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Comparison Between EU-US Tax Treaty Networks

Introduction

As a result of global trade, taxes have turned out to be a key issue of concern. Founded upon the overwhelming latent for double taxation, being taxed two times on the same revenue from two distinct states without respite from either state and the ever-growing latent for tax evasion, many nations have been eager to negotiate bilateral tax treaties, to minimize the aforesaid subjects of tax scams and double taxations. [1]Nevertheless, for the nations involved or the taxpayer, a tax treaty is of less value if there are no provisions that permit some sort of resolution for likely double taxation matters when there are differing interpretations of the treaty. To address this situation, different governments have integrated different types of alternative dispute mechanisms like Arbitration and Mutual Agreement Procedures (MAP) in the tax treaties. In this study, I shall first address the issues of consistency between U.S. and member states, potential tax planning possibilities for EU-U.S. investments, and constraints that the U.S. must consider when developing business structures to define investment proposals. I shall then go ahead and compare trends, specific and general, of different alternative dispute mechanisms as used in the U.S. and EU.

Negotiation, potential tax planning possibilities, and constraints to consider

Every tax treaty in the U.S. is negotiated independently to deal with issues that occur from the particular interaction of the two nation’s tax laws and to deal with specific tax policies that may be vital to each nation. This is because the U.S. tax treaties are usually based on different model treaties, hence each of the sixty U.S. tax treaties normally shares a regular structure containing many related or the same provisions. Thus, disparities exist among authentic U.S. tax treaties, specific U.S. tax treaties, and the OECD Model Treaty. [2] In other words, there is no consistency in the negotiation of tax treaties between U.S. and different member states.

There are certain potential tax planning activities between the EU and the U.S. This is because the U.S. regularly participates in the revision and upgrading of the OECD Model Treaty to mirror new global financial developments and the emerging modes of tax avoidance and tax evasion. By doing so, the U.S. can address various issues that mount up in a globe where cross-border dealings and business structures revolutionize swiftly and where transnational corporate taxpayers mostly depend on insistent tax planning, as well as treaty planning, to decrease their general tax costs.

There are several constraints that the U.S. must consider when developing business structures to define investment proposals. Firstly, for the U.S. to be able to renegotiate each specific tax treaty to attend to new advancements, the Treasury Department would be required to renegotiate over sixty distinct treaties, an overwhelming and time-consuming undertaking. Secondly, given the complexity in updating the contents of tax treaties to particularly address every new development, great force is placed on interpreting present treaties in the milieu of development. This is so because Congress has from time to time addressed changing developments by ratifying legislation overruling specific provisions of tax treaties, a stride that amounts to a violation of the U.S. commitments under the treaties and, as a result, updating tax treaties are always downcast by officials of the Treasury Department. Hence, all these constraints need to be considered when developing a business structure to define the investments between the EU and U.S.

General Trends

Much of Europe goes behind the guide of the OECD as most of the members are also affiliates of the European Union. For that reason, a majority of the interconnected treaties between EU nations have the preceding OECD Model of Mutual Agreement Procedures (MAP)[3] before the changes of July 2008 which incorporated mandatory arbitration. Nevertheless, there are some things exclusive to Europe. The first thing is the compulsory and necessary arbitration procedures concerning transfer pricing and permanent business issues amid EU members. The arbitration measures are based on the EU Arbitration Convention. [4] The measures simply affect fifteen of the present EU members, but procedures to include every EU member are in progress.

On the other hand, the U.S. also strives to keep tax treaty disputes private even with the common ingenuousness of information. The U.S. has two distinct methods which work together. The first one is the statutory language of I.R.C. and the second is the actual tax treaty provisions. [5]Just like the OECD Model the U.S. Model Tax Treaty Convention has a language of common confidentiality place, which is enclosed in Article 26, paragraph 2. [6]

Similar to the OECD Model the language states[7]:

“Any information received under this Article by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals about, the taxes referred to above, or the oversight of such functions. Such individuals or administrators shall use the data solely for such functions. They may disclose the information in public court proceedings or judicial proceedings” (p.113).

