Arbitration today Jean-Pierre Lieb Ernst & Young Société d'Avocats

Page 2 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today ► We asked EY tax controversy leaders in eight countries to share insights with us ► Brazil, China, France, Italy, Japan, Mexico, South Africa and Turkey ► Surveying exercise took place during the course of December 2014

Page 3 International Arbitration in Tax Matters : Taking the Debate Forward Setting the context: expectations around disputes ► “Do you expect that over the course of the next three years there will be an increase in international tax disputes in your country?” ► Increase somewhat: 4 countries (Brazil, China, Canada, Japan) ► Increase significantly: 3 countries (France, Mexico, South Africa) ► Stay the same: 1 country (Turkey) ► Expectations of business: EY’s 2014 Tax risk and controversy survey ► 962 global participants ► 68% of the largest companies surveyed report that they feel tax audits have become more aggressive in the last two years. ► When asked to what extent they foresee more double taxation for their company in the next two years, 61% of the largest companies expressing an opinion either agreed or strongly agreed.

Page 4 International Arbitration in Tax Matters : Taking the Debate Forward Setting the context: MAP under strain? ► At the end of 2013, there were 4,566 cases in ending inventory, a 12% increase over 2012 and a 94.1% increase compared to the 2006 reporting period, according to the most recent OECD statistics. ► Germany (858), United States (732) and France (618) had the largest ending inventory of MAP cases in ► More than 90% of OECD member countries’ MAP inventories are cases with other OECD members ► OECD member countries witnessed a 14% increase in new MAP cases initiated in 2013, rising to 1910 cases from 1678 in ► The United States experienced the largest overall number of new MAP cases of all OECD member countries (from 236 in 2012 to 403 in 2013) ► While 1910 new MPA cases were initiated in 2013, only 197 cases (including those with partner countries) were reported to have been completed in This is a reduction of approximately 30% from the 279 cases reported completed in ► That closure rate represents just 10.3% of the 2013 case initiation rate and only 4.3% of the total stock of open MAP cases.

Page 5 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Inclusion of arbitration clauses in tax treaties “Does your country have a policy of pushing for the inclusion of arbitration clauses in its tax treaties? If so how many of your treaties contain such a clause?” ► Brazil: No. Brazil does not accept arbitration in its DTT. ► China: We are not aware of arbitration clauses introduced in existing tax treaties between China and other countries / jurisdictions. We understand that there is no concrete plan for the Chinese legislator to include arbitration clauses in relevant tax treaties. ► France: Yes – with some, but not all, treaty partners ► Italy: Most of the Conventions (especially the most recent) signed by Italy include such arbitration clause, therefore it appears that the Italian Authorities are favorable to such procedures. The arbitration clauses contained in the various Conventions signed by Italy are compliant to the OECD Model as ruled by art. 25 of the OECD Model Convention. ► Japan: Yes. 6 treaties contain arbitration clauses which follow the OECD model.

Page 6 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Inclusion of arbitration clauses in tax treaties “Does your country have a policy of pushing for the inclusion of arbitration clauses in its tax treaties? If so how many of your treaties contain such a clause?”(Continued) ► Mexico: No, Mexico does not have the policy of pushing for the inclusion of arbitration clauses. That said, Mexico has 11 Tax treaties which include an arbitration clause, all of which follow the OECD standard. ► South Africa: No. The Davis Commission, which is responsible for Tax reform has noted in its report of 23 December 2014 that there are currently only a limited number of treaties that contain an arbitration clause. ► Turkey: DTTs that Turkey has signed do not include the arbitration clause indicated under Article 25/5 of the OECD Model Convention. The arbitration application of ICSID (International Centre for Settlement of Investment Disputes) could be applicable for the investment disputes. ICSID Convention was entered into in Bilateral investment treaties (“BITs”) are other legal texts through which Turkey has approved the resolution of international tax matters through arbitration process.

