Increased taxpayer rights for tax dispute resolution under new EU Directive

from Tax Controversy and Dispute Resolution Increased taxpayer rights for tax dispute resolution under new EU Directive November 2, 2017 In brief The European Union is taking an important step forward in order to achieve more effective and efficient tax dispute resolution procedures. On October 10, 2017, the Council adopted the Directive on Tax Dispute Resolution mechanisms in the European Union (the Directive). The Directive builds on the existing Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/EEC; the so-called EU Arbitration Convention ) and aims to implement a harmonized and transparent framework in the EU in order to cope with an increasing number of double or multiple taxation cases. The Directive introduces a more extensive scope and is no longer limited to cases of double taxation arising from transfer pricing adjustments and attribution of profits to permanent establishments. It also implements additional safeguards in view of taxpayers rights, including access to the procedure, clear and shorter timeframes, as well as a guarantee that a solution resolving double taxation will be reached. The Directive also now explicitly provides for legal remedies for taxpayers in order to assure that competent authorities apply the provisions of the Directive and execute the solutions reached. EU Member States must implement the Directive into their national laws by June 30, 2019 at the latest. It will be applicable to any complaint submitted from July 1, 2019 onwards relating to tax disputes concerning income or capital earned in a tax year commencing on or after January 1, 2018. In detail Background The Directive originates from the Action Plan for a Fair and Effective Corporate Tax System in the European Union. The preamble of the Directive recognizes that double taxation can create serious tax obstacles for cross-border business operations. The existing mechanisms, such as Mutual Agreement Procedures (MAP) under bilateral tax treaties and the EU Arbitration Convention may not always lead to the effective resolution of all relevant tax disputes in a timely manner, and they show deficiencies in practice. Improvements to the dispute resolution mechanisms are considered necessary because of more regular and focused tax audit practices established by tax administrations, resulting in a potentially increasing number of double or multiple taxation cases with high amounts at stake. The Council of the EU therefore endorses a new harmonized and transparent framework for the resolution of disputes, which in turn should contribute to legal certainty and a more business-friendly environment in the EU. On the more global level, the need for improvement of the effectiveness and efficiency of MAP was recognized by the www.pwc.com

OECD s Committee on Fiscal Affairs. This resulted in Action 14 of the OECD s base erosion and profit shifting (BEPS) Action Plan providing for a minimum standard on dispute resolution, complementary best practices, and establishment of monitoring mechanisms (peer reviews) to ensure fulfilment of the minimum standards. The minimum standard of Action 14, including an optional clause for binding arbitration in double tax treaties, is implemented through the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) signed on June 7, 2017. Enlarged scope The Directive is applicable to disputes arising from the interpretation and application of agreements and conventions that provide for the elimination of double taxation of income and, as the case may be, capital. The Directive provides for a broader scope than the EU Arbitration Convention. As opposed to the EU Arbitration Convention, which only applies to transfer pricing adjustments and attribution of profits to permanent establishments, the Directive e.g., also applies to disputes in relation to fiscal residency, the existence/absence of a permanent establishment, or the application of withholding tax in the source state. The Directive provides for an important clarification of the meaning of double taxation, by explicitly recognizing that this notion also includes the cancellation or reduction of losses that could be used to offset taxable profits. Procedure with clear enforceable timelines 1 Any person, who is a tax resident of an EU Member State and who is affected by a dispute related to double or multiple taxation on his income or capital may call on the new procedure. A request (complaint) needs to be made within three years from the receipt of the first notification of the action resulting in, or that will result, in double or multiple taxation. As two or more Member States can be involved in the dispute, the complaint must be made simultaneously to each of the concerned EU competent authorities. The complaint is subject to a number of formal requirements with respect to the used language and content. In order to be accepted, the complaint must contain certain mandatory information, such as identification of the persons/companies involved, tax periods concerned, details of the relevant facts and circumstances of the case and supporting documents enclosed. Competent authorities of each of the Member States concerned can within three months from the receipt of the claim, request the taxpayer to provide further information. The competent authorities of the Member States concerned will take a decision on the acceptance or rejection of the complaint within six months after the receipt of it (or the receipt of the additional information requested). In absence of a decision within this timeframe, the complaint is deemed to be accepted. Legal remedies are foreseen for the taxpayer in case of rejection of the complaint (see further). Any of the concerned competent authorities may, within a period of six months from having received all the necessary documents, decide to resolve the dispute on a unilateral basis. If that is not the case, the Member States concerned shall endeavour to solve the dispute by means of a MAP within a period of two years. If the Member States reach an agreement under the MAP within the stipulated timeframe, the agreement will be binding on the competent authorities and enforceable by the taxpayer subject to the taxpayer s acceptance of the agreement. Mandatory and binding arbitration The Directive contains an explicit obligation of result and introduces certain steps if competent authorities do not timely resolve the case. For the competent authorities to reach an agreement under MAP a strict twoyear period is put forward as deadline starting from the acceptance of the complaint. If the Member States fail to reach an agreement under the MAP in that timeframe, the competent authorities concerned need to inform the taxpayer of the reasons thereto. In the latter case, upon a request by the taxpayer to the competent authorities of the Member States concerned, an Advisory Commission must be set up. This Commission consists of three to five independent arbitrators, and one or two 1 A schematic overview of the procedure is included in annex. 2 pwc

