Explanatory Memorandum to COM(2016)686 - Double Taxation Dispute Resolution Mechanisms in the EU - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2016)686 - Double Taxation Dispute Resolution Mechanisms in the EU. |
|---|---|
| source | COM(2016)686  |
| date | 25-10-2016 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
From the first day of its mandate, this Commission has placed on top of its political agenda job creation, growth and investment. To achieve these overarching priorities the Commission has been, inter alia, pushing an ambitious reform agenda for a deeper and fairer internal market, as an essential foundation for building a stronger and more competitive EU economy.
These objectives translate, as regards taxation, in the need to build a fair and efficient corporate tax system in the EU.
To ensure the fairness of the tax systems, the Commission has made the fight against tax evasion and tax avoidance and aggressive tax planning a key priority and has pushed a very active reform agenda. In this context the Commission - in close cooperation with Member States and with the support of the European Parliament - is building a solid defence structure against tax evasion and avoidance in Europe, a robust response system against external threats to Member States' tax bases and a clear path towards fairer taxation for all EU citizens and businesses. At the same time, there is a need to ensure that tax systems are also efficient, so that they could support a stronger and more competitive economy. This should be done by creating a more favourable tax environment for businesses that reduces compliance costs and administrative burdens, and ensure tax certainty. In particular, the importance of tax certaintly in promoting investment and stimulating growth has been recently recognised by G20 leaders and has become the new global focus in the taxation area.
Fighting against tax avoidance and aggressive tax planning, both at EU and global level, must therefore go hand in hand with creating a competitive tax environment for businesses. They are the two sides of the same coin. A fair tax system is not only one that ensures that profits are actually taxed where they are generated but also one that ensures that profits are not taxed twice.
One of the main problems that businesses operating across border currently face is double taxation. There are already mechanisms in place that deal with the resolution of double taxation disputes. They are the Mutual Agreement Procedures (MAP) which are foreseen in Double Taxation Conventions (DTCs) entered into by Member States as well as in the Union Arbitration Convention 1 on the elimination of double taxation on the elimination of double taxation in connection with the adjustment of profits of associated enterprises. The Commission monitors the number of cases that are dealt with by Member States and the respective results on an annual basis. The analysis shows that there are cases that are prevented from entering existing mechanisms, that are not covered by the scope of the Union Arbitration Convention or DTCs, that get stuck without the taxpayer being informed about the reasons or that are not resolved at all.
Although the existing mechanisms work well in many cases, there is a need to make them work better regarding access for taxpayers to those mechanisms, coverage, timeliness and conclusiveness. Moreover, the traditional methods of resolving disputes no longer fully fit with the complexity and risks of the current global tax environment.
There is therefore a need to improve existing double taxation dispute resolution mechanisms in the EU with the aim to design a fair and efficient tax system that increases legal certainty. This is a key contribution to the creation of a fair tax system as well as ensuring that the EU internal market remains an attractive area for investment.
The proposed directive focusses on business and companies, the main stakeholders affected by double taxation situations. It builds on the existing Union Arbitration Convention, which already provides for a mandatory binding arbitration mechanism, but broadens its scope to areas which are not currently covered and adds targeted enforcement blocks to address the main identified shortcomings, as regards enforcement and effectiveness of this mechanism.
• Consistency with existing policy provisions in the policy area
The Commission’s Communication on an Action Plan for a Fair and Efficient Corporate Tax System in the EU, which was adopted on 17 June 2015 2 identified five key areas for action. One of these areas related to creating a better tax environment for business in the EU, with a view to foster growth and jobs in the Single Market. The Communication identified the proposal for a Common Consolidated Corporate Tax Base (CCCTB), which is planned to be adopted on the same day as this proposal, as a major step towards a better tax environment for business but recognised that, in the meantime, other initiatives should enhance the EU's tax environment for business.
This proposal complements the one on CCCTB. Since consolidation is only part of the second phase of the new approach to CCCTB, there would still be a need for effective dispute resolution mechanisms. Moreover, although a fully adopted CCCTB is designed to ensure that profits are taxed where they are generated, not all companies will be within the mandatory scope of the CCCTB. Therefore, it can be expected that even after a number of double taxation disputes will continue to arise, for which appropriate mechanisms need to be in place.
