The EU has recently focused on combatting tax avoidance and aggressive tax ... (incl. the Anti-Tax Avoidance Directive)2 and the Tax Transparency Pack-.
The EC Proposal for Double Taxation Dispute Resolution: Turning the Tide? Filip Debelva Joris Luts1 An updated version of this paper will be published in Bulletin for International Taxation, Vol. 71 (2017). The European Commission has recently published its proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms. The authors conclude that this proposal aptly takes into account the position of both the taxpayer and the tax authorities.
INTRODUCTION The EU has recently focused on combatting tax avoidance and aggressive tax panning. Measures such as the Anti-Tax Avoidance Package (incl. the Anti-Tax Avoidance Directive)2 and the Tax Transparency Package have provided the Member States with more firepower in this respect.3 This has led to the perception that the EU only has attention for strengthening the position of Member States and disregards the balance between the right of the Member States to raise taxes and the rights of the taxpayer. However, as PISTONE aptly points out: “(s)tronger powers for tax authorities to cooperate in cross-border scenarios worldwide should march hand-in-hand with a stronger protection of taxpayers’ basic rights.”4 The recently published Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union (‘Proposal’ or ‘proposed DDTDRM’, as the case may be)5 is the first EU proposal in a long time which genuinely tries to tip the balance back in the right direction. In this article, the authors start by explaining the need for effective double taxation resolution mechanisms. In a second part, the proposed DDTDRM itself is discussed, which includes an analysis of (i) its legal characteristics, (ii) its scope of application and (iii) the procedure concerned. In this respect, the authors will also provide some reflections.
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The authors are both PhD Fellows at KU Leuven (Belgium). All opinions expressed herein are strictly personal to the authors. 2 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 3 Another example is the recent proposal for a Common Corporate Tax Base, which mentions in its preamble that “the corporate tax environment in the Union should be shaped in accordance with the principle that companies pay their fair share of tax in the jurisdiction(s) where their profits are generated” (Proposal for a Council Directive on a Common Corporate Tax Base, COM(2016) 685 final, second preamble). 4 P. PISTONE, Coordinating the Action of Regional and Global Players during the Shift from Bilateralism to Multilateralism in International Tax Law, 6 World Tax J. 1 (2014), Journals IBFD at 4. 5 Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union, COM(2016) 686 final.
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1 THE NEED FOR AN EFFECTIVE DISPUTE RESOLUTION MECHANISM 1.1 INTERNATIONAL DOUBLE TAXATION International double or multiple taxation is generally considered a severe impediment to free trade and an obstacle to the development of cross-border activity.6 From an economic perspective this will lead to sub-optimal results, as maximization of economic output requires that investment is located where it is most productive. International double taxation prevents this from occurring, as it creates a disincentive to work or invest abroad.7 This was also emphasized by the European Commission in its Report on company taxation in the internal market: “the choice of an investment, its financing or its location should in principle not be driven by tax considerations. From this perspective, and in an international context, similar investments should not face markedly different effective levels of taxation purely because of their country location. Differences in the effective levels of corporate taxation may in fact imply welfare costs because economic activity may not take place in the lowest (pre-tax) cost location by the lowest cost producers.”8 It is also wrong to assume that double taxation will necessarily lead to a combined higher revenue, as higher tax rates will not always yield higher revenue. This can inter alia be explained by the fact that high tax rates also induce taxpayers to commit fraud or to move from high-tax jurisdictions to low-tax jurisdictions.9 This in turn leads to a lower overall revenue. As a result, double taxation de facto leads to a penalization of those who are not guilty of tax evasion or avoidance.10
1.2 EXISTING MEASURES Despite being a clear obstacle to the further development of world trade, double taxation remains an issue in international economic relations. The conclusion of tax treaties and the introduction of European Union legislation have not fully resolved these issues. Currently, there are two main types of dispute resolution mechanisms exist to deal with disputes of international taxation: (i) the mutual agreement procedure (‘MAP’) included in tax treaties and (ii) the arbitration mechanism of the EU Arbitration Convention. The MAP - as included in Article 25 OECD Model - is omnipresent in tax treaties. However, the procedure provided by this article is not satisfactory, mainly due to the lack of concrete time limits, the time-intensive nature of the process, the absence of an enforceable requirement to eliminate double taxation11 and the
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Commission (EC), ‘Towards an Internal Market without Tax Obstacles’ (Communication) COM (2001) 582 final, 23 October 2001 and Commission (EC), ‘Co-ordinating Member-States' direct tax systems in the Internal Market (COM(2006)823 final, 19.12.2006). 7 LEAGUE OF NATIONS (1927), Double Taxation and Tax Evasion – Report presented by the Committee of Technical Experts on Double Taxation and Tax Evasion, Geneva, Doc. C. 216. M. 85. 1927. II, 8. 8 Commission of the European Communities, Company Taxation in the Internal Market (COM(2001)582 final), 2. 9 A.B. LAFFER, S. MOORE & P.J. TANOUS, The End of Prosperity, New York, Threshold Editions, 2008, 29-30. 10 M. PIRES, International Juridical Double Taxation of Income, Kluwer Law and Taxation Publishers, 1989, 87. 11 According to this provision, the competent authorities shall endeavor to resolve the issue by MAP. This implies that there is no real enforceable obligation to do so.
