|Many taxpayers hope that
Mexico will seize the opportunity to make arbitration a
part of its tax system
If representatives wisely choose to apply Part VI of the
Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting (the MLC),
it will definitely be considered as a winning bet on the future
of foreign investments in Mexico. If instead, the decision goes
the other way, we unenthusiastically point out that Mexico
would be missing out on a historic opportunity to strengthen
the rule of law and to guarantee legal certainty in the
resolution of conflicts arising out of double taxations.
International arbitration in tax matters
International arbitration in tax matters is regarded as an
integral part of the already renowned mutual agreement
procedures (MAPs) included in double taxation model treaties,
such as (i) the OECD Model Convention (OECD Model), or (ii) the
United Nations Model Convention (UN Model).
Traditionally, international tax-related disputes have been
solved through MAPs. Nevertheless, and with the release of the
Base Erosion and Profit Shifting (BEPS) project in 2013, the
general expectation regarding tax related controversies is that
a significant number of new and more complex disputes will
arise. Hence, speculation falls on the belief that present
mechanisms will prove insufficient to solve these international
double taxation (or double non-taxation) issues.
Since the 2008 recession, foreign governments have increased
the number and sizes of tax audits and assessments because they
are in need of increasing their revenue. This has also brought
an increase of double taxation cases of international
This is a real challenge for domestic courts since these
controversies are very sophisticated and require deep
specialisation by the judges that will analyse and decide which
interpretation should prevail.
In fact, OECD MAP statistics for 2015 "reveal that at the
end of the 2015 reporting period, the total number of open MAP
cases reported by OECD member countries was 6176, a 14%
increase as compared to the 2014 reporting period and a 163%
increase as compared to the 2006 reporting period". Also, "the
average time for the completion of MAP cases with other OECD
member countries was" of 23.22 months, from 2006 till 2015,
taking each year's average.
Base erosion and profit shifting has been a concern for the
OECD country members and therefore a group of 60 countries have
been working together to implement 15 actions to tackle these
Mexico has led the implementation of many of such
recommendations in its domestic legislation.
Referring in particular to Action 14 (Making Dispute
Resolution Mechanisms More Effective) of the BEPS project, it
was said: "Countries agree that the introduction of the
measures developed to address base erosion and profit shifting
pursuant to the Action Plan on Base Erosion and Profit
Shifting (…) should not lead to unnecessary
uncertainty for compliant taxpayers and to unintended double
taxation. Improving dispute resolution mechanisms is therefore
an integral component of the work on BEPS issues".
Although in this particular case Action 14 refers to
directly improving MAPs through the commitment of implementing
the minimum standard resulting of the BEPS Project, other
countries took it a step forward and declared the
"commitment to provide for mandatory binding MAP
arbitration in their bilateral tax treaties as a mechanism to
guarantee that treaty-related disputes will be resolved within
a specified timeframe".
These forward-thinking member states are: Australia,
Austria, Belgium, Canada, France, Germany, Ireland, Italy
Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Poland, Slovenia, Spain, Sweden, Switzerland, the United
Kingdom and the US. Together, these countries were involved in
more than 90% of outstanding MAP cases at the end of 2013.
In order to fulfil its commitment, this group worked
separately through an ad hoc subgroup to create Part
VI of the MLC. It needs to be said that also other countries
participated in the discussions, including Mexico.
The main reasons to envision an arbitration-dedicated
section of the MLC were because, in its opinion:
- expectation of the increase of double
taxation disputes exists;
- arbitration has proved the most effective
mechanism to treat the risk of double taxation;
- it gives legal certainty to
- arbitration prevents unresolved issues and
long periods of time to resolve cases; and
- it would incentivise competent authorities
to resolve issues by themselves, instead than by a third
Unfortunately, Part VI is not deemed to be complete, since
its provisions need complimentary treatment, which will take
place with the implementation of specific competent authority
agreements (CAAs). These will be implemented in order for the
arbitral procedure to work correctly. The following items,
among others, could and should be included in the CAAs, as
explained in §230 and on, of the explanatory statement to
- Minimum information that should be
presented to analyse the case.
