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.
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
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.
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.
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
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.
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.
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.
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.
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
To ensure even-handedness in relation to developing countries,
arbitrators need to be aware of possible complications pertaining to developing
"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.
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
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.
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.
- 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
- 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).
- 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).
- 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).
- 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).
- Lennard, supra note 45 (quoted in Isabel Gottlieb, Developing Countries
Concerned About Binding Arbitration: UN, 2018 (27) Tax Mgmt. Transfer
Pricing Rep. 233
- 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).
- Jasmin Kollman et al Arbitration in International Tax Matters, 77(13)
Tax Notes Int'l 1189, 1194 (2015).
- See generally LA Motivation Des Decisions Des Juridictions
(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
- 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).