EU to Tackle Double Tax Disputes, Foreign Hybrid Mismatches

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By Joe Kirwin

Oct. 20 — The European Commission will renew its effort to help companies resolve double taxation disputes in the European Union by proposing legislation that will call on member states to reach definitive results through arbitration.

In addition, the EU executive body will propose a legal framework designed to stop companies from arbitraging differences in tax regimes, as such mismatched laws can enable double non-taxation.

The double taxation dispute proposal, expected Oct. 26, is considered crucial among multinational companies, tax accountants and lawyers, as often in the EU, compensation isn’t forthcoming despite clear evidence that a company has been taxed twice by two EU countries on the same profits. The new legislation is also considered vital due to an expected increase in double taxation disputes in the wake of the new EU Anti-Tax Avoidance Directive that will take effect in 2019.

“We must strengthen mechanisms to resolve tax disputes in the EU including double taxation,’' said European Taxation Commissioner Pierre Moscovici in an Oct. 14 speech. “This will be done through a directive imposing arbitration as an obligation for member states to reach a result.”

Beyond the EU Arbitration Convention

The former French finance minister said the current intergovernmental EU Arbitration Convention that deals with double taxation involving primarily transfer pricing disputes “remains embryonic in the absence of binding force.”

“It is not normal in a single market that companies are still taxed twice and fail to win the case,” Moscovici said. “This is an initiative that is eagerly awaited by the business community because it would solve many cases of double taxation.’'

Besides the EU Arbitration Convention, double taxation disputes can also be addressed through bilateral double taxation treaties among EU member countries. “The best solution to resolving double taxation disputes would be a move to a multilateral convention among all EU countries that includes a binding arbitration protocol,” Edoardo Traversa, a professor of tax law at the Catholic University of Louvain in Belgium, told Bloomberg BNA in an Oct. 18 interview.

“There is an OECD model for multilateral disputes and most EU member states are part of the OECD. However, that is very difficult to do because member states are protective of their national sovereignty when it comes to taxation.”

OECD Minimum Standards

OECD recommendations adopted in October of 2015 in the project to combat tax-base erosion and profit shifting call for double taxation disputes to be resolved within 24 months as a minimum standard. They also call for a binding mutual agreement procedure (MAP) as part of a multilateral treaty. The overwhelming majority of the EU business community and tax professionals and some academics support a MAP based on the results of a European Commission public consultation concluded earlier in 2016.

“The EU should follow the OECD’s recommendations on minimum standards for tax administrations in applying MAP and should consider whether these minimum standards could be higher and more effectively monitored,” KMPG LLP said in its response to the commission’s public consultation. “Binding arbitration is the only way to effectively eliminate double taxation.”

The Federation of European Accountants (FEE) insisted in its submission that “only by developing a comprehensive new EU legislative tool the general objectives of scope, enforceability and efficiency of the dispute resolution mechanism can be met.”

MAP Critics

Mandatory binding arbitration using a MAP has its critics.

“Any proposals for strengthening dispute resolution mechanisms for resolving tax treaty disputes are unsuitable for the majority of countries, and in particular developing countries, and should remain purely voluntary,’' said Tommaso Faccio, a professor of accounting and taxation at the University of Nottingham in the U.K. “Tax treaty provisions are binding in domestic law and can be enforced through national tribunals. Accordingly, multinationals shouldn’t be given further privileges over other taxpayers.’'

Faccio added that a risk exists that aggressive tax planning will increase with a mandatory binding arbitration on double taxation disputes “as it will provide certainty that an agreement will ultimately be reached and create an incentive to continue base erosion and profit shifting behavior.”

In advance of the proposal, a European Commission official told Bloomberg BNA Oct. 20, on the condition of anonymity, that the double taxation dispute resolution mechanism to be unveiled Oct. 26 “includes the OECD Action 14 approach in the new rules, but our proposal will go slightly further.”

Hybrid Mismatches

The new hybrid mismatch proposal for dealing with multinational companies based outside the EU comes after the issue was removed from the EU Anti-Tax Avoidance Directive approved in June. Concerned that the ATAD hybrid mismatch approach goes beyond OECD reforms, EU ministers called for new rules for foreign countries “consistent and no less effective than the rules recommended by the OECD BEPS report on Action 2 with a view to reaching agreement by the end of 2016.”

The ATAD provision states that where a hybrid mismatch results in a double deduction for a multinational company, the deduction should only be granted in the member state where the payment has its sources.

“The problem is that the ATAD hybrid mismatch goes beyond the OECD, as it is more aggressive,” said Traversa. “The EU approach is basically allowing coordinated unilateral reaction. Although what was agreed was scaled back compared to the European Commission proposal, it was wisely decided that such an approach was not enforceable with multinational companies based in foreign countries.”

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

To contact the editor on this story: Rita McWilliams in Washington at rmcwilliams@bna.com

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