International arbitration for tax disputes, "baseball" style

Sun Nov 25, 2012 5:54pm EST
 
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By Patrick Temple-West

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.

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.   Continued...