This article was originally written by Patrick Cannon for International Advisor.
New EU rules came into force on 1 July 2019, which aim to provide a quick and efficient way for individual and corporate tax payers to resolve disputes when they are being taxed twice in different countries on the same income or gains, according to Patrick Cannon, a London-based tax barrister practising at Old Square Tax Chambers.
This is because of a mismatch in the rules of the country where the gains arise and the home country of the taxpayer or because both countries apply a different interpretation of the tax rules and each claims the right to tax.
How serious is the problem?
According to the European Commission, there are around 2,000 such disputes in the EU of which 900 or so have been going on for over two years and are worth €10.5bn (£9.5bn, $11.6bn).
Up until now, it has not been possible for the taxpayer affected to initiate a dispute resolution and they were reliant on the countries involved to use a multilateral convention to submit the dispute to arbitration, and there was no way to ensure that any country reached a final agreement to resolve the issue.
This was particularly frustrating for high net worth individuals (HNWIs) caught up in such tax disputes and suffering serious cash-flow difficulties as a result.
The lack of certainty and being entirely in the hands of the fiscal authorities in each country concerned added to the feeling of helplessness.
What has changed?
The new directive puts states under a legal duty to take conclusive decisions in double-taxation cases. The headlines are:
- Taxpayers can now trigger a dispute resolution procedure under which the states concerned must try to resolve the issue amicably within two years;
- If no resolution is found after two years the taxpayer can require the setting up of an advisory commission to give an opinion on the matter and if the states fail to do this the taxpayer can ask the national court to force the state to act;
- The advisory commission will consist of three independent members appointed by the states concerned and representatives of the fiscal authorities in those states;
- The advisory commission must deliver its opinion within six months and the states concerned must carry out that opinion unless they then agree another solution within a further six months; and
- If the decision is not implemented the taxpayer can enforce the solution through his national court and states must publish the final opinion or an abstract
When does this take effect?
The directive applies to complaints submitted from 1 July 2019 onwards that relate to disputes involving the double-taxation in different states of income or gains earned after 1 January 2018. Member states can also agree to apply the directive to any complaint submitted prior to then or to earlier tax years.
The European Commission has published a useful table comparing the position before and after the changes made by the directive, as follows.
|Tax Dispute Resolution|
|Member States’ obligation to resolve transfer pricing disputes not always enforced||Enforceable obligation on Member States to arrive at a resolution of all disputes within the scope of the directive|
|Often no recourse for taxpayers when mechanisms not applied properly||Recourse for taxpayers to national courts to unblock procedures|
|Unpredictable timeline for procedures||Clearly defined and enforceable timelines with a standard period of 6 months for the arbitration phase|
|Scope limited to issues related to transfer pricing and permanent establishments||Scope extended to all tax disputes between Member States that derive from tax treaties and other international agreements, that provide for the elimination of double taxation for businesses and citizens|
|No transparency requirements||Obligation to notify taxpayers and publish abstracts of the final decisions.|
This development will be warmly welcomed by HNWIs innocently caught up in disputes between the fiscal authorities of member states which are each seeking to tax the same income or capital gains.
It gives the taxpayer the right to force the dispute into a resolution procedure and imposes mandatory time limits and ultimately allows the taxpayer recourse to his national court in order to secure a binding resolution.
Indeed, the very existence of this procedure may make the fiscal authorities more amenable to reaching a timely resolution with their counterparts rather than be put through the dispute resolution procedure under the directive.