Page 7 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Has arbitration ever been used in your country? “Has arbitration ever been used in your country? Are you able to provide an approximation of the number of times it has been used?” ► Brazil No. Tax is in Brazil is charged according to the law; so, a taxpayer will either win or lose a dispute. ► China: As a general rule, arbitration (on any issue) is very rarely used in China. Tax disputes are generally resolved through negotiation with the tax authorities. ► France: Yes 3 times, each time within the scope of the EU Arbitration Convention ► Italy: Yes arbitration has been used in Italy, both according to art. 25 of the Convention on double taxation issues and according to the EU Arbitration Convention specifically referring to TP issues. We cannot provide an approximation of the number of times it has been used, since such data are not disclosed by the Tax Authorities. ► Japan: No

Page 8 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Has arbitration ever been used in your country? “Has arbitration ever been used in your country? Are you able to provide an approximation of the number of times it has been used?” ► Mexico: As far as we know it has never been used. ► South Africa: No. Only used in non-tax matters ► Turkey: No

Page 9 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: BIT or DTT? “For tax issues, is a default choice generally made in your country between the use of arbitration within Bilateral Investment Treaties (BIT) or Double Tax Treaties?” ► Brazil: No. ► China: Not applicable ► France: No ► Italy: No, both Bilateral Investment Treaties and Double Tax Treaties signed by Italy include arbitration procedures. ► Japan: Unknown ► Mexico: Yes – Double Tax Treaties ► South Africa: Unknown ► Turkey: Arbitration clause is not a default choice for DTT’s. However in BIT’s the provision of international arbitration in case of a dispute arises between the contractors is a default choice.

Page 10 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Timing issues “At what stage of proceedings is Arbitration generally available?” ► Brazil: Not applicable ► China: Not applicable ► France: 2 years from the date on which the case has been first presented (i.e., according to article 25 of the OECD Model Convention). ► Italy: As per France ► Japan: As per France ► Mexico: When after an agreed period of time the tax authorities are not able to reach an agreement in a MAP procedure. ► South Africa: Unknown ► Turkey : In order to apply to arbitration within the scope of BIT’s the dispute shall have arisen from an investment dispute originated from a tax matter and the shareholder who exposed to tax assessment should be resided one of the contracting states of ICSID. In case that the parties could not reach a favorable result at the end of the legal remedies available within the domestic legislations, the parties may apply for arbitration.

Page 11 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Triggering arbitration “Under what circumstances arbitration may be triggered?” ► Brazil: Not applicable ► China: Not applicable ► France: When a MAP case exceeds a certain amount of time (2 years) ► Italy: It is necessary: i) that the competent authorities are not able to resolve the case under the Mutual Agreement Procedure within 2 years from the presentation of the case; ii) that the taxpayer agrees to be bound by the arbitration board; iii) that no decision on the reported issues has already been rendered by a court or administrative tribunal of either State; iv) that the issue subject to arbitration concerns is specifically referred to the Convention. Such provisions are included in most Double Tax Treaties signed by Italy. (i.e., according to article 25 of the OECD Model Convention). ► Japan: As above (Italy)

Page 12 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Triggering arbitration “Under what circumstances arbitration may be triggered?” ► Mexico: When after an agreed period of time the tax authorities are not able to reach an agreement on a MAP procedure. ► South Africa: Unknown ► Turkey: In order to apply to arbitration within the scope of BIT’s the dispute shall have arisen from an investment dispute originated from a tax matter and the shareholder who exposed to tax assessment should be resided one of the contracting states of ICSID. In case that the parties could not reach a favorable result at the end of the legal remedies available within the domestic legislations, the parties may apply for arbitration.

Page 13 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Binding vs Non-Binding “Are the outcomes of arbitration binding?” ► Brazil: Not applicable ► China: Not applicable ► France: Yes ► Italy: Yes, according to art. 25 of the OECD Model Convention and to most of the Double Taxation Conventions signed by Italy, once the procedure its activated, the decisions of the arbitration board are final and binding for each Contracting State. ► Japan: Yes, according to art. 25 of the OECD Model Convention and to most of the Double Taxation Conventions signed by Italy, once the procedure its activated, the decisions of the arbitration board are final and binding for each Contracting State.

Page 14 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Binding vs Non-Binding “Are the outcomes of arbitration binding?” ► Mexico: Only when the tax authorities and the taxpayers agree to within the process. ► South Africa: Unknown ► Turkey : Yes - The outcomes of the ICSID Arbitration are binding.

