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International Manual

HM Revenue & Customs
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Transfer Pricing: methodologies: Mutual Agreement Procedure: SP1/11: arbitration stage

Statement of Practice 1/11: arbitration stage

The Arbitration Convention obviously provides for arbitration in certain circumstances, but the OECD Convention and Commentary thereon also contemplates the inclusion of arbitration provisions within tax treaties. The UK is now beginning to incorporate provision for arbitration in some of its tax treaties.

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 two years from the presentation, the person can request that any unresolved issues be submitted to arbitration.

The relevant provision in the OECD Convention precludes the availability of arbitration where a decision on these issues has already been rendered by a court or administrative tribunal of either treaty partner state. However, where possible the UK will seek when agreeing treaties to have terms more favourable to the taxpayer included in the treaty.

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.

The competent authorities will decide the mode of application of the arbitration provision. 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.

For MAP cases within the Arbitration Convention, Article 7(1) provides that if the competent authorities fail to reach an agreement that eliminates double taxation within two 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 two 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 authorities and the associated enterprises to waiving of the time limit. MAP will therefore proceed accordingly.

The associated enterprises, of course, retain the right to invoke the two 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 cooperate 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 cooperate in setting up an advisory commission.

The two-year time limit before a case proceeds to the second stage may also be extended where the case is still under appeal through domestic procedures in one of the treaty partner states.

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, where the domestic law of a Contracting State does not permit the competent authorities of that State to derogate from the decisions of their judicial bodies, 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 Arbitration Convention 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 UK will adopt a similar approach where arbitration is provided for under its treaties unless the relevant treaty prevents it.

The advisory commission, constituted in accordance with Article 9 of the Arbitration Convention and before which the taxpayer may appear (Article 10(2)), must deliver within six months a decision which will eliminate the double taxation (Article 11). The competent authorities must then act within six months in accordance with the decision, unless they agree to eliminate the double taxation by some other means (Article 12).

Article 8 of the Arbitration Convention provides that the competent authority of a Contracting State is not obliged to initiate either of the two stages, MAP or advisory commission, where one of the enterprises involved is liable to a serious penalty. The UK has declared that it will interpret the term ‘serious penalty’ as comprising criminal sanctions and administrative sanctions in respect of the fraudulent or negligent delivery of incorrect accounts, claims or returns for tax purposes.

The UK’s domestic provisions on penalties for inaccuracies were revised in Finance Act 2007, replacing the terms ‘fraudulent’ or ‘negligent’ with ‘deliberate’ or ‘careless’. In the 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 Arbitration Convention 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 Arbitration Convention affecting MAP or arbitration in the OECD Model on which the UK seeks to base its tax treaties.

The UK and other EU Member States subscribe to the “Code of Conduct for the effective administration of the Arbitration Convention” (90/436/EEC and revised by 2009/C 322/01). The Code provides that the two years 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 Convention 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.

Although the Arbitration Convention 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 people named at the end of this statement.