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By Joe Kirwin
European Union finance ministers gave formal approval to legislation designed to dramatically reduce the 900-plus unresolved company cross-border double taxation disputes.
The Oct. 10 approval for the EU Double Taxation Dispute Resolution Directive comes amid skepticism from tax professionals that it has the resources to be effective. It includes mandatory binding arbitration and establishes new, streamlined options for businesses and individuals.
Provisions in the directive require countries in the bloc to set up an Advisory Commission, made up of independent experts or judges, that must reach a decision on disputes within 120 days.
The legislation also opens the option for alternative arbitration processes as well as an Alternative Dispute Resolution Commission, and leaves open the option of giving the European Court of Justice a role in resolving double tax disputes.
“We proposed this new system to improve legal certainty and EU competitiveness by creating a binding obligation on member state authorities to resolve tax disputes in a timely manner,” said European Taxation Commissioner Pierre Moscovici at an Oct. 10 news conference in Luxembourg at the conclusion of a meeting of the Council of Economic and Financial Affairs. “This is an important step to allow EU citizens and businesses alike to have fair tax treatment.”
The European Commission, which proposed the legislation in November 2016, said this new dispute mechanism could help resolve more than 900 pending double-taxation disputes worth approximately 10.5 billion euros ($12.2 billion).
However, Dirk Van Stappen, a Belgium-based transfer pricing expert with KPMG LLP, told Bloomberg BNA that although the legislation contains improvements “from a conceptual point of view,” the backlog of pending cases isn’t likely to be reduced.
“It does not alter the fact that almost all competent tax authorities are understaffed,” Van Stappen said in an Oct. 9 email. Without additional staffing, a “speedier decision-making process will be highly unlikely in practice.”
Another concern with the new legislation is that although it requires the advisory commission or alternative dispute resolution bodies to reach a decision, competent authorities aren’t bound by those decisions. Nonetheless, Aldo Castoldi, the head of transfer pricing for Deloitte LLP for the central Mediterranean region, told Bloomberg BNA he expects the new arrangements to motivate EU competent authorities to reach agreements before they go to arbitration.
“The very possibility of starting a binding arbitration process, although not decisive, will increase the pressure on competent authorities to try and solve bilateral double taxation issues through a mutual agreement in a more reasonable time frame than it has been so far,” Castoldi said in a Oct. 9 email statement. “In fact they will have little excuse to justify delays going forward.”
Castoldi also said the limited scope of the EU legislation, narrowing it to cross-border double tax disputes in the EU and not those involving EU member nations and a non-EU country, was a missed opportunity.
The proposal also contains key elements of Action 14 of the OECD’s Action Plan on Base Erosion and Profit Shifting.
In 2016, the EU approved the Anti-Tax Avoidance Directive, which encompasses a range of other BEPS reforms, including those dealing with exit taxation, interest deductions and cross-border hybrid mismatches.
Both Van Stappen and Castoldi said cross-border double taxation disputes have been growing steadily in the last 10 years and the trend will continue.
“Double taxation disputes will grow exponentially in the coming years,” Van Stappen said. “All BEPS spin-offs will be accountable for that.”
The new EU directive requires all EU member states to transpose the legislation into national law by June 30, 2019.
Tax authorities in EU member states have the option to use the new legislation to either apply it only to tax complaints that stem from 2018 or to backlogged disputes.
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