Page 15 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Time limits “When arbitration is the result of the Mutual Agreement Procedure failing to reach a satisfactory result, is there a time limit after which point a MAP case is referred to arbitration?” ► Brazil: Not applicable ► China: Not applicable ► France: 2 years ► Italy: 2 years from the date on which the case has been first presented (i.e., according to article 25 of the OECD Model Convention). ► Japan: 2 years from the date on which the case has been first presented (i.e., according to article 25 of the OECD Model Convention).

Page 16 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Time limits “When arbitration is the result of the Mutual Agreement Procedure failing to reach a satisfactory result, is there a time limit after which point a MAP case is referred to arbitration?” ► Mexico: Yes, in general terms if after a period of time within the MAP process an agreement is not reached, the arbitration is available. The time is variable from treaty to treaty. In some treaties there is not a limitation of time. ► South Africa: In the case of the SA/ Swiss treaty provision is made for referral to arbitration after three years if MAP did not result in an agreement. The parties must however agree that the award will be binding and once this agreement is reached the award must be given within one year. ► Turkey : Not applicable

Page 17 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Mandatory entrance? “Does entrance into arbitration become mandatory at any point in time?” ► Brazil: Not applicable ► China: Not applicable ► France: Yes ► Italy: No, the arbitration procedure is not mandatory and the tax payer must agree to activate the arbitration procedure. ► Japan: No, it depends on taxpayers’ requests. ► Mexico: No ► South Africa: No ► Turkey : Not applicable

Page 18 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Most common tax issues addressed “In your country, which tax types are most commonly addressed via arbitration (please list first, second and third most common tax types, if possible)” ► Brazil: Not applicable ► China: Not applicable ► France: No information publically available ► Italy: Transfer pricing, beneficial ownership ► Japan: Not applicable ► Mexico: Not applicable ► South Africa: Not applicable ► Turkey : Not applicable

Page 19 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Business’ perceptions of arbitration “Generally speaking, how would you characterize business' experiences with arbitration?” ► Brazil: Neither positive or negative ► China: Neither positive or negative ► France: Generally positive ► Italy: Generally negative ► Japan: Neither positive nor negative because there are no arbitration cases in Japan. ► Mexico: Not applicable ► South Africa: Neither positive or negative ► Turkey : Not applicable

Page 20 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Governments’ perceptions of arbitration “Has the government in your country expressed any views (positive or negative) on the use of arbitration or its potential use in the future?” ► Brazil: Yes. There are a lot of small disputes in which the cost of challenging would be higher than the cost of State structure; as such, arbitration would be positive for Brazil as a cost reduction tool not only for the State, but also for the taxpayers. ► China: Not applicable ► France: No ► Italy: No, the government hasn’t expressed any official view on such topic. Anyhow, with the Circular n. 21 from June the 5th, 2012, the Italian Tax Authorities have reported an increase in the adoption of such procedures and have consequently announced an intensification in their effort, together with the Italian Finance Ministry, in representing Italy in such disputes with the aim to increase the amount of disputes that reach a positive outcome.

Page 21 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Governments’ perceptions of arbitration “Has the government in your country expressed any views (positive or negative) on the use of arbitration or its potential use in the future?” ► Japan: Not applicable ► Mexico: No ► South Africa: The report of the Davis Review Committee, which is responsible for tax reform in South Africa (and in line with the BEPS report), notes that the lack of use of arbitration by South Africa is unfortunate, but neither the government or the Davis Committee has yet addressed this action point in the interim report issued for comment on 23 December ► Turkey : No

Page 22 International Arbitration in Tax Matters : Taking the Debate Forward Arbitration today: Future growth of arbitration? “Over the course of the next three years, do you foresee the use of arbitration in your country growing / shrinking / staying the same?” ► Brazil: Growing somewhat ► China: Growing somewhat ► France: Growing somewhat ► Italy: Growing somewhat ► Japan: Growing somewhat ► Mexico: Growing somewhat ► South Africa: Growing somewhat ► Turkey : Staying the same

Page 23 International Arbitration in Tax Matters : Taking the Debate Forward Questions?