U.S.- Japan tax treaty protocol to introduce mandatory arbitration

Tax Controversy & Dispute Resolution ()

On January 24, 2013, a Protocol to the United States-Japan Income Tax Treaty1 was signed that, if ratified, would (among other things) provide for mandatory binding arbitration of certain mutual agreement procedure (MAP) cases. Double tax cases arising from transfer pricing adjustments, and cases involving Advance Pricing Agreement (APA) requests, are among the cases that would be eligible for arbitration under the new Protocol. In addition, cases involving the attribution of profit to a permanent establishment (PE) (including the threshold issue of whether a PE exists) would also be eligible for arbitration.

The signing of this Protocol signals a growing acceptance of the alternative mechanism of mandatory arbitration to resolve difficult cases that the tax authorities are unable to resolve through competent authority negotiations. Mandatory arbitration provisions also have been included in recent U.S. treaties or treaty protocols with Belgium, Canada, France, and Germany, and several bilateral cases have now been resolved through arbitration. The new U.S. treaty protocols with Switzerland and Spain also contain mandatory binding arbitration provisions, but have not yet been ratified by the Senate. Japan has also agreed to arbitration provisions in treaties with Hong Kong, the Netherlands, Portugal, and New Zealand (the latter two have yet to be ratified).

Transfer pricing cases between the United States and Japan have generally been resolved expeditiously in recent years. The new arbitration provision, which would be applicable to MAP cases that remain unresolved for more than two years, shows a commitment by both tax authorities to continued timely resolution of these bilateral matters.