This Article is written by Charul Mishra, from Symbiosis Law School, Hyderabad and edited by Neha Mallik. In this article, the author has dealt with the need for the procedure of Arbitration in International and Indian Taxation Disputes.
The increasing focus of national governments around the world on multinationals and their tax relations is likely to result in higher tax conflicts at the domestic level and, in several cases, arbitration at the international stage. It launches a new period in which we are likely to see concurrent legal proceedings which may be well appropriated to ensure that taxpayers properly safeguard their rights and seek all available remedies. Due to extraordinary growth in the transnational world economy, and with an incredibly high level of trade between nations concerning various goods, services, and resources, international tax problems have compounded and become even more important. The rising number of foreign tax disputes made it imperative to find an efficient and reliable means of dispute resolution. The idea that at least one of the parties in most foreign tax disputes is a sovereign country brings special and highly nuanced features in the taxation field to the dispute resolution process.
Arbitration in International Tax Disputes
There are few arbitration proceedings encountered by the international tax community. Despite the consensus on the importance and comparative advantages of foreign cooperation and civil arbitration, it may seem to have referred to only a few cases for the process of arbitration. This condition can be clarified by the fact that there will be states widely consenting to the surrender of part or all of their taxation power to a third party, and agree to adhere to the arbitration award, in advance. Although states ultimately agree on entering into tax treaties with other sovereign countries to give up certain taxing privileges, referring a tax dispute to a self-governing body would be a major step that many countries would not take. In reality, the most important issue to resolve when dealing with arbitration and taxation seems to be counting a sovereign state as a party to the arbitration proceedings. The existence of a sovereign state sets the proceedings in a different tone.
Is Arbitration a viable option for resolving International Tax Disputes?
- A few years back when arbitration was not used for resolving International tax disputes, International commercial arbitration was just an idea for any legal dispute. But till present, arbitration has evolved a next level dispute resolution process and emerged into an independent sector of law. Now, various lawyers and legal practitioners from numeral sectors of law have been attracted to the field of alternate dispute resolution. Currently, more than twenty magazines and newspapers deal with arbitration in different languages. The topic is organized by a multitude of seminars and meetings in proliferating rooms, and, most notably, conflicts are gradually settled by arbitration. Arbitration can broadly be defined as the submission of a dispute to an arbitral tribunal consisting of one or more arbitrators chosen by the parties to the dispute because of their neutrality. The parties decide in advance to cooperate with the arbitration award when they refer their matter to the court.
- The arbitration arrangement may be established, either judiciously at the time of the Master Agreement (clause compromissoire) or after the parties concluded the contract and the disagreement (compromise) occurred. Like the judiciary that derives its legitimacy and authority from the state, arbitration is based on the voluntary arbitration agreement, which is then accepted by the courts for compliance purposes for its force, integrity and influence. Some legal frameworks impose arbitration awards if other requirements are met, such as the arbitrators’ independence and competency, the Order public, etc.
- Arbitration became desirable with rapid growth in both domestic and foreign industries, trade, and economic transactions. The rise in the number of transactions has led to a rise in business and monetary disputes which, in effect, caused the cases to overflow the courts in most nations. Whether arbitration is viable for taxation or not, it can be understood by the following points:
- The first point can be that arbitration may be an expedited form of dispute resolution. It has built a reputation for fostering difficulty and delay in court procedures. Not only court schedules cause unjustifiably long delays in hearing cases, but parties also succeed in prolonging the judicial process and thus eroding the result of its validity and enforceability when it is to their advantage. In certain cases, arbitration proceedings themselves can be fairly prolonged if the parties to the arbitration proceed to an annual or delay the award well before the court.
- The second point is that the arbitration can be less onerous for the parties than court proceedings. In most cases, the statement appears to be true. Some arbitral tribunals today, however, set their fees so high that it is unfeasible for some parties to refer cases to those entities. The unfeasible legal costs are the product of procedural complications, such as discovery processes, resulting in high legal fees and lengthy delays that raise the costs for the litigating parties. The third point is that unlike the general court procedure, arbitration is not accessible to the public. The assurance of privacy and security, especially in sensitive industrial, commercial enterprise, and investment areas, provides a good opportunity to arbitrate conflicts, helping to keep the information of the conflict only identified to the parties and the arbitrators.
- And the last point is that the arbitration board is also claimed to be more impartial than the regional tribunals. It has been reported that local judges may feel pressured to favour the country’s security in economic issues about major global investment, to the disadvantage of foreign interests. Although the bias argument can prove true in some cases, some foreign parties, especially multinationals, tend to exaggerate this reality by arguing that, in less developed nations, the judiciary is solely in the hands of the executive branch and that the court system is so weak, unclear and unpredictable that foreign parties will be afraid of justice.
- A variety of collections of arbitration rules, international treaties and conventions (especially the 1958 New York Convention on the Recognition and Compliance of Foreign Arbitration Awards) and international arbitration services collaborated to make arbitration a standard global trade dispute settlement mechanism. The International Chamber of Commerce (ICC); the International Center for the Resolution of Investment Disputes (ICSID), as well as the American Arbitration Association are some of the International arbitration court services. The advent of inter-regional arbitration proceedings and services characterizes a more recent development in the resolution of international corporate and institutional disputes. Examples of this trend are the Euro-Arab Industrial Arbitration and negotiation Scheme, and the Iran-US S Dispute Resolution Tribunal.