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general lack of attention for taxpayer rights.12/13 The OECD already recognised these problems in 2007, and proposed the introduction of a mandatory arbitration clause in Article 25(5) OECD Model.14 The arbitration mechanism of Article 25 OECD Model also has shortcomings, including the lack of transparency15 and the fact that the taxpayer is from the outset not considered a party to the dispute.16 Treaty practice also shows that very few tax treaties currently have incorporated this arbitration clause.17 The shortcomings of Article 25 OECD Model and the resulting lack of effective resolution of double taxation disputes were also the main reason for the OECD embarking on BEPS action 14, which aimed at strengthening the effectiveness and efficiency of the MAP process.18 Meanwhile, the OECD has published the draft version of the Multilateral Instrument developed in the context of BEPS action 15, which also includes a draft (optional) provision aimed at introducing mandatory binding arbitration in the worldwide network of bilateral tax treaties.19 However, the appetite for adopting mandatory binding arbitration as a dispute resolution mechanism seems to be low: only a small sub-set of the 100 countries have shown interest to adopt such rule.20 Hence, one could legitimately wonder whether the Multilateral Instrument will bring about fundamental change as regards taxpayer protection in the context of international tax disputes.
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K. PERROU, Taxpayer Participation in Tax Treaty Dispute Resolution, Amsterdam, IBFD, 2014, sec. 7.3.1.1: “The taxpayer has the right to request that the MAP is initiated by presenting his request to the competent authorities, but in general he is excluded from the MAP process. The MAP discussions are discussions between the competent authorities, i.e. between government authorities, and as such private parties are not entitled to participate in them directly”. 13 See for these issues e.g. the OECD BEPS Action 14 Report and R. ISMER, “Article 25 OECD and UN MC” in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 153. 14 OECD, Improving the resolution of tax treaty disputes (Report adopted by the Committee on Fiscal Affairs on 30 January 2007), 2007. At the same time, it appears the total number of new MAP cases which are initiated, as well the inventory of pending MAP cases has reached an all-time high (http://www.oecd.org/ctp/dispute/map-statistics-2015.htm). 15 R. ISMER, “Article 25 OECD and UN MC” in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 155 and see m.nos. 157 et seq. for further potential improvements of the arbitration process. 16 D. RAMOS MUÑOZ, “Tax arbitration and its issues: from fiction to reality, to surrealism”, Spain Arbitration Review 2014, 17: “the taxpayer does not enjoy a ‘party’ status in the proceedings […]; the taxpayer has no right to have the issue resolved in arbitration”. 17 Currently, 370 out of a possible 378 double tax conventions have been concluded within the European Union. Out of those 370, only 14 contain a mandatory arbitration clause. 18 OECD, Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, Paris, OECD Publishing, 2015, http://dx.doi.org/10.1787/9789264241633-en. See also see A. PROSS and E. LIO, “Modernising MAP : BEPS Action 14 to improve dispute resolution”, ITR 2016, no. 9, 16-20, P. TOLEDO PIRES DE OLIVEIRA, “Action 14 of the OECD/G20 Base Erosion and Profit Shifting Initiative: Making Dispute Resolution More Effective – Did Action 14 “Piggyback” on the Initiative?”, BIT 2017 (to be published). 19 See for the draft Multilateral Instrument (in particular Part VI. Arbitration): http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf and the related Explanatory Statement: http://www.oecd.org/tax/treaties/explanatory-statement-multilateral-convention-to-implement-tax-treaty-reelatedmeasures-to-prevent-BEPS.pdf. 20 J. SCHWARZ, “International Tax Dispute Resolution and the BEPS Multilateral Convention: A Camel Safari”, Kluwer International Tax Blog, 7. Dec. 2016.
