As more and more companies conduct business across international borders, questions of tax revenue recognition and transfer pricing taxes become more and more salient. Tax authorities in different nations, fighting over which country gets to tax the multi-national corporation's income, enter into sometimes-heated disputes over where that income should be recognized, leading to costly and time-consuming litigation.
In the last couple of years, however, the United States and Canada have found a new way to resolve their disputes over tax-revenue recognition. By agreeing to the colloquially-termed "baseball arbitration," each country proposes a tax figure to which they think they are entitled. The competing figures are examined by a panel of three experts - each country selects one expert, and the remaining expert is chosen by the two appointed experts. The panel determines the figure it believes to be the most appropriate. The country whose figure is chosen collects that tax revenue. The other country leaves the table-empty handed.
It is not a perfect analogy - in baseball, arbitration can arise only in the third, fourth, and fifth years of a player's career. Since the player is still under team control, the collective bargaining agreement between the owners and the players provides for arbitration to determine the appropriate salary for a player in those particular years. The player and the team each submit figures that they believe are appropriate and the arbitration panel determines which figure is correct. However, the player does not run the risk of leaving empty-handed. He merely risks being awarded a lower salary, unlike in the tax disputes, where one country does not recognize any revenue and is left without the ability to collect taxes on any of it.
Today, this means of resolving tax questions is only used in disputes between the United States and Canada, France, and Germany. Treaties to extend this practice to resolve disputes with Hungary, Luxembourg, and Switzerland have passed the U.S. Senate Foreign Relations Committee but have been stalled procedurally from proceeding to a full Senate vote. If approved, the treaties will broaden the spectrum of arbitration as an effective means of resolving tax disputes between countries, and will likely entice more countries to play ball.