EU Directive on dispute resolution

Sat 28 Oct 2017

The Council of the European Union announced the adoption of a Directive on dispute resolution on 10 October that sets out clear deadlines for agreeing a binding solution on double taxation disputes.

• Member States will now have a legal duty to take conclusive and enforceable decisions under the improved dispute resolution mechanism. If not, the national courts will do this for them.
• The agreement will ensure that taxpayers faced with tax treaty disputes can initiate a procedure whereby the Member States in question must try to resolve the dispute amicably within two years.
• If at the end of this period, no solution has been found, the Member States must set up an Advisory Commission to arbitrate.
• If Member States fail to do this, the taxpayer can bring an action before the national court to do so.

Member States must bring these rules into effect by 30 June 2019 at the latest. The new rules will apply to any complaint submitted from 1 July 2019 onwards relating to questions of dispute relating to income or capital earned in a tax year commencing on or after 1 January 2018. Competent Authorities of Member States concerned may, however, agree to apply the Directive with regard to any complaint that was submitted prior to that day or to earlier tax years.

If the UK is treated as having left the EU before the commencement date for these provisions, it may nevertheless be bound by its agreement to adopt part VI of the OECD multilateral instrument (MLI) on mandatory binding arbitration.

The EU and EEA countries that have so far adopted part VI of the MLI are:

• EEA – Liechtenstein.
• EU Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, Malta, NL, Portugal, Slovenia, Spain, Sweden.

Those EU countries which have not yet adopted part VI of the MLI and which presumably will eventually be brought within the same provisions as a result of the EU Directive are:

• Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia.

The UK treaties with Norway (article 27), Iceland (article 23) and Switzerland (article 24) also have Mutual Agreement Procedure articles. Thus it is likely that the UK will be bound by mutual agreement procedures with all its current European partners, even after Brexit.

Background on the reasons for the EU Directive on dispute resolution

The EU Dispute Resolution Directive arises from an earlier consultation considering the effectiveness of mechanisms for resolving EU tax disputes. Prior to the application of this new Directive the European Arbitration Convention applies.  However, that Convention only applies to transfer pricing disputes and attribution of profits to permanent establishments.  It does not deal with all cross border tax disputes (for example whether a permanent establishment exists) and the procedural aspects could be cumbersome.

The EU Dispute resolution directive is designed to improve matters for taxpayers as far as getting disputes resolved. The arbitration part of the OECD multilateral instrument achieves a similar outcome to the EU Dispute Resolution Directive.  Both refer to the competent authorities ‘endeavouring’ to reach agreement within a period of 24 months.  If agreement is not reached then there is a procedure for mandatory binding arbitration (in the MLI) or an advisory commission/Alternative Dispute Resolution process (under the EU Directive).

For a discussion on how to manage international tax disputes affecting your business, please get in touch with the Mazars tax investigations or international tax teams.