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A second reaction against the abovementioned procedural insufficiencies is the EU Arbitration Convention, which is an international law instrument that is at the same time part of the EU acquis communautaire.21 Whilst the EU Arbitration Convention has its strengths, it only has a very limited substantive scope (i.e. only transfer pricing disputes are covered).22 The EU Joint Transfer Pricing Forum has recognized some of the problems in the application of the Arbitration Convention and has brought out a Code of Conduct, which is of course a soft law instrument, also does not impose binding rules upon the Member States concerned.23 The Proposal has been developed against the backdrop of the insufficiencies of the existing measures for solving double taxation disputes. Multiple potential avenues were examined.24 In the end, the EC opted for a proposal for a directive, which introduces a common double taxation resolution mechanism that would apply throughout the Union.
2 THE PROPOSAL 2.1 INTRODUCTORY REMARKS 2.1.1 Legal basis The Proposal is based on Article 115 of the Treaty on the Functioning of the European Union (TFEU), which provides a legal basis to the Council to issue directives for the approximation of the laws of the Member States “as directly affect the establishment or functioning of the internal market”.25 Directives in tax matters must respect the principle of subsidiary and the principle of proportionality. According to the principle of subsidiarity, the Union may act (in casu by a directive) only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the Member States but can rather be better achieved at Union level.26 A conflict with the principle of subsidiarity will only be found to exist where the aims can be achieved just as much in all Member States by individual action or cooperation
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G. KOFLER, "Article 9 OECD and UN MC" in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 133 and L. HINNEKENS, “European Arbitration Convention: Thoughts on Its Principles, Procedures and First Experience”, EC Tax Review 2010, 112. 22 Its territorial scope is also limited to (double taxation resulting from transfer pricing disputes between) EU Member States. 23 Code of conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (2006/C 176/02), updated in 2009: Revised Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (2009/C 322/01). 24 One of the options which were considered by the EC, was the inclusion of a specific enforcement mechanism in bilateral tax treaties on the basis of Article 273 TFEU. Such a referral provides the CJEU with jurisdiction to decide on double taxation disputes. This is already currently the case in Art. 25 of the German-Austria tax treaty (see also the pending case C-648/15 Austria v. Germany). However, the EC did not consider this a viable option, as this solution will depend on an actual implementation of such a provision in the bilateral relations of the Member States concerned (Impact Assessment, 48-49). 25 A discussion of whether the Proposal violates the principle of conferral is outside the scope of this contribution. 26 Article 5(3) TEU.
