European Union adopts new Directive to better resolve double taxation disputes

Tax Alert

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The Council of the European Union adopted the Tax Dispute Resolution Mechanism Directive on 10 October 2017. Whereas currently the scope for mandatory arbitration in dispute resolution is limited to transfer pricing adjustments and the attribution of profit to permanent establishments, the new Directive aims to ensure businesses and citizens are able to resolve, in a timely fashion, all disputes related to the interpretation and application of agreements that provide for the elimination of double taxation on income and capital.

According to the Council, some of the key objectives of the new rules under the Directive include:

  • Creating an enforceable obligation on Member States to arrive at a resolution of all disputes that originate in tax treaties and affect the tax position of businesses and citizens
  • Providing recourse for taxpayers to national courts to unblock procedures
  • Clearly defined and enforceable timelines with a standard period for the arbitration phase
  • Extending the scope to all tax disputes between Member States that derive from tax treaties and other international agreements
  • An obligation to notify taxpayers and publish abstracts of the arbitration decisions

To achieve these objectives, the Directive specifically provides 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 of the respective Member States will do this for them
  • Taxpayers faced with tax treaty disputes can initiate a procedure whereby the Member States in question must attempt to resolve the dispute amicably within two years
  • If at the end of the two-year period no solution has been found, 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 do so in their place

The Advisory Commission (as agreed by either the relevant competent authorities, or designated national court of the Member States concerned) is to be made up of one chair, a maximum of two representatives from each competent authority, and a maximum of two independent persons of standing. It 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.

Key takeaways

Multinationals should welcome this new Directive from the Council of the European Union as a step towards improving access to tax dispute resolution mechanisms within the European Union. The new Directive is intended as a European wide mechanism that 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, non-transfer pricing disputes between member states that cannot be resolved bilaterally will default to be resolved through mandatory arbitration under the new Directive.

This latest development in Europe works 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. The adoption of the Directive with mandatory arbitration on all tax treaty related disputes is expected to put further pressures on countries to agree their positions in mutual agreement procedures. Thus, the Directive will increase legal certainty, while fostering a more business friendly environment for investments in the Union.

Current mechanisms written into tax treaties and under the EU Arbitration Convention do not always lead to an effective resolution of tax disputes. A recent monitoring exercise carried out by the Council of the European Union revealed certain shortcomings, particularly in relation to accessibility of dispute resolution mechanisms, as well as the length and effective conclusion of the procedure. According to the European Commission, there is currently an estimated figure of 900 double taxation disputes in the European Union, with approximately €10.5 billion at stake.

The adoption of the Directive is a timely improvement to the dispute mechanisms available to taxpayers, not just for cases involving double taxation, but also for cases involving difficulties in the interpretation of tax treaties. A wider range of cases will be covered by the Directive, 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 more tax administrations begin regular and focused audit practices on cross-border transactions.

See our APA and MAP Country Guide, or contact any of the authors for more information about resolving tax treaty disputes.