The only key disparity in the U.S. Model Tax Convention is the addition of the use of the information for supervision purposes. Therefore, from a model point of view, the U.S. and OECD models are very alike.

Even though the language in the aforementioned article is much related to the OECD and U.S. Model Tax Conventions, the actual dissimilarity comes in articles 25, paragraphs 5 and 6 about the binding arbitration provisions. The involved people and their authorized agents or representatives, have to agree before the commencement of the arbitration proceedings not to unveil to any other individual any information received in the course of the arbitration proceeding from either arbitration board or Contracting State except the resolving of such board. [8]

This specific clause raises the confidentiality height when the tax treaty disagreement appeals to the arbitration provisions. All parties involved must concur not to reveal any information contained in the technical elucidation of the compulsory arbitration provisions. Article XIII calls for all those involved to sign onto a confidentiality accord. [9]

Carroll (1927)[10] also explains that even if the U.S. has similar provisions, according to article 26 in OECD, the new compulsory arbitration provisions seem to enlarge confidentiality. On top of the treaty language, the U.S. Congress increased confidentiality by transiting I.R.C. §6105.189. [11]This specific code section provides statutory power to the present tax treaty provisions on confidentiality.

The US and the OECD have noticeably dissimilar approaches to taxpayer participation. Nevertheless, an evaluation of the pro-exclusion matters connected to the proceedings mainly deals with the privacy of the proceedings. In a private and covert proceeding, there is a probability for taxpayer participation to potentially circumvent domestic authorities. Conversely, if these proceedings were disclosed, the concerns would decrease.

The liberated flow of people, capital, goods, and services is a major creditable goal of the EU. Conversely, the EU is realizing that to accomplish these goals, there ought to be a liberated flow of information. [12]

The EU, OECD, UN, and the US have all secured limits on the accessibility of information concerning tax dispute decrees under MAP. Nonetheless, since MAP is founded on secrecy, this constraint is also justified, though validation ends when the treaty argument shifts from MAP to mandatory arbitration.

At present, only the EU, US, and OECD have mandatory arbitration provisions though all follow a similar course of secrecy concerning the deliberations and assessments associated with the resolution.

The EU Specific Trends

The EU through its Arbitration Convention has a position very comparable to the US and OECD concerning confidentiality. The EU and the European Economic Community (EEC) are founded on the four freedoms. [13]These freedoms are the foundations for EU legislation, together with taxes. The European Court of Justice (ECJ) assures these freedoms to every EU resident and company. As a division of this authority, the ECJ started to attend to direct taxation cases about taxes between diverse member states. The significance of this budge is that the ECJ proceedings are unrestricted and deal with unjust taxation, which breaches one of the freedoms. [14]

To gain way into the mandatory arbitration discussions, the taxpayer might have to look for a ruling through the ECJ. This would let the sharing of the proceedings with the government positions in handling the transfer pricing matter. Even though this is not a direct method to ask for information, the EU lacks any direct technique out of a related argument offered in the OECD division.

The European Court of Justice (ECJ) has augmented its power to include cases of direct taxation besides the European Arbitration Convention. [15] Even though the ECJ has not dealt with a case of an international tax treaty, the court has declared its place on tax treaties and how they are to be analyzed in the EU. Besides, the court particularly contends with the OECD model treaty by affirming that they do not have to conform to the OECD model though the policies are in line with its provisions.

Both the provisions and the objectives of the ECJ treaty and the OECD model convention are different. As noted by Bassett& Fuller (2008)[16], the ECJ outlooks tax treaties as vital although the treaties cannot infringe the EU’s four freedoms. At the same time, going by OECD points let off nations from going by EU law. Therefore, the ECJ can become more significant in the part of tax treaty elucidation;particularly MAP in the future.[17] Different from other EU member treaties, this specific treaty calls for arbitration three years past the initiation of the MAP.

