UPDATE 1-International arbitration for tax disputes, 'baseball' style

Patrick Temple-West
Reuters Middle East

* U.S. leads Canada 3-0 in winner-takes-all tax game

* Arbitration rulings are confidential

* Companies welcome the certainty of arbitration

WASHINGTON, Nov 25 (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.

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


"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.


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


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 reached a $3.4 billion

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.

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