The UK has published draft regulations adopting an EU directive that promises faster resolution of double taxation disputes between Member States.

Overview

Exposure to taxation in two different EU Member States on the same item of income is more than just a theoretical possibility. Bilateral Tax Treaties between Member States contain procedures for their respective tax authorities to negotiate a reduction or elimination of such double taxation. But the process is slow, opaque and does not guarantee success. Even worse, taxpayers have no seat at the table.

Under a new EU directive, taxpayers now have the ability to force competing EU taxing authorities to arbitrate double taxation disputes for tax years beginning on or after 1 January 2018. With this taxpayer-driven mechanism, Member States could be forced to resolve the dispute within two years, or be bound by the decision of an independent advisory commission.

Background

An EU Member State (State) is largely free to design its own tax systems and procedures and to decide what to tax, when to tax it, and at what rate, as long as its rules are not discriminatory or otherwise contrary to EU treaties. But inconsistent tax laws in different States put numerous cross-border transactions at risk of being taxed twice.

Certain long-established mechanisms are designed to address double taxation disputes. Bilateral Tax Treaties (Tax Treaties) between most States allocate taxing rights, and set forth a mutual agreement procedure (MAP) for resolving disputes between States. But these provisions are far from perfect. The “competent authorities” of the two States are not required to reach agreement under the MAP. Thus, double taxation can persist. In a substantial number of cases, resolution takes considerably longer than two years. Finally, the taxpayer is not a participant in the MAP and thus has little input into any resolution, even though the issue might continue in future tax years. Although mandatory binding arbitration between States has been available under an EU Arbitration Convention, it is limited to transfer pricing and permanent establishment issues.

EU Council Directive

Recognising the need for a comprehensive solution to the double taxation problem, on 10 October 2017 the European Commission adopted a directive containing a taxpayer-driven, mandatory binding arbitration mechanism between States. Under the EU Directive:

  • Taxpayers can initiate a mutual agreement procedure requiring States to resolve a double taxation dispute within two years.
  • If States fail to reach agreement within two years, the taxpayer can request an opinion from an advisory commission made up of independent members appointed by the States and representatives from each State.
  • Generally within six months, the advisory commission must deliver an opinion on how to resolve the dispute.
  • The advisory commission’s resolution is binding unless the States reach a different agreement within six months.

The EU directive applies to complaints submitted on or after 1 July 2019, relating to tax years beginning on or after 1 January 2018. The competent authorities can also agree to apply the directive to any complaint submitted prior to that date or to earlier tax years. HMRC has begun a consultation on draft regulations implementing the directive in the UK.