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HMRC internal manual

International Manual

Transfer pricing: methodologies: Mutual Agreement Procedure: Arbitration

General Remarks

The UK is in favour of using arbitration to eliminate double taxation where the Competent Authorities have been unable to reach agreement.  Article 25(2) of the Model Convention requires Competent Authorities to endeavour to resolve cases by mutual agreement - this is not a commitment to eliminate taxation not in accordance with the Model Convention. To eliminate taxation not in accordance with the Model Convention, the 2015 version of the Model Convention contains Article 25(5) which requires unresolved MAP cases to enter arbitration within two years from the presentation of the MAP case. The arbitration panel is required to arrive at a decision that eliminates taxation not in accordance with the tax treaty and that decision is binding on both treaty partners.


It is UK policy to include a provision for arbitration in its double tax treaties. The scope of arbitration provisions in the bilateral double tax treaties may vary from the OECD Model Convention. Part VI of the MLI contains 9 articles that provide the option for signatories to commit to mandatory binding arbitration. The UK has committed to mandatory binding arbitration through the MLI. Although the arbitration articles in the MLI set out a framework for the contracting states to apply mandatory binding arbitration, this framework allows a degree of flexibility in scope and conduct of arbitration. 


Also available to residents of the EU is arbitration via the EUAC.  While the UK remains a member of the EU, a resident of the EU will be able to make claims under the EUAC in respect of transfer pricing and permanent establishment cases if the case involves the UK and another member state.


Arbitration through Bilateral Treaties

The UK seeks to follow article 25(5) of the Model Convention in its bilateral double taxation treaties. As the UK does not restrict access to MAP in cases where a decision on the issues subject to the MAP request have already been rendered by a court or administrative tribunal, it follows that the UK would not seek to restrict access to arbitration in such cases.  A number of other states may restrict MAP where the issues have already been subject to a decision of a court or administrative tribunal


The Model Convention provides that unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, it shall be binding and shall be implemented notwithstanding any time limit in the domestic law of either treaty partner state. If the taxpayer rejects the outcome of the MAP arbitration they may choose to pursue the domestic remedies that had been suspended. In such a case, the UK would consider that the efforts of the Competent Authorities to resolve the case by MAP to have been exhausted. 


The provision that Competent Authorities will decide the mode of application of the arbitration provision in article 25(5) leaves Competent Authorities free to determine the form that arbitration takes. In some treaties the Competent Authorities have agreed memoranda of understanding (MoU) setting out the form of arbitration. This will include matters such as the form of the request for arbitration, the information that must have been provided to both Competent Authorities when the case for MAP was presented, terms of reference and the selection of arbitrators.


The UK is content for arbitration to apply to all cases where taxation is not in accordance with its tax treaties. Not all tax treaty partners agree and as a consequence bilateral agreements may be restricted to cases of double taxation or just to cases involving transfer pricing or attribution of profit to permanent establishments.  For the exact terms and scope of the arbitration provision reference to the individual treaty and MoU, if applicable, is required.


It will be necessary in every case to have regard to the relevant tax treaty, but generally for treaties with an arbitration provision, where a person has presented a case and the Competent Authorities are unable to reach an agreement to resolve that case within 2 years from the presentation, the person can request that any unresolved issues be submitted to arbitration.


Arbitration for Treaties Amended by the MLI

By virtue of Part IV of the MLI, where the UK’s treaty partner has also signed the MLI without a relevant reservation or notification then the tax treaty will have an arbitration clause added.  Where the tax treaty already has a provision for arbitration, the UK’s preference for retaining or replacing that provision will be determined by the option that provides the most comprehensive scope for arbitration. 


Part VI of the MLI builds on Article 25(5) and provides further rules for the structure and conduct of arbitration in Articles 19 to 26. There is scope for signatories to agree alternative approaches to arbitration within the rules. Arbitration can be requested in any case where taxation is not in accordance with the provisions of the covered double tax treaty. As some signatories to the MLI have made reservations to modify the scope of Part VI, the arbitration clauses inserted into UK treaties by the MLI will vary in structure, conduct and scope.


