems in India, the approach adopted by the HMRC in promoting co-operative compliance and in encouraging the use of ADR to improve compliance, reduce costs and resolve pendency needs to be given serious consideration. If implemented with safeguards, co-operative approaches and ADR techniques as used by the HMRC may immensely benefit the Indian system. The HMRC, through its far-sighted approach, has set a great example for the implementation of ADR in tax matters and thus, India indeed has several lessons that it can learn from the UK on this issue.
Given that the work done by Dr. Parthasarathy Shome through reports on the Indian GAAR and indirect transfer provisions released by the Commission set up under his chairmanship has been largely well researched, balanced and in line with international tax jurisprudence, taxpayers in India may yet see some light at the end of the tunnel owing to the TAR Commission.
India is facing a position where so as to ensure certainty for taxpayers and to encourage investment reaffirming its position as the global economy that it aims to be, it needs to avoid an environment where protracted litigation in tax disputes is a common affair. In this context, although India comes from common law based system and harbors several socio-political cultural attitudes and synergies owing to its colonial past, improvement in the existing system is the need of the hour- particularly when the system in other jurisdictions has been continuously evolving so as to adopt the most modern techniques for resolving disputes in tax matters. Consequently, India has several pages to borrow from other countries so as to overcome the hurdle of long drawn out litigation in tax matters for it to fulfill its potential and become the investor- friendly jurisdiction that it strives to become.

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Sarah G. Nowland, ‘Three’s (Not) a Crowd in International Tax Arbitration: International Tax Arbitration as a Development of International Commercial Arbitration Rather than a MAP Fix’, 37 Hastings Int’l & Comp. L. Rev. 183, vii (2014)
Sed Crest, ‘A New Way to Resolve International Tax Disputes’ (2005) 16 International Tax Review 24, 25
Sriram Govind, Sameera Varanasi, ‘Dispute Resolution In Tax Matters: An India- UK Comparative Perspective’ (September 2013), International Taxation 9
The Right Honourable Beverley McLachlin, P.C., ‘Judging the Vanishing Trial in The Construction Industry’ (2010) 2 Faulkner L. Rev. 315
Tibor Varady, International Commercial Arbitration, A Transnational Perspective (2009) 27 4th ed., West’s American Casebook Series
William W. Park, Arbitrability: International & Comparitive Perspectives, Chapter 10 “Arbitrability and Tax” (2009) 182 L. Mistelis & S. BrekoulakisBooks
Authority for Advance Rulings (Income-tax), Handbook on Advance Rulings (2008)
McCaffrey, US International Tax Guide (2011)
Michael Lang, Introduction to the Law of Double Taxation Conventions (2nd edn., IBFD and Linde 2013)
Paul Hopkins, ADR Client Strategies in the UK: Leading lawyers on preparing clients, navigating the negotiation process and overcoming obstacles: The success of mediation in the UK (Thomson West; Aspatore Books 2008)
Websites and Online blogs
Deloitte, ‘Strategy Matrix for Global Transfer Pricing: Planning for Methods, Documentation, Penalties and Other Issues’ (2008) <http://www.iasplus.com/dttpubs/0807transferpricing.pdf>
Gloria Miccioli, ‘International Commercial Arbitration’ (2011) The American Society of International Law <http://www.asil.org/sites/default /files/ERG_.ARB.pdf>
Government of India, ‘Government Sets-Up Tax Administration Reform Commission under Dr. Parthasarathy Shome’ (August 26, 2013) <http://www.finmin.nic.in/press_room/2013/TaxAdminReform_shome.pdf>
Government of India, ‘Government Sets-Up Tax Administration Reform Commission under Dr. Parthasarathy Shome’ (August 26, 2013) http://www.finmin.nic.in/press_room/2013/TaxAdminReform_shome.pdf
Hadari, Yitzhak, ‘Compulsory Arbitration in International Transfer Pricing and Other Double Taxation Disputes’, (October 2013) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1483621>
HMRC Guidance on Tax Compliance Risk Management, <http://www.hmrc.gov.uk/manuals/tcrmanual/index.htm>
HMRC High Net Worth Unit, Tax Professionals: A New Approach, <http://www.hmrc.gov.uk/menus/hnwu- magazine.pdf>
HMRC, ‘Alternative Dispute Resolute for SME s and individuals: Project Evaluation Summary’ <http://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/news/adr-public-eval-report.pdf>
HMRC, ‘Resolving Tax Disputes Practical Guidance For HMRC Staff on The Use of Alternative Dispute Resolution in Large or Complex Cases’ <http://www.hmrc.gov.uk/practitioners/adr-guidance-final.pdf>
HMRC, ‘Resolving Tax Disputes: Commentary on the Litigation and Settlement Strategy’ <http://www.hmrc.gov.uk/ practitioners/lss-guidance-final.pdf>
Ian D Field, ‘Judicial Mediation and Ch III of The Commonwealth Constitution’, <http://epublications.bond.edu.au/ cgi/viewcontent.cgi?article=1068&context=theses>
ICC – International Chamber of Commerce, Arbitration in Internaitonal Matters, Policy Statement 1 (3 May 2000) <www.iccwbo.org/Data/Policies/2000/Arbitration-in-international-tax-matters/>
John Mikesell, ‘Fiscal Administration’ 9th edition, Cengage Learning 611
Kris Schlaman & Brian Trauman, ‘Mandatory arbitration designed to speed agreement, Transfer Pricing International Journal’ (2011) <http://www.kpmg.com/Global/en/services/Tax/Global-TransferPricingServices/Documents/ustrea ties-nov2011.pdf.>
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Lord Justice Jackson, ‘Review of Civil Litigation Costs: Final Report’ (December 2009) 355-56 <http://www.judiciary.gov.uk/NR/rdonlyres/8EB9F3F3-9C4A-4139-8A9356F09672EB6A/0/jacksonfinalreport140110.pdf>
Michael McIntyre, ‘Comments on the OECD Proposal for Secret and Mandatory Arbitration of International Tax Disputes’, (2006) 7 Fla. Tax Rev. 622 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=895633
Mukesh Butani, ‘Arbitration has relevance in International Taxation’ (August 9, 2010) Business Standard, <http://www.business-standard.com/india/news/arbitration-has-relevance-in-international-taxation/403933/>
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PwC, ‘Dispute Resolution – The rise of treaty arbitrationclauses, Tax Controversy and Dispute Resolution Alert: Preventing – Managing – Resolving Tax Audits and Disputes Worldwide’ (Aug. 25, 2011) <http://www. pwc.com/en-GX/ gx/ tax/newsletters/ tax-controversydisputeresolutions/ assets/ pwc-treaty-arbitration-clauses.pdf>
PWC, ‘PKN- Third Bilateral APA Concluded Between Denmark and China’, (June 2011) http://www.pwccn.com/webmedia/doc/634438150496233653_cn_dm_tp_apa_jun2011.pdf
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Sriram P. Govind, ‘Making a Case for International Tax Tribunals’ (Moneycontrol.com, September 6 2011)?<http://www.moneycontrol.com/news/the-firm/making-a-case-for-international-tax-tribunals_583400.html> accessed on 14 October 2012.