representatives of each Member State. Similar to the Arbitration Convention, the Directive excludes the arbitration procedure in cases where penalties were imposed for tax fraud, wilful default, and gross negligence. The Directive provides Member States with the flexibility to set up an Alternative Dispute Resolution Commission instead of the Advisory Commission, which may apply any dispute resolution processes or technique to solve the dispute in a binding manner. The dispute resolution procedure may take the form of a mediation, conciliation, or even final offer (i.e., baseball) arbitration. An Advisory Commission or Alternative Dispute Resolution (ADR) Commission shall deliver its opinion to the competent authorities within six months after the date on which it was set up. This period may be extended by three months. Based on this opinion the competent authorities shall agree on how to resolve the dispute within six months of the notification of that opinion. The competent authorities may take a decision that deviates from the opinion. However if they fail to reach an agreement, the opinion of the Advisory Commission or ADR Commission becomes binding. Recourse for taxpayer In the preamble, the Directive emphasizes the respect of the fundamental rights of taxpayers and the principles recognized by the Charter of Fundamental Rights of the European Union (Charter) and, in particular, the respect for the right to a fair trial and the freedom to conduct a business. Therefore the involvement of taxpayers in the dispute resolution mechanism is increased and a recourse with national courts is foreseen to unblock procedures. Denied access In case the complaint is rejected by one of the competent authorities, an Advisory Commission is set up, which decides on the acceptance of the complaint, followed by the initiation of the MAP in case the Advisory Commission accepts the complaint. If within 60 days, none of the competent authorities initiate the MAP, the Advisory Commission shall provide an opinion on the dispute. In the event of a rejection of the complaint by all relevant competent authorities, the taxpayer can file an appeal against this rejection to the national courts of the Member States. The national courts have the competence to decide on the admissibility of the complaint, can overrule denied access and have the MAP initiated. Set-up of Advisory Commission If Member States fail to agree on the composition or appointment of the Advisory Commission, the taxpayer can request its national court to set up an Advisory Commission. Implementation of the decision Furthermore, the taxpayer has the possibility to refer to the national court of the Member State, if the competent authority of that Member State has failed to implement the final decision reached by the competent authorities or in absence of their decision, the opinion of the Advisory Commission or by the ADR Commission. These solutions introduce the obligation of resolution of the dispute while not hindering national sovereignty of each Member State. Increased involvement of the taxpayer The Directive requires the Member States to inform and involve the taxpayer at several stages throughout the procedure. The taxpayer can participate in the evidence-taking procedure by providing the Advisory Commission or ADR Commission with any information, evidence, or documents that may be relevant for the decision. The taxpayer may also attend or be represented at the hearing upon its request. Prior to setting up the Advisory Commission (or ADR Commission), the Member States need to notify the taxpayer on the date in which the opinion on elimination of double taxation will be adopted, a reference to any applicable legal provision (both domestic and treaty-based), and on the rules of functioning for the Advisory Commission. Transparency measures Enhanced transparency is one of the objectives of the Directive. Therefore a final decision may be published subject to agreement by the taxpayer. If the taxpayer objects to the publication of the entire final decision, an abstract of the final decision will be published. The competent authorities will send the final decision or abstract to the taxpayer prior to publication. The publication of the decision is to serve as an incentive and put more pressure on the competent authorities to propose a more diligent decision supported with corresponding arguments already in the MAP phase of the procedure. Entry into force EU Member States must implement the Directive into their national laws by June 30, 2019 at the latest. The provisions of the Directive will be applicable to any complaint submitted from July 1, 2019 onwards relating to tax disputes concerning income or capital earned in a tax year commencing on or after January 1, 2018. Competent authorities of Member States concerned may however agree to apply this Directive 3 pwc

with regard to any complaint that was submitted prior to that day or to earlier tax years. The takeaway The Directive introduces important enhanced provisions and measures to ensure efficient and timely resolution of double taxation disputes in the EU. It introduces a mandatory and binding dispute resolution mechanism that is no longer limited to cases of double taxation arising from transfer pricing adjustments and attribution of profits to permanent establishments. Improved access to the procedures, increased involvement for the taxpayer, clear and shorter timeframes, and an obligation for the Member States to implement a solution are the cornerstones of the Directive. Taxpayers can also call on legal remedies provided under national law to unblock the procedure at several stages in order for their rights to be honoured. EU Member States must implement the Directive into their national laws by June 30, 2019 at the latest and are encouraged to devote sufficient resources to dispute resolution. 4 pwc

Annex: Schematic overview of tax dispute resolution procedure according to the Directive Flowchart 3 years 2+ (3+3) + 6 months 2 years (+ 1 year) 6 months 6 (+3) months 120 days 5 pwc

Let s talk For a deeper discussion of how this issue might affect your business, please contact: Tax Controversy and Dispute Resolution Edwin Visser, Amdsterdam +31 88 792 36 11 edwin.visser@nl.pwc.com David Swenson, Washington, D.C. +1 202 414 4650 david.swenson@pwc.com Stefaan De Baets, Brussels +32 2 710 47 19 stefaan.de.baets@be.pwc.com Mark Whitehouse, London +44 20 7804 1455 m.whitehouse@pwc.com Bram Markey, Brussels +32 9 268 83 48 bram.markey@pwc.com Jasna Voje, Brussels +32 2 710 72 85 jasna.voje@be.pwc.com Ine Lejeune, Brussels Law Square* +32 2 710 78 05 ine.lejeune@lawsquare.be Véronique De Brabanter, Brussels Law Square* +32 2 710 78 17 veronique.de.brabanter@lawsquare.be * Law Square cvba is an independent Belgian law firm having a privileged relationship with PwC Business Advisory Services cvba. Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions SOLICITATION 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC helps organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com 6 pwc