The sustained increase in the levels of tax litigation represents a serious problem for many countries (Thuronyi and Espejo, 2013. IMF, Legal Department). This is especially true when such litigation levels cause, among other aspects, the multiplication and prolongation of conflicts in time; surcharge of the judicial system; they increase the cost and uncertainty not only for the public administration, but also for the private sector; cause delay in collecting substantial resources to the Treasury; and they affect the relationship of the tax administrations with the taxpayers. A context that puts pressure on the tax administrations to seek appropriate solutions to reverse them.

In this regard, the meeting of the G-20 (Hangzhou, China, September 2016) considered that improving certainty in tax matters is one of the priority issues on the agenda, on the understanding that it constitutes a factor of high relevance for companies at the time of defining investment and locations, and deficiency in this regard affects cross-border trade and investment.

On this issue, the OECD and the IMF, at the request of the mentioned group, have compiled a report (“Tax Certainty”, March 2017) which, in what concerns us, emphasizes the need to reduce or eliminate the uncertainty in early stages of the conflict generation and urges that if the dispute persists, the system should provide an effective solution mechanism. It recognizes that there are solid arguments to use alternative mechanisms for resolution of disputes, such as mediation, conciliation and arbitration, as well as that they are not appropriate in all cases (for example, if they are used in order to conclude a dispute in a sense substantially inconsistent with the intention of the tax law).

On the other hand, the international experience detects a significant proliferation and consolidation in the use of “Alternative Dispute Resolution mechanisms in Tax Matters” – ADR – (the preventive formulas have a more incipient development), regulated in many tax-legal systems of European and Anglo-Saxon countries, to a lesser extent in Latin America. The countries that apply them include: Australia, Belgium, Canada, China, France, Germany, Hong Kong, India, Italy, Mexico, Netherlands, Russia, Singapore, South Africa, Turkey, Venezuela, Great Britain and United States, and this list is not exhaustive.

ADRs have proved to be efficient to alleviate the aforementioned litigation, as well as a strategic measure in favour of the implementation of a paradigm shift in the relationship between taxpayers and the tax administration, characterized by expecting increased cooperation and mutual trust, to the rapprochement of the positions in pursuit of the resolution of contentious issues, rather than the traditional process of confrontation and unilateral definition by the administration.

This confirms the current relevance of studying ADR mechanisms, defined roughly as those consensual procedures that are regulated and operate apart from the traditional tax procedure of disputes resolution; they have the priority objective of ending a contentious issue relating to the determination of the tax liability, raised between the tax administration and the taxpayer and that the administration failed to elucidate through the use of its means of investigation.

Now, the decision to incorporate these instruments in a particular order must be preceded by a proper study of the situation that generates the high levels of conflict, including an analysis of the legal system and the operation mode of the tax administration.

In another respect, it is deemed inappropriate and even counter-productive to transfer mechanisms applied by other countries without first studying, from the vast international experience, which one is best suited to the system, how they take into consideration the specific problems of the country, the extent to which they will be applied, the possibilities in the field of human and material resources of the tax administration and the characteristics of the tax system.

Among the main consensual formulas regulated in the international scope, arise: a) negotiation, b) conciliation, c) mediation, d) transaction and e) arbitration.

Broadly speaking, the negotiation is defined (for example: ” Actas con Acuerdo” in Spain, “Accerttamento with Adessione” in Italy, “Early Neutral Evaluation” in Britain, etc) as a consensual procedure that involves only the parties (taxpayer and tax administration), which is used primarily to resolve the differences that have arisen in the early stages of the conflict (control or verification stage), and takes place before the entry into force of the administrative decision. It can be said that the negotiation is adopted as an early opportunity of dialogue between the parties, to understand the scope of the question that appears controversial, in order to find a solution and avoid the deepening and extension of the conflict.

On the other hand, the mediation is figure with the greatest reception in international practice (for example: Germany, USA, Great Britain, Italy, and Mexico). It implies the intervention of a neutral third party in the procedure. As a general rule, it applies once issued the administrative act, even during the judiciary procedure, in circumstances where the parties have failed to find a consensual solution to the conflict and, therefore, the intervention of a third party who comes to collaborate with its technical knowledge, skilled in mediation techniques and above all from a neutral position, to facilitate the understanding between parties.

In turn, each kind of ADR offers a myriad of variables in regards to the possibilities of regulation, according to: a) the scope of application, i.e. the stage of the procedure in which it is enabled (administrative or judicial instance); b) the subjects involved in the procedure, either only the parties or an intervening third parties; c) the form of resolution, which can be decided by the parties or externally decided, if the outcome is decided by a third party agreed upon by the procedure (e.g. Arbitration in Venezuela and Portugal); d) the scope of application, as in the case of factual issues or legal issues (for example the mechanism called “Tatsachliche Verständigung”, in Germany, applies only with respect to factual issues); e) the inclusion in the tax procedure, which can be voluntary or have a compulsive character (e.g. In Italy, it is required to have articulated “Il Reclamo e la Mediazione”, as a prerequisite for accessing the judicial instance of appeal); among other aspects.

In this instance, we cannot forget to mention that part of the doctrine rises against the use of ADRs, saddling them with alleged weaknesses, such as that they would violate the principle of legality, conceived as a law application and as a requirement of adequacy of the administrative action under the law. It should be answered that, if we have a legal provision which enable the conclusion of agreements, as well as recognizing the existence of a margin of discretion, typical of the complex nature of tax systems, among other arguments, this help to sustain that they do not affect the mentioned principle.

Also among those who oppose their use by alleging a breach of the principle of non-availability of the tax credit and renunciation of the collection of taxes, when the difference is subject to negotiation, we can therefore respond that such availability cannot be validly considered, nor that the tax administration renounces to the exercise of any jurisdiction or power, when the problem that enables the use of ADR is precisely the uncertainty affecting the determination of the said tax liability.

On the other hand, recognized scholars, statistical series, such as comparative studies carried out by countries that apply ADRs (for example Italy, Spain, Great Britain, Australia, etc.), recognize their effectiveness to reduce conflicts in tax matters, enunciating a series of collateral benefits, among which are: a) decongestion of the judiciary; b) improvement in the perception of the tax administration, based on a better relationship, to move from confrontation to policies that promote increased participation and cooperation by the taxpayer; c) lower cost, higher efficiency, and speed in procedures; d) decrease in conflicts; e) improvement in revenue management.

In this regard, it can be added that the implementation of such mechanisms should not represent a risk per se, since the possible breaches above mentioned may rather arise from an incorrect or poor configuration of the legal regime or from the denaturation that these agreements suffer if they are inadequately applied by the administration. These do not represent unavoidable obstacles, but rather, aspects that can in principle be reversed with a proper legal regulation, and the training and control of the involved officials.

The success of implementing consensual mechanisms required to address, inter alia: a) refinement of the rules which govern its regulation in every tax system; b) training and proper education of the human resources involved in its implementation; c) design and adaptation of the material resources of the tax administration; d) effective control of the involved officials.

Ultimately, ADRs are inspired by the principles of efficiency, transparency and citizen participation, so that their incorporation into the tax system, adopting the provisions and safeguards needed to prevent their denaturalization, could add a suitable management tool, in order to achieve the reduction of conflicts, greater legal certainty and a better relationship between the tax administration and the taxpayers.

This post is a Synthesis of the awarded work of the XXV CIAT/AEAT/IEF Essay Contest. (Spanish only)

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