12 Dec 2013
Mediating Tax Disputes: Global Developments
Over the last number of years, mediation has increasingly become recognised as an efficient and effective process for resolving tax disputes. In this article, CEDR Ireland’s Practice Manager Nicola White explores recent developments in this field.
Historically, tax disputes are settled either by litigation or, in the majority of cases, outside of court by agreement between the taxpayer and tax authority after on-going negotiations. However, there are many disputes that can remain unresolved for long periods between these two extremes and without any clear roadmap to resolution.
So, what is the difference between negotiating directly with the tax authority and using mediation to resolve the dispute? According to Giles Salmond of Deloitte ‘mediation has a structure, timetable and dynamic that ordinary negotiations lack. The presence of a mediator is the key distinguishing feature of the process, as compared to a normal party to party negotiation.’ Unsurprisingly, countries are now exploring ADR processes such as mediation as an alternative route in the road map to resolving tax disputes. As noted by Jone and Maples ‘A successful tax mediation regime can not only help parties to move away from adopting entrenched litigious positions and towards focusing on early resolution outside of the Courts; but it may also help to improve taxpayers’ views of the tax dispute resolution system, thereby increasing voluntary compliance. If appropriately used, mediation should result in significant time and cost efficiencies for both taxpayers and the tax authority.’
According to PwC ‘ADR may be suitable for a wide range of disputes across different taxes, particularly those which relate to transfer pricing, capital vs revenue or valuation issues. It may be particularly useful for use in long-running disputes where positions on both sides have become entrenched, with litigation or one party conceding appearing to be the only options.’ Furthermore, it was noted by the World Bank Group that ‘As tax laws are complex, tax disputes are often fact-intensive. A combination of these factors can contribute to uncertainty regarding the correct interpretation of the issues in the dispute, and thereby warrant mediation or negotiation that allow parties to search for creative solutions that fulfill the needs of both disputants.’
According to the HMRC ‘ADR can be used as a cost effective, consensual and speedy means of supporting the resolution of tax disputes (whether the dispute is ultimately resolved by agreement between the parties or by litigation).’ HMRC’s support for ADR stems from its commitment to use collaborative dispute resolution to resolve disputes efficiently, as set out in its refreshed Litigation and Settlement Strategy.
Since 2011, HMRC has been using two ADR pilots to explore in more detail the criteria for when ADR might be appropriate for resolving tax disputes. One involves large businesses or taxpayers with complex tax affairs – in which the relevant disputes are subject to an ADR process which uses CEDR accredited HMRC staff to facilitate discussion and/or the involvement of third-party accredited mediator. The other pilot covers disputes involving mainly Small and Medium-Sized Enterprises and individual taxpayers (SMEi) – using an in-house HMRC-trained facilitator to help the parties agree resolution. This pilot has no access to third-party mediators.
In September 2013, assessment reports for both these schemes were published. The ADR Pilot for Large Disputes reported that the issues in dispute in pilot cases included: partial exemption; qualification for relief; valuation; double taxation relief; and penalty for non-deduction of CIS tax. The cases which had been through ADR represented tax at stake of just more than £57 million. It further states in the Report that ‘experience in the pilot shows that resolution in large and/or complex disputes can be facilitated by trained HMRC people or by external mediators.’ However, it stressed the importance of having the correct people at the table with the necessary authority to settle.
The ADR Pilot for SME’s and Individual assessment report found that there is ‘evidence that ADR can work for both VAT and Direct Taxes disputes both before and after an appealable decision or assessment has been made.’ Furthermore, it was recommended that ADR in SME and Individuals ‘should be rolled out in Local Compliance.’ Following the success of both pilots, HMRC have announced that they intend to roll out the pilots on a national scale.
In 2011, Bangladesh introduced several reforms to its tax laws and administration by amending its Finance Act. One significant reform was the adoption of an ADR mechanism for major public dues such as income tax, value added tax (VAT), and customs. The National Board of Revenue (NBR) of Bangladesh was seeking short-term options that could help reduce the existing tax case backlogs; and longer-term solutions for new tax disputes (notably, a more holistic approach to tax dispute resolution reform). Following the amendment of the Finance Bill, the system currently allows for mediation procedures to be initiated by the taxpayer at any time of the tax appeals process as long as it is agreed upon by the tax authorities. The introduction of mediation for tax appeals is expected to reduce the backlog in tax disputes significantly.
The Internal Revenue Service (IRS) offer a number of ADR programmes designed to resolve cases much earlier than the formal IRS Appeals process. The IRS ADR programmes which utilise mediation include Fast Track Settlement (FTS) -, Fast Track Mediation (FTM) and Post-Appeals Mediation (PAM). The FTS programme offers taxpayers a way to resolve disputes in less than 60 days by utilising the assistance of a FTS Appeals official, trained in mediation and dispute resolution techniques. The FTS Appeals official serves as a neutral mediator and also has the ability to use their delegated settlement authority to offer a settlement in both factual and legal issues in the event the parties cannot reach a settlement through the use of mediation techniques. Similarly, both the FTM and PAM programmes offer taxpayers and the IRS the opportunity to mediate disputes through an IRS Appeals officer who acts as a neutral party. However, unlike in FTS, in these programmes the IRS Appeals official does not have settlement authority and will not render a decision regarding any issue in dispute. 
Other countries that have also introduced mediation schemes for resolving tax disputes include: Belgium, South Africa, the Netherlands, and Canada.
Benjamin Franklin once said ‘In this world nothing can be said to be certain, except death and taxes.’ But so too are disputes a certainty. It is promising to see mediation being recognised in a number of countries as a cost and time efficient process to resolve tax disputes. It can only be hoped that other countries follow suit.
At CEDR, we have a number of initiatives running in relation to tax mediation. These include:
- CEDR ADR Tax Hub CEDR is part of an initiative that has created an ideas ‘Hub’, a leadership forum for discussion, review, development and innovation of collaborative working tools and techniques to help guide policy and practice in tax matters.
- Tax Mediator Panel CEDR has trained a group of tax professionals and commercial mediators in mediation and conflict management skills for dealing with tax disputes between tax authorities (HMRC), businesses and individuals.
- Specialist training programmes for tax mediators.
- Tax Implications on Settlement - Breakfast Briefing - 30th January 2014 - London
 Jone and Maples ‘Mediation as an alternative option in Australia’s tax disputes resolution procedures’ (2012) 27 Australian Tax Forum
 ‘The Role of the Lawyer in Out of Court Dispute Resolution’ IM-Mediation Resolution April 2013, The World Bank
 The summary on Bangladesh was taken from ‘The Role of the Lawyer in Out of Court Dispute Resolution’ IM-Mediation Resolution April 2013, The World Bank.
 The summary on the IRS Mediation scheme was taken from Jone and Maples ‘Mediation as an alternative option in Australia’s tax disputes resolution procedures’ (2012) 27 Australian Tax Forum