EU agrees to mandatory binding arbitration of tax disputes

by Davide Anghileri

The EU Economic and Financial Affairs Council (ECOFIN) on 23 May agreed to a proposed directive that will create a new system for resolving double taxation disputes between the EU States. The ECOFIN also made progress on a proposal for a common corporate tax base (CCTB) in the EU.

The initiatives are imperative for the better functioning of the internal market and are designed to enhance tax certainty, said Edward Scicluna, minister for finance of Malta, which currently holds the Council presidency.

Double taxation dispute resolution

The EU aims to make existing dispute resolution mechanisms more effective and efficient by introducing mandatory and binding arbitration.

Under the EU agreement, taxpayers are permitted to initiate a mutual agreement procedure and Member States are given two years to reach an agreement to resolve the dispute.

The new arrangement calls for an arbitration procedure if the mutual agreement procedure fails which will result in a decision that is binding on the Member States.

The arbitration will be conducted by an advisory panel, called an “advisory commission,” comprised of three to five independent arbitrators and up to two arbitrators appointed by each Member State involved.

 To ensure the independence of those appointed to the pool of independent arbitrators, the arbitrators must not be employees of tax advisory companies or have given tax advice on a professional basis.

The compromise text allows States to exclude disputes that do not involve double taxation on a case-by-case basis. The agreement also allows for the possibility of setting up a more permanent structure, called a standing committee, to deal with dispute resolution cases if Member States agree.

The new provisions will apply to complaints submitted after 30 June 2019 on questions relating to tax years beginning on or after 1 January 2018. Member States may, however, agree to apply the directive to complaints related to earlier tax years.

In a world where the number of unresolved case is growing, and with 10 billion euros or 3 percent of the corporate tax income in dispute, this new provision will enhance and enforce the effectiveness of dispute resolution mechanisms and contribute to the elimination of economic distortions and inefficiencies of cross-border investment, said Council President Scicluna.

Scicluna added that the enhanced dispute resolution mechanism will give peace of mind to taxpayers, as it will safeguard business interests, provide tax certainty, and reduce compliance costs.

Vice-President of the EU Commission Valdis Dombrovskis stressed that the new text provides a more efficient tool as it is binding and that it provides more transparency as arbitration outcomes may be public. The system is also fairer because, in case of non-application, taxpayers may appeal in court.

Next steps

The next step is for the European Parliament to give its opinion on the proposal. After that, the Council will adopt the directive.

Member States will have until 30 June 2019 to transpose the directive into national laws and regulations

Common corporate tax base

The Council also discussed a proposal for a CCTB, aimed at reducing the administrative burden of multinational companies.

In his introductory speech, Scicluna said that the proposed text revamps a 2011 proposal that was withdrawn and replaced by proposals for a two-step corporate tax reform with the aim to establish a single rulebook for calculating companies’ corporate tax liability. The goal is to promote the competiveness and attractiveness of the EU market.

Scicluna said that the focus of the discussion should be on the right mix of harmonization and flexibility for a common base.

Most countries expressed support for the proposal, though some, like France and Austria, also noted the complexity, ambitiousness, and difficulty of the project.

The Dutch minister of finance said that it is unclear that the CCTB can combat tax abuse, that the CCTB is not in line with the principle of subsidiarity, and that the effect of a CCTB on tax revenues is unclear. Other countries, including Austria, Luxembourg, Italy, and Croatia, raised a red flag on this last issue.

Regarding flexibility, different opinions were expressed. Belgium said that in principal, flexibility should be granted, especially for smaller countries. Luxembourg said that the interaction with the State aid discipline must also be taken in account.

The common view expressed by the delegates was that more analysis and study should be done on the proposal.

Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, said that the EU Commission will continue to support the effort.

Moscovici said the measure is a tool to create a simple, fair, and effective tax system that, at the same time, will increase EU competitiveness and counteract tax avoidance and aggressive tax planning.

Regarding the impact on revenue, Moscovici said that the Commission has already prepared figures that are at the disposal of countries; however, Member States have to prepare clear and open figures on their side so comparisons can be made. The EU commissioner said that the CCTB is decisive reform that presents difficulties and reservations, but it is of great importance and thus EU should not give up on it.

The Presidency, at the end, confirmed its intent to continue discussions on elements of the CCTB proposal, and agreed that an appropriate degree of flexibility should be provided for.

A separate proposal on tax consolidation (CCCTB) will be considered without delay once the CCTB rulebook has been agreed.

Davide Anghileri

Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.

Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues. He can be reached at danghileri@yahoo.it.

Davide Anghileri

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