At its October 10 Luxembourg meeting, the ECOFIN adopted the Directive on tax dispute resolution mechanisms

At its October 10 Luxembourg meeting, the ECOFIN adopted the
Directive on tax dispute resolution
to strengthen procedures to resolve disputes
that arise from the interpretation of double tax treaties.

During the meeting, ministers also adopted conclusions on
the financing aspects of climate change, ahead of a UN
conference in November 2017, presented the proposed VAT reform,
and set out the proposed strategy for digital taxation.

“This new [dispute resolution] system is a big improvement.
It will encourage investment by creating a more favourable tax
environment and reducing costs for businesses,” said Toomas
Tõniste, finance minister of Estonia, which currently
holds the Council presidency.

The process to introduce these rules had begun under the
previous Maltese presidency of the EU Council. An estimated 900
double taxation disputes are currently ongoing across the EU,
worth approximately €10.5 billion ($12.5 billion) in tax
benefits for businesses.

Stef van Weeghel, partner and global tax policy leader at
PwC in the Netherlands, described the adoption of the Directive
as a very important achievement. “In the current environment
governments are incentivised by the BEPS programme and by other
initiatives to take a tough stance vis-à-vis
taxpayers and their tax planning, and in this environment the
risk of international double taxation has increased. A
mandatory dispute resolution mechanism as provided for by the
Directive is thus very important.”

Under the new regime, member states will have clear
deadlines to agree on a binding solution when tax treaty
disputes arise. Member states will have two years to resolve
the dispute amicably. If a resolution cannot be reached during
this timeframe, an advisory commission, consisting of three
independent members and representatives of the competent
authorities in question, will have to be established by the
member states to deliver a final, binding decision within six

“Member states will now have a legal duty to take conclusive
and enforceable decisions under the improved dispute resolution
mechanism. If not, the national courts will do this for them,”
a statement from the European Commission explained.

However, there are some differences between the
EU’s Directive and recommendations made by the
OECD under BEPS Action 14 (making dispute resolution mechanisms
more effective). Weeghel said some of the differences include
the time limits being fixed in the EU’s Directive,
there being more detail in the procedural rules, more scope for
taxpayer participation, no default “baseball arbitration” and,
importantly, publication of decisions or at least of anonymous
summaries of decisions.

“To me, the time frame for resolving disputes is realistic
and fair, but I would note that I find the two-year period for
the mutual agreement procedure stage rather long when compared
to the six months given to the advisory commission to develop
its opinion,” Weeghel said. “If dispute resolution pursuant to
the Directive really takes off, I could see that the procedures
developed could serve as a best practice to be adopted in the
context of BEPS Action 14.”

Bill Dodwell, head of tax policy at Deloitte in the UK, told
International Tax Review that Directive sits alongside
mandatory binding arbitration under the Multilateral
Convention, which implements the inclusive
framework’s adoption of the BEPS project.

“Taxpayers will need to choose which route to follow in
disputes between these countries. In many ways, the
Multilateral Convention offers a swifter, more definitive,
approach. However, in some cases the Directive may allow a
broader range of potential disputes to be resolved,” Dodwell
said. “Ultimately, having a binding arbitration process
substantially improves the whole dispute process by encouraging
countries to reach agreement in tax disputes.”

However, Weehegel is unconvinced that the new EU system will
help businesses reduce litigation and compliance costs in the
short term. “One would hope that in the presence of a mandatory
dispute resolution mechanism, EU member states would be
incentivised to resolve disputes either on a unilateral basis
or through the mutual agreement procedure and if this prospect
would indeed materialise, business would potentially save costs
on litigation and compliance. However, to the extent the
dispute resolution mechanism is fully exhausted, the effect
could be quite the contrary, i.e. that businesses spend more on
the resolution of the dispute, but then presumably with the
result that double taxation will have been resolved.”

Companies will be able to submit complaints under the new
system for tax years starting on or after January 1 2018 after
member states have transposed the Directive into domestic law
by June 30 2019.

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At its October 10 Luxembourg meeting, the ECOFIN adopted the Directive on tax dispute resolution mechanisms

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