Resolution of Tax Disputes in the EU
By Francesca Pengo
The EU has adopted new rules on tax dispute resolution effective from 1 July 2019. Directive 2017/1852 significantly improves the resolution of tax disputes by ensuring that both citizens and businesses can effectively solve disputes on the interpretation and application of EU tax treaties as well as issues relating to double taxation.[1] Double taxation arises when tax is levied on the same income or profits of an individual or a business by two or more Member States. This may occur because of a discrepancy in Member States’ domestic tax laws or diverging interpretations and/or application of the same provision of a bilateral tax treaty.[2] Currently, estimates reveal that 2000 double taxation disputes are pending in the EU, 900 of which are more than two years old and worth €10.5 billion.[3]
Directive 2017/1852 thus introduces new mechanisms for the elimination of double taxation by supplementing the 1990 Union Arbitration Convention:[4] its broader scope was expanded to cover all disputes arising from the interpretation and application of agreements and conventions providing for the elimination of double taxation of income and capital,[5] as opposed to merely instances of double taxation deriving from transfer pricing, the adjustment of profits of Member States’ associated enterprises.[6] Moreover, where the Union Arbitration Convention only afforded tax authorities with the possibility to submit disputes to arbitration, Directive 2017/1852 allows taxpayers to initiate the process themselves,[7] in the expectation that their tax matters will be resolved by the relevant judicial authorities in an acceptable and predictable timeframe.[8]
How does the dispute resolution mechanism work?
‘Any affected person’ is entitled to submit a complaint requesting the resolution of the tax dispute to each competent authority of each Member State concerned, regardless of the availability of national law remedies,[9] provided it fulfils certain requirements.[10] The competent authorities of the Member State(s)concerned subsequently have a 6-month period to accept or reject the complaint and inform the affected person and other competent authorities, if applicable, of their decision.[11]
Under the administrative mutual agreement procedure (MAP), the competent authorities of the Member States involved have a 2-year timeframe to reach an amicable agreement.[12] Member States are encouraged to use non-binding alternative dispute resolution forms, such as mediation or conciliation.[13] In the absence of an agreement,[14] or upon rejection of the complaint by a competent authority,[15] the dispute should be submitted to a dispute resolution procedure, the choice of which should be flexible: either through the ad hoc Advisory Commission (AC) or through the more permanent Alternative Dispute Resolution Commission (ADRC).[16]
Where the taxpayer hence requests to set up an AC to deliver its opinion,[17] it shall be set up by the competent authorities within 120 days from receipt of the request[18] and be comprised of three independent members (one of whom acts as Chair) appointed by Member States and representatives of the competent authorities concerned.[19] Alternatively, the competent authorities of the Member States concerned may choose to set up an ADRC, which differs in form from the AC, providing more flexibility in the choice of dispute resolution model.[20] Where appropriate, Member States could select to use any other dispute resolution process, including the ‘final offer’ arbitration process (a process whereby each party in a dispute presents a last, best offer to solve the dispute which the arbitrators must choose between as the most appropriate).[21] The latter differs from the independent opinion process utilised by the AC in which the arbitrators are allowed to independently reach a solution based on their own opinion of the most appropriate outcome.[22]
Regardless of the dispute resolution procedure elected, the competent authority of each of the Member States concerned shall notify the affected person of the procedural rules of either commission.[23] Both AC and ADRC must deliver their opinion on how to resolve the dispute within six months of their formation,[24] in writing.[25] On the basis of the opinion delivered, the competent authorities of the Member States concerned have six months to make a final decision, which may deviate from that rendered by the AC or ADRC.[26] If they fail to reach an agreement, the opinion becomes binding on the competent authorities,[27] who must communicate it to the affected person within thirty days and publish it.[28] The final decision is binding on the Member States concerned and implemented following the affected person’s acceptance of the decision and renouncing of his/her right to any domestic remedy.[29]
Overall, Directive 2017/1852 provides more tax certainty for individuals and businesses facing problems of double taxation as well as increased transparency behind the resolution of tax disputes in the EU.[30] Thanks to the enforceable obligation for Member States to resolve arising tax disputes, clearly defined and enforceable arbitration timelines and the extended scope covering all tax disputes between Member States deriving from tax treaties and international agreements, the Directive successfully affords taxpayers a well-defined pathway to solving their cross-border tax disputes.[31]
[1] Council Directive (EC) 2017/1852 on tax dispute resolution mechanisms in the European Union [2017] (Dispute Resolution Mechanisms Directive) OJ L 265/1 recital 1.
[2] European Commission, ‘Fair Taxation: New EU-wide system to resolve tax disputes between Member States applies from today’ (1 July 2019) <https://ec.europa.eu/commission/presscorner/detail/en/IP_19_3377> accessed 19 October 2020.
[3] ‘Resolution of tax disputes in the European Union’ (European Commission) <https://ec.europa.eu/taxaation_customs/business/company-tax/resolution-double-taxation-disputes_en> accessed 19 October 2020.
[4] Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (Union Arbitration Convention) [1990] OJ L 225/10.
[5] Dispute Resolution Mechanisms Directive (n 1) art 1.
[6] S Simontacchi, M Adda and B Alinovi, ‘A path towards the avoidance of double taxation in the EU’ (International Tax Report, 31 July 2020) <https://www.internationaltaxreport.com/practice/a-path-towards-the-avoidance-of-double-taxation-in-the-eu-143286.htm> accessed 19 October 2020.
[7] Dispute Resolution Mechanisms Directive (n 1) art 3.
[8] ibid recital 3.
[9] ibid art 3(1).
[10] ibid art 3(3).
[11] ibid art 3(5).
[12] ibid art 4(1).
[13] ibid recital 6.
[14] ibid art 6(1)(b).
[15] ibid art 6(1)(a).
[16] ibid recital 6.
[17] ibid art 6(1).
[18] ibid art 6(1).
[19] ibid art 8(1).
[20] ibid art 10(1)-(2).
[21] ‘Fiscalis Project Group (FPG) 093 Working Paper on the Implementation of Article 10 of Directive (EU) 2017/1852 on Tax Dispute Resolution Mechanisms in the European Union’ (2019), European Commission Working Paper 31 <https://ec.europa.eu/taxation_customs/sites/taxation/files/2019-tax-dispute-resolution-fiscalis-project-group-report.pdf> accessed 19 October 2020.
[22] ibid 30-31.
[23] Dispute Resolution Mechanisms Directive (n 1) art 11.
[24] ibid art 14(1).
[25] ibid art 18(1).
[26] ibid art 15(1).
[27] ibid art 15(2).
[28] ibid art 18(2)-(3).
[29] ibid art 15(4).
[30] Fair Taxation (n 2).
[31] Resolution of tax disputes in the European Union (n 3).