ADR in Taxation Disputes (Part 2/2)

By Charlotte Tran

In the previous blog, we have outlined numerous advantages of the use of ADR in tax disputes, in comparison with tax litigation. It is also imperative to understand which specific ADR methodologies are the most suitable and beneficial for resolving tax disputes. Before getting more insights on this note, it is crucially important to indicate instances where using ADR is appropriate and advisable. Although there is always a clear incentive for tax advisers to encourage the use of ADR, it does not always provide appropriate measures or outcomes for the taxpayers. According to many experts, ADR is not seen to be effective resolution for many situations, such as tax credits, legislation interpretation or criminal investigations.[1] On the other hand, ADR is particularly useful for instances related to transfer pricing or valuation issues.[2] Therefore, each dispute must be assessed on a case-by-case basis to seek the most optimal solution to the tax dispute.

The use of Mediation in Tax Disputes

Once ADR is determined to be the suitable option, we can start to evaluate the merit and status of the case in order to determine the applicable methodology. Under the umbrella of ADR, mediation has a high reputation of resolving tax disputes in a consensual manner with high efficiency.[3] Arbitration requires the arbitrator(s) to impose a binding decision on the involved parties. On the opposite, mediation rather focuses on facilitating parties to reach the final solution with the support of a trained mediator.[4] In its nature, tax dispute requires a collective of issues surrounding one or many subjects. Therefore, a binding decision is not ideal for both parties to acquire an adequate solution on an amicable note. Tax (fiscal) mediation accordingly gains its popularity for its efficiency and its broad application.[5] Explicitly, mediation aims to challenge the assumptions of parties, find the common interests, and provide a collaborative process to determine the negotiation positions.[6] In the Commentary to the OECD Model Tax Convention, mediation is explicitly advised to be implemented where conflicts of “the relative merits of positions” take place.[7] Specifically, the Comnentary explains that the mediator plays a crucial role of assisting parties to better understand their viewpoints. The process normally begins with a meeting between the parties and the accredited mediator to explore the dispute. The mediator plays a crucial role in listening, indicating and communication the strengths/weaknesses of the parties’ positions.[8] Upon such communication, both parties have the opportunity to understand each other’s viewpoints and reach a common ground. According to the Commentary, mediation is best suited for parties to agree on many issues falling under the scope of the dispute.[9] On an additional note, mediation can also take place at any stages of the disputes, even at an appeal stage of a dispute.[10] More importantly, medication gives parties flexibility to determine the agreed terms without much interference.[11] Similar to other ADR methodologies, the whole process is confidential and gives the parties trust and comfort to discuss the dispute. Nevertheless, the involvement of the tax authority may require disclosure of certain documents or information, as required by law.[12]

Forms of Mediation

Within the ambit of mediation, there are several forms of process, depending on the nature of the dispute. Informal mediation normally requires the assistance of a neutral mediator facilitating the discussion of both parties to progress the settlement.[13] During this meeting, the mediator will not provide any opinions upon the merits of the arguments.[14] On the other hands, formal mediation requires the presence of a mediator presides over a structured mediation session.[15] Specifically, parties will have the chance to discuss the matters in a systematic way with the assistance of the mediator. Expert involved mediation provides a panel of impartial experts to provide more insights on technical matters and thus, shed lights on the chance of success in court.[16]

Mediation in International Tax Disputes

In the context of international tax disputes, mediation is also regarded as one of the most effective dispute resolution instruments”.[17] Explicitly, each country has its sovereign rights to determine its scope and nature of its tax system.[18] Thus, conflicts commonly arise when different domestic tax systems are not aligned with each other.[19] These differences create massive obstacles to transnational business transaction and more likelihood for double taxation. On this note, many specialists believe that mediation does not raise sovereign issues since it simply does not generate a binding decision against the wished of the competent authority.[20]

In conclusion, mediation is considered as one of the most effective dispute resolution instruments. With the nature of ADR mechanism, mediation facilitates a confidential discussion between the involved parties. By communicating the strengths and weaknesses of their positions, the mediator assists the parties to understand each other’s viewpoints. Furthermore, mediation allows the parties to reach an agreement in an amicable and consensus manner by not imposing a binding final decision against the wishes of the parties. This particular feature also brings an optimal option for international tax disputes without raising any obstacles regarding sovereignty. Depending on the nature and status of the dispute, different forms of mediation will be accordingly applicable for a suitable outcome.

[1] ‘Alternative Dispute Resolution: An Attractive Option for Tax Disputes’(IBISS & CO) https://ibissandco.com/tax-tips/alternative-dispute-resolution-tax-disputes/ accessed 12 June 2021.

[2] ‘Alternative Dispute Resolution: An effective way to settle your tax dispute’ (PwC) https://www.pwc.co.uk/services/tax/insights/alternative-dispute-resolution-a-new-way-to-settle-your-tax-dispute.html accessed 12 June 2021.

[3] ‘Mediation can get things moving: An alternative approach to resolving tax disputes’ (Deloitte) https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/tax/deloitte-uk-tax-las-adr-brochure.pdf accessed 12 June 2021.

[4] Ibid.

[5] Maxine Aaronson, ‘The case for Mediation of Tax Controversies’ (IRS Practice Adviser report) https://www.federaltaxplanning.com/wp-content/media/the_case_for_mediation_in_tax_controversies.pdf accessed 12 June 2021.

[6] Deloitte (n 3).

[7] Michelle Markham, ‘Litigation, Arbitration and Mediation in International Tax Disputes: An Assessment of whether this results in competitive or collaborative relations’ (2018) ASIA ARB. J. 277.

[8] Ibid.

[9] Ibid.

[10] Sir Gavin Lightman and Felicity Cullen QC, ‘Mediation in Revenue Cases’ (Tax Bar) http://taxbar.com/wp-content/uploads/2016/01/Mediation_in_Revenue_Cases_FC.pdf.pdf accessed 13 June 2021.

[11] Ibid.

[12] Ibid.

[13] An Attractive Option (n 1).

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] Michelle Markham (n 7).

[18] Ibid.

[19] Ibid.

[20] Ibid.