- Detailed requisites that arbitrators shall
comply in order to be appointed.
- Timeframes to hand in the position papers
by the competent authorities.
- Timeframe for the arbitral panel to issue
its final decision.
- Costs allocation.
But, even though the number of treaties that make reference
to arbitration has increased considerably in the last few
years, arbitration still poses some thorny issues, such as:
- Countries' (fiscal) sovereignty;
- Negative prior arbitration experiences in
- Arbitrators' impartiality;
- Requisites for selecting arbitrators;
- Developing countries vs. stronger
- Burdens of arbitration costs; and,
- Which cases would be eligible for
arbitration, among others.
In order to fully understand the debates over the choice of
OECD member states to implement, or not, mandatory arbitration
as a complement and second step after the MAP has not been
successful, we need to look at the OECD Model and its
Article 25(5) of the OECD Model Convention was introduced in
2008 in order to provide a solution when the competent
authorities are unable to reach an agreement within two years
from the initial presentation of the case. It provides in fact
for mandatory arbitration.
On the other hand, the UN Model, in Article 25B(5),
introduced two alternate versions in 2012: mandatory
arbitration and voluntary arbitration.
Regarding the types or arbitration relating to tax matters,
there are basically two: the 'free' or 'conventional
arbitration', and the 'baseball', 'final offer' or "last best
offer" arbitration. The commonly referred to "baseball
arbitration" comes from rules for settling salary disputes
between Major League Baseball teams and their players: the two
parties put out their offer and the third party, in this case,
the appointed arbitrators, will settle the dispute by picking
the number they judge to be closest to the right answer.
Mexico's past experience and present opportunity to be
So far, Mexico has never implemented a mandatory arbitration
provision in any of its tax treaties. Nevertheless, Mexico has
agreed to voluntary arbitration with the following
- the US
- United Kingdom
- Luxembourg (relating only to article 9 of
It is in our interest to point out that Mexico has already
lost the specialisation on tax matters since the Federal
Administrative Court no longer solves predominant tax
There has also been a public concern among the legal
community and private sector regarding the origin and
background of some of the judges that have been appointed to
the Mexican Supreme Court of Justice and also to the Federal
Administrative Court since some of them used to be
counterparties to taxpayers.
We have come to know, unofficially, that Mexico has been
evaluating the inclusion of mandatory arbitration, even though
only in limited cases like the ones regarding articles 4 (dual
residency but only for natural persons), 5 (permanent
establishment), 7 (business profits), and 9 (associated
enterprises) of the OECD Model and, in any case, Mexico seems
more inclined to a "baseball type of arbitration" than the
Our opinion is that this is a perfect time for Mexico to
really strengthen the rule of law in dispute tax resolutions
regarding the interpretation and application of the tax
Taking in the words of Michael Lang and Jeffrey Owns, when
"tax revenues intensifies between countries looking to address
budget shortfalls, the business community is confronted with
the seemingly ever-expanding spectre of double taxation". At
least in Mexico, tax audits and tax administrations have become
more aggressive, with more information and technological
resources, and taxpayers, and even more, foreign investors, are
evermore left without legal security and certainty over their
The reality in Mexico is that taxpayers and foreign
investors need to live with the fact that the Federal Court for
Administrative Justice has lost its specialisation on tax
matters, and has also lost perspective on whose rights should
be always protected and guaranteed. Domestic remedies have
proven inadequate and inefficient when it comes to rapidly
solving international tax issues.
As the UN Committee of Experts in International Cooperation
in Tax Matters pointed out in a 2010 report: "legal certainty
provided by tax conventions may be jeopardised even if the
number of unsolved cases is negligible; any domestic judicial
system failing to provide for a solution (…) would be
considered as seriously flawed. Consequently, arbitration is
needed to provide the necessary certainty favouring
cross-frontier investments […] Mandatory arbitration is
apparently a powerful incentive facilitating the endeavours of
the competent authorities to reach an agreement."