Furthermore, this proposal builds on existing policy provisions in the policy area, in particular the Union Arbitration Convention. The proposed Directive aims at broadening the scope and improving procedures and mechanisms in place without replacing them. This is a way to ensure that Member States on the one hand are provided with more detailed procedural provisions for the elimination of double taxation disputes but at the same time are left with sufficient flexibility to agree amongst them on a mechanism of their choice. The situation for the taxpayer is improved in several respects. According to the proposed Directive taxpayers get enhanced rights to enforce – subject to certain criteria - the setting up of resolution mechanisms, will be better informed about the procedure and can rely on the Member States being forced to achieve binding results.
• Consistency with other Union policies
This proposal falls within the ambit of the Commission’s initiatives for fairer and more effective taxation. It would contribute to the elimination of tax obstacles, which create distortions that impede the proper functioning of the internal market. It would therefore contribute to a deeper and fairer internal market.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Direct tax legislation falls within the ambit of Article 115 of the Treaty on the Functioning of the EU (TFEU). The clause stipulates that legal measures of approximation under that article shall be in the legal form of a Directive.
• Subsidiarity
This proposal complies with the principle of subsidiarity. The nature of the subject requires a common initiative across the internal market. The rules of this Directive aim to improve the effectiveness and efficiency of double taxation dispute resolution mechanisms as they create serious impediments to a well-functioning Internal Market. double taxation dispute resolution mechanisms are by nature bi- or multilateral procedures, requiring coordinated action between the Member States. Member States are inter-dependent when applying the double taxation dispute resolution mechanisms: even if relevant double taxation dispute resolution mechanisms are available, the shortcomings identified such as denials of access or length of the procedure will only be effectively solved if addressed and agreed mutually by the Member States.
Legal certainty and predictability at the level of the taxpayer can only be addressed through a common set of rules setting up a clear obligation of result, terms and conditions of the effective elimination of double taxation and ensuring implementation of the double taxation dispute resolution mechanisms decisions consistently throughout the EU. Furthermore, an EU initiative would add value, as compared to the existing national rules or bilateral treaties by offering a coordinated and flexible framework.
Such an approach is therefore in accordance with the principle of subsidiarity, as set out in Article 5 TFEU.
• Proportionality
The envisaged measure does not go beyond what is strictly necessary to achieve its objectives. It builds on the existing mechanisms and adds a limited number of rules to improve them. These rules are tailored to address the shortcomings identified. The Directive refers also to Alternative Dispute Resolution (ADR) mechanisms and recourse procedures that already exist in other areas. Finally, the Directive ensures the essential degree of coordination within the Union.
The objectives of this proposal can be achieved with minimal costs for businesses and Member States, while avoiding tax and compliance costs for companies as well as unnecessary administrative costs for Member States' tax administrations.
In light of this, the proposal does not go beyond what is necessary to achieve its objectives and is therefore compliant with the principle of proportionality.
• Choice of the instrument
The proposal is based on a Directive, the instrument available under the legal base of Article 115 TFEU.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultation
A public consultation was run from 17 February to 10 May 2016 by the European Commission asking for feedback on the status quo, objectives, possible kinds of action, and the options envisaged. In total 87 submissions were received.
The initiative received general support from business stakeholder groups and from a number of Member States who are primarily concerned about the negative impact of non-action at EU level. Non-governmental organisations, private individuals and other respondents to the consultation did not express a negative position but in contrast underlined the rather positive impact of other initiatives such as the CCCTB.
The vast majority of respondents considered that effective measures should be in place to ensure that double taxation is removed within the EU and that the existing mechanisms are not sufficient as regards the scope of mandatory binding dispute resolution, enforceability and efficiency. They considered that the current situation is detrimental to growth, creates barriers and prevents foreign investors from investing in the EU internal market. Respondents generally confirmed that there was a need for taking action in the EU and that this should build on the existing mechanisms. As regards the objectives, they should ensure the elimination of double taxation, be compatible with international developments and provide a stronger role for the taxpayer.
• Collection and use of expertise
The Commission services held a meeting of the European Joint Transfer Pricing Forum (EU JTPF) and the Platform for Tax Good Governance (EU Platform) respectively on 18 February 2016 and on 15 March 2016 3 to discuss the subject matter with relevant stakeholders and Member States. A synopsis report on all the consultation activities carried out by the European Commission to support this initiative is available on the web site of the European Commission. The initiative was also further discussed with Member States representatives on 26 July 2016.
• Impact assessment
The proposal is supported by an impact assessment which was reviewed by the Regulatory Scrutiny Board on 7 September 2016. The Board issued a positive opinion.
