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International tax arbitration: OECD and EU developments

The discussion on alternative dispute resolution mechanisms has recently picked up pace in the tax world. With initiatives at both an international and EU level as a result of the imminent implementation of the OECD's multilateral instrument (or the ‘MLI’) and also the approval of the Council Directive on tax dispute resolution mechanisms in the European Union EU 2017/1852 (the Directive), the landscape for resolving international tax disputes is likely to change significantly in the near future. But how will these developments impact the position of the taxpayer in disputes? And how can Freshfields Bruckhaus Deringer help make the most of the new opportunities?


As part of the OECD's Base Erosion and Profit Shifting (BEPS) project, it was identified that a number of measures to address BEPS issues required implementation in double tax treaties (DTTs). These measures are compiled in the MLI which was adopted by a group of more than 70 countries in early June 2017.

One part of the MLI, albeit an optional part, will introduce arbitration into DTTs of those countries which opted for the arbitration rules of the MLI to apply (MLI Arbitration). Depending on the ratification process in the signatory states (which is underway in most states), it is expected that the MLI will enter into force in early 2018.

At an EU level, the Action Plan on Corporate Taxation was devised in 2015 (putting a new emphasis on the CCCTB-project), a part of which aims to create a better tax environment for business. In pursuit of this goal, on 10 October 2017, the Council adopted a new set of rules to improve the resolution of tax disputes. These rules are included in the Directive which encourages arbitration as a possible dispute resolution mechanism. Member States, however, are free to adopt other comparable binding modes of dispute resolution (Alternative Dispute Resolution). The deadline for Member States to transpose the Directive's package of rules into national law is the end of June 2019.

Depending on the countries involved in a dispute, a case may be eligible both for arbitration under the MLI and the Directive. However, the Directive will take precedence and put an end to any ongoing MLI Arbitration if a dispute is brought to the attention of the competent authorities according to the provisions of the Directive.

What's new under the MLI and the Directive?

Arbitration in international tax cases is, per se, nothing new; some existing DTTs already include arbitration as a method to resolve disputes arising as a result of the provisions of the applicable DTT. In addition, the Union Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/EEC) (the Arbitration Convention) allows for arbitration in transfer pricing disputes.

There are, however, important changes introduced to international tax arbitration by the MLI and the Directive. In summary, more cases will be eligible for arbitration, proceedings should become more time-efficient and, most importantly, MLI Arbitration or any other Alternative Dispute Resolution will be mandatory. These changes are described in further detail below:

  • Clearly defined time-frame: The MLI and the Directive do not allow for ‘open ended’ proceedings, as is frequently experienced under the existing rules. Instead, it is expected that future MLI Arbitration or Alternative Dispute Resolution proceedings will be resolved in shorter time-frames. The Directive takes this one step further by allowing the taxpayer to take recourse to national courts in order to ‘unblock’ arbitration procedures. This will increase the practical relevance of arbitration.
  • Extended scope: with the subject matter of eligible cases under the MLI Arbitration provisions being double taxation issues and under the Directive being tax issues related to tax treaties and international agreements, more cases will be eligible for MLI Arbitration or Alternative Dispute Resolution than, for example, under the Arbitration Convention. However, as an area prone to disputes, most future arbitration cases will probably remain transfer pricing disputes.
  • Mandatory Arbitration / Alternative Dispute Resolution: if a mutual agreement procedure (MAP) on the disputed issue – which precedes both MLI Arbitration or the Alternative Dispute Resolution – is unsuccessful, MLI Arbitration or any other Alternative Dispute Resolution will in the future be a mandatory second stage for the states involved in the dispute.
  • Binding decisions: a decision by the Arbitration panel or other decision-making body will be binding for the states involved. Together with the mandatory nature of the MLI Arbitration or Alternative Dispute Resolution proceedings, this will incentivise the contracting states to settle cases already at the MAP stage, leading to even shorter proceedings. In addition, the Directive also enables the taxpayer to enforce implementation of the decision by resorting to national courts.
  • Arbitration method: the most novel aspect of the new rules is found in the recommended arbitration decision making model. Both the Directive and the MLI Arbitration provide for 'final offer’ arbitration, or so-called ‘baseball arbitration’, as one of the arbitration methods (with baseball arbitration being the default method under the MLI). Under the ‘final offer’ arbitration method, the panel only has to decide between one of the offers presented to it by the competent authorities of the states. There is no need to substantiate the decision or supplement it with any reasoning. Consequently, it is anticipated this will be a quicker and more cost effective resolution mechanism than other typically used mechanisms.

Procedural Aspects

Before a dispute is brought to MLI Arbitration (or to Alternative Dispute Resolution), states are under an obligation to aim to resolve the issue using a MAP. Only when and if such MAP is unsuccessful, within a certain time period (at least 2 years), will the taxpayer be entitled to request that the case is submitted to MLI Arbitration or Alternative Dispute Resolution.

