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September 23, 2017

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In baseball-style arbitration for tax disputes, US is reigning champion

WASHINGTON -- The United States remains 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 (IRS) 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 US$100 million.

Launched in December 2010, the arbitrations follow the rules for settling salary disputes between Major League Baseball teams and their players. As in baseball, the two parties — revenue agents from the two countries — put forward a figure.

As in baseball, third-party mediators settle disputes by picking the number they judge to be closest to the right answer. In the tax game, that's the amount a company pays. The winning country gets the tax revenue. The losing country goes home empty-handed.

"It's baseball arbitration: One position wins and the other one loses," said Brian Trauman, a principal at Big Four accounting firm KPMG LLP. The cases that have been resolved have "really big dollars at stake," he said.

Now the United States is adding an arbitration clause into tax treaties with other countries, hoping to broaden its winning streak to a global stage.

Companies also prefer such showdowns as government-to-government arbitration can give them quicker tax bill certainty, in some cases allowing them to free up cash reserved for potential tax liabilities.

The arbitration process arises in tax questions involving a multinational company's transfer pricing taxes, where two countries disagree over which of them should collect corporate taxes. Companies can request that countries go to arbitration if revenue agents cannot settle their tax disputes in two years.

In the end, the identities of the companies paying the taxes remain confidential as do the amounts of taxes paid. None of the tax experts consulted would disclose the names of the companies nor the amounts paid in each of the three cases.

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 experts said.

"Baseball arbitration" clauses are in pending tax treaties with Hungary, Luxembourg and Switzerland. Future treaties with the United Kingdom and Japan may have the same provisions, tax experts said.

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