Global Tax Overhaul to Include Binding Dispute Resolution: OECD

A top OECD official said the agency will come up with a new dispute resolution mechanism to sidestep opposition to mandatory binding arbitration as the global tax overhaul moves forward.

The Organization for Economic Cooperation and Development is seeking global agreement on plans to reform how multinationals pay tax worldwide. As part of that plan, the organization wants to introduce a binding dispute resolution mechanism, but that’s shaping up to be a very contentious issue. Companies say it’s needed, while developing countries say they won’t agree to it.

“We are working toward something other than mandatory binding arbitration, that would have an equivalent effect,” said Grace Perez-Navarro, deputy director at the OECD’s Center for Tax Policy and Administration, at a Nov. 22 public consultation in Paris.

Dispute resolution mechanisms that lock countries into the decided outcome, such as mandatory binding arbitration, are included in some bilateral tax treaties to ensure that disagreements between companies and tax authorities over how much tax is owed is resolved in a set amount of time.

Companies say reforming the global tax system won’t be possible without a guarantee that tax disputes between companies and governments will be resolved in a set amount of time.

But many developing countries worry that being forced into a type of dispute resolution they cannot escape from infringes on their sovereignty, which is why the African Tax Administration Forum opposes such measures, said Thulani Shongwe, an economist in the secretariat of the forum.

The African Tax Administration Forum, which represents 36 of Africa’s 54 countries, is pushing for more effective dispute resolution mechanisms to be developed, Shongwe said.

The OECD recognizes both views and is trying to work toward a solution, Perez-Navarro said.

“The important thing is to have binding dispute resolution so that you do have certainty, in particular as we are changing the rules and moving to a formulaic approach for at least some aspects of the international tax system.”