Dispute prevention and resolution are essential to help preserve trust in the tax systems. This chapter explores the strategies put in place by tax administrations to resolve and prevent disputes fairly and efficiently.
Tax Administration 2023
Comparative Information on OECD and other Advanced and Emerging Economies
Tax Administration
8. Disputes
Abstract
Introduction
Taxpayer rights and obligations are frequently set out in law or taxpayer charters. Table 8.1. sets out some of the most commonly reported rights and obligations. Underpinning these rights and obligations is effective access to processes that allow taxpayers to challenge assessments and decisions. This safeguards taxpayer rights and ensures that appropriate checks and balances exist on the exercising of tax powers by administrations. At the same time, tax administrations and taxpayers should also strive to work together to prevent disputes from arising in the first place, thus reducing burdens and uncertainty for both parties.
Table 8.1. Taxpayer’s rights and obligations
Source: OECD (2019), Tax Administration 2019: Comparative Information on OECD and other Advanced and Emerging Economies, https://doi.org/10.1787/74d162b6-en.
This chapter examines the dispute resolution and review strategies in the jurisdictions covered by this report, as well as their performance in this area.
Dispute resolution review mechanisms
All 58 jurisdictions covered in this report provide taxpayers with the right to challenge assessments. Almost all administrations report having an internal review mechanism in place, and a large majority of administrations provide taxpayers with the option to seek an independent review by an external body, which can help improve legal certainty for taxpayers while avoiding potentially lengthy and costly legal proceedings. For those administrations that offer both review mechanisms, approximately 80% require taxpayers to seek an internal review before their case can be reviewed by an external body. (See Figure 8.1.)
Box 8.1. Resolving international tax disputes: Mutual agreement procedures
Double taxation of the same transaction or income can have significant economic impacts. Tax treaties, also known as double taxation agreements, usually aim to remove double taxation by setting out mutually agreed rules on the allocation of taxing rights for taxpayers resident in the signatory jurisdictions. They can also provide mechanisms to help prevent tax non-compliance.
Given the complexity of these situations, the parties may disagree on the application or interpretation of those rules. To respond to these situations, the vast majority of tax treaties have a formal process for dispute resolution through a mutual agreement procedure (MAP). Such a procedure is set out in Article 25 of the OECD Model Tax Convention, which is used by most jurisdictions as the framework for their tax treaties. MAP is critical component in ensuring the effective working of tax treaties, and in helping to reduce double taxation.
Source: OECD (2017), “Improving mutual agreement procedures”, in Tax Administration 2017: Comparative Information on OECD and Other Advanced and Emerging Economies, https://doi.org/10.1787/tax_admin-2017-18-en.
Figure 8.1. Dispute resolution: Available review mechanisms, 2021
Source: Table A.70.
Performance in dispute resolution
While tax administrations cannot generally control the timing of judicial processes, many of them are working on improving dispute resolution processes to make them quicker. These might include mediation or other non-judicial routes. The examples included in Box 8.2. illustrate how technological advances offer new possibilities for tax administrations to improve the efficiency of dispute resolution.
Box 8.2. Examples – Improving the efficiency of dispute resolution
France – Digital transformation of the legal function
For the legal functions at the French tax administration (DGFiP), both opportunities and challenges are expected in the years to come. These include:
Responding to increasing activity flows despite a likely decrease in headcount;
Compensating for the loss of internal knowledge due to retirements;
Harmonising processing practices;
Improving the search for information in order to refocus staff on higher added value analytical work;
Better sharing DGFiP positions with external stakeholders and taxpayers; and
Remaining competitive in the technological race with law firms and other players.
To address these, the DGFiP has embarked on a long-term project over the 2023-2030 period, to make the most of the possibilities offered by digitalisation. The project will follow a ‘modular’ approach in order to mitigate the technological, budgetary and operational strains that such a transformation entails:
A single entry point will be established for all requests, allowing (i) taxpayers to get real-time information regarding the processing of their requests and (ii) internal monitoring and collaborative work using a new software suite.
A unified document database will be created, gathering all positions taken by the DGFiP, whether in response to requests for rescripts or contentious claims. Expert systems will then be connected to this database.
Artificial Intelligence will be used to make the most of the unified document base and the flow of information. Tools are envisaged that provide legal staff with proposed responses to simple and recurrent requests, to detect new trends earlier, or even to predict future legal developments.