Sue Walton, ‘Mediating tax disputes: HMRC’s ADR Pilots’ (July 14, 2011) Tax Journal <http://www.taxjournal.com/ tj/articles/mediating-tax-disputes-hmrcs-adr-pilots-28822>
The Business Standard, ‘Rule 10H on pre-filing consultation: A unique feature of Advance Pricing Agreements’ (June 16, 2013) <http://www.business-standard.com/article/economy-policy/rule-10h-on-pre-filing-consultation-a-unique- feature-of-advance-pricing-agreements-113061600657_1.html>
The Economic Times, ‘Authority for Advance Rulings Needs Overhaul’ (September 20, 2012) <http://articles.economictimes.indiatimes.com/2012-09-20/news/33977104_1_authority-for-advance-rulings-aar-rulings-letter-rulings>
United Nations, Report of the Sub-Committee on Dispute Resolution <http://www.un.org/esa/ffd/tax/sixthsession/Report_DisputeResolution.pdf>
Case Laws
Bulgarian Foreign Trade Bank v. A.I. Trade Finance Inc. No. T1881-99, 15(2) Mealey’s, A-1 (2000)
Dunnett v. Railtrack PLC 2 ALL ER850 (2002)
Halsey v. Milton Keynes General NHS Trust 4 ALL ER920 (2004)
Hickman v. Blake Lapthorn EWHC 12 (2006)
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,Inc. 473 U.S. 614 (1985)
Neal v. Jones (t/a Jones Motors) EWCA Civ 173 (2002)
Statutes, Conventions, Treaties and others
28 U.S.C. § 1782, Assistance to foreign and international tribunals and to litigants before such tribunals
9 U.S.C. § 1, General Provisions: “Maritime transactions” and “Commerce” defined; exceptions to operation of title
Competent Authority Assistance, IRS
Department of the Treasury, U.S. Tax Treaties, Publication 901, Cat. No. 46849F
I.R.C. § 61(a) (2013), ‘Gross income defined’
Memorandum of Understanding between the Competent Authorities of the Kingdom of Belgium and the United States of America, U.S.-Belg. 5 (2009)
OECD Model Tax Convention on Income and on Capital, 2010
OECD, Model Tax Convention on Income and on Capital (July 18, 2008), at 17, available at http://www.oecd.org/dataoecd/14/32/41147804.pdf
OECD, OECD Model Tax Convention on Income and on Capital: An Overview of Available Products
Resolution of tax treaty conflicts by arbitration, IFA congress seminar series; Vol. 18e, (1994).

Solicitors Regulation Authority Code of Conduct, 2011
The Convention for the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, 1990
The High Risk Corporates Programme, available at: http://www.hmrc.gov.uk/large-businesses/prog-approach.htm
The United Nations Conference on International Commercial Arbitration, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958
Tribunal Rules, 2009, SI 2009/273
U.S.-Belgium Tax Convention,
U.S.-Canada Tax Convention,
U.S.-France Tax Convention,
U.S.-France Tax Convention, U.S.-Canada Tax Convention, art. 21; U.S.-Belgium Tax Convention, art. 24; U.S.-Germany Tax Convention, art. 25.

U.S.-Germany Tax Convention,
United States- Republic of Korea Income Tax Convention, available at http://www.irs.gov/pub/irs-trty/korea.pdf (last visited Oct. 20, 2011).