The EU Arbitration Convention - Effective As Of 1 January 1995

This is contibution number two by KPMG Meijburg & Co regarding KPMG comments on the anticipated positive effects of the EU Arbitration Convention which became effective on January 1, 1995.

This article is most likely to be relevant for multi-nationals enterprises (ie with cross border activities) within Europe with production and/or distribution activities.

Although EU Treaty on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises" ("the Arbitration Convention") was originally signed on 23 July 1990, it took until 28 October 1994 for all necessary ratification procedures to be completed. As a result the Convention will enter into force on 1 January 1995. The Convention is binding to the signatories of the Convention which are the current twelve E.U. Member States. It therefore does not automatically apply to new Member States. The Convention contains procedural rules under which double taxation of business profits (in most cases) will be eliminated within a relatively short period of time.

In practice, the rules of the Convention will be invoked if the tax authorities of one or more States apply;
- transfer pricing corrections; or
- corrections of profits attributable to head office and/or permanent establishment as a result of which a situation of double taxation occurs.The Arbitration Convention has a duration of five years (subject to extension) and shall apply to proceedings initiated after 1 January, 1995. Below, a summary is provided of the procedural rules of the Convention.

Procedure
An enterprise which is confronted with the intent of a tax authority to adjust its profits and which does not agree with such adjustment may present its case to the Member of State of which it is a resident. Such a case must be presented within three years of the first notification of the action that resulted or is likely to result in double taxation. The Member State must notify the other Member States concerned.

If the complaint appears to be well-founded a strict procedure will have to be followed. If the competent authorities can not reach an agreement on the appropriate intercompany transfer pricing policy, on Advisory Commission shall issue its opinion. The opinion of the advisory commission is binding unless, within six months of the date on which the advisory commission delivered its opinion, the competent authorities themselves can come to a mutual agreement, which then can either deviate from or be in accordance with the binding opinion.

Conclusion
The Arbitration Convention is a major step forward in solving transfer pricing disputes between enterprises in the current twelve E.U. Member States and the tax authorities of these Member States. The Arbitration Convention will force the tax authorities of these Member States to take a more restrictive approach in applying transfer pricing corrections and ultimately the taxpayer has the certainty that any disputes which remain will have to be solved at the tax authorities' level in such a way that no double taxation occurs.

22 November 1994, KPMG Meijburg & Co

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Further information can be obtained from Mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247.

© Business Monitor 1995 Tel +44 171 820 7733.