Double taxation and international tax law
One of THEVOZ Attorneys services most requested by our clients is reducing or eliminating double taxation. Double taxation is defined as “the imposition of comparable taxes in two (or more) countries on the same taxpayer in respect of the same subject matter and for identical periods…it has harmful effects on the international exchange of goods and services and cross-border movements of capital, technology and persons.” [OECD Model Tax Convention on Income and on Capital 2017.] Double taxation is one of the most unfair and damaging outcomes for either individuals or companies, and THEVOZ Attorneys works with clients to resolve these actions expeditiously.
The standard best practices for resolving double taxation disputes are:
- Reduce the risk of double taxation through careful tax planning, which THEVOZ Attorneys does for our clients all the time.
- In the case where a client receives a letter from a tax authority in a country where they do business that essentially rejects that company’s assertions about company practices and/or structure and finds the company liable for the double taxation, THEVOZ will represent the client before the taxing authorities.
However, increasingly there is another avenue for dispute resolution for double taxation and other international tax disputes: international arbitration.
Arbitration for resolving international double taxation disputes
An international arbitration framework has become increasingly essential as a result of the increase in labor and business mobility. With mobility comes more opportunity for disputes and disagreements between taxing jurisdictions. Moreover, some of these disputes involve issues that are novel and unique and may not been previously resolved or even discussed in the context of a resolution procedure.
The arbitration process can be used as a fulcrum to to resolve disputes between taxpayers and tax jurisdictions. But an international tax attorney like THEVOZ Attorneys must know how to force an arbitration.
The Mutual Agreement Procedure (MAP), is a provision included in many international tax treaties to resolve double taxation disputes. The BEPS Action 14 Minimum Standard adopted in 2015 was agreed to by many developed and developing countries to improve the resolution of tax related disputes. The result of the adoption of the Minimum Standard, there was a marked increase in the number of cases dealt with by competent authorities. These changes have led to a marked increase in case resolutions. Increasingly, even transfer pricing cases are being reviewed under the MAP process.
The evolution of international tax law and dispute resolution.
As business and labor mobility increase and dispute resolution processes evolve, the role of the international tax attorney is changing. It is no longer enough to know which tax treaties are used to settle disputes, or to understand the best practices for tax planning for the benefit of clients engaged in global businesses. Increasingly, international tax attorneys must understand where the opportunities are in international dispute resolution frameworks, and where are the discontinuities in regulations and laws that could become problematic for certain industries.
A simplistic illustration may shed some light on the direction of international tax law in a highly dynamic and mobile business environment:
“Place of management” is a critical criterion for determining where a company should be taxed. The problem is that “place of management” is variously defined by different countries and there is no single accepted definition enforced by a controlling authority, for example, the definition changes between each taxing jurisdiction. This leaves companies highly vulnerable to double taxation disputes.
For example, a company is headquartered in Country A, where the definition of “place of management” is where the board of directors’ meetings are held, and important decisions are made at those meetings. Country B’s definition of “place of management” is that day-to-day operations take place in Country B. The issue arises because the company would actually prefer to be taxed in Country B due to a lower tax rate. While the day-to-day operations do occur in Country B, the company does, in fact, hold board of directors’ meetings and make important management decisions in Country A. The company gets a letter from Country A stating that they are liable for taxes in that country and now will be double taxed. There is no controlling authority that defines “place of management,” so the company has little recourse but to appeal Country A’s decision.
Or do they? The company’s international tax attorney proposes the company hold all board of directors’ meetings in Country B, and all major decisions made at those meetings be reflected in the minutes. Day-to-day operations of the company are already in Country B, as are a management team. Now the company can effectively argue their “place of management” is Country B and only pay taxes in that country. No more double taxation.
The role of the international tax attorney in this scenario is not merely to know
Anticipating the next international tax controversy
Increasingly, the role of an international tax attorney is to have a global understanding of tax laws, including new arbitration processes, that may impact clients. As dispute resolution frameworks become increasingly important to global business, the historical reliance on local definitions for company structuring and myriad tax issues will become somewhat irrelevant. The weight of dozens, or even hundreds, of “soft precedents” that result from an arbitration will change the environment for global business. The more consistent arbitration decisions are, the more companies and governments will come to rely upon the arbitration and negotiation process to provide a fair outcome. International tax attorneys will need to stay informed about these decisions in order to provide good service to clients.
And it is not just about dispute resolution. International tax law is becoming more complex and more essential to global businesses. The international tax attorney who makes it their business to see where the gaps and inconsistencies are, in terms of statutes and enforcement, and anticipate the next tax controversy, will be able to provide exemplary service to clients.