ADR in Taxation Disputes (Part 1/2)

By Charlotte Tran

Have you ever disagreed with a tax assessment by the tax authority? In general, tax disputes cover the situations where taxpayer challenged tax authorities’ assessment or legal interpretation on a certain policy. Tax disputes are conventionally settled by litigations or out-of-court agreements between the taxpayers and the tax authority. An abundance of tax litigations/appeals becomes a burden for many legal systems. On top of that, concerns have been growing over the lengthy and complex procedure of tax litigation along with additional obstacles as a result of the Covid-19 pandemic. Accordingly, alternative dispute resolution (ADR) tends to be adopted more widely due to its more efficiency and flexibility. There are indeed many aspects to consider when evaluating the use of ADR in tax disputes. Nevertheless, it is imperative to narrow the scope of assessment to the most prominent aspects, such as the produced outcomes, time, and costs efficiency.

Time Efficiency

Judicial proceedings generally require a lengthy procedure with complex administration and tax litigation is not an exception. Although the approaches of the format vary from country to countries, the entire procedure entails many phases. Depending on the agreement between the parties, the process normally commence with the taxpayer filling a statement of case to the court.[1] The parties must also submit a list of documents and/or any agreed statements of facts on which they intend to rely on.[2] In a later phase, parties will exchange witness evidence and/or evidence if any.[3] In order to determine the hearings schedule, parties must also submit a proposed schedule and files bundle.[4] According to many experts, the lengthy process is normally associated with the delays in scheduling.[5] It is also prominent to mention multiple notifications which both parties must make well in advance. On an additional note, the courts are often under-resourced due to a significantly volume of caseloads.[6] As a result, the litigation process can take months or even years to reach the final judgement. On the other hand, the ADR process is usually completed within 90-120 days, as required by the judge referring the case to an ADR process.[7] In practice, 80% of ADR cases are resolved within 120 days.[8]

Economical Option

According to many judges and experts, ADR can be regarded as an ideal means to resolve tax disputes with cost efficiency. Specifically, tax litigation requires an incredibly large financial burden especially if professional assistance of experts is needed.[9] Depending on the value of the claim, the court fee is determined based on the percentage of the claim value.[10] In the UK, using litigation is estimated to cost in the range of £2,500 – £10,000, excluding the counsel’s fee.[11] On this note, the counsel’s fee is also determined based on the percentage of final claim payment won along with the fees charged based on time.[12] Whereas, the cost of ADR is relatively low, ranging between £350 to £1,275 per dispute.[13] As opposed to high costs of litigation, ADR offers a more affordable and effective accessibility to obtain an adequate outcome, especially for taxpayers with lesser resources.[14]

High Flexibility

Upon a high demand for digitalization, ADR has bigger advantages in migrating to online environment. Specifically, online dispute resolution process simply replicates the physical activities and approaches online.[15] Many applications can be used to facilitate file-sharing and collaboration with convenience.[16] On the contrary, litigation takes much more time to implement digital technology due to its  complex procedure.[17] The rapid shift to virtual court hearings imposes many obstacles and questions on the access, comfort, privacy and security.[18] Virtual hearings casually deal with difficulties and disruptions due to internet connectivity and infrastructure.[19] Furthermore, many concerns have been raised over the insecurity of data and identity of litigants and advocates on an online environment.[20] With an excessive volume of tax claims, there exists severe delays in scheduling of online hearings. Therefore, the movement of shifting towards online dispute resolution is increasing with the innovative use of AI or Robot as the arbitrator or mediator.[21] In practice, AI or Robot mediators have been integrated in solving disputes in several countries, such the UK (2019).[22] UNCITRAL Arbitration Rule and the ICC Arbitration Rules have no stipulation against a machine arbitrator.[23] The use of ODR shortens and simplifies the conventional process with adequate and amicable outcomes for both parties.

In conclusion, ADR provides an ideal means to resolve tax disputes with flexibility and efficiency. It brings a timely and affordable accessibility for involved parties to reach an adequate outcome in an amicable setting. Furthermore, it plays a crucial role in lifting the burden of excessive caseloads for judicial proceedings. In a digitalization era, the use of online dispute resolution (ODR) plays a significant role in bringing equality, fairness, and timely solutions to all taxpayers.

[1] ‘Tax litigation in the UK (England and Wales): overview’ (Thomas Reuters) https://uk.practicallaw.thomsonreuters.com/1-623-2951?transitionType=Default&contextData=(sc.Default)&firstPage=true#co_anchor_a467556 accessed 1 June 2021.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Anika Gill, Jason Gray, Martin Skitmore and Stephen Callagha, Comparison of the effects of litigation and ADR in South-East Queensland (2015).

[6] Simon Whitehead (Ed), The Tax Disputes and Litigation Review (7th edn, Law Business Research).

[7] ‘ADR (Alternative Dispute Resolution) FAQs’ (Superior Court of California) http://www.sdcourt.ca.gov/portal/page?_pageid=55,1555413&_dad=portal&_schema=PORTAL#:~:text=Most%20cases%20require%20only%20one,case%20to%20an%20ADR%20process accessed 1 June 2021.

[8] ‘Tax and Alternative Dispute Resolution (ADR): Another way to solve your tax dispute’ (BDO United Kingdom) https://www.bdo.co.uk/en-gb/services/tax/tax-dispute-resolution-services/tax-and-alternative-dispute-resolution accessed 1 June 2021.

[9] ‘Mediation vs Soaring Litigation Costs to Resolve a Dispute’ (QASSS) https://qasss.co.uk/mediation-vs-soaring-litigation-costs-to-resolve-a-dispute/ accessed 1 June 2021.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Ibid

[15] Jinyan Li, Nathan Jin Bao, Shanghua Hu, Wei Hu and Matias Zerbino, Digitalization, and International Tax Dispute Resolution: A Window of Opportunity for BRITACOM (Li et al Digitalization and Dispute Resolution 2020).

[16] Ibid.

[17] Ibid.

[18] Yash, Agarwal, ‘Challenges in Setting up Virtual and Online Courts in India’ (TheLeafLet) https://www.theleaflet.in/challenges-in-setting-up-virtual-and-online-courts-in-india/ accessed 1 June 2021.

[19] Ibid.

[20] Ibid.

[21] Digitalization and International Tax Dispute Resolution (n 15).

[22] Ibid.

[23] Ibid.