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between the Member States.27 According to the EC, the Proposal complies with the principle of subsidiarity in light of the specific nature of the subject of the Proposal, i.e. the introduction of an effective and efficient procedure to resolve double taxation disputes in the context of the proper functioning of the internal market.28 It was submitted that this objective requires a common initiative across the internal market, since double taxation dispute resolution mechanisms are by nature bi- or multilateral procedures and certainty and predictability for the taxpayer can only be addressed through a common set of rules.29 In addition, the EC argues that the Proposal adds value as compared to the existing national rules or bilateral treaties concluded by the individual Member States by offering a coordinated and flexible framework.30 However, not all Member States seem to agree with this conclusion.31 The principle of proportionality, on the other hand, requires that Union actions are both (i) appropriate to attain its objectives and (ii) indispensable, in the sense that it does not go beyond what is necessary to achieve the objective(s).32 In essence, the principle of proportionality guides the Union legislator towards action that is well designed and will interfere, to the least possible extent, with the competences of the Member States.33 According to the EC, the proposed DDTDRM complies with the principle of proportionality for a number of reasons: (i) it builds on the existing mechanisms and adds a limited number of rules to improve them, which are tailored to address the shortcomings identified; (ii) it refers also to Alternative Dispute Resolution (ADR) mechanisms and recourse procedures that already exist in other areas; (iii) it ensures the essential degree of coordination within the Union; and (iv) it can be implemented 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. 2.1.2 Implementation issues Once adopted, the Proposal – which takes the form of a directive – must be implemented by the Member States. This obligation applies to all national branches (i.e. the legislative, executive and judiciary of the
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K. LENAERTS & P. VAN NUFFEL, European Union Law, London, Sweet & Maxwell, 2011, 134, m.no. 7-028 and C.W.A. TIMMER-
MANS, “The Basic Principles” in P.J.G. KAPTEYN, A.M. MCDONNELL, K.J.M. MORTELMANS and C.W.A. TIMMERMANS (eds.), The Law
of the European Union and the European Communities, Alphen aan den Rijn, Kluwer Law International, 2008, 143. 28 Recital 10 of the Proposal. 29 Explanatory Memorandum, 4. 30 Ibid. 31 In the Netherlands, the Dutch Foreign Affairs Minister issued a letter to the Dutch House of Representatives (Tweede Kamer der Staten-Generaal) (nr. 34 604, https://zoek.officielebekendmakingen.nl/kst-34604-2.pdf) found that the proposed DDTDRM complies with the principle of subsidiarity. However, on request of the Tweede Kamer, a Parliamentary Reservation has been made in the Council by the Netherlands on this legislative proposal. In addition, the Finance committee of the Dutch Senate has decided to perform a subsidiarity check of the proposals. In Sweden, the Tax Committee of Parliament (Riksdag) found that the proposed DDTDRM violated the principle of subsidiarity. According to the reasoned opinion, “the Commission's statement does not clarify why a solution to the identified problems in the field of dispute resolution need to be addressed by means of a Directive. In light of this, the Riksdag considers that the proposal as it is currently designed, is not compliant with the principle of subsidiarity” (see http://www.ipex.eu/IPEXL-WEB/dossier/files/download/082dbcc55904ee960159177c390e1262.do).. A Joint Committee for EU Affairs in the Spanish Parliament (Cortes Generales), on the other hand, adopted a Resolution stating that the Proposal is in accordance with the principle of subsidiarity (http://www.ipex.eu/IPEXL-WEB/dossier/files/download/082dbcc558ffc839015902b4b6d0031 9.do). 32 Article 5(4) TEU and K. LENAERTS & P. VAN NUFFEL, European Union Law, London, Sweet & Maxwell, 2011, 143, m.no. 7035. 33 A. DASHWOOD, M. DOUGAN, B. RODGER, E. SPAVENTA and D. WYATT (eds.), Wyatt and Dashwood’s European Union Law, Oxford, Hart, 2011, 123.
