In International Tax Disputes CRA’s Greed Expensive for Canada

In international tax disputes, all the countries involved want to take the first bite of corporate tax. Corporations are getting away with paying lower tax by putting the countries against each other.

Launched in December 2010, the international tax 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.

A third-party mediator 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.

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.

Tax lawyers and accountants of Canada and USA 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.

The tax 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.

Tax experts on both sides said Canada had lost all three disputes because it was effectively trying to hit home runs – seeking too much in taxes during arbitration to realistically win the case.

“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, but “Canada truly believed they would win.”

David Rosenbloom, a Washington, D.C.-based U.S. tax lawyer at Caplin & Drysdale, said the Canada 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.”

The CRA 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 future 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. (with news source from Reuters)