The implementation of the OECD project on Base Erosion and Profit Shifting led to an increased uncertainty for taxpayers with cross-border activities due to a higher risk of double taxation. The traditional tools available to the taxpayers to deal with the resolution of such double taxation have revealed some shortcomings regarding access to the mechanism, coverage, timeliness and conclusiveness.
In this context, the European Union has adopted a Directive on Tax Dispute Resolution Mechanisms (the “TDRM Directive”). The TDRM Directive aims at improving the tax disputes resolution mechanisms in an EU context by:
The Luxembourg parliament has passed the transposition bill in first reading on 11 December 2019. The new mechanism will be applicable to any complaint submitted by an EU resident. This relates to a tax dispute concerning income or capital earned in a fiscal year commencing on or after 1 January 2018. VAT is not in scope of the new mechanism.
The new dispute resolution mechanism applies when a dispute arises between Luxembourg and one or several EU Member States in relation to the interpretation and application of agreements and conventions that provide for the elimination of double taxation of income and capital.
The new dispute resolution mechanism draws on the process of the EU Arbitration Convention, having 3 procedural stages:
The procedure starts with the taxpayer filing a complaint. The complaint must be filed within 3 years from the first notification of the action resulting in, or that will result in, the question in dispute.
The complaint is subject to formal prerequisites, which determine its eligibility. It must be filed simultaneously with the Luxembourg direct tax authorities (the “ACD”) and each of the competent authority of the other concerned Member States. This multiple filing requirement adds to the administrative load of the taxpayer compared to the mechanisms currently available. Fortunately, an exception exists for individuals and small and medium-sized enterprises.
The competent authorities of each Member State concerned will decide to accept or reject the complaint within 6 months. This time limit may, however, be postponed in case the competent authorities request additional information. One important safeguard for the taxpayer is that in absence of decision from a Member State within the timeline, the complaint will be deemed accepted.
When a complaint is rejected, the taxpayer may:
Mutual agreement procedure stage
Unless one Member State decides to resolve unilaterally the double taxation, the competent authorities will endeavour to solve the dispute within a 2-year period through a mutual agreement procedure (“MAP”). The 2-year period can be extended by one year. The taxpayer will be notified through the MAP, becoming binding and enforceable. It is also subject to the taxpayers’ acceptance of the decision [AN1] and waiving his right to any other remedy. In case of pending national proceeding, the taxpayer will have to prove that he has withdrawn his action.
Dispute Resolution stage
Where the competent authorities of the Member States concerned cannot reach an agreement, they still have the obligation to inform the taxpayer and explain the reasons for the failure to reach an agreement. The taxpayer may request the set up of an Advisory Commission and may request an order to the President of the Luxembourg District Court (Tribunal d’Arrondissement) if the Advisory Commission is not set up within 120 days.
Competent authorities have the freedom to determine the set up and rules of functioning of the Advisory Commission, provided it includes at least one chair, one representative of each competent authority concerned, and independent persons of standing chosen from a pre-established list maintained by the European Commission.
As an alternative to the set up of an Advisory Commission, the competent authorities of the Member States concerned may agree to set up an alternative form of dispute resolution body (the Alternative Dispute Resolution Commission), which can solve the dispute using any dispute resolution process or technique (e.g. mediation, conciliation, final offer arbitration process). The Alternative Dispute Resolution Commission can be of permanent nature, but also flexible in terms of composition and formal requirements in comparison to the Advisory Commission.
The Advisory Commission (or Alternative Dispute Resolution Commission as the case may be) shall give its opinion to the competent authorities of the Member States concerned within six months following the date it was set up (with a possible 3-month extension). This decision becomes final only if the competent authorities do not agree on another solution within a 6-month period. The final decision is notified to the taxpayer and it is implemented, subject to his consent and his waiver of other remedies.
The mechanism implemented by the TDRM Directive represents a positive evolution in the creation of a fair tax system to avoid profits being taxed twice. The taxpayer will have to choose between the different options available to solve a double taxation, i.e. mutual agreement procedure based on a double tax treaty (with possible impact of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting), Arbitration Convention, mechanism based on the TDRM Directive. The following are factors to consider:
It is crucial that Member States give its full effect to this new mechanism to offer more tax certainty to taxpayers and address double taxation situations.
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