* U.S. leads Canada 3-0 in winner-takes-all tax game
* Arbitration rulings are confidential
* Companies welcome the certainty of arbitration
By Patrick Temple-West
WASHINGTON, Nov 25 The United States is
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 resolving salary disputes between Major League Baseball
players and their teams. In the tax game, however, the companies
forced to pay and the payments remain confidential.
The United States has had similar agreements with France
since 2004 and Belgium and Germany from 2006, but no cases
involving them have gone to baseball arbitration, the tax
Baseball arbitration plans are in pending tax treaties with
Hungary, Luxembourg and Switzerland. Future treaties with the
United Kingdom and Japan may have the same provisions, tax
The arbitration process arises often in tax questions
involving a multinational company's transfer pricing taxes,
where two countries disagree over which of them should collect
corporate taxes. The winning country gets the tax revenue. The
loser goes home empty-handed.
Companies like the baseball arbitration provision because it
lends certainty to their tax bills. Companies can request that
countries go to arbitration if revenue agents cannot settle
their tax disputes in two years.
AIMING TOO HIGH?
The arbitration panels are made up of three experts, one
chosen by each country and the third by the other two experts.
Revenue agents from each country submit a tax bill number to the
panel. The panel picks the number it thinks is closest to the
Tax experts on both sides said Canada had lost all three
disputes because it was trying to hit home runs - seeking too
much in taxes during arbitration.
"Canada has lost three in a row," said Dale Hill, a former
manager of Canada's cross-border tax negotiations with the
United States and a partner with Gowling Lafleur Henderson LLP
in Ottawa. "Maybe Canada has been more aggressive," Hill said.
David Rosenbloom, a Washington, D.C.-based U.S. tax lawyer
at Caplin & Drysdale, said: "The Canadian Revenue Agency has
developed over the years a habit of taking really extreme and
unwarranted positions. It's almost as though they're unaware
arbitration is in the treaty."
Richard McAlonan, who directs the IRS negotiating program,
told Reuters t his month t hat the agency had resolved a "handful"
of the cases. He declined further comment.
The Canadian Revenue Agency said in a statement that it
prefers to resolve its tax disputes with the United States "at
the negotiating table." Going to arbitration "would be the last
resort," the CRA said. It declined to comment on the cases,
citing confidentiality rules in the treaty.
Canada's losses may mean its revenue agents will be more
cautious in tax negotiations with the United States. The
countries negotiate 75 to 100 cases a year, Hill said. "It's
going to get tougher for Canada to negotiate," he said.
The tax treaties with Hungary, Luxembourg and Switzerland
passed the U .S. S enate Foreign Relations Committee in 2011. But
Republican Senator Rand Paul has so far prevented all three
treaties from going before the full Senate.
A spokeswoman for Paul could not be reached for comment.
Paul has previously objected to the treaties' provisions that
require more sharing of U.S. taxpayer information.
New treaty arbitration provisions with Switzerland and the
UK would especially benefit the pharmaceutical industry, while
auto companies would appreciate the provision in a Japanese
treaty, said Lorraine Eden, a professor at Texas A&M University.
Companies in both sectors have a lot of transfer pricing tax
uncertainty and can face double taxation if unable to force
countries into binding arbitration, she said.
UK-based GlaxoSmithKline Plc reached a $3.4 billion
transfer pricing s ettlement with t he IRS in 2006. But the UK did
not accept the U.S. settlement, and Glaxo faced UK taxes on the
same profits, Eden said.
"Would they like the opportunity to go to binding
arbitration and settle this? Absolutely," Eden said.