The arbitration decision is binding on both Competent Authorities subject to the exceptions in Article 19(4). For the decision to be binding, the person directly affected by the decision must not pursue litigation on the resolved issues and must withdraw from any litigation suspended pending the outcome of arbitration within 60 days from being notified of the decision. In the event that both Competent Authorities agree a different resolution, Article 24 permits them to override the decision of the panel and implement their agreed resolution. Article 22 allows a case to be resolved before the conclusion of arbitration if the Competent Authorities reach agreement or the person affected withdraws their request.


Arbitration through the EUAC

Article 7(1) of the EUAC provides that, should the Competent Authorities fail to reach an agreement that eliminates double taxation within 2 years from the date on which the case was first submitted, they shall set up an advisory commission to deliver its opinion on the matter. Article 7(4) provides that the Competent Authorities may, with the agreement of the associated enterprises concerned, waive the 2 year time limit. Where the UK Competent Authority considers that continuation of the MAP is likely to result in earlier resolution of a case than referral to an advisory commission, it will assume the tacit agreement of the other Competent Authority and the associated enterprises to waiving the time limit, unless otherwise informed. MAP will therefore proceed accordingly.


The associated enterprises retain the right to invoke the 2 year time limit when it expires. If the enterprises, or the other Competent Authority, notify the UK Competent Authority of their wish to invoke the time limit, the UK will co-operate fully in establishing an advisory commission. Similarly, when the UK Competent Authority does not consider that MAP will result in earlier resolution of the case, it will ask the other Competent Authority to co-operate in setting up an advisory commission.


The 2 year time limit before a case proceeds to the arbitration stage (second stage) may also be extended where the case is still under appeal through domestic procedures in a treaty partner state.


The code of conduct provides that the 2 year period from the presentation of the taxpayer’s case to the time at which arbitration can be invoked is started when the Competent Authorities receive certain information from the taxpayer. This includes identification of the enterprise concerned, details of the relevant facts and circumstances of the case, identification of the relevant tax periods, copies of any assessments, tax audit reports or similar giving rise to double taxation, details of any appeals and litigation initiated by the enterprise or other parties to the relevant transactions, an explanation of why the principles of the EUAC are considered not to have been observed. The enterprise must also undertake to respond completely and quickly to requests by the Competent Authority for further information.


The submission of a case to the advisory commission does not prevent a contracting state from initiating or continuing judicial proceedings or proceedings for administrative penalties in relation to the same matters (Article 7(2)).


Article 7(3) provides that the second stage will not commence until the time provided for appeal has expired without an appeal having been made, or the taxpayer has withdrawn the appeal or settled it by agreement. This might effectively present the taxpayer with a choice between pursuit under the domestic appeals process or arbitration. Although the UK has previously decided to apply Article 7(3) it no longer sees the need to do so. For the purposes of the EUAC the UK will be prepared to consider reference of a case to an advisory commission notwithstanding a prior decision within the UK judicial process.


The advisory commission, constituted in accordance with Article 9 of the EUAC and before which the taxpayer may appear (Article 10(2)), must deliver within 6 months an opinion which will eliminate the double taxation (Article 11). The Competent Authorities must then act within 6 months in accordance with the decision, unless they agree to eliminate the double taxation by some other means (Article 12).


Article 8 of the European Arbitration Convention provides that the Competent Authority of a contracting state is not obliged to initiate either of the 2 stages, MAP or advisory commission, where one of the enterprises involved is liable to a serious penalty.  In light of its experience since 1990, the UK will, in practice, only exercise its discretion under Article 8 in cases involving the imposition of penalties for deliberate inaccuracy. In considering whether to proceed under the EUAC the UK will take into account the facts and circumstances which have led to the taxpayer becoming liable to such a sanction. There is no provision equivalent to Article 8 of the EUAC affecting MAP or arbitration in the Model Convention on which the UK seeks to base its tax treaties.



Although the EUAC is regularly invoked, it has generally been possible for states to arrive at agreement under MAP without proceeding to the secondary stage of the advisory commission. Enquiries about the provisions, or about presenting a case, should be addressed to the contacts detailed at INTM 423110.