At its meeting on May 23, 2017, the Economic and Financial Affairs Council of the EU (ECOFIN) reached agreement on the proposal for a Council Directiveon Double Taxation Dispute Resolution Mechanisms in the EU (‘the Directive’).
The two initiatives discussed by the ECOFIN are part of the Commission’s package of corporate tax reform proposals, which were published on October 25, 2016, (see ETF 303) as part of the EU’s ongoing fight against aggressive tax planning and its efforts to resolve double taxation issues for businesses in line with recommendations set out under Action 14 of the OECD BEPS project.
The proposed Directive on Double Taxation Dispute Resolution Mechanisms aims to introduce an improved system to resolve double taxation disputes in the EU. Although dispute resolution mechanisms, such as mutual agreement procedures under double taxation conventions between Member States and the EU Arbitration Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises, already exist, they are lengthy, costly and do not always result in agreement. In addition, more effective dispute resolution procedures are considered necessary to address the potential side effects of measures taken to address BEPS. For this reason, the Commission considers that mechanisms available in the EU need to be improved with respect to scope, timeliness, certainty and access for taxpayers, while ensuring a uniform application within the EU.
The Directive introduces a mandatory and binding mechanism for resolving disputes that give rise to double taxation on business income and that arise from the application or interpretation of double tax treaties. The Directive contains clear deadlines for Member States to agree on solutions.
Taxpayers can initiate a mutual agreement procedure under which Member States must reach agreement within two years (this may be extended by up to one year, if justified). If the mutual agreement procedure fails, the arbitration procedure is automatically initiated, whereby an Advisory Commission composed of independent arbitrators and representatives of each Member State is set up. The Advisory Commission has six months (this may be extended by three months) to issue its opinion. The competent authorities of the Member States concerned then have six months to agree on how to eliminate double taxation in the disputed case. The final decision is binding on the Member States and although it must be published (in full or abbreviated form) it does not establish a precedent. Taxpayers may refer to their national court if the Advisory Commission is not set up within a certain timeframe.
Member States can agree to set up an Alternative Dispute Resolution Commission instead of the Advisory Commission. The former has more flexibility in terms of dispute resolution processes and the techniques used.
The ECOFIN’s agreement on a General Approach to the proposed Directive included agreement on the following three issues:
The legislative procedure for the Directive is consultation, meaning that the Council will adopt the text once the European Parliament has given its (non-binding) opinion. A vote in the European Parliament’s ECON committee is scheduled for June 8, 2017, and a plenary session is scheduled for July 4, 2017. Once adopted, Member States will have until June 30, 2019, to transpose the Directive, which will apply to complaints submitted after that date on issues relating to tax years starting from January 1, 2018. However, Member States may apply the Directive to complaints related to earlier tax years.
A policy debate on the CCTB proposal (see ETF 303) took place during the meeting, with members of the ECOFIN being asked to give their views on whether the CCTB includes the elements that would offer the right mix of harmonization and flexibility, in light of the increased need for the EU to be competitive in the international arena.
Representatives of the Member States generally expressed their support for the CCTB initiative and the aim of strengthening the EU Single Market by facilitating cross-border operations within the EU. Speakers reiterated their countries’ commitment to combating tax evasion and tax avoidance.
However, concerns were also expressed, in particular on the impact of the CCTB on tax revenues and the potential harm to the EU’s competitiveness in global markets. A few Member States noted the need for flexibility in implementing the CCTB, in particular the super-deduction for research and development (R&D) expenses and the new Allowance for Growth and Investment (AGI) due to the absence of corresponding domestic rules. The Commission, along with several other Member States, expressed the concern that too much flexibility can be detrimental to the objective of harmonization. In addition, some Member States mentioned concerns raised by their national Parliaments with regard to the compliance of the CCTB proposal with the subsidiarity and proportionality principles.
Technical work on the CCTB proposals will continue in the working groups, including a more detailed assessment of the impact on national budgets. The Finance Minister of Estonia expressed the intention to continue working on this proposal during Estonia’s Presidency of the Council, starting in June.
The agreed proposal for resolving double taxation disputes between Member States may be seen as complementing the initiatives to combat tax avoidance. The improved mechanisms should enhance tax certainty and as such contribute to the European Commission’s efforts to improve the business environment in the EU. In this respect, the agreement should be seen in the context of the recent focus on tax certainty by both the OECD and the EU.
The debate on CCTB makes clear that some Member States still have strong reservations on this matter. As the initiative is subject to unanimous approval by Member States, the current proposals may have to undergo significant amendment in order to achieve final agreement, in particular by granting more flexibility to Member States.
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