A combination of global forces, including the need by foreign governments to raise significant revenue, has converged to result in a substantial increase in the number and size of tax audits, assessments, and disputes with revenue authorities worldwide. One reason for the increased number of international tax disputes is that revenue authorities are engaging in intense tax audits in which they challenge business transactions with aggressive positions that, in some cases, are generally inconsistent with established international tax norms. Although multinational companies continue to pursue historic alternative dispute resolution techniques, they also should consider the potential impact of newly available techniques such as mandatory binding arbitration that may enable more effective and timely management of financial risks.
New arbitration approach compels agreement
One of the newest dispute resolution techniques is the recent inclusion of mandatory binding arbitration clauses in U.S. income tax treaties. The provision is part of the mutual agreement procedures (MAPs) that enable designated representatives and competent authorities (CAs) of the treaty governments to interact with the intent to resolve international tax disputes. Although CA provisions generally require the treaty countries to use their best endeavors to resolve treaty disputes, they do not require the parties to reach an agreement. The new mandatory binding arbitration clause will, under certain circumstances, compel a process that is binding on both governments.