New double taxation dispute resolution mechanism

02 June 2017

A draft dispute resolution mechanism for settling disagreements between EU member states on the interpretation of double taxation agreements has been agreed by the European Council.

Law firm Pinsent Masons provides an update about the draft directive, which will now be voted on by the European Parliament, and 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.

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.

Tax expert Heather Self of Pinsent Masons said:

"…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.”

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.

OECD and G20 member countries agreed in 2015 to commit to minimum standards on the resolution of international tax disputes.

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