The proposal is based on the preferred option identified in the impact assessment, which is to set up a mandatory binding effective dispute resolution mechanism, i.e. a Mutual Agreement Procedure combined with an arbitration phase, with a clear time limit and an obligation of result for all Member States. The proposal applies to all taxpayers that are subject to one of the listed income taxes on business profits.
In terms of economic impact, the proposal will reduce the compliance and litigation burden for companies operating in the EU as regards their cross-border activities. It will also alleviate both external costs and internal administration costs related to the management of such disputes. It will facilitate the investment decisions within the EU by providing more certainty and predictability to investors, as regards the neutralisation of additional costs arising from double taxation. At the level of tax administrations, the proposal should reduce delays and procedure costs but also be a strong incentive to adjust the administration capacity and internal procedures optimally. It will therefore improve efficiency. It should have a positive effect on tax collection in the medium and long term, as it should boost growth and investment in the European Union but also improve confidence of the taxpayers in the tax system overall, thus stimulating voluntary compliance.
In terms of societal benefits, this initiative responds to the increased expectation from the public for a fair and effective tax system. It will ensure consistency in the treatment of double taxation disputes for cross-border transactions at the EU level and provide also for more transparency on how these disputed cases are solved.
• Fundamental rights
This Directive respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union. In particular, this Directive seeks to ensure full respect of the right to a fair trial, by giving taxpayers access to their national competent court at the Dispute Resolution stage in case of denial of access or when the Member States fail to establish an Advisory Commission. It also safeguards the freedom to conduct a business.
4. BUDGETARY IMPLICATION
The impact of the proposal on the EU budget is presented in the financial statement accompanying the proposal and will be met within available resources.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will monitor the implementation of this Directive in cooperation with Member States. The relevant information will be gathered primarily by Member States.
The current monitoring of the Union Arbitration Convention at the level of the EU JTPF is proposed to be extended to all cases of double taxation disputes in cross-border situations covered by the new legal instrument and gathered on a yearly basis. The following information collected will enable the Commission to assess whether the objectives are met:
• number of initiated/ closed/ pending cases across the EU
• duration of dispute resolution mechanisms including the reasons for not adhering to the timelines foreseen
• number of instances where access was denied by a Member State
• amounts of tax involved in cases (in general and for those who go to arbitration)
• number of instances of arbitration requested.
As statistical data is already collected and should continue to be collected on a yearly basis, it is expected that the costs of such activity would remain unchanged, for Member States and for the Commission.
Five years after the implementation of the instrument, the Commission will evaluate the situation as regards double taxation resolution in cross-border situations for companies in the EU with respect to the objectives and the overall impacts on companies and the internal market.
• Detailed explanation of the specific provisions of the proposal
The Directive builds to a large extent on the terms of the Convention on the elimination of double taxation in connection with the adjustments of profits of associated enterprises (90/436/EEC) 4 , the Union Arbitration Convention, which is part of the EU acquis. Once implemented the Directive will reinforce mandatory binding dispute resolution in the EU.
It would broaden the scope of dispute resolution mechanisms to all cross-border situations subject to double income tax imposed on business profits (Article 1). The objective of eliminating double taxation and the specific situations this should cover are restated in the same terms as in the Union Arbitration Convention. The proposed Directive however adds an explicit obligation of result for Member States as well as a clearly defined time-limit. On the other hand, situations which characterise double non-taxation or cases of fraud, wilful default or gross-negligence are excluded (Article 15).
In line with the Union Arbitration Convention the Directive allows for a Mutual Agreement Procedure (MAP), initiated by the complaint of the taxpayer, under which the Member States shall freely cooperate and reach an agreement on the double taxation dispute within 2 years (Article 4). If the MAP fails, it automatically leads to a dispute resolution procedure with the issuance of a final mandatory binding decision by the competent authorities of the Member States involved.
Contents
- The diagram below summarises the three key procedural stages, the complaint, the MAP and the dispute resolution procedure:
- The diagrams below summarise the different steps followed at the stage of the complaint and the connection with the two subsequent steps, i.e. the MAP or dispute resolution phase:
The diagram below summarises the three key procedural stages, the complaint, the MAP and the dispute resolution procedure:
Articles 3 to 5 provide formal rules to clarify the conditions under which a complaint shall be admissible to the MAP, i.e. the time frame for the complaint, the explanation of the double taxation situation by the taxpayer and the provision of the information in order to enable the competent authorities to examine the case and to consider its admissibility. They also strengthen the information provided to the taxpayer and sets obligations for the Member States to send notifications if a case is rejected or considered as not admissible.
