The existing European mechanisms for arbitration resolution of tax disputes on double taxation, prescribed in tax agreements and in accordance with the EU Arbitration Convention, do not always result in effective resolution of tax disputes. The recent monitoring carried out by the Council of the European Union revealed certain shortcomings, especially in relation to accessibility of dispute resolution mechanisms, as well as the length and effective conclusion of the procedure. According to the European Commission, the estimated figure of tax disputes on double taxation in the EU is about 900, with approximately 10.5 billion euros at stake.
In this regard, on October 10 this year, the EU Council approved the Directive to resolve tax disputes (hereinafter – the Directive). The directive is aimed at changing the current situation, when the scope for mandatory arbitration in dispute resolution is limited to the issues of transfer pricing adjustments and the profit distribution of related persons. Thus, legal persons and natural persons will be able to resolve all disputes related to the interpretation and application of agreements that provide for the elimination of double taxation of income and capital.
Among the key objectives of the new rules under the Directive are the following:
Creating an obligation on Member states to take decisions on all disputes originating in tax treaties and affect the tax position of businesses and citizens;
Providing an opportunity for taxpayers to unblock procedures at national courts;
Clearly defined timelines and standard period for each arbitration phase;
Extending the scope to all tax disputes between Member States that derive from tax treaties and other international agreements;
Mandatory notification of the taxpayers and publication of reviews of arbitration decisions.
To achieve these objectives, the Directive provides for the following:
Member States will now have a legal obligation to take conclusive and enforceable decisions under the improved dispute resolution mechanism; and if they do not meet such obligations, the national courts will take such decisions;
Taxpayers having tax treaty disputes can initiate a procedure whereby the Member States which have concluded the current agreement must attempt to resolve the dispute amicably within two years;
If no decision has been found at the end of the two-year period, the competent authority of each Member State must set up an Advisory Commission to arbitrate;
If the competent authorities fail to set up the Advisory Commission to arbitrate, the taxpayer can bring an action before the national court to appoint such Advisory Commission.
The Advisory Commission (as agreed by the relevant competent authorities or appointed by national court of the Member States concerned) consists of one chair, maximum of two representatives from each competent authority, and a maximum of two independent persons of standing. The Commission will have six months to deliver a final, binding decision that is immediately enforceable and resolves the dispute.
The Directive will be applicable to matters submitted after 1 July 2019, on issues related to the tax year starting on or after 1 January 2018.
Multinationals should welcome the Directive as a step towards improving access to tax dispute resolution mechanisms within the European Union. The new Directive establishes a European mechanism in which multinationals can access to resolve all tax treaty related disputes. It expands on the scope of existing mechanisms in the EU Arbitration Convention to cover not just disputes concerning profit adjustments of associated enterprises but also other tax treaty related disputes. In particular, disputes between Member States that are not related to transfer pricing that cannot be resolved bilaterally will be resolved by default through mandatory arbitration under the new Directive.
These changes in Europe work alongside the minimum standards agreed under Action 14 of the OECD BEPS Action Plan to improve the effectiveness and timeliness of mutual agreement procedures under tax treaties. The adoption of the new Directive means that European countries have gone further than the minimum standards, which did not include mandatory arbitration in dispute resolution. It is expected that the adoption of this Directive will put further pressures on the countries to agree their positions in mutual agreement procedures. Thus, the Directive will increase legal certainty, while creating a more friendly environment for business and investment in the European Union.
The adoption of the Directive is a timely improvement of dispute resolution mechanisms available to taxpayers, both for double taxation cases and cases involving difficulties in interpreting tax agreements. The Directive will cover a wider range of disputes, and Member States will have clear deadlines to agree on a binding solution going forward. This is likely to be important in the post BEPS environment, where tax certainty is difficult to obtain on a unilateral basis and where taxation disputes are likely to increase as tax administrations begin regular and focused audit practices on cross-border transactions.