A final decision by an MLI Arbitration panel is binding on the contracting states, with the possibility of the taxpayer declining the Arbitration award or disputing it in national (court) proceedings. With regard to the opinion delivered by the Alternative Dispute Resolution mechanism under the Directive, Member States may deviate from such opinion, but it will be the default binding result if no agreement can be reached.

As regards the interaction of MLI Arbitration or Alternative Dispute Resolution proceedings with national proceedings, this primarily depends on whether MLI Arbitration or Alternative Dispute Resolution awards can take precedence over national judicial decisions. Depending on the states involved, it might be possible for the taxpayer to address a dispute both in national tax proceedings as well as in MLI Arbitration or Alternative Dispute Resolution. In any event, the taxpayer is advised to carefully plan the steps taken and order of proceedings in which to resolve a case.

When will MLI Arbitration or Alternative Dispute Resolution be available? The MLI Arbitration rules will apply to any case that is submitted to MLI Arbitration after the entry into force of the MLI (expected in 2018 for early ratifying states) where both contracting states have elected for the MLI Arbitration provisions to apply. For disputes that are already in progress, it will be decided on a case-by-case basis whether they are submitted to MLI Arbitration. Under the Directive, the Alternative Dispute Resolution mechanism will apply to complaints submitted from 1 July 2019 onwards if they relate to income or capital earned in tax years commencing after 1 January 2018.

Role of the taxpayer

MLI Arbitration and the Directive, in principle, work along the same lines. Deviations, however, apply with regard to the role of the taxpayer within the proceedings:

  • Role of the taxpayer under MLI Arbitration: within the procedural rules of the MLI, the role of the taxpayer in MLI Arbitration cases is limited. Although it is the taxpayer that initiates the proceedings, it will mostly be a proceeding between the relevant competent authorities. It therefore remains to be seen if the contracting states and their competent authorities will encourage taxpayer involvement and also how the draft procedural rules to be published by the OECD will deal with this issue. However, in practice, a taxpayer should aim to make the best use of its possibilities, e.g. via the submission of a legally well-argued application, especially in cases where the arbitration method is the ‘Independent Opinion’ method. This could support the competent authorities in their position and facilitate decision by the arbitration panel which, under the ‘Independent Opinion’ method, is required to submitted a reasoned and well-founded decision.
  • Role of the taxpayer under the Directive: in contrast, the Directive provides the taxpayer with more extensive rights. It provides a right for the taxpayer to provide the deciding panel with information, evidence or documents that may be relevant for the decision. In addition, taxpayers may also appear (or be represented) before the panel.

Depending on the case and the proceedings chosen by the taxpayer, the taxpayer and its advisors should try to make as much use as possible of its rights and possibilities in the given proceedings.

Where Freshfields Bruckhaus Deringer can help

As an international law firm with expertise in both (non-tax) arbitration and tax law (including tax investigations and litigation), Freshfields Bruckhaus Deringer is best equipped to provide bespoke advice in international tax arbitration cases. Starting out from providing a legally well-reasoned and argued applications, to reaching out to the competent authorities – with whom in many countries long-standing working relationships exist – to representing the taxpayer in hearings before the decision-making body, Freshfields Bruckhaus Deringer's lawyers have the experience needed to navigate the taxpayer through the proceedings. Our experience also includes transfer pricing disputes which are not merely a ‘number-crunching’ exercise, but require detailed knowledge of the underlying legal rules and legal reasoning.

Our expertise in arbitration and transfer pricing cases includes advising:

  • a multi-national corporation in the chemical industry on international transfer pricing MAP/arbitration cases between Austria and other countries;
  • an international pharmaceutical company in defence of its transfer pricing policies and procedures including analysis of the transactions, briefing of an expert witness and advice on transfer pricing aspects of the litigation strategy, followed by advice on improvements to the company's transfer pricing controls;
  • a multinational group on tax treaty claims in and on domestic legal proceedings in Africa, including on the interaction of potential arbitration and contractual claims;
  • an agricultural business on the transfer pricing aspects of its case (concerning construction, accounting and corporate governance) in international arbitration proceedings with its JV partner;
  • a US headed pharmaceuticals group about allegations of improper transfer pricing and fraud made by European revenue authorities and prosecutors;
  • a French energy infrastructure group on a transfer pricing advance pricing agreement in relation to the position of its UK subsidiaries and UK permanent establishments of its French and German subsidiaries;
  • on the successful arbitration of a US$2bn claim by two multinational oil and gas companies under a Production Sharing Contract relating to taxation, royalty payments cost recovery and contractual stabilisation;
  • a major industrial client in a post-M&A ICC arbitration relating to the acquisition of a Belgium target which was affected by the European Commission's decision that the Belgian excess profit exemption constituted state aid;
  • a multinational oil and gas company on a successful arbitration under the UNCITRAL Rules involving a South East Asian Government relating to a major Asian liquified natural gas project;
  • a Japanese energy company in a potential dispute with a South-Eastern Asian country relating to arbitrary taxation measures; and
  • a major international mining company on a dispute with an Asian government under an investment agreement and applicable bilateral investment treaties arising out of proposed changes to the applicable tax and royalty regime.


For further information on both the MLI and the Directive see: