History Of Baseball Arbitration

Arbitration and specifically Last Best Offer Arbitration, has historically been used to resolve disputes between unions and management and is best known for resolving compensation disputes between Major League Baseball teams and their players, hence the name "Baseball Arbitration".

The evidentiary standards and substantive approach to be used by the arbitrators is consistent with a form of dispute settlement called in the United States "baseball arbitration," which many have advocated as peculiarly appropriate for transfer pricing issues. The term Baseball Arbitration does not refer to the weaponry used to settle the dispute. Rather, it is a method established by the principal professional baseball organization in the United States to deal with salary disputes between team owners and players[1].

As is well known, the usual procedure used in commercial arbitration is one in which arbitrators hear evidence and reach a decision based upon their analysis of law and facts in which the damage award, if any, might be any amount and is often somewhere between the demands of the claimant and the position of the defendant. In "baseball arbitration," however, a dramatically different approach governs. Each side (the team and the player) finally submits a number which it believes to be the appropriate salary figure. The arbitrators then have two choices: the team's submission or the player's submission. No compromise award is permitted.

Introduction Of Baseball Arbitration

To motivate the parties (in this example, the governments) to reach a settlement, "Baseball Arbitration" or "Last Best Offer Arbitration" uses uncertainty in the outcome of the arbitration proceeding. The majority of tax accords require governments to handle disputes amicably. Nonetheless, nothing beats good intentions and promoting free trade and financial flows to get governments to agree on a solution.

A majority of treaties say that countries must endeavour to resolve disputes. Parties who refuse to compromise during regular negotiations or in their last best offer before an arbitrator risk losing all or part of the arbitration procedure[2].

The uncertainty of the outcome and the potential cost of an adverse Baseball Arbitration ruling motivates both parties to compromise and avoid Arbitration. For parties who are ready to take less risk and wait to see if their viewpoint is accurate, traditional Arbitration entails determining an acceptable middle-ground solution and they will because conventional arbitration requires greater discussion and written conclusions from the arbitration panel.

A bad outcome in Last-Best-Offer arbitration could cost both parties a lot of money, so they tend to settle to avoid it. Parties with lower risk tolerances or who are willing to wait for the result of their case to make a decision are more likely to use arbitration. They will have to wait because conventional arbitration requires the arbitration panel to deliberate and draught intelligent decisions.

The EU Arbitration Convention, which is modelled after judicial arbitration, has regularly delayed decisions. These EU delays may actually drive tax authorities and taxpayers to seek more practical or faster options, which the EU requires[3].

The MAP Article
Article 26 of the Canada-US Tax Convention sets out a mechanism for resolving disputes about the convention's interpretation and application. Paragraph 2 of Article 26 has always read as follows: In cases where the objection is justified and the competent authority of the contracting state is unable to resolve the case on its own, the competent authority of the other contracting state will attempt to resolve the case by mutual agreement[4].

Most contentious and disputed treaty partner problems stem from the highlighted paragraphs above. To settle all cases of double taxation or taxation that isn't in accordance with the convention, "Endeavor to resolve" isn't strong enough[5].

Paragraph 6 of the MAP article was changed to incorporate the OECD's new arbitration provisions introduced in 2008 in the OECD's Model Tax Convention. In cases where competent authorities have attempted but failed to reach a complete agreement in accordance with the mutual agreement procedure set forth in this article, the case shall be resolved by arbitration conducted in accordance with paragraph 7 and any rules or procedures agreed upon by the contracting states. Arbitration is allowed under paragraph 6 if the rules and definitions are followed, and the MOU agreed upon by the revenue agencies.

Advantages Of Baseball Arbitration

An advantage of "Baseball Arbitration" may be that this approach encourages each competent authority to make their proposed solution or "Last Best offer" as fair and reasonable as possible, in order to be selected by an independent arbitral panel as the best possible solution and consequently that it persuades treaty country partners to adopt a collaborative approach when engaging with each other. A concern remains that this style of arbitration might "unduly favour countries more experienced in MAP[6].

Developing countries may have fewer experts with experience in the field of arbitration capable of making a persuasive "last best offer", while arbitrators who may be former tax administrators from developed countries, or former corporate tax advisers, may not be able to understand and sympathize with issues specific to these countries[7].

To ensure even-handedness in relation to developing countries, arbitrators need to be aware of possible complications pertaining to developing country disputes:
"From the point of view of developing countries, arbitrators should have an understanding of the economic and social situation and the developing countries background. For example, delays in interactions of competent authorities could result from lacking resources rather than from the unwillingness to cooperate.

Baseball Arbitration's main benefit to taxpayers would be reduced double taxation and the relatively quick provision of certainty. Some of the benefits could include a significant reduction in double taxation barriers to trade and investment, as well as the empowerment of weaker administrations when it comes to interpreting and applying tax treaties with stronger economies. It would be a plus if collaborative relationships could be preserved and improved.

Disadvantages Of Baseball Arbitration

While there are concerns that Baseball Arbitration will disadvantage developing countries, another long-held belief is that many disputes between developed and developing countries, or between developing countries and multinational enterprises, could be resolved much more quickly and fairly if binding arbitration were available. This viewpoint is based on the assumption that having a binding mandatory arbitration mechanism in place, where disputed issues are resolved by an independent arbitral panel, would go a long way toward redressing any power imbalances between disputing parties[8].