The diagrams below summarise the different steps followed at the stage of the complaint and the connection with the two subsequent steps, i.e. the MAP or dispute resolution phase:
Articles 6 to 7 complement the initial MAP phase with an automatic arbitration procedure which foresees solving the dispute by way of arbitration within a timeline of fifteen months in case Member States failed to reach an agreement during the initial amicable phase. Situations where both Member States do not agree on admissibility of the taxpayer's case to the MAP phase can also be submitted to arbitration at an earlier stage, so as to solve this conflict on admissibility of the case (potential denial of access), provided that the taxpayer requests for it and establishes that it has renounced domestic remedies or that the recourse period for such remedies has expired. Under this supplemental arbitration procedure and according to Article 8 of the Directive, a panel of three to five independent persons (arbitrators) have to be appointed (one or two for each Member State plus one independent chairman), together with two representatives of each Member State. This ‘Advisory Commission’, issues a final opinion on eliminating the double taxation in the disputed case, which would be binding for Member States, unless they agree on an alternative solution to remove the double taxation (Article 13).
A default fast-track enforcement mechanism supervised by the competent national courts of each Member State involved is created in cases where the Advisory Commission is not set up within a certain time limit (Article 7). The taxpayer would have the possibility to refer to the national court in this case, to appoint the independent persons who would then chose the chairman. The independent persons and the chair will be chosen from a pre-established list maintained by the European Commission.
The following diagrams describe the dispute resolution phase as well as the new resolution process set up in case of denial of access at an early stage as a result of only one Member State denying the acceptance or the admissibility of the complaint with the other Member State accepting:
This enforcement and default appointment mechanism for the arbitration body is modelled on existing mechanisms in EU Member States according to which national courts appoint arbitrators when parties having entered into an arbitration agreement fail to do so. The national competent court which would be designated by the Member States would specifically address the cases corresponding to the shortcomings identified in the impact assessment, i.e. denial of access where Member States do not agree on the admissibility of the double taxation disputes, blocked and prolonged procedure exceeding two years.
Article 8 follows the requirements agreed in the Union Arbitration Convention regarding the setting up of an Advisory Commission and the terms and conditions under which the list of independent persons who can be members of the Advisory Commission is set up and maintained by the European Commission. Article 6 provides for the possibility for the competent authorities of the Member States concerned to agree and set up an alternative form of dispute resolution body, which can solve the case using other dispute resolution techniques, such as mediation, conciliation, expertise or any other appropriate and effective technique.
Article 10 provides a functioning framework for the Advisory Commission, the Rules of Functioning (RoF). These cover substantial aspects such as the description of the case, the definition of the underlying legal basis and questions to be addressed by the Advisory Commission and some key logistical and organisational aspects. These include the timeline, organisation of meetings and hearings, exchange of documents, working language and cost administration.
Article 12 reflects the Union Arbitration Convention and deals with information requirements and procedural aspects of the Advisory Commission.
Articles 13 and 14 follow the Union Arbitration Convention as regards the terms and conditions, including the constrained timeline, under which the Advisory Commission should issue its opinion, which should be the reference for the subsequent final and binding decision of the competent authorities. Specific obligations of the Member States regarding costs are provided for in Article 11 and reflect the provisions of the Union Arbitration Convention on these aspects.
The interaction with domestic judicial proceedings and appeals is dealt with in Article 15 in a way similar to the Union Arbitration Convention. It includes provisions on exceptional cases which should not fall within the scope of the procedure (i.e. cases of fraud, wilful default or gross-negligence are excluded).
Enhanced transparency is one of the objectives of the proposed Directive. Article 16 includes the provisions of the Union Arbitration Convention in this respect, according to which the competent authorities may publish the final arbitration decision and more detailed information, subject to agreement by the taxpayer.
Article 17 defines the role of the European Commission in the procedure, in particular as regards the maintaining of the list of independent persons according to Article 8 i.
Article 18 provides for the European Commission to adopt the practical arrangements necessary for the proper functioning of the procedures introduced by this Directive, with the assistance of a Committee on double taxation dispute resolution.
Article 19 empowers the European Commission to adopt legal acts as defined by Article 20 in order to update Annexes I and II to take account of new circumstances.