Arbitration in Tax Matters

Richard Edward Dotoli

Tax arbitration is already internationally accepted in the agreements against double taxation – cases of the MPA (mutual agreement procedure), BEPS Action 14 and APA (advanced pricing agreement) – and also in some countries’ internal law – such as Portugal. In the Brazilian law, after overcoming the fallacy that arbitration would violate the principle of non-obviation of the control of harm or threat to a right by the Judiciary[1], there is still (unreasonable, we believe) resistance as to whether the arbitral proceeding is viable to settle matters that involve taxation aspects. 

This reluctance is based on four propositions: the violation of legality principle and vagueness doctrine, violation of equality, unwaivability of the tax liability and the prohibition of “tax waiver”. However, these arguments may be surely overcome and refuted when the interest in preventing the litigation and quickly solving conflicts, in addition to the expertise in tax matters, become the biggest concerns of both tax payers and tax authorities.

First, in the course of a duly regulated arbitral proceeding, the public administration will act based on strict legality, according to a previous right to an adversary system to solve a dispute of interests with the taxpayer on the controversial matter. The definition of the tax discussed under arbitration will not be changed at all.

As to the argument according to which tax arbitration would mean waiver of revenue – thus subjected to the limitations of the Supplementary Law No. 101/00: it could never be considered a “benefit” to the taxpayer, once a third party, impartial, will settle a dispute derived from a legal relation based on facts and legal arguments, and there will be no unilateral advantage to any party (administration or taxpayer). Impartiality, technical knowledge and reliability are premises of arbitration.

The purpose of the limitation provided in the Supplementary Law No. 101/00 is simply to avoid the granting, by the ordinary legislator, of advantages to certain taxpayers without a reasonable justification, which could reduce revenue.

Hence, if at the end of the arbitral procedure there is an apparent waiver due to reduction of the amount of tax liability originally required and collected, it means that said amount was not legally required by law of the taxpayer.

Therefore, the arbitration is merely the means to create the individual and specific tax rule obtained by the subsumption of the fact to the abstract taxable event provided in the law. It does not create, increase or extinguishes the tax liability. The extinction occurs with the payment, statute of limitations, preemption, installment plan or remission. Those are the legal causes to extinguish the tax liability.

Accordingly, the ordinary legislator, when determining the basis to guide the arbitration, has established limitation of amounts, themes or taxes that may or may not the submitted to arbitration, as well as the means to pay or refund the tax. With that, he allowed the taxpayer to close the arbitral procedure, indicating procedures to settle the tax liability without the need of an endless pilgrimage to the administrative body – and, not rare, to the Judiciary – in order to obtain a definitive solution to the case.

In light of the constitutional principles of efficiency, morality and access to the Justice System, the tax arbitration not only is commendable, but also crucial for reducing general and massive litigation. It relieves a saturated judicial structure, provides speed to the solution of disputes and technical knowledge to the awards (rendered by experts in tax matters, which is the opposite of what occurs in the tax courts in the country); and sometimes even reduces costs (direct and indirect), for both tax authority and taxpayer. The Portuguese experience is, without a question, a case of success that can be used as an example.


[1] STF, Internal Interlocutory Appeal on Foreign Judgment 5.206/Spain, Full Bench, Reporting Justice Sepúlveda Pertence, DJ 04.30.2004.