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Member States).34 The transposition in national law by the competent legislative body is currently expected to occur by 31 December 2017.35 Some questions can be raised with regard to the obligations of the member states in this respect. A first question is whether the member states still have the competence to apply existing and conclude future double taxation dispute resolution mechanisms. We would submit that the Member States can still apply the Arbitration Convention and apply c.q. conclude inter se tax treaties containing a double taxation dispute resolution mechanisms.36 This is because, whilst the Proposal substantially harmonises double taxation dispute resolution mechanisms within the EU, the Proposal does not seem to entail ‘exhaustive harmonisation’, nor does it amount to ‘pre-emption’ of Member State legislative competence in this area of law.37 In this respect, the Explanatory Memorandum is abundantly clear: “The proposed Directive aims at broadening the scope and improving procedures and mechanisms in place without replacing them.”38 In addition, the Proposal does not call upon the member states to withdraw from the Arbitration Convention or from inter se tax treaty dispute resolution mechanisms. Let us now shift our attention to the question whether the Member States may implement the Proposal in a more advantageous way for the taxpayer (e.g. prolonged time limits, additional due process rights, extension to other taxes than business income taxes, etc.). In our opinion, this would be allowable. In cases of such unilateral extensions, these provisions will need to be interpreted in line with the provisions 34
S. PRECHAL, Directives in EC Law (2nd ed.), Oxford, Oxford University Press, 2005, 5-6. Art. 21 proposed DDTDRM. 36 However, some authors seem to argue that such treaties would become ‘mixed treaties’ which would an intervention by the Union in the process of concluding it due to the primacy of EU law. These remarks have been made in the context of the conclusion of the BEPS multilateral instrument, as this instrument may ‘affect common rules or alter their scope’. See R. STREINZ, “Multilateral Instrument and EU Competence”, BTR 3 (2015), 429-443; A. ZALASIŃSKI, “Conclusion of the BEPS Multilateral Instrument and Distribution of Competences between the EU and its Member States”, BTR 3 (2015), 444-448. Support for this conclusion may be found in article 3(2) TFEU, which stipulates that the EU shall have exclusive competence to enter into international agreements whose “conclusion is provided for in a legislative act of the Union.” Indeed, each time the EU adopts provisions laying down common rules, the Member States’ right to enact measures, such as concluding treaties, is affected. 37 The concepts of ‘harmonisation’ and ‘pre-emption’ are not fully developed and usually considered intertwined (see e.g. A. ARENA, “Exercise of EU competences and pre-emption of Member States’ powers in the internal and external sphere: towards ‘Grand Unification’”, YEL 2016, 9; R. SZUDOCZKY, The Sources of EU Law and Their Relationships: Lessons for the Field of Taxation, Amsterdam, IBFD, 2014, sec. 7.2.1. and A. VON BOGDANDY and J. BAST, “The Federal Order of Competences” in A. VON BOGDANDY and J. BAST (eds.), Principles of European constitutional law, Oxford, Hart Publishing, 2009, 290-291). Both concepts are related to the issue of determining whether a provision of national law (including treaties) which governs the same subject matter covered by common EU law rules, conflicts with such rules of EU law (A. ARENA, “Exercise of EU competences and pre-emption of Member States’ powers in the internal and external sphere: towards ‘Grand Unification’”, YEL 2016, 5-6 and 9; compare also R. SCHÜTZE, European constitutional law, Cambridge, Cambridge University Press, 2012, 364 and E.D. CROSS, “Pre-emption of Member State law in the European Economic Community: a framework for analysis”, CML Rev. 1992, 451). The answer to the question how to resolve such conflict is governed by the principle of primacy of EU law, which also applies to conflicts between (tax) treaties concluded by the Member States and (primary and secondary) EU law (e.g. R. SCHÜTZE, European constitutional law, Cambridge, Cambridge University Press, 2012, 352-354 and L. HINNEKENS, “Compatibility of Bilateral Tax Treaties with European Community Law. The Rules”, EC Tax Review 1994, 160162). Whether such conflicts exists depends on whether (i) the EU common rules have ‘exhaustively harmonised’ an area of law c.q. have ‘pre-empted’ Member State legislative action or, alternatively, whether (ii) the EU legislature envisaged the co-existence of the common EU rules and other measures (A. ARENA, “Exercise of EU competences and pre-emption of Member States’ powers in the internal and external sphere: towards ‘Grand Unification’”, YEL 2016, 9). (Absence of) such pre-emptive effects may be implied or expressly envisaged by the EU legislature (R. SCHÜTZE, European constitutional law, Cambridge, Cambridge University Press, 2012, 367). 38 Explanatory Memorandum, 3. 35
