Plaintiff v Defendant

Plaintiff v Defendant - [2009] VSC 534 - VSC 2009 case summary — Zoe

[17]

15.1 The Contractor agrees to:

(a) maintain residence, for taxation purposes in Malta, Singapore or such other jurisdiction as agreed between the company and the Contractor;

(b) to comply with its obligations under the laws of Australia and Malta, including (without limitation) the payment of all Taxes within the times required, obtaining all applicable registrations for Tax purposes, providing Tax Invoices and lodging all prescribed Tax Returns to ensure compliance with the laws of Australia and Malta to the extent such action is not able to be legally undertaken by the Company in accordance with clause 15.9;

(c) at the request of the Company, negotiate with the Company in good faith and use reasonable endeavours, including without limitation the provision of all information, the prompt execution of documents and the arrangement of its financing, to ensure that allowable deductions, credits, refunds and rebates are available to the maximum extent and to minimize to the extent legally possible any Australian and Maltese Taxes associated with the Services.

...

15.4 Subject to this Article 15, the Company shall indemnify and hold the Contractor harmless from and against any and all Tax Claims including without limitations any withholding tax on any payment by the Contractor to a Related Body Corporate, whether in the form of dividend payments or otherwise, with respect to Taxes imposed under Australia, Singapore, Malta, as well as under any other jurisdiction (Tax Indemnity).

15.5 The Company shall not be liable to indemnify the Contractor under the Tax Indemnity for any Tax claim which arises as a result of, or in respect of, or by reference to:

(ii) the Contractor's failure to comply with Article 15.1(a), 15.9(ii) and 15.10 of this Contract.

...

15.8

(i) Subject to Article 15.8(ii), where the Company is liable to make any payment under the Tax Indemnity, the due date for the making of that payment (Due Date) shall be the date falling seven days after written notice has been served on the Company demanding that payment under the Tax Indemnity.

...

(vi) Prior to the Due Date, the Company shall on a monthly basis pay to the Escrow Agent an amount equal to the Taxes deemed to have been incurred in the previous month (Deemed Taxes). The Deemed Taxes will be held by the Escrow Agent under an escrow agreement to be prepared which contains usual and reasonable provisions for an arrangement of the type contemplated but otherwise in accordance with this Article 15.8. The Deemed Taxes shall be calculated by the Contractor and the calculation shall be submitted to the Company with all necessary information to understand and evaluate the calculation. The Company shall pay the Deemed Taxes to the Escrow Agent within seven days of the receipt of the calculation.

(vii) The Company's payments under the Tax Indemnity shall be made from the accumulated amount of Deemed Taxes. If the payment under the Tax Indemnity exceeds the accumulated amount of Deemed Taxes, the balance shall be paid by the Company to the Contractor in accordance with this Article 15.8. If the accumulated amount of Deemed Taxes exceeds the payment under the Tax Indemnity, the balance shall be credited to the Company when calculating next month's Deemed Taxes.

15.9

(i) The Company will, on behalf of the Contractor, undertake, manage and control the conduct of any action required in relation to the Contractor's obligations to comply with Tax Law, including without limitation, the preparation and filing of Tax Returns and making of any applicable registrations for Tax purposes.

(ii) The Contractor must provide the Company with all assistance and information required to enable the Company to satisfy its obligations under Article 15.9(i).

15.10 If the Contractor becomes aware of any circumstance which is likely to give rise to a claim under the Tax Indemnity, the Contractor agrees to give or cause to be given written notice of the Tax Claim (as the case may be) to the Company within a reasonable time.

(i) The Company will assume the conduct of any action in respect of a Tax Claim and the Contractor shall take such action as the Company may reasonably request to avoid, dispute, defend, resist, appeal or compromise any Tax Claim.

(ii) The Contractor must not:

(a) accept, comprise or pay;

(b) agree to arbitrate, comprise or settle; or

(c) make any admission or take any action in relation to a Tax claim.

without the Company's prior written approval, which must not be unreasonably withheld or delayed.

