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By Joe Kirwin
European Union members will draft national laws incorporating a directive that gives give companies and individuals the option of mandatory arbitration to resolve double taxation disputes beginning in 2019.
An accord EU finance ministers reached May 23 is expected to help settle more than 900 outstanding double taxation cases between multinational companies and national tax authorities that are worth more than 10.5 billion euros ($11.8 billion). The draft legislation is based on the principles established in Action 14 of the OECD’s 15-item plan to combat base erosion and profit shift, which calls for making dispute resolution more effective.
The draft Double Taxation Dispute Resolution Directive requires dispute resolution mechanisms to be mandatory and binding, with clear time limits and an obligation to reach results.
The new legislation, which must be implemented into each EU member state’s national laws, will require each EU country to set up an advisory commission to hear double-tax disputes involving all income streams.
Member states also have the option of adopting alternative dispute resolution panels that can use innovative mediation methods.
“This agreement is crucial to making the EU an attractive environment for investment,” said Malta Finance Minister Edward Scicluna, whose country holds the rotating EU presidency and therefore chaired the Council of Economic and Financial Affairs (Ecofin) meeting at which the agreement was reached.
“In the same way that we have taken measures to prevent tax avoidance, we have now moved to strengthen the avenues to resolve double taxation disputes,” he added.
Currently, EU member states have the option to resolve double taxation disputes via bilateral treaty conventions. But these are usually long, drawn out, and costly legal battles that often end with no decision, according to EU officials.
The initial dispute resolution plan, proposed by the European Commission in 2016, caused considerable controversy because of its scope. Originally, the plan included only business taxation issues, but it also covered double taxation disputes between non-EU multinational companies and EU members.
To broker a compromise, Malta drafted a plan that broadened the scope to cover both company and individual disputes. It only involves disputes within the EU, however.
Further, the compromise agreement gives EU member countries the option, on a case-by-case basis, to exclude disputes that don’t involve double taxation. Some EU member states also argued without success for a monetary-threshold scope limit.
The new legislation not only establishes mandatory, binding rules with a two-year time limit but also provides various options for convening a dispute panel. One option involves an advisory commission, another an ad-hoc . Another involves an “ad-hoc” structure with experts and judges from two or more member countries.
In recent weeks, Malta’s goal of reaching an agreement May 23 faced a potential snag as some EU members led by Germany and France pushed to give the European Court of Justice a rule in arbitrating disputes. However, other EU countries, led by the U.K., opposed an explicit role for the ECJ.
In the end, EU finance ministers signed off on a declaration stating that “member states shall endeavor to explore the possibilities to further enhance the resolution of disputes among member states relating to the interpretation and application of tax agreements and conventions by way of a permanent body, including the possibilities provided for under Art. 273 in the Treaty of the Functioning of the European Union.”
According to Malta officials, the reference to Article 273 in the EU treaty concerns the ECJ.
“Because some member states did not want to have a specific reference to the ECJ, it was agreed that ‘permanent structures’ could involve the EU court or it could even involve a new agency,” said a Maltese diplomat who spoke to Bloomberg BNA on the condition of anonymity at the conclusion of the meeting.
Several EU member states have recently added double taxation dispute clauses to bilateral tax treaties that provide a role for the ECJ. In the coming months, the ECJ is due to issue a judgment on a double taxation dispute between Germany and Austria that will be the first of its kind.
Based on the new proposed agreement, EU member states will have until September 2019 to implement the legislation into their national laws. The agreement also stipulates that member states have the right to put the legislation into effect in 2018.
The agreement reached May 23 is considered a “political accord” that will be rubber-stamped in June by EU finance ministers after the European Parliament has approved its version of the legislation. However, because the Double Taxation Dispute Resolution Directive is based on EU tax law, the European Parliament doesn’t have co-decision powers.
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