With the increasing complexity of international trade and multinational operations, tax disputes have become a critical issue for both taxpayers and tax authorities. Issues such as double taxation and transfer pricing frequently lead to disagreements between countries, requiring effective resolution mechanisms.
Alongside Mutual Agreement Procedures (MAP), arbitration has emerged as an essential mechanism that provides a final and binding resolution to tax disputes.
What Is Arbitration?
Arbitration is a dispute resolution process where an independent and impartial arbitrator or arbitration panel examines the dispute and issues a binding decision. In the context of tax disputes, arbitration is often provided for in Double Taxation Treaties (DTTs) and supported by Bilateral Mutual Agreement Protocols.
Arbitration Practice in Turkey
- Turkey has accepted arbitration clauses in many of its Double Tax Treaties.
- The Turkish Code of Civil Procedure (Law No. 6100), effective since 2017, regulates arbitration proceedings, although specific tax arbitration practices are mainly governed by international agreements.
- Encouraged by the OECD’s BEPS project, arbitration is increasingly used in Turkey as a method to resolve disputes that cannot be settled through MAP.
How Does Arbitration Work?
- Dispute Identification: The dispute arises under a DTT and the MAP process is initiated.
- MAP Failure: If the MAP fails to resolve the dispute, arbitration may be triggered.
- Appointment of Arbitrators: The parties or treaty provisions select independent arbitrators.
- Hearing and Evidence: The parties present their arguments and evidence to the arbitration panel.
- Binding Decision: The arbitration panel issues a final, binding decision on the dispute.
The arbitration decision is usually final and binding, and cannot be appealed in court.
Arbitration vs. MAP: Key Differences
| Feature | MAP (Mutual Agreement Procedure) | Arbitration |
| Purpose | Negotiated resolution of disputes | Final and binding decision |
| Timing | Initiated when dispute arises | Triggered if MAP fails |
| Binding Nature | Non-binding, based on mutual consent | Binding and enforceable |
| Duration | Can take months or years | Generally shorter but can be complex |
Importance for Turkey
- Turkey has been strengthening its use of arbitration to promote international investment and tax compliance.
- Arbitration enhances investor confidence by offering clear and enforceable dispute resolution mechanisms.
- Several of Turkey’s DTTs explicitly provide for arbitration, and its use is becoming more widespread.
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