European Council agrees new double taxation dispute resolution mechanism

The draft directive (32-page / 204KB PDF), which will now be voted on by the European Parliament, will allow corporate and individual taxpayers to initiate a 'mutual agreement procedure' (MAP) between the member states where there is a dispute about what tax should be paid and where. The member states will have two years to come to an agreement, before the dispute proceeds to mandatory binding arbitration.

"This directive is an important part of our plan for strengthening tax certainty and improving the business environment in Europe," said Edward Scicluna, minister for finance of Malta, which currently holds the presidency of the European Council.

Member states will have until 30 June 2019 to transpose the directive into their national laws and regulations, according to the announcement. It will then apply to complaints submitted after that date on issues relating to the tax year starting on or after 1 January 2018, unless the member states agree to apply its provisions to complaints related to earlier tax years.

Double tax agreements are designed to ensure that individuals and businesses operating in different countries are not taxed in more than one jurisdiction on the same profits. Double tax can create serious obstacles where business is conducted across borders, creating an excessive tax burden and causing economic distortion.

The EU's draft directive aims to address this by way of a "mandatory and binding" dispute resolution mechanism, with "clear time limits and an obligation to reach results". It "thereby sets out to secure a tax environment where compliance costs for businesses are reduced to a minimum", according to the Council.

The mechanism set out in the draft directive will apply to a broad range of disputes, although disputes that do not involve double taxation may be excluded on a case by case basis. A corporate or individual taxpayer facing double taxation will be able to initiate the MAP, giving affected member states two years to reach agreement on the issue. If the MAP fails, the dispute will be referred to an 'advisory commission' for resolution.

The advisory commission will be made up of an advisory panel of between three and five independent arbitrators, together with up to two representatives of each member state. The arbitrators will be chosen from a pool of 'independent persons of standing', who must not be employees of tax avoidance companies or have given tax advice on a professional basis. The panel chair must be a judge, unless otherwise agreed. The panel's opinion will be binding on the member states involved unless they agree on an alternative solution.

Following debate on the draft text, the Council has also agreed to the possibility of setting up a permanent 'standing committee' to deal with dispute resolution cases with the agreement of member states.

OECD and G20 member countries agreed in 2015 to commit to minimum standards on the resolution of international tax disputes. Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said previously that the implementation of the OECD's global project to tackle base erosion and profit shifting (BEPS) had the potential to lead to many more instances of double taxation depending on how the changes are implemented by the different countries involved.

Commenting on the draft directive, Self said that it was "good to see the EU broadening the scope of dispute resolution procedures, and particularly setting up practical measures such as a panel of approved arbitrators".

"The UK needs to ensure that, following Brexit, UK companies still have access to robust processes to resolve disputes which could lead to double taxation," she said.