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of the Proposal itself and will be subject to the ECJ’s jurisdiction, at least to the extent that this would otherwise put a uniform interpretation of EU law at risk.39 However, one must also take into account that such favourable deviations need to be recognised in all Member States taking part in the dispute resolution process. For instance, if one Member State allows complaints to be lodged within a period of three years (whilst the Proposal refers to a period of two years) and a taxpayer submits his complaint after two years, the Member States involved that have neatly followed the Proposal are likely entitled to dismiss the complaint: indeed, it takes two to tango. 2.1.3 Interpretation of unclear terms For the purposes of implementation, the directive must be interpreted. In this respect, it is settled caselaw that where a provision of EU law (e.g. a directive) is “open to several interpretations, preference must be given to that interpretation which ensures that the provision retains its effectiveness”.40 In short, the directive should be interpreted in light of its overall aim(s) where the scope of the directive is unclear. The CJEU generally recognizes that a directive’s aim may be derived from its preamble and recitals, as well as its preparatory documents.41 Looking at the recitals, the explanatory memorandum and the impact assessment of the Proposal, it is clear that the overall aim is “the resolution of double taxation disputes and the effective elimination of the double taxation at stake”.42 The emphasis of this directive lies on the effective resolution of disputes, thus a pragmatic approach is recommended. In the following section, in which we will discuss the scope of the Proposal, the abovementioned aim will be taken into account where the wording of the Proposal’s provisions is unclear or otherwise open to interpretation. 2.1.4 Compliance with fundamental rights Whilst the dispute resolution mechanism set forth in the Proposal is undeniably a step in the right direction in terms of protection of taxpayer rights in international tax disputes, the question is whether the rights and protection granted is legally sufficient in the light of applicable due process rights. A detailed analysis of this question would greatly exceed the scope of this contribution, however, we do want to succinctly zoom in on some potential issues (infra). As mentioned above, the proposal will be adopted under the legal form of a Directive. This implies that the Charter of Fundamental Rights is applicable to the directive and its implementation in domestic law.43 Since an implementation of a directive undeniably constitutes an implementation of EU law, the Member States should afford deference to the Charter’s fundamental rights.44 In this respect, the Member States 39
ECJ, 18 Oct. 1990, Dzodzi, Case C-297/88 and C-197/89, §36-37; ECJ, Case C-28/95, 17 Jul. 1997, Leur-Bloem, §28-34; ECJ, 14 Mar. 2013, Allianz Hungária Biztositó and Others, C‑32/11, §20. 40 Settled case-law, e.g. ECJ, 24 Feb. 2000, Commission v France, Case C-434/97, §21; ECJ, 25 Oct. 2007, Fortum Project Finance, Case C-240/06, §36 and ECJ, 10 Sep. 2014, Holger Forstmann Transporte, Case C-152/13, §26. 41 K. LENAERTS & P. VAN NUFFEL, European Union Law, London, Sweet & Maxwell, 2011, 814, no. 21-062. 42 Recital 2 of Proposal. 43 According to its Article 51(1), the Charter’s provisions must be respected inter alia by the Member States when they are “implementing Union law”. 44 E.g. K. LENAERTS & P. VAN NUFFEL, European Union Law, London, Sweet & Maxwell, 2011, 692, m.no. 17-005 and 834, no. 22-025; J. KOKOTT and C. SOBOTTA, “The Charter of Fundamental Rights of the European Union after Lisbon”, EUI Working Papers, AEL 2010/6, 9; E. HANCOX, “The meaning of “implementing” EU law under Article 51(1) of the Charter: Åkerberg Fransson”, CML Rev. 2013, 1418-1419. As aptly summarised by one commentator, it is “difficult to argue that the choice of form and methods of implementation [cf. Article 288 TFEU] should include the choice of whether to violate a fundamental right, and natural by way of contrast to argue that respect for fundamental rights should be regarded as an implicit part of
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cannot seem to escape their obligation to respect fundamental rights by merely referring to the fact that their national measures constitute an implementation of a directive. Indeed, the CJEU has already held that “EU law requires that, when transposing directives, the Member States take care to rely on an interpretation of them which allows a fair balance to be struck between the various fundamental rights protected by the EU legal order. Subsequently, when implementing the measures transposing those directives, the authorities and courts of the Member States must not only interpret their national law in a manner consistent with those directives but also make sure that they do not rely on an interpretation of them which would be in conflict with those fundamental rights or with the other general principles of EU law”.45 In the context of the Proposal, relevant rights are a.o. the right to respect for private and family life jo. the protection of personal data (Arts. 