The Importance of Alternative Dispute Resolution in Taxation

In recent years we have seen significant changes in the international economic and tax environment.  Tax compliance has become increasingly challenging for MNEs, especially in relation to cross border transactions and as a result the need for efficient dispute resolution methods is in the forefront.

Globally, the current trends of tax dispute resolution focus on pre-audit mechanisms as well as post audit alternative mechanisms.

The use of Advance Pricing Agreements (APAs) is undeniably the most effective pre-audit mechanism available for resolving transfer pricing issues; we also now see an expanded use of AI by the tax administration in identifying tax issues and enhancing settlement communications with the taxpayers.

Post audit, locally introduced procedures, such as the administrative appeals before the Directorate for Dispute Resolution as well as international tax cooperation settlement mechanisms including the use of the Mutual Agreement Procedure (MAP) offer consistent and fair resolution of tax disputes for MNEs. The use of these mechanisms results in a more amicable and efficient way to resolve tax disputes minimizing time investment and costs compared to litigation. We do see however, that despite the advantages of such mechanisms, their use is still not as extensive. Finally, we are awaiting to see in practice the use of Arbitration as implemented according to the EU Dispute Resolution Directive.

In aspiration to a broader use of alternative dispute resolution methods, tax authorities should offer stronger incentives for the use of such methods also using the developments of technology and AI as preventive measures to avoid dispute escalation and as a means of faster dispute resolution enhancing compliance and efficiency within tax systems.