Improved dispute solution within the EU regarding double taxation

The Economic and Financial Affairs Council configuration (Ecofin) has agreed on a proposal for a directive regarding double taxation solutions within the EU. The purpose of the proposal is to increase legal security and improve the terms for multinational companies undertaking cross-border operations within the EU.

Applicable law

If one or a number of jurisdictions tax the same income, asset or financial transaction, double taxation arises for the taxpayer. The majority of these situations are addressed in the double taxation agreements. However, if the parties to a double taxation agreement interpret an agreement differently, double taxation can, still, arise. Such double taxation can be addressed through the Mutual Agreement Procedure undertaken between the member states’ authorities. If the tax authorities in question do not reach an agreement, the taxpayer can apply for arbitration. The arbitration procedure regarding double taxation within the EU is covered by the EU’s Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises, which was signed on 23 July 1990.

Ecofin’s draft

Lately, the number of mutual agreement procedures and dispute resolutions have increased. It is believed that the BEPS-project will continue to increase the number of mutual agreement procedures. In the light of this both OECD and EU have undertaken projects to increase and strengthen the effectiveness and efficiency of the mutual agreement procedures process. OECD has presented the Multilateral instrument for BEPS tax treaty measures which will be signed in Paris on the 7th of June, 2017. The Multilateral instrument will provide the signatures with improved tools to strengthen the effectiveness and efficiency of the mutual agreement procedures process and dispute resolutions. In October 2016, The European Commission presented its proposal for a new Directive on a mandatory and binding double taxation dispute resolution mechanisms in the EU to combat this.

The Maltese presidency has considered it to be a priority to reach an agreement on a proposal of improvements on double taxation dispute resolution mechanisms within the EU before the end of its term. On 23rd of May 2017, the Ecofin agreed on a draft Directive for Double Taxation Dispute Resolutions within the EU.

The draft Directive is aimed to increase the legal certainty, and improve the conditions for cross-border activities in the internal market by ensuring a more fair treatment, transparency as well as to be more flexible than the existing EU Arbitration Convention. This is supposed to be accomplished by:

• Widen the scope of the Double Taxation Dispute Resolution mechanism so that other double taxation situation than transfer pricing and permanent establishment also is covered,
• Clear and enforceable timelines are stipulated on when the dispute must be resolved,
• Allowing for a more flexible approach to the choice of the desired method to resolve double taxation disputes, as long as the solution is meet within the set timeline, and
• Obligating the Competent Authorities to publish abstracts of the final arbitration decision.

In line with the existing EU Arbitration Convention, the Directive allows for a mutual agreement procedure to be initiated by the taxpayer, under which the Member States must reach an agreement within two years. If the procedure fails, an arbitration procedure is launched to resolve the dispute within specified timelines. For this, an advisory panel of three to five independent arbitrators is appointed together with up to two representatives of each Member State. The advisory panel issues an opinion for eliminating the double taxation in the disputed case, which is binding on the Member States involved unless they agree on an alternative solution to remove the double taxation.

Next step

Following the Ecofin’s agreement on draft Directive, the European Council will adopt the Directive once the European Parliament has given its opinion on the Directive. Following this, the Member States will have until 30 June 2019 to implement the Directive into their national laws and regulations. Taxpayers will be able to submit complaints under the new system for tax years starting on or after January 1, 2018, after the Member States have implemented the Directive into domestic law by June 30, 2019. However, if a Member State chooses, the Directive can be retroactively applied to complaints related to earlier tax years.

Comments

Double taxation is one of the main problems facing multinational groups with cross-border operations. The double taxation may increase both the costs and the administrative burden of the taxpayer. The double taxation has also a negative impact on the cross-border investments in the EU. Tools such as the mutual agreement procedure and the EU Arbitration Convention have been developed to solve these double taxation dispute. In the light of the last year's increased mutual agreement procedures, Member States’ increased inventory of mutual agreement procedure and the development of the BEPS-project the existing tools to fight double taxation has been deemed to not be sufficient enough.

The Directive is considered to ease the administrative burden, litigation cost and compliance cost for the taxpayer. For multinational groups active in certain countries the Directive will be seen as a potential benefit, however, the use of the new dispute resolution tools may not be evenly spread across the Member States. The improvements and the dispute resolutions mechanism have been anticipated and is warmly received, even though there may be some reluctance to enter into the new dispute resolutions mechanisms where there is an obligation to publish the arbitration results.

It remains to be seen how the development of the Directive and its implementation proceeds. However, the Competent Authorities’ have limited resources and following the new Directive, the Member States is likely to need to allocate more resources to the Competent Authorities in order to meet the requirements and timeframes of the new Directive. In the lack of resources, a well-produced and exhaustive application can, in the meantime, increase the likelihood of a timely dispute resolution.