U.S. Specific Trends

The U.S. place or position, specifically how it interacts with the present binding arbitration provisions, seems tobe one of firm confidentiality and no taxpayer participation. The present U.S.-German Tax Treaty has a conflicting place from the OECD projected compulsory arbitration provisions. The U.S. point is that the taxpayer has no consign in the arbitration process since the true motive for the arbitration is for thetwo administrations to present data and law shielding their places and for the arbitration panel to decide amongst the two choices. The U.S., by way of Treasury, would like to confer with the taxpayer, but the taxpayer will have no straightchance to present their point to the arbitration board, nor will the taxpayer recognize the U.S. point in the arbitration.

There are both advantages and disadvantages to the U.S. point regarding taxpayer participation in thearbitration procedure. The U.S. position can be criticized for several reasons. First, the taxpayer is privy to the disagreement;hence the taxpayer should be in a position to represent theirviews to the arbitration panel. Second, the taxpayer may bring in facts to the board that are not on hand in the government representations before the tribunal. Third,the arbitration board should be capable of hearing the taxpayer’s place on the applicable legal surmise and interpretation of the treaty. Fourth, the arbitration board should be capable of seeking additional facts straight from the taxpayer, not from governments.

For the U.S., a range of commentators have shielded the exclusion of the taxpayer for severalreasons.[18]First, the taxpayer is not a real partaker in the disagreement. This is justified by the fact that the disagreement and interpretation of the treaty is amid the two governments. Secondly, taxpayer involvement might give the taxpayer a chance to get a secret hearing of their tax disagreement outside the authority of the tax departments of the taxing nation. Finally, it is possible for the taxpayer to evade the participant state’s court system using a covertforum, the arbitration board.

The IRS, by way of the proposed resolution, is giving the law and particulars to authenticate the liability of the taxpayer. Therefore, it would appear the civic could contact the mandatory arbitration planned resolution at least. The second existing way is through the FOIA. The FOIA necessitates the government to reveal any information that is not particularly exempted inside the statute or somewhere else in the legislative code.

The U.S. possibly has the utmost level of confidentiality, by not letting the taxpayer to take part inthe mandatory arbitration procedures through the governmental confidentiality provisions of §6103 and§6105.[19] Conversely, the U.S. too has a long account of disclosure. This disclosure even contains items one may regard as covert government communications. For example, general counsel advise, private letter rulings,320 technical advise memorandums and the field check advise organized by the Chief Counsel’sagency.[20] Further, the U.S. has the Freedom of Information Act (FOIA).[21]So as to obtain the information wanted within this item, a two-fold advance is essential; the initial is alegislative advance, while the second looks for information from the FOIA.

In the part of legislation,in the committee reports managing the channel of §6105, the committee was beneath the notion that competent authority accords usually do not contain an account of the law or relevance of law to facts. In its place, such accords are negotiated arrangements to decide on double taxation matters.

Nevertheless, as required by mandatory arbitration provisions, the arbitration board will decide on a proposed resolution,which will either infer a law or relate a law to a set of facts.[22]In whichever situation, the mandatory arbitration provisions seems to be outer the committee’s span, hence it seems that §6105 may havea limitation or requires modification.

The second presented method founded on the weakness of §6105, is the accessibility of I.R.C. §6110 and the FOIA.[23] I.R.C. §6110 is the information revelation code section foundin the Internal Revenue Code.[24]The IRS is expected to supply the public equipment linked to all written determinations. A written determination is not particularly distinct to the Internal Revenue Code, although the courts have describedthe term as establishing the legal responsibility of the taxpayer.