Georgia – Unified database
The Unified Methodological Base is an online data search platform, which is accessible to employees of the Georgia Revenue Service, and in part to taxpayers. A wide variety of information is available on the database including:
Legislative acts including international agreements, orders of the Minister of Finance and Director General of the revenue service, government resolutions, etc.;
Internal regulations and methodological instructions, preliminary decisions, procedural manuals, situational manuals, standard operating procedures, service standards, etc.;
Guidance on specific topics; and
Information on hot topics.
The database is helping meet a number of important goals, including:
Identifying problem areas in the application of tax legislation, and targeting them for further action;
Reducing complaints and disputes as the working practices are clearer and uniform; and
Increased predictability of the decisions of the dispute review bodies as information on previous decisions is available.
Italy – Business intelligence portal
Business Intelligence is a web portal that allows the monitoring of various activities of the Italian Revenue Agency, including, for example, those relating to tax litigation, rulings, audit activities and assistance to taxpayers. As regards tax disputes, the portal allows access to reports and applications designed to provide information of a quantitative and qualitative nature, related to the progress of dispute resolution.
In the area dedicated to tax litigation there are different functions available including:
Analysis, for example on the number of appeals or hearings in the Courts of Fiscal Justice;
Access to reports of data related to budget objectives;
Access to registers of appeals which allows accessing data on the compliance with the deadlines for sending requests for appeal, as required by the memorandum of understanding with Legal Council of State;
A research function for disputes which gives the possibility to follow the development of a selected tax dispute case, and to see the latest counter-arguments lodged at the Court of Fiscal Justice; and
Access to predefined analysis which contains data on the progress and results of specific operational processes, and each local office may consult the data within its competence.
Sources: France (2023), Georgia (2023) and Italy (2023).
Making effective adjustments to dispute resolution processes requires sound reporting and monitoring mechanisms, and many administrations are active in improving the level of management information available. As a result, this report contains performance information from approximately 90% of administrations.
Tables 8.2. and 8.3. compare the change between 2018 and 2021 in the number of review cases initiated and on hand at fiscal year-end, for both internal and external reviews. Between 2019 and 2020, the majority of administrations reported a reduction in the number of cases initiated and on hand at fiscal year-end. In relation to cases under external review, this result can also be observed for 2021. However, in relation to the number of cases under internal review, the majority of administrations reported increasing numbers in 2021.
Table 8.2. Dispute resolution: Change in number of cases initiated during the year
Percent of administrations that reported an increase or decrease in the number of cases initiated
Sources: Tables A.71. and A.72.
Table 8.3. Dispute resolution: Change in number of cases on hand at fiscal year-end
Percent of administrations that reported an increase or decrease in the number of cases on hand
Sources: Tables A.71. and A.72.
Figures 8.2. and 8.3. take a more detailed look at the jurisdiction level data and show the change between 2020 and 2021 in the number of review cases on hand at fiscal year-end, for both internal and external reviews. What is interesting to note are the significant increases in the number of internal review cases reported by a few jurisdictions.
At the same time, it should be pointed out that the volume of cases per jurisdiction varies significantly and where the number of cases is very low there can be significant fluctuations between years. This becomes more evident when looking at Figure 8.4., which highlights the wide differences between jurisdictions in the use of internal review procedures. Looking at Table 8.4., which shows the evolution of the average number of internal review cases initiated, it can be observed that the average has been stable between 8 and 9 internal review cases initiated per 1 000 active PIT and CIT taxpayers between 2018 and 2021.
Figure 8.2. Internal review procedures: Change between 2020 and 2021 in the number of cases at fiscal year-end
Source: Table A.71.
Figure 8.3. Independent review by external bodies: Change between 2020 and 2021 in the number of cases at fiscal year-end
Source: Table A.72.
Figure 8.4. Number of internal review cases initiated per 1 000 active PIT and CIT taxpayers, 2021
Source: Table D.42.
Table 8.4. Evolution of the average number of internal review cases initiated per 1 000 active PIT and CIT taxpayers between 2018 and 2021
Note: The table shows the averages for those jurisdictions that were able to provide the information for the years 2018 to 2021. The number of jurisdictions for which data was available is shown in parenthesis.
Source: Table D.42.
Different interpretations of tax law by taxpayers and the tax administration are a normal part of tax administration, and it is not uncommon for these differences to become subject to litigation, once the internal and external review procedures have been exhausted. Whilst tax administrations report that most disputes are resolved without the need for litigation, Figure 8.5. reports the performance of administrations for cases decided upon by the courts. It shows significant differences in the success rate of administrations, although for some jurisdictions the number of cases decided is very low, meaning results can fluctuate significantly between years.
