EU Proposes Plans to Resolve 900 Double Tax Disputes

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By Joe Kirwin

Oct. 26 — The European Commission has put forward binding measures using national courts and quicker time frames to finally resolve 900 outstanding cases of double taxation worth more than $10 billion in the European Union, along with changes targeting tax avoidance involving hybrid mismatches.

The plans, outlined Oct. 25 and 26, will give companies the option to appeal matters to their national courts. In addition, the scope of the European Union Arbitration Convention may be expanded to include more than just transfer pricing cases.

Multinational companies have consistently complained about the slow process in the EU in resolving double taxation disputes. Urgent reform is considered especially vital as a barrage of new disputes are expected in the coming years as the EU implements the recently approved EU Anti-Tax Avoidance Directive.

The commission is also suggesting amendments to the EU Anti-Tax Avoidance Directive, approved earlier this year, to prevent multinational companies from using hybrid mismatches to avoid tax by taking advantage of differing tax laws between EU member countries and foreign jurisdictions.

The plans are part of a corporate tax reform package that also includes a renewed attempt to establish a mandatory Common Consolidated Corporate Tax Base for multinational companies with a 750 million euro turnover ($819 million).

Double Taxation

The key measure to resolve double tax issues calls for a dispute to be resolved amicably within 15 months where a company is being taxed for the same profits by the tax authorities of two EU member countries.

Where no agreement is reached—as is often the case today—the proposal calls for an advisory commission to arbitrate the case and make a binding decision within six months.

“This decision will be immediately enforceable and must eliminate the double taxation,’' European Commission Taxation Commissioner Pierre Moscovici said at an Oct. 26 news conference.

Any company, including small-to-medium sized businesses facing double taxation of profits, is expected to have access to the improved dispute resolution mechanism.

“Fixed time frames for resolving disputes are not always respected, and there is generally a need to improve the efficiency, effectiveness and legal certainty of the mechanisms in place today,’' Moscovici said.

The proposal also includes an alternative option, for companies to appeal double taxation cases through their national courts, for a binding decision.

Noting that there are currently pending double taxation disputes in the EU worth more than $10 billion, Moscovici also said the proposal “will reduce the compliance and litigation burden” for companies operating in the EU as regards their cross-border activities.

EU Arbitration Convention

The proposal, issued in the form of a directive, will require the unanimous consent of all 28 EU member states. It also calls for expansion of the scope of the EU Arbitration Convention to cover other tax matters beyond its current transfer pricing disputes scope.

Based on the commission timetable, EU member countries would have to adopt the legislation into their national law by the end of 2017, provided the proposal is approved in the Council of Ministers in next six months.

The European Parliament would have consultation rights on the proposal but no co-decision.

The specific provisions in the European Commission proposal involve:

  •   an enforceable requirement to eliminate double taxation for businesses in all cases;
  •   option for taxpayers to appeal to national courts to unblock procedures;
  •   an enforceable timeline with a maximum period of 15 months for the arbitration phase;
  •   scope extended to all cross-border issues in the context of business profits; and
  •   obligations for notification of taxpayers and publication of arbitration decision.

Hybrid Mismatches

The proposal to prevent multinational companies from using tax arbitrage tactics that lead to hybrid mismatch double non-taxation was originally part of the EU Anti-Tax Avoidance Directive.

However, EU member countries, which approved a provision against hybrid mismatches involving companies operating in two EU member countries, decided in the final stages of the ATAD negotiations in June that a separate provision was necessary to deal with foreign countries. The EU finance ministers then called on the commission to make a proposal in line with the OECD BEPS reforms.

According to commission officials speaking to journalists Oct. 26, the new amendments are in line with the OECD BEPS Action 2.

“If a hybrid mismatch with a foreign country leads to double non-taxation the company may have to pay tax on certain payments in the EU that it normally would not have to or may no longer be able to deduct certain payments,’' a commission official told journalists.

Better than BEPS?

The OECD BEPS reform No. 14 calls for improved double taxation dispute resolution, including a call for a mutual agreement procedure.

“The OECD BEPS reforms do not include a mandatory binding dispute resolution mechanism, and the OECD intends to develop that at a later stage,’' said a European Commission official who spoke to journalists Oct. 26.

European business lobby group BusinessEurope, which represents more than 10,000 companies, said the proposal is “long overdue.”

In a statement, KPMG LLP said one of the most important provisions in the dispute resolution proposal would “allow taxpayers to request their national court to initiate a binding arbitration procedure within a set timeframe.”

To contact the reporter on this story: Joe Kirwin in Brussels at Joe Kirwin@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The EU proposals for corporate tax reform, including double taxation dispute resolutions, hybrid mismatches and the CCCTB, are at https://ec.europa.eu/taxation_customs/business/company-tax/corporate-tax-reform-package_en_en.

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