Important Cases of Arbitration and International Tax Disputes
Case of Greek Tax Arbitration:
However not being essentially global, given the little available information on these two arbitration cases that involve a Greek taxpayer and the Greek Government display authoritative features. Many years ago a Greek taxpayer signed an agreement with the Greek tax office on the tax system to be followed by the Greek taxpayer while participating in Greece’s trade and industry. It is unclear whether Greek taxpayers were Greek citizens. The arrangement with the Greek tax authorities contained an arbitration provision providing for a compulsory referral to arbitration in any dispute.
After a tax conflict, and based on an arbitration agreement, the Greek taxpayer pressured his government to recognize a Swiss arbitration tribunal consisting of a Swiss Supreme Court judge as an impartial judge, a Swiss lawyer on behalf of the Greek taxpayer and a Greek government representative. Exchange of briefs, hearing, and pleading were generally carried out without any trouble, and, in both cases, awards were made promptly, in absolute discretion, and ultimately followed by both parties.
Case of Algerian Tax Arbitration
Around twelve years ago, a controversy erupted between the State of Algeria and a U.S. oil corporation based in Algeria over the management of some cash incentives paid by companies to the State of Algeria according to an arrangement between the State and the company. The Company agreed to treat the cash bonuses received as expenses but the deduction was challenged by the Algerian Government. The parties consented to assign their tax dispute to an arbitral tribunal supported by the ICC, relying on the arbitration provision contained in the Agreement. The parties have officially adopted the arbitral award which has been kept anonymous.
Arbitration in Indian Tax Disputes
Tax dispute resolution has traditionally been a primary focus area for overall tax operation in India. It happens because of a variety of factors, including ambitious taxpayers, a hostile atmosphere of regulation, as well as delays and lengthy pendency in the system of dispute resolution. The typical litigation process in India (hierarchy wise) is illustrated below: Commissioner for Tax (Appeals), Court of Appeals for Income Tax, High Court, and Supreme Court. Alternatively to the Commissioner (Appeals), some taxpayers (foreign companies or taxpayers in whose case transferring price adjustments are made) have the option to approach the ‘Dispute Resolution Panel,’ which is a college of three income tax commissioners. The resolving conflicts Panel route provides some primary benefits, which would include the taxpayer’s challenges to the Assessing Officer’s proposed draft evaluation being determined in a time-bound manner (nine months from the end of each month from the Assessing Officer’s order date).
The Settlement Commission is an additional body for the settlement of conflict which resolves income tax conflicts. In the implementation to the Settlement Commission, the taxpayers may disclose additional revenue over and above what is already made public before the tax office or even in the tax return. Despite certain key limitations, the reasonably available immune system from the penalty and court proceedings is a massive benefit of the Settlement Commission route. Typically, the Settlement Commission route has been ascertained to be appealing for taxpayers who have triggered searches, as well as for tax-paying citizens who have received services on a contract basis.
The tax office is not entitled to tend to favour an appeal to the Income Tax Appellate Tribunal against such an assessment concluded on the grounds of the order of the Dispute Resolution Panel, i.e. on points which are decided in favour of the taxpayer. The tax claim fails to bear fruit before the Dispute Settlement Panel agrees on the issue. The Government has pursued a variety of measures in the last few years to decrease the use of litigation which involve circulars released by the Central Board of Direct Taxes (CBDT) clarifying its tax stance on many contentious issues; circulars released at an early stage of topics like the General Anti-Avoidance Law (GAAR) in the context of ‘frequently asked questions’ to explain tax implications; stakeholder opinions sought on some topics through drafted circulars such as the position of successful management.
Reasons for growth of Arbitration for resolving taxation disputes
Growth in the issues of a digitized economy
Recently, e-commerce and trade exchanges have seen a significant increase in the evolution of a ‘virtual’ global market stage. The development of a taxable connection in India is indeed an area that has recently become very contentious, especially in the context of strongly digitized enterprises. The tax offices, for example, have taken the view that a website may constitute a Permanent Establishment in India under certain circumstances. This is an environment that may see some lawsuits in the years ahead. From the viewpoint of a taxpayer, particular consideration needs to be paid to determine possible risks on this issue, after reviewing the most recent judicial rulings, changes in the law, etc.
Transfer pricing litigation
Transfer Pricing rules were launched in India as of 1 April 2001. The reforms of liberalization in 1991 and changes in global market structures contributed to greater cross – border trade, which prompted the implementation of special tax evasion provisions under Chapter X of the Income Tax Act, 1961 (Act). The initial years of transfer pricing experienced remarkable litigation, partially because it was a new area for both taxpayers and the tax offices. As the learning process on this subject increased, the pattern in disputes started changing.
Tax authorities began to scrutinize vigorously foreign exchanges entered into with their multinational business groups among Indian citizens and non-resident taxpayers. Industry-wide conflicts addressed topics arising from simplistic subjects on comparisons to more nuanced economic principles on characterization, abstract marketing, market benefits, management fees, cost-sharing arrangements, banking transactions, etc. There is a need for alternative dispute resolution in the tax disputes.
Although the mutual agreement process refers to an actual need for the effective enforcement of tax treaties and laws, be it International tax disputed or Indian Tax Disputes, the role assigned to this resolution process is similar to settlement in the context that there is no requirement to make a decision, and that it has rather preliminary structure. If the process for mutual agreement fails, the parties can refer the dispute to the national courts or, out of desperation, waive their claims. The arbitration could supplement the procedure for a mutual agreement.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: