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Claudia Lauten and Andreas Oestreicher, PwC, Düsseldorf and Frankfurt
The German Ministry of Finance released its official baseline approach for negotiating double taxation agreements (DTAs) on April 18. This baseline reflects the German taxation agreement policy and serves to support German principles when the government is negotiating new or revised DTAs. The document is intended to help the German government achieve its objectives related to the taxation of international transactions, using provisions that are as consistent as possible.
One of many key elements to this baseline approach is that the German government wishes to pursue provisions that facilitate tax dispute resolution. Specifically, as a basis for negotiations, the German government would like to see a binding, compulsory arbitration procedure that is available upon request. Such a binding arbitration procedure may offer treaty partners an effective means for eliminating double taxation and may also provide a more timely process for taxpayers to resolve disputes. Germany's desire to pursue this provision is further evidence of a growing global trend - fuelled by the substantial increase in the number and size of tax audits worldwide and the increasing burden on the traditional mutual agreement procedures within DTAs.
As of January 1, 2013, the German treaty network encompassed 88 DTAs in the area of income and property taxes. For the first time, the German tax authorities have presented the treaty policy underlying recent DTAs that have been promulgated.
Although each agreement is negotiated individually between the contracting partners, this release provides the official basis to start future DTA negotiations. Moreover, Germany intends to adjust the official baseline on a regular basis to be in line with the current status of international treaty development globally, its domestic tax law, and its tax treaty policy.
Germany is proposing a sample agreement as a mere starting point for negotiations, not as an inflexible document or one set in stone. On the contrary, individual treaty negotiations are to be based on bilateral economic relations and shall take into account the competitive interests of German domestic trade and industry, the foreign activities of export-orientated German businesses, as well as securing German interests in taxing income from international transactions. Due to existing differences in the domestic tax legislation and the tax treaty policy of contracting states, one may expect differences in form and content between the individual DTAs resulting from negotiations going forward.
Germany intends to integrate provisions from the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN) Model Treaties when concluding or revising its DTAs. Germany's baseline for negotiations looks to the recommendations of the OECD in both the Model Treaty as well as supplementary or alternative wordings contained in the commentary. As a consequence, the structure and content of Germany's baseline for negotiation corresponds to a large extent to the OECD model. In agreements with developing countries, however, where the orientation is generally on the UN model treaty, deviations of considerable significance are possible. One example may be in the area of withholding tax rates.
With respect to dispute resolution, Article 24 section 5 contains an extensive and binding arbitration clause which is designed to avoid double taxation. It is intended for use when the competent authorities (CAs) cannot reach agreement in the mutual agreement procedure within the DTA. The clause largely corresponds to Article 25 section 5 of the OECD Model Treaty. Up to now, only a few German DTAs contain this provision including those with the United States, Canada, France, and Austria. The sample German DTA clause reads as follows:
a) under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of this Convention, and
b) the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the presentation of the case to the competent authority of the other Contracting State, and
c) it is not an isolated case for which prior to the date at which the arbitration procedure would otherwise have started, the competent authorities reach agreement that it is not suitable for a decision by way of an arbitration procedure, and
d) it is not a case to which the Convention No. 90/436/EWG on the elimination of double taxation in connection with the adjustment of profits of associated enterprises of 23 July 1990 is to be applied,
any unresolved issues arising from the case shall be submitted to arbitration if the person so requests. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph.”
Specific departures from the OECD Model Treaty include the reference to the EU Arbitration Convention and the fact that unresolved issues shall not be submitted to arbitration if a decision on these issues has already been rendered by a court or administrative tribunal of either State. As far as the method of reaching an arbitration result, Germany prefers the so-called baseball arbitration approach, which is not otherwise mandated by the OECD Model Treaty. Generally under this method, an arbitration board may choose only the proposal of one side to the dispute - the board is not free to reach its own conclusion. The decision of the board is binding on both treaty partners.
The German sample DTA adopts various key concepts from the OECD Model Treaty. As an example, the title and preamble make it clear that the purpose of a German DTA is not only avoiding double taxation, but also preventing tax evasion and tax avoidance. In order to secure efficient and accurate taxation, the German baseline for negotiations also includes the OECD standards on transparency and effective exchange of information on tax matters. In addition, it implements the Authorized OECD Approach for determining the profit attributable to a permanent establishment.
With respect to transfer pricing matters, it is important to note that Article 7 section 3 (relating to business profits) adopts the optional wording from the OECD commentary. Under this provision, contracting states should avoid having to carry out a corresponding adjustment which it considers to be inappropriate. In this case, a mutual agreement procedure is to be initiated.
A discussion of further departures from the OECD Model Treaty is outside the scope of this article. Note that the BMF (German Federal Ministry of Finance) internet page provides the baseline negotiations document.
The German basis for negotiations has no immediate impact on how existing DTAs are to be interpreted. As such, the DTA text currently in force between Germany and its treaty partner is authoritative in each case with respect to dispute resolution procedures, notwithstanding this new sample DTA. However, the German baseline for negotiations makes clear in which direction Germany is heading for new or revised German DTAs going forward - the inclusion of a binding arbitration procedure. Although the tax environment and the negotiation situation are always taken into consideration, this newly released basis for negotiations may point to the potential outcome of individual DTA negotiations currently under way. Are these provisions expected to provide welcome relief to multinational companies? The answer is likely 'yes’. Although treaty countries are generally required to use their best efforts to resolve treaty disputes, they are not required to reach agreement. These provisions can compel a process that is binding on both governments potentially easing the strain on the system attributable to the continued increase in using CA procedures. These treaty clauses could also prompt governments to more quickly resolve cases (so as to avoid arbitration) and may enable the resolution of cross-border disputes in a quicker timeframe than under the traditional CA process.
It is important to note treaty arbitration clauses are only one potential dispute resolution mechanism. There are others for multinational companies to evaluate in Germany including appeals and litigation. Taxpayers should think about proactive actions that can potentially avoid a dispute from occurring in the first place, such as advance pricing agreements
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