Figure 8.5. Percentage of cases resolved in favour of the administration, 2021
Note: Cases resolved in favour of the administration means those cases where the administration has been successful in more than 50% of the issues contested in each case. For Colombia, France and Korea please see the notes in Table A.73.
Source: Table D.42.
Dispute prevention
As disputes can be resource intensive processes, preventing them is the most effective strategy, and a key element in the dispute prevention framework is the provision of guidance and advice to taxpayers. Tax administrations often do this as part of their wider service strategy. This can include putting information and interactive tools on their website, publishing guidelines and taxpayer information briefs, and carrying out educational and business support initiatives. In addition, many administrations offer specific dispute prevention mechanisms and some of those approaches are described in this section.
Rulings
As shown in Table A.120 of the 2019 edition of this series (OECD, 2019[1]), as part of tax administrations’ commitment to give taxpayers certainty of treatment, it is now common practice for administrations to set out how they will interpret the laws they administer, and how it will interpret the tax law in particular situations, through rulings:
A public ruling is a published statement of how an administration will interpret provisions of the tax law in particular situations. They are generally published to clarify application of the law, especially where a large number of taxpayers may be impacted by particular provisions and/or where a provision has caused confusion or uncertainty. Typically, a public ruling is binding on the tax administration if the ruling applies to the taxpayer and the taxpayer relies upon it.
A private ruling relates to a specific request from a taxpayer (or their tax representative) seeking greater certainty as to how the law would be applied by the tax administration in relation to a proposed or completed transaction(s). The objective of private rulings is to provide additional support and certainty to taxpayers on the tax consequences of more complex transactions.
Co-operative compliance programmes
Over the last few years, there has been an increasing focus on the use of co-operative arrangements to manage compliance and enhance tax certainty. These programmes often involve a more transparent relationship between tax administrations and taxpayers, and can involve more proactive approaches to resolving material tax risks. The concept of co‑operative compliance has been the subject of several OECD reports, most recently Co‑operative Tax Compliance: Building Better Tax Control Frameworks (OECD, 2016[2]).
As the operation of a co‑operative compliance programme is resource intensive due to the high level of engagement between tax administration officials and taxpayers, traditionally those programmes were reserved for large companies. However, technological advances in risk assessment processes have led to a number of administrations reporting the application of this concept to other taxpayer groups (see Figure 8.6.).
Figure 8.6. Existence of co-operative compliance approaches for different taxpayer segments, 2021
Source: Table A.90.
International Compliance Assurance Programme
The International Compliance Assurance Programme (ICAP) is a voluntary programme for a multilateral co-operative risk assessment and assurance process. It is designed to provide multinational enterprise groups (MNE groups) with increased tax certainty with respect to certain of their activities and transactions as long as they are willing to engage actively, openly and in a fully transparent manner. ICAP does not provide an MNE group with the legal certainty that may be achieved, for example, through an advance pricing arrangement (APA). However, it does give assurance when tax administrations participating in an MNE group’s risk assessment consider covered risks to be low risk.1 (OECD, 2021[3])
Joint audits
Another tool that can assist in preventing disputes is a joint audit where officials from two or more administrations join to form a single audit team which will examine issues or transactions of taxpayer(s) with cross-border business activities and in which the jurisdictions have a common or complementary interest. By collaborating it may be possible for the participating tax administrations to detect and address differences or potential disputes at an early stage. (OECD, 2019[4])
References
[3] OECD (2021), International Compliance Assurance Programme – Handbook for tax administrations and MNE, OECD, Paris, https://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/international-compliance-assurance-programme-handbook-for-tax-administrations-and-mne-groups.htm (accessed on 22 May 2023).
[4] OECD (2019), Joint Audit 2019 – Enhancing Tax Co-operation and Improving Tax Certainty: Forum on Tax Administration, OECD Publishing, Paris, https://doi.org/10.1787/17bfa30d-en.
[1] OECD (2019), Tax Administration 2019: Comparative Information on OECD and other Advanced and Emerging Economies, OECD Publishing, Paris, https://doi.org/10.1787/74d162b6-en.
[2] OECD (2016), Co-operative Tax Compliance: Building Better Tax Control Frameworks, OECD Publishing, Paris, https://doi.org/10.1787/9789264253384-en.
Note
← 1. See https://www.oecd.org/tax/forum-on-tax-administration/international-compliance-assurance-programme.htm for more information (accessed on 22 May 2023).