Tax Disputes between States

Tax dispute resolution mechanisms

Directive (EU) 2017/1852 — EU tax dispute resolution system aims to improve the system for resolving disputes over tax agreements between EU countries, thus giving both citizens and businesses greater certainty and more timely decisions.

It concerns in particular disputes over double or multiple taxation — where 2 or more countries claim the right to tax the same income or profits.

It builds upon the 1990 convention on the elimination of double taxation which is limited to disputes over transfer pricing and the allocation of profits to permanent establishments (also known as the Union Arbitration Convention — UAC).

KEY POINTS

Scope

The directive applies to all taxpayers subject to taxes on income and capital covered by bilateral tax treaties and the UAC.

Settlement procedure

Mutual agreement procedure

As a first step, the claimant submits a complaint to the tax authorities of the EU countries concerned. The authorities should try to reach a mutual agreement on the complaint within 2 years after the complaint is accepted by the tax authority.

Dispute arbitration procedure

An Advisory Commission is set up to resolve a dispute when:

a complaint is rejected by one of the EU countries concerned:
An Advisory Commission can be requested by the claimant if one of the EU countries relating to the dispute rejects the complaint. The Advisory Commission must adopt a decision on the admissibility and acceptance of the complaint, within 6 months of the complaint’s rejection, which is binding on the countries concerned.

a complaint is not resolved within 2 years after it is accepted:
An Advisory Commission must be set up if the tax authorities of the EU countries involved in the dispute failed to reach an agreement to eliminate the double taxation within 2 years after accepting the complaint. The Advisory Commission must deliver its opinion on how to solve the dispute no later than 6 months after being set up by the countries concerned.

The countries concerned may agree to set up an Alternative Dispute Resolution Commission instead of an Advisory Commission, which may differ in composition and form from the Advisory Commission. The countries in question have the right to take a decision that does not follow the opinion of the Advisory Commission or, if appropriate, the Alternative Dispute Resolution Commission. However, if they do not reach an agreement on how to settle the dispute, they are bound by this opinion.

Report

The European Commission is to assess the application of the directive and report to the Council by 30 June 2024.

The directive has applied since 3 November 2017. It has to become law in the EU countries by 30 June 2019.

BACKGROUND

Cross-border double taxation arises when a business is taxed by 2 different countries on the same income or capital. It is a serious brake on doing business across borders, results in economic distortions and has a negative impact on cross-border investment.

MAIN DOCUMENT

Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union (OJ L 265, 14.10.2017, pp. 1-14)

Elimination of double taxation (arbitration)

Convention on elimination of double taxation — adjustment of profits of associated companies.This intergovernmental convention, also known as the arbitration convention, introduces a procedure to eliminate double taxation in specific situations. For example, where branches of multinational companies (associated companies) which are based in different EU countries are taxed by more than one EU country as a result of an upward adjustment in its profits in another EU country.

KEY POINTS

When double taxation arises, the company affected can present its case to the tax authorities concerned; if those authorities cannot solve the problem satisfactorily, they seek to reach mutual agreement with the authorities of the EU country where the associated firm is taxed.

If the authorities in the 2 EU countries are unable to reach an agreement, they present the case to an advisory commission, which suggests a way of resolving the dispute.

Although the tax authorities may subsequently adopt, by mutual agreement, a solution which is different from the one suggested by the advisory commission, they are bound to adopt the commission’s advice if they cannot reach agreement. The commission consists of a chair, 2 representatives from each of the tax authorities concerned, and an even number of independent members.

The convention was signed on 23 July 1990 and came into force from 1 January 1995 until 31 December 1999 (a period of 5 years). On 25 May 1999, the Council adopted a protocol amending the convention; extending it for further periods of 5 years at a time.

Code of conduct

A code of conduct for the effective implementation of the convention was drawn up by the EU’s Joint Transfer Pricing Forum (JTPF) and adopted in 2006. The JTPF, set up in 2002, assists and advises the European Commission on transfer pricing* issues. A revised code of conduct was adopted in 2009.

The code of conduct clarifies aspects including:

the scope of the convention,
the admissibility of a case,
the mutual agreement procedures and
the dispute resolution procedures.
Extension of the convention to new EU countries

Progressively, as more and more countries became members of the EU, the convention was extended to them by means of the following legal instruments:

a convention in 1995 on the accession of Austria, Finland and Sweden to the convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises;
a convention in 2005 on the accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia to the convention;
an act concerning the conditions of accession of Bulgaria and Romania and the adjustments to the treaties on which the EU is founded;
an act of accession of Croatia to the EU through which the country acceded to the convention and the protocol. Decision 2014/899/EU set the date of entry into force of the convention and protocol for Croatia and amended the text of the convention resulting from Croatia’s accession.
Council Directive (EU) 2017/1852

In October 2017, the Council adopted Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the EU which builds on the arbitration convention. The directive’s scope is broader than the convention and will apply to all taxpayers subject to taxes on income and capital covered by bilateral tax treaties and the arbitration convention. Over time, the use of the arbitration convention may reduce, given the advantages of the directive requiring double taxation to be removed.

It has applied since 1 January 1995.

MAIN DOCUMENT

Convention on the elimination of double taxation in connection with the adjustment of transfers of profits between associated enterprises (OJ L 225, 20.8.1990, pp. 10-24)

Successive amendments to the convention have been incorporated into the original document. This consolidated version is of documentary value only.

Brexit Information

Tax Disputes between States

Tax dispute resolution mechanisms

KEY POINTS

BACKGROUND

MAIN DOCUMENT

Elimination of double taxation (arbitration)

KEY POINTS

Code of conduct

MAIN DOCUMENT

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