[109]

IX. Resolution of Tax Issues

... the resolution of statutory claims involving tax issues is unsuitable for arbitral determination. Of the statutory issues that can surface in the context of a commercial transaction (antitrust, bankruptcy, etc.), it is the least susceptible to resolution by reference to commercial good sense. Basic familiarity with tax regulations reveals such regulations and the problems they raise have a truly sui generis character. The resolution of tax problems is a specialty. Often, the provisions of the tax laws are ambiguous; it is always a challenge to determine even whether they apply. The content of the provisions usually gain real meaning only in the context of the IRS process. Tax disputes involve the exercise of discretion by a variety of individuals and the operation of a number of processes: in addition to the parties themselves, an auditor, a supervisor, the recourse to an internal settlement process, and finally an appeal to the tax courts. It would be foolhardy to maintain that any non-specialist could determine the content and application of the relevant tax laws.

Therefore, an intimate professional acquaintance with the content of U.S. tax laws is not required to conclude that the question of the applicability of relevant tax provisions on withholding tax from the payments made under an international contract raises the type of interpretative problems that are completely inapposite for submission to the commercial and juridical expertise of international commercial arbitrators. Even assuming regulatory claims pertaining to antitrust, securities, RICO, or bankruptcy laws are arbitrable, none of these laws depends upon an administrative agency akin to the IRS for their implementation or definition. Not only is the content of tax law unusually complex, but the process designed to give practical content and implementation to the regulatory provisions is also intricate, complicated, and elusive to the dictates of common sense. The individual discretion of members of this vast bureaucracy often lead to inconsistent and unpredictable results. Supervisors are not bound by the determinations of the initial auditors, and the parties may reach yet another result through a settlement conference prior to appeal to tax court. The agency can take the position that each tax case or problem is sui generis and commands a singular interpretation of the law. Therefore, there may be little room for predictable outcomes and accurate prophecies of potential tax liability outside the perimeters of the IRS.

The facts of the hypothetical case present an additional complication in light of the international character of the transaction and the foreign nationality of some of the implicated companies. Presumably, this is not the usual fare of the IRS's supervision of the tax consequences of business conduct. For example, in the circumstances of the case, the IRS must determine whether the royalty payments were subject to the newly-imposed tax. The applicable provisions may be far from clear. To the extent the character of the parties' relationship raises a res nova for tax purposes, the ambiguity of the law will be exacerbated, making the IRS bureaucracy and the attendant appeals procedure the sole mechanism for achieving a certain result as to tax liability.

An arbitral award ruling on this matter would certainly not be binding upon the IRS in subsequent similar disputes and might not resolve the tax liability issue that divides the parties. Because the IRS and the appellate court process have exclusive jurisdiction to determine the application of tax provisions to individual cases, a determination of a tax issue by a private, non-national adjudicatory body can only be binding on the arbitrating parties. A valid arbitral award can be rendered enforceable by judicial judgement; to that extent, the arbitral determination of the tax liability issue may be binding upon the IRS. However, in this regard the award is likely to be challenged by one of the parties or the IRS under Article V of the 1958 New York Arbitration Convention on the basis of inarbitrability, violation of U.S. public policy, and/or excess of arbitral authority. The award could also be subject to the "second-look" doctrine as to its ruling on the issue, thereby making it subject to a merits review by the U.S. courts. This result would not only confound the attempt to resolve the dispute, and threaten the legitimacy of the award, but it would also create a jurisdictional conflict between the IRS and the process of international arbitration. These complications and destructive conflicts could be avoided simply by an advisory reference to the IRS or a tax court at a preliminary stage of the arbitral proceeding.

Finally, in the hypothetical case, an undeniable duplication of issues exists between the action brought before the federal district court in New Jersey and the issues submitted to the arbitral tribunal. If part of the basic purpose for submission to arbitration is to achieve efficiency and expertise in international commercial adjudication, neither rationale of the arbitral process is served in these circumstances. The federal court has jurisdiction over a case involving basically identical issues arising from an integrated commercial transaction between corporate parties. Moreover, these issues require a national court's particular and special expertise. There must be some value for international commercial parties to engage in an efficient and competent adjudication of claims before the court.[11]

At a glance

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Judgment (177 paragraphs)

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Legislation Cited (6)

Cases Cited (4)