Mandatory Binding Arbitration
- Article 18 - Choice to Apply Part VI [read]
- Article 19 – Mandatory Binding Arbitration [read]
- Article 23 - Type of Arbitration Process [read]
- the final offer approach;
- the independent opinion approach
- Game-tree Structure used in Article 23 [read]
Article 18 - Choice to Apply Part VI
A Party may choose to apply this Part with respect to its Covered Tax Agreements and shall notify the Depositary accordingly. This Part shall apply in relation to two Contracting Jurisdictions with respect to a Covered Tax Agreement only where both Contracting Jurisdictions have made such a notification.
Article 19 – Mandatory Binding Arbitration
1. Where:
a) under a provision of a Covered Tax Agreement (as it may be modified by paragraph 1 of Article 16 (Mutual Agreement Procedure)) that provides that a person may present a case to a competent authority of a Contracting Jurisdiction where that person considers that the actions of one or both of the Contracting Jurisdictions result or will result for that person in taxation not in accordance with the provisions of the Covered Tax Agreement (as it may be modified by the Convention), a person has presented a case to the competent authority of a Contracting Jurisdiction on the basis that the actions of one or both of the Contracting Jurisdictions have resulted for that person in taxation not in accordance with the provisions of the Covered Tax Agreement (as it may be modified by the Convention); and
b) the competent authorities are unable to reach an agreement to resolve that case pursuant to a provision of a Covered Tax Agreement (as it may be modified by paragraph 2 of Article 16 (Mutual Agreement Procedure)) that provides that the competent authority shall endeavour to resolve the case by mutual agreement with the competent authority of the other Contracting Jurisdiction, within a period of two years beginning on the start date referred to in paragraph 8 or 9, as the case may be (unless, prior to the expiration of that period the competent authorities of the Contracting Jurisdictions have agreed to a different time period with respect to that case and have notified the person who presented the case of such agreement),
any unresolved issues arising from the case shall, if the person so requests in writing, be submitted to arbitration in the manner described in this Part, according to any rules or procedures agreed upon by the competent authorities of the Contracting Jurisdictions pursuant to the provisions of paragraph 10.
Type of arbitration process
the Final Offer Approach
Paragraph 1 of Article 23 provides that "[B]y default, a "final offer" arbitration process (otherwise known as "last best offer" arbitration) will apply, except to the extent that the competent authorities mutually agree on different rules. Under this approach, the competent authorities will each submit to the arbitration panel a proposed resolution which addresses all of the unresolved issues in the case in a manner that is consistent with any previous agreements that have been reached in that case by the competent authorities. For each adjustment or similar issue in the case, the proposed resolution will include only the disposition of specific monetary amounts (for example, of income or expense) or the maximum rate of tax charged pursuant to the Covered Tax Agreement."
The decision will be adopted by a simple majority of the panel members, and will not include any rationale or explanation. In light of the purpose of arbitration to act as a streamlined method for resolving disputes between the competent authorities, the decision will be delivered in writing to the competent authorities and may not be used as precedent with respect to any other cases.
Independent Opinion Approach
Paragraph 2 of Article 23 provides that a Party that is not willing to accept the "final offer" approach described in Article 23(1) as a default rule may reserve the right not to apply paragraph 1 to its Covered Tax Agreements and to adopt the "independent opinion" approach as the default type of arbitration process, except to the extent that the competent authorities of the two Contracting Jurisdictions mutually agree on different rules, which may apply to all cases or to a particular case.
Under the "independent opinion" approach, each competent authority must provide to the arbitration panel any information that the panel may consider necessary to reach its decision. As part of the mutual agreement under Article 19(10), the competent authorities may wish to describe the process they will use to reach agreement on the issues to be resolved by the arbitration panel. The competent authorities may also agree, as part of the competent authority agreement entered into pursuant to Article 19(10), that each competent authority may submit a supporting position paper for consideration by the arbitration panel. Unless the competent authorities agree otherwise, the arbitration panel may not take into account any information that was not available to both competent authorities before both competent authorities received the request for arbitration.
The arbitration panel will then decide the issues which have been submitted to arbitration in accordance with the applicable provisions of the Covered Tax Agreement and, subject to those provisions, those of the domestic laws of the Contracting Jurisdictions.
The decision of the arbitration panel will be presented to the competent authorities in writing, indicating the sources of law relied upon and the reasoning which led to its result. It would also normally include a description of the relevant facts and circumstances of the case, a clear statement of the positions of both competent authorities, and a short summary of the proceedings. The adoption of the arbitration decision will be by a simple majority of the panel members. As with the "final offer" approach, the decision will have no precedential value.
Reservations subject to acceptance
Paragraph 3 addresses the following situation that arises from different choices of arbitration process each party (contracting jurisdiction) has made. A Party that chooses the "final offer" approach have two choices when the other party reserves its right under paragraph 2 of the Article not to apply the final offer approach: either i) the final-offer party can accept the reservation of the other party; or ii) it may reserve its right for adopting the independent opinion approach as provided under paragraph 2.
Unlike the cases in other Parts of the MLI, Reservations made under Part VI are subject to acceptance by the other party to the arbitration.
Mutual agreement to be reached on the type of arbitration process to be applied
Paragraph 3 continues to provide that "[a] party that has not made the reservation described in paragraph 2 may reserve the right for the preceding paragraphs of this Article not to apply with respect to its Covered Tax Agreements with Parties that have made such a reservation. In such a case, the competent authorities of the Contracting Jurisdictions of each such Covered Tax Agreement shall endeavour to reach agreement on the type of arbitration process that shall apply with respect to that Covered Tax Agreement. Until such an agreement is reached, Article 19 (Mandatory Binding Arbitration) shall not apply with respect to such a Covered Tax Agreement."
Game-tree Structure used in Article 23
The arbitration process under Article 23 is another example of using the game-tree structure in the MLI. Article 23 proceeds in the following manner:
The initial node is the “final offer” approach under article 23(1), which is the default option of the arbitration process with respect to any unresolved issues of a case under the mutual agreement procedure. If party A chooses the final offer approach, then party B may accept it, or reject it. The game tree proceeds to the beginning of a second decision node.
- If Party B accepts the final offer approach, then the game tree ends here.
- If party B does not accept the final offer approach, it may reserve its right for (opt-out of) the final offer approach not to apply to its CTAs. Concurrently or simultaneously, the "independent opinion" approach under article 23(2) shall automatically apply to the arbitration proceeding.
Consequent upon B's non-acceptance of "final offer" approach, the MLI provision provides for a third decision node. Party A, who adopts the final offer approach, has two choices (the terminal node):
- it accepts the independent opinion approach that party B has chosen; or
- it can reserve its right not to apply with respect to its CTA with party B who has made a reservation for the final offer approach.
Paragraph 3 of Article 23 continues “[…] in such a case, the competent authorities of the contracting jurisdictions of each such covered tax agreement shall endeavour to reach agreement on the type of arbitration process that shall apply with respect to that CTA. Until such an agreement is reached, Article 19 (Mandatory Binding Arbitration) shall not apply with respect to a CTA.