For instance, if the developed country's confidentiality laws prevent the disclosure of data on transfer pricing relevant to a dispute to the developing country's revenue authority, the data could be more easily disclosed to an independent arbitral panel. Disputed issues would be dealt with by an independent arbitral panel, which would go a long way toward redressing any power imbalances between disputing parties. For example, if the developed country's secrecy regulations precluded data on transfer pricing relevant to a dispute from being released to the developing country's revenue authorities, the data could be more easily disclosed to an independent arbitral tribunal.

The Limits Of Baseball Arbitration

Limiting an adjudicator's duty to selecting one of the parties proposals as Baseball Arbitration does may seem irrational to any lawyer. Additionally, it violates a long-standing judicial (and emerging arbitral) tradition of reasoned reasoning, which is claimed to restrict arbitrariness, improve the process's quality, make outcomes more appealing (to both parties and the broader public), and allow for review and precedent to operate[9]

The preceding section gave arguments for why, in certain situations, the benefits of Baseball Arbitration may exceed, or at least balance, these reasons for reasons (speed, low cost, and simplicity; reduced sovereignty costs; preference for negotiated solutions; and less chilling effect on rulemaking and broader relationships[10].

Conclusion
A rise in the number of unresolved issues in matters controlled by tax treaties, according to the business community, will distort trade and investment patterns and increase administrative and compliance expenses. Unresolved tax issues will surely obstruct effective tax administration from the government's perspective. Increased governmental monitoring of related-party cross-border transactions have made it more difficult for competent authorities to completely address double taxation issues in a timely manner. In all except the most extraordinary of cases, a rising number of tax bodies are now obligated to refer their conflicts to binding arbitration.

The mere possibility of losing control of a matter to an arbitration tribunal, according to recent experience with Canada-US arbitration, can push competent authorities to seek a compromise conclusion. Arbitration clauses are supposed to provide taxpayers with more quick dispute resolution, greater tax certainty, and, ultimately, increased confidence in treaty relief management.

Baseball Arbitration procedures seeks to address international tax disputes between taxpayers and governments are often seen as a positive move. "The OECD and the International Chamber of Commerce" have both endorsed it as a necessary reform. The employment of last best offer or baseball arbitration rules to resolve disputes appears particularly remarkable since it pushes both parties to take more fair views in frequently highly unclear situations. Due to the large range of possible defensible transfer prices, the last best offer strategy appears particularly promising in transfer pricing cases.

End-Notes:

1. Last best offer' or 'baseball arbitration' refers to the practice of requiring that the arbitrators pick one side or the other in its entirety. The goal is to encourage parties to put forward reasonable proposals rather than taking extreme positions in the hope the arbitrators will split the difference.
2. Jeffrey P. Katz & Sara K. Kearns, The money pitch: Baseball free agency and salary Arbitration The money pitch: Baseball free agency and salary arbitration by Abramsroger I.. philadelphia: Temple University Press, 2000, Academy of Management Perspectives 142–143 (2001).
3. See Brien M. Wassner, Major League Baseball's Answer to Salary Disputes and the Strike-Final offer Arbitration: A Negotiation Tool Facilitating Adversary Agreement, 6 VAND. J. ENT. L. & PRAc. 5 (2003).
4. Protocol Amending the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital, U.S.-Can., Sept. 21, 2007, S. TREATY Doc. No. 110-15 (2008).
5. Protocol amending the convention between the United States https://www.treasury.gov/resource-center/tax policy/treaties/Documents/Treaty-Protocol-Canada-9-21-2007.pdf (last visited Apr 27, 2022).
6. Lennard, supra note 45 (quoted in Isabel Gottlieb, Developing Countries Concerned About Binding Arbitration: UN, 2018 (27) Tax Mgmt. Transfer Pricing Rep. 233
7. Dispute resolution: The Mutual Agreement Procedure - un.org, , https://www.un.org/esa/ffd/wp-content/uploads/2013/05/20130530_Paper8A_Ault.pdf (last visited Apr 28, 2022).
8. Jasmin Kollman et al Arbitration in International Tax Matters, 77(13) Tax Notes Int'l 1189, 1194 (2015).
9. See generally LA Motivation Des Decisions Des Juridictions Internationales (Helene Ruiz Fabri & Jean-Marc Sorel eds., 2008); The Reasons Requirement In International Investment Arbitration: Critical Case Studies (Guillermo Aguilar Alvarez & W. Michael Reisman eds., 2008); Justice Bingham, Reasons and Reasons for Reasons: Differences Between a Court Judgment and an Arbitration Award, 4 ARB. INT'L 141 (1988); Toby T. Landau QC, Reasons for Reasons: The Tribunal's Duty in Investor-State Arbitration, in ICCA Congress Series No. 14, at 187 (2009)
10. Danilo Ruggero Di Bella et al., "final-offer arbitration": A procedure to save time and money? Kluwer Arbitration Blog (2019), http://arbitrationblog.kluwerarbitration.com/2019/01/25/final-offer-arbitration-a-procedure-to-save-time-and-money/ (last visited Apr 28, 2022).