1. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. Washington, DC Carol A. Dunahoo At the Crossroads of Tax Cooperation: IFA (India)/OECD Conference Mumbai, 23-24 January 2008 The Resolution of Tax Treaty Disputes: Alternative Mechanisms D

2. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 2 Overview Need for Alternative Mechanisms Key Alternatives –Advance Pricing Arrangements/Agreements –Arbitration

3. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 3 Need for Alternative Mechanisms MAP process resolves most, but not all, cases But examination + MAP and/or litigation can be a long, resource-intensive process Examination and MAP/litigation processes can also be very adversarial in nature Both governments and companies need greater tax certainty and efficiency

4. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 4 APAs APA = –Agreement between tax authorities and taxpayers –that determines in advance –the transfer pricing methodology and related conditions to be applied to specified transactions during the specified period

5. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 5 APAs (cont’d) Taxpayer’s compliance with APA is subject to verification by tax administration If APA is based on “critical assumptions,” certain adjustments may be required Otherwise, APA terms apply and are not subject to change by any party

6. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 6 APAs (cont’d) Piloted initially by U.S. IRS in 1990-91 Japan and U.K. developed programs on parallel track Since adopted by many other countries OECD MEMAP identifies bilateral APA programs as a best practice that will “reduce the number of international tax disputes and provide taxpayers and tax administrations with greater tax certainty.”

7. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 7 APAs (cont’d) Additional benefits for tax administrations— –Resource and time savings –APA process less adversarial, so information shared more readily –Opportunity to analyze facts fully provides greater understanding of business practices Many tax administrations now prefer APAs to regular process of examination + MAP (e.g., Australia, Canada, Korea, Japan, U.K.)

8. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 8 Arbitration Current international trend: addition of binding, mandatory arbitration to MAP In 1995 EU Arbitration Convention and some bilateral treaty provisions Endorsed by OECD in 2007 dispute resolution report and 2008 Model Convention U.S. just agreed to binding, mandatory arbitration with Germany, Belgium, and Canada

9. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 9 Arbitration (cont’d) Benefits of arbitration provisions— –Guarantee elimination of double taxation –Improve ability of competent authorities to reach agreement within specified period –Save government and taxpayer resources –Recourse to arbitration procedure very rarely needed

10. Alternative Dispute Resolution Mechanisms ©2008 Baker & McKenzie 10 Arbitration (cont’d) Issues –Taxpayer privacy Can be protected as under rest of MAP process –National sovereignty Not an issue for tax administrations seeking to apply treaties as intended