Conclusion

In conclusion, the alternative mechanisms of dispute settlements used by the EU nd U.S have several common trends. To start with, both countries mantain that the taxpayer has no consign in the arbitration process since the true motive for the arbitration is for the two administrations to present data and law shielding their places and for the arbitration panel to decide amongst the two choices. Second, the U.S. and EU OECD models are almost similar. The only disparity in the U.S. Model Tax Convention is the addition of use of the information for supervision purposes. Third, the U.S., Congress founded the confidentiality code of I.R.C. §6105 on the fake assertion that MAP does not contain analysis of law and truth. On the other hand, the EU, in its Arbitration Convention is supposed to necessitate disclosure.

Foonotes

  1. Carroll, M. B. (1927). Double taxation relief, discussion of conventions drafted at international conference of experts and other measures. Trade Information Bulletin, 523, II.
  2. Tillinghast, D.R. (2007). Taxpayer participation in mandatory arbitration under the new German and Canadian protocols and Belgian treaty Tax Mana. Int’l J., 581-582.
  3. Manual on Effective Mutual Agreement Procedures (MEMAP), February 2007 Version. Web.
  4. Ibid.
  5. Bassett, W.S. & Fuller, J.P. (2008).The United States introduces mandatory arbitration for resolving certain treaty disputes. Int’l Tax J., 15- 16.
  6. Ibid.
  7. Buys, C.G. (2003).The tensions between confidentiality and transparency in international arbitration. Am. Rev. Int’l Arb., 121, 134-135.
  8. Bassett, W.S. & Fuller, J.P. (2008).The United States introduces mandatory arbitration for resolving certain treaty disputes. Int’l Tax J., 15- 16.
  9. McIntyre, M. J. (2006). Commentary: Comments on the OECD proposal for secret and mandatory arbitration of international tax disputes. New York: Oxford University Press.
  10. Carroll, M. B. (1927). Double taxation relief, discussion of conventions drafted at international conference of experts and other measures. Trade Information Bulletin, 523, II.
  11. Buys, C.G. (2003).The tensions between confidentiality and transparency in international arbitration. Am. Rev. Int’l Arb., 121, 134-135.
  12. Barnard, C. (2004). The substantive law of the EU: the four freedoms. New York: Oxford University Press.
  13. Ibid.
  14. Ibid.
  15. Bassett, W.S. & Fuller, J.P. (2008).The United States introduces mandatory arbitration for resolving certain treaty disputes. Int’l Tax J., 15- 16.
  16. Ibid.
  17. Barnard, C. (2004). The substantive law of the EU: the four freedoms. New York: Oxford University Press.
  18. Ibid.
  19. Buys, C.G. (2003).The tensions between confidentiality and transparency in international arbitration. Am. Rev. Int’l Arb., 121, 134-135.
  20. Ibid.
  21. Bassett, W.S. & Fuller, J.P. (2008).The United States introduces mandatory arbitration for resolving certain treaty disputes. Int’l Tax J., 15- 16.
  22. Ibid.
  23. McIntyre, M. J. (2006). Commentary: Comments on the OECD proposal for secret and mandatory arbitration of international tax disputes. New York: Oxford University Press.
  24. Bassett, W.S. & Fuller, J.P. (2008).The United States introduces mandatory arbitration for resolving certain treaty disputes. Int’l Tax J., 15- 16.

References

Barnard, C. (2004). The substantive law of the EU: the four freedoms. New York: OxfordUniversity Press.

Bassett, W.S. & Fuller, J.P. (2008).The United States introduces mandatory arbitration for resolving certain treaty disputes. Int’l Tax J., 15- 16.

Buys, C.G. (2003).The tensions between confidentiality and transparency in international arbitration. Am. Rev. Int’l Arb., 121, 134-135.

Carroll, M. B. (1927). Double taxation relief, discussion of conventions drafted at international conference of experts and other measures.Trade Information Bulletin, 523, II.

McIntyre, M. J. (2006). Commentary: Comments on the OECD proposal for secret and mandatory arbitration of international tax disputes.New York: Oxford University Press.

Tillinghast, D.R. (2007). Taxpayer participation in mandatory arbitration under the new German andCanadian protocols and Belgian treatyTax Mana. Int’l J., 581-582.

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