International arbitration for tax disputes, 'baseball' style
WASHINGTON (Reuters) - The United States remains undefeated in the nearly two years since it began settling corporate tax disputes with Canada through a winner-takes-all process popularly known as "baseball arbitration."
Tax lawyers and accountants in both countries said the U.S. Internal Revenue Service had won three of the binding decisions and Canada none. They said the IRS had collected a significant sum of money, possibly in excess of $100 million (62 million pounds).
Launched in December 2010, the arbitrations follow the rules for settling salary disputes between Major League Baseball teams and their players. As in baseball, the two parties - revenue agents from the two countries - put forward a figure.
As in baseball, third-party mediators settle disputes by picking the number they judge to be closest to the right answer. In the tax game, that's the amount a company pays. The winning country gets the tax revenue. The losing country goes home empty-handed.
"It's baseball arbitration: One position wins and the other one loses," said Brian Trauman, a principal at Big Four accounting firm KPMG LLP. The cases that have been resolved have "really big dollars at stake," he said.
Now the United States is adding an arbitration clause into tax treaties with other countries, hoping to broaden its winning streak to a global stage.
Companies also prefer such showdowns as government-to-government arbitration can give them quicker tax bill certainty, in some cases allowing them to free up cash reserved for potential tax liabilities.
The arbitration process arises in tax questions involving a multinational company's transfer pricing taxes, where two countries disagree over which of them should collect corporate taxes. Companies can request that countries go to arbitration if revenue agents cannot settle their tax disputes in two years.
In the end, the identities of the companies paying the taxes remain confidential as do the amounts of taxes paid. None of the tax experts consulted would disclose the names of the companies nor the amounts paid in each of the three cases.
The United States has had similar agreements with France since 2004 and Belgium and Germany from 2006, but no cases involving them have gone to "baseball arbitration," the tax experts said.
"Baseball arbitration" clauses are in pending tax treaties with Hungary, Luxembourg and Switzerland. Future treaties with the United Kingdom and Japan may have the same provisions, tax experts said.
AIMING TOO HIGH?
The tax arbitration panels are made up of three experts, one chosen by each country and the third by the other two experts. Revenue agents from each country submit a tax bill number to the panel.
Tax experts on both sides said Canada had lost all three disputes because it was effectively trying to hit home runs - seeking too much in taxes during arbitration to realistically win the case.
"Canada has lost three in a row," said Dale Hill, a former manager of Canada's cross-border tax negotiations with the United States and a partner with Gowling Lafleur Henderson LLP in Ottawa. "Maybe Canada has been more aggressive," Hill said, but "Canada truly believed they would win."
David Rosenbloom, a Washington, D.C.-based U.S. tax lawyer at Caplin & Drysdale, said the Canada Revenue Agency "has developed over the years a habit of taking really extreme and unwarranted positions. It's almost as though they're unaware arbitration is in the treaty."
Richard McAlonan, who directs the IRS negotiating program, told Reuters this month that the agency had resolved a "handful" of the cases. He declined further comment.
The CRA said in a statement that it prefers to resolve its tax disputes with the United States "at the negotiating table." Going to arbitration "would be the last resort," the CRA said. It declined to comment on the cases, citing confidentiality rules in the treaty.
Canada's losses may mean its revenue agents will be more cautious in future tax negotiations with the United States. The countries negotiate 75 to 100 cases a year, Hill said. "It's going to get tougher for Canada to negotiate," he said.
The tax treaties with Hungary, Luxembourg and Switzerland passed the U.S. Senate Foreign Relations Committee in 2011. However, Republican Senator Rand Paul has taken advantage of Senate procedures to block the three treaties from going before the full Senate.
A spokeswoman for Paul could not be reached for comment. Paul has previously objected to the treaties' provisions that require more sharing of U.S. taxpayer information.
New treaty arbitration provisions with Switzerland and the UK would especially benefit the pharmaceutical industry, while auto companies would appreciate the provision in a Japanese treaty, said Lorraine Eden, a professor at Texas A&M University.
Companies in both sectors have a lot of transfer pricing tax uncertainty and can face double taxation if unable to force countries into binding arbitration, she said.
UK-based GlaxoSmithKline Plc (GSK.L) reached a $3.4 billion (2.1 billion pounds) transfer pricing settlement with the IRS in 2006. But the UK did not accept the U.S. settlement, and Glaxo faced UK taxes on the same profits, Eden said.
"Would they like the opportunity to go to binding arbitration and settle this? Absolutely," Eden said.
(Editing by Howard Goller, Steve Orlofsky and Theodore d'Afflisio)
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