In our opinion, one of the main advantages that mandatory
arbitration would bring to Mexico is that it would have a
positive impact on foreign direct investment, giving out a good
faith message to investors looking to come to Mexico. It is a
reality that FDI can generate new jobs, bring new technologies,
promote growth and employment, etc.
It should be considered that adhering to mandatory
arbitration translates into adding to the efficiency
of the MAP, meaning it is adding on already acquired
experience. Mexico would not be starting 'from scratch'.
It would be a sign of good faith from Mexican authorities,
that the taxpayer and the foreign investor are not enemies, but
government allies. Without assurance, without transparency,
what message would the Mexican government be sending to
commercial and economic partners as well as Mexican
It is also public policy to provide certainty and a safe
environment for investments which translates into better
domestic conditions. Because, at the end of the day, it is not
about safeguarding a single case's taxes allocation, but the
bigger picture. It is about avoiding double taxation and
applying the rule of law.
Mandatory arbitration can be most definitely used as a
'safety valve', meaning something that relieves the pressure of
overcrowding, which will happen once the MLC comes into force.
Mexico would be missing a historic opportunity to be avant
garde, to be aligned with international interests. As
Robert Frost wrote: "Two roads diverged in a wood, and I
– I took the one less travelled by, and that has made
all the difference".
Alejandro Torres Rivero
Chevez, Ruiz, Zamarripa y Cia.
Tel: +52 55 52 57 70 72
Alejandro Torres Rivero's practice at Chevez, Ruiz,
Zamarripa y Cia., focuses mainly on tax and
administrative litigation, as well as on the
specialised amparo trial, with a particular
emphasis in alternative dispute resolution
Alejandro has served as the leader of the tax
committee of the Mexican Bar Association, and later
became part of the executive council of the same
institution. He was also vice-chair of the
International Bar Association Taxes Committee. He
hosted "Háblame Derecho", a televised
interview program on legal matters of the Judicial TV
Channel, and is author of multiple publications on
tax-related subjects. Alejandro has been a full
professor of tax law as well as amparo at his
alma mater and at the Universidad
Alejandro's spectrum of interests, other than the
aforementioned, consists of pioneering, boosting and
practicing alternative dispute resolution in tax
matters, such as the ones recently implemented in
Mexico's legal system known as acuerdos
conclusivos, as well as in a more international
context, i.e. MAPs, APAs, BAPAs, MAPAs and,
Alejandro is a lawyer trained at the Universidad
Iberoamericana in Mexico City, and he later
specialised in tax law from the Universidad
Panamericana, in Amparo by the
Instituto de Investigación Judicial of
the Supreme Court of Justice of Mexico. His is
continuing his studies, and is currently enrolled in a
Cornell University MBA.
Andrea Obregón Widmer
Chevez, Ruiz, Zamarripa y Cia.
Tel: +52 55 52 57 73 67
Andrea Obregón Widmer's recent work at
Chevez, Ruiz, Zamarripa y Cia., has focused mainly on
alternative dispute resolution mechanisms in
tax-related matters, as well as in-house research on
domestic and international tax law.
Previously, Andrea has focused on domestic and
international commercial arbitration and later on, she
practiced tax litigation in Mexico.
Andrea's international academic experience started
with the obtainment of her law degree from Alma
Mater Studiorum – Universitá di
Bologna in Italy, as well as her LLM from the same
university, submitting her final thesis on
"International Commercial Arbitration and Illegality".
She also attended in 2012 the private international law
summer programme at The Hague Academy of International
Law at the Hague, Netherlands. Andrea got her Italian
studies officially validated by the Mexican authorities
and is therefore permitted to practice in Mexico. She
also obtained a diploma from the Escuela Libre de
Derecho and International Chamber of Commerce in
commercial arbitration in 2014, where her final
dissertation got published.