- There are currently around 900 double taxation disputes in the
EU, and they are estimated to be worth about €10.5 billion. A
double taxation dispute is one in which two or more countries claim
the right to tax the same income or profits of a company or a
person. Typically, such disputes arise due to conflicting national
implementation or interpretation of double taxation agreements and
the disputes may involve issues relating to tax residency, the
existence of a (hidden) PE, flows of dividends, interest and
royalties. Double taxation disputes can create serious tax
obstacles for businesses operating across borders. To reduce the
potential friction to cross border investment and trade, the EU
introduced the Dispute Resolution Mechanism Directive ((EU)
2017/1852) (DRM) to strengthen the mechanisms available to resolve
double taxation disputes between Member States.
How will the dispute resolution mechanism work?
- Taxpayers that face a double taxation dispute involving another Member State can submit a request to the Revenue Commissioners (Revenue) that the matter be resolved through the mutual agreement procedure (MAP). This means that the Member States in question must try to resolve the dispute amicably within two years. Revenue will decide if the taxpayer's request can be accepted and resolved through the MAP within six months from the date that the request is received. If the request is rejected, Revenue is obliged to explain the reasons for its decision and the taxpayer is entitled to file an appeal against the decision with the Tax Appeals Commission (TAC). If Revenue does not provide an answer within the six-month term, the request is considered as formally accepted.
- Once the request is accepted and the MAP is opened, Revenue and the tax administration(s) of the other Member State(s) are under an obligation to resolve the issue within two years from the date that the taxpayer is notified of the formal acceptance of the request. This term can be postponed by another year if additional information is required. Importantly, the opening of the MAP procedure does not act as a bar to the commencement of tax litigation or as a stay on proceedings already in being.
- Once Revenue and the tax administration(s) of the Member
State(s) concerned have reached an agreement on how to resolve the
question in dispute, the taxpayer is notified without delay. The
decision is binding on the tax administrations and is enforceable
by the taxpayer, subject to the taxpayer accepting the decision and
renouncing his or her right to any other remedy, where applicable.
Where proceedings have already commenced before the TAC or other
tax court, the decision will only become binding and enforceable
once the taxpayer has provided evidence to the tax administrations
of the Member State(s) concerned that action has been taken to
terminate those proceedings.
Advisory Commission and the Alternative Dispute Resolution Commission
- If the complaint to initiate the MAP is rejected, or after a
period of two years (three in case of postponement) the MAP has not
produced an agreement, the taxpayer can file a further request for
the setting up of an Advisory Commission. The Advisory Commission
is comprised of three independent members appointed by the Member
States concerned and representatives of the tax administration(s)
in question. The Chair of the Advisory Commission will be a judge
unless the parties agree otherwise. The Advisory Commission will
provide an independent opinion on the taxpayer's request within
six months from the day it is established, but this timeline can be
extended by a further three months if necessary.
Alternatively, the tax administration(s) of the Member State(s) concerned can agree to set up an Alternative Dispute Resolution Commission (ADRC) instead of an Advisory Commission to deliver an opinion on how to resolve the question in dispute. The ADRC can, where appropriate, apply any dispute resolution process or technique to solve the question, including the ‘final offer' arbitration process (otherwise known as ‘last best offer' arbitration), which is a process that is binding on all of the parties concerned.
- Where the Advisory Commission or the ADRC mechanism provides for a solution, the tax administrations involved must agree to resolve the controversy within six months. Save for the 'final offer' arbitration process, the outcome of the dispute resolution process is not binding on the tax administrations involved, which can agree on a solution to the dispute that is different from the one provided by the Advisory Commission or by the ADRC mechanisms. However, if no agreement is reached between the Member States, then the issue will be resolved according to the outcome of the arbitration phase.
- On the costs of the proceedings, unless the Member States agree
otherwise, the costs of the Advisory Commission or the ADRC will be
shared by the Member States and the taxpayer will bear his or her
own costs. However, where a taxpayer withdraws a complaint or
unsuccessfully appeals a decision of Revenue not to commence a MAP,
the taxpayer will be liable for the costs of the proceedings.
- The double taxation dispute resolution mechanism provides clear timelines and a transparent and flexible framework that facilitates the engagement of the taxpayer for the resolution of double taxation disputes. This will provide enhanced legal certainty for those engaging in cross-border investment and will ensure effective dispute resolution for double taxation issues between EU Member States.
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.