2020 arbitration, conciliation and international cooperation
Multinationals have faced increasing levels of scrutiny from tax authorities as governments continue their focus on corporate tax to increase revenues and counterbalance austerity measures. Looking at the current tax litigation landscape with case studies from India, Spain, Australia and Canada, Taxand discussed the future of litigation battles and international tax cooperation in 2020, at the Taxand Global Conference hosted by Taxand China in Shanghai.
Frederic Donnedieu de Vabres, Chairman of Taxand, the world’s largest independent global organisation of specialist tax advisors to multinational businesses, provides an overview of the session presented by; Craig Milner, Taxand Australia, Timothy Wach, Taxand Canada, Mukesh Butani, Taxand India and Luis Manuel Vinuales, Taxand Spain:
As governments aggressively try to fill budget deficits, tax litigation action against multinationals has been on the rise. According to Taxand’s annual global survey 2014 globally, 73% of CFO respondents have seen a rise in the frequency of tax audits.
From Vodafone’s landmark transfer pricing case in India, to Roche’s business restructuring coming under fire in Spain over permanent establishment rules, to Australia’s Resource Capital Fund which came under scrutiny for its partnership structure and the application of a double tax treaty – there are plenty of very live examples of tax litigation cases going to court all over the world.
“There is a widely held view that the dispute resolution framework in India has largely failed, predominantly because the legislation never really translated into actions. This has permeated Asia more widely and the litigation structure is regularly viewed in a sceptical manner. Protracted litigation cases and tax disputes are straining court infrastructure and unsettling multinationals. We have seen the introduction of Advance Pricing Agreements and the creation of a Disputes Resolution Panel as an alternative mechanism for resolving disputes arising from transfer pricing issues. The Authority for Advance Rulings has become less effective as new special courts and hearing benches have been brought in, making aggressive demands on multinationals to meet their revenue targets.”
“It is well known that there has been pressure on the Spanish tax administration to raise revenues following the impact of the financial crisis. However, authorities were already becoming aggressive ahead of the 2008 crash, especially on anti-abuse rules. Large tax assessments have become a normality in the country. Moreover the Spanish media too are helping to blur the public’s perception of the differences between avoidance and fraud. This potential reputational risk coupled with the threat of criminalisation and tax authorities achieving a 60-70% success rate, has ensured a sharp decline in appetite for litigation. Settlements to help bring in cash needed by the Treasury are now being frequently sought and arbitration requests are on the rise.”
“Australia is also looking to increase tax revenues and the government is using legislative powers to do this through litigation. This is evidenced by the fact that the Commissioner succeeded in 75% of litigation cases in 2013, demonstrating that the authorities are being very focused in their targeting of specific battles that will help to raise revenues effectively. As Australia takes on a leading role in the OECD’s BEPS proposals, it has enforced new GAAR and transfer pricing rules to aid their surge in the litigation arena. Moreover Australian authorities have focused on increased information exchange and data matching in addition to a faster court process. The Australian Tax office have also invested in senior hires from the private sector.”
“In Canada, there is little recognition of international tax guidelines issued by the likes of the OECD, with the legal system strictly applying the letter of Canadian law rather than listening to the changes in opinion and guidelines internationally. . The authorities are still being forceful in pursuing audits and litigation cases, though this is largely focused on those businesses being particularly aggressive in their structures. As a result, the volume of litigation in Canada is straining court infrastructure, particularly the prominent tax planning cases which take considerable time and money to resolve and result in ever higher penalties for those who lose. Canadian authorities have also been increasing the number of cross-border information requests – under both domestic law and treaties - but face continual challenges from “debt dumping” structures.”
While the rate of investigations by tax authorities into multinationals’ tax structures and the demand to show substance show no signs of abating, this could change in the future.
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By 2020, Taxand believes that the majority of tax disputes with local authorities will be settled, through arbitrations and conciliations. To do this, the exchange of information across jurisdictions will play a crucial role and wide adoption of best practice recommendations following the publication of the OECD’s guidelines on BEPS. Time will tell.