Economising international tax dispute resolution: transaction-cost perspective
Abstract
The unprecedented extent of globalisation, the growth of international
business and global value chains, and businesses’ greater use of tax
optimisation schemes have all spurred the proliferation of international tax
disputes. The situation may be further exacerbated, at least in the short run,
by the newly launched Base Erosion and Profit Shifting (BEPS) Project, which
was initiated by the Organisation for Economic Co-operation and
Development (OECD) together with the Group of 20 (G20) as a response to
aggressive tax planning by many multinational enterprises (MNEs). These
are all placing significant pressure on the current system of international tax
dispute resolution (ITDR).
Traditionally, most tax disputes have been finalised through the Mutual
Agreement Procedure (MAP). However, this mechanism has been
increasingly criticised for its lack of efficiency, finality and transparency. Many
believe the procedure is fundamentally broken. Correspondingly, the orthodox
literature of ITDR has placed an overwhelming focus on legalistic methods of
dispute resolution, such as tax arbitration or adjudication. In particular,
students of ITDR tend to draw on lessons from trade and investment regimes,
both of which are characterised by a legalistic dispute-settlement system.
This research questions the validity of the comparative study based purely on
legal terms, and seeks to build a self-sufficient, interdisciplinary framework for
the topic of ITDR, drawing on the light of transaction cost (TC) theory. The
framework facilitates a benefit-cost evaluation of the ITDR system. On the
benefit side, the concern is to identify a dispute-settlement mode that can
best economise the entire international tax regime. On the cost side, the
question is which ITDR mode implies the lowest transaction costs. Based on
this benefit-cost analysis, a MAP-based dispute-settlement system, which will
be centred upon the MAP but supplemented by tax arbitration and mediation,
is derived as the optimal mode of ITDR. This research further explores ways to economise various ITDR mechanisms
including the MAP, tax arbitration and mediation, still based on the TC
framework. With respect to the MAP, the proposals on the structuring of the
MAP process, the efficient model of tax participation, and the reassessment
of “package deals” are intended as the most original contribution from this
research to the existing literature of ITDR. As to tax arbitration, this research
emphasises the synergy between the MAP and tax arbitration, highlighting
the supplementary role of tax arbitration in the MAP-based system. In
particular, the proposals on the documentary trial method and the wider use
of final-offer arbitration are distinguished from the past studies. This author
also explores solutions to address the underuse of tax mediation. In addition
to the measures that are particular to each of these ITDR mechanisms, this
thesis also proposes a holistic solutions to economise the entire ITDR system,
i.e., to institutionalise the system.