* U.S. leads Canada 3-0 in winner-takes-all tax game
* Arbitration rulings are confidential
* Companies welcome the certainty of arbitration
WASHINGTON, Nov 25 (Reuters) - 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 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 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
"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
"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
AIMING TOO HIGH?
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
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."
Richard McAlonan, who directs the IRS negotiating program,
told Reuters this month that the agency had resolved a "handful"
of the cases. He declined further comment.
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.
The tax treaties with Hungary, Luxembourg and Switzerland
passed the U.S. Senate Foreign Relations Committee in 2011.
However, Republican Senator Rand Paul has taken advantage of
Senate procedures to block the 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 settlement with the 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.