7 and 8), and, most importantly, the right to an effective remedy and to a fair trial (Art. 47). Article 47 provides that “[e]veryone whose rights and freedoms guaranteed by the law of the Union are violated has the right to an effective remedy before a tribunal in compliance with the conditions laid down in this Article. Everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal previously established by law. Everyone shall have the possibility of being advised, defended and represented”. Since Article 47 Charter’s scope is broader than that of Article 6 ECHR46, it therefore also applies to pure tax matters.47 Once applicable, Article 47 Charter’s fair trial guarantees must be interpreted consistently with the way in which the fair trial guarantees under Article 6(1) ECHR are interpreted (cf. Article 52(3) Charter). The authors would like to signal a few potential issues which might arise when assessing tax dispute resolution mechanisms (in general) in the light of fair trial standards. It should however be noted that the case law of the European Courts is not fully developed on these points. This applies all the more in relation to arbitration mechanisms, for which the applicability of fair trial rights (albeit those of Article
the result to be achieved under the directive” (P. CRAIG, Administrative EU Law, 2012, 565, with reference to B. DE WITTE, “The Past and Future Role of the European Court of Justice in the Protection of Human Rights” in P. ALSTON et al. (eds.), The EU and Human Rights, Oxford, Oxford University Press, 1999, chapter 27). 45 E.g. ECJ, 16 Jul. 2015, Coty Germany, C-580/13, §34. See also ECJ, 29 Jan. 2008, Promusicae, §68, with reference to ECJ, 6 Nov. 2003, Lindqvist, C-101/01, §87 and ECJ, 26 Jun. 2007, Ordre des barreaux francophones et germanophone and Others, C-305/05, §28. 46 Article 6 ECHR is deemed not to apply to pure tax disputes because (i) its scope is limited to “civil rights and obligations” and “criminal charges” and (ii) pure taxes cannot ordinarily be subsumed under any of both categories (e.g. ECtHR, 12 Jul. 2001, Ferrazzini, Application no. 44759/98, §29; ECtHR, 23 Nov. 2006, Jussila v. Finland, Application no. 73053/01, §29; ECtHR, 24 Nov. 2016, Polimerkonteyner v. Ukraine, Application no. 23620/05, §25). Article 47 Charter, on the other hand, is not limited to civil rights or criminal charges. See e.g. the Explanations to the Charter (OJ C 303, 14.12.2007), where it is explicitly held that “[i]n Union law, the right to a fair hearing is not confined to disputes relating to civil law rights and obligations”. 47 A. PEKKA et al., "Right to an Effective Remedy and to a Fair Trial" in S. PEERS et al. (eds.), The EU Charter of Fundamental Rights: A Commentary, London, Hart Publishing, 2014, 1210-1211, nos. 47.44-47.46.
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6 ECHR) has been subject to much debate and does not appear to have settled.48 In this respect, the authors would cautiously conclude that Article 47 Charter’s standards would apply to the arbitration mechanism as provided in the proposal.49
48
What has more or less been clarified regarding the relation between Article 6 ECHR and arbitration can be summarised in the following points. First, it is crucial to make a distinction between (i) voluntary (genuine) arbitration, where two parties voluntarily decide to submit disputes to an arbitrator instead of a State Court and (ii) compulsory arbitration – where parties are required to submit disputes to an arbitrator. With respect to the latter, it is settled that the fair trial guarantees of Article 6 ECHR are fully applicable (ECtHR, 24 Jun. 1986, Lithgow et al. v UK ; EComHR, 12 Dec. 1983, Bramelid, §30). With respect to the former, the applicability of such rights is disputed, and the main discussion is whether the arbitration agreement implies an automatic waiver of (some) fair trial guarantees. Second, it is clear that the fair trial guarantees are fully applicable to any court proceedings related to the arbitration (e.g. in relation to the appointment of an arbitrator or the recognition and enforcement of an arbitral decision). Third, in both voluntary and compulsory arbitration, parties can waive the fair trial guarantees in the course of the proceedings (i.e. ex post), provided a number of conditions are met. See for the main doctrinal contributions on the issue, C. JARROSSON, “L’arbitrage et la Convention européenne des droits de l’homme”, Revue de l’arbitrage 1989, no. 4, 573-607; D. WEDAM-LUKIC, « Arbitration and Article 6 of the European Convention on Human Rights », Arbitration 1998, no. 64(1) Supp.; A. SAMUEL, “Arbitration, Alternative Dispute Resolution Generally and the European Convention on Human Rights”, Journal of International Arbitration 2004, 413-437; J.C. LANDROVE, “European Convention on Human Right’s Impact on Consensual Arbitration: An Etat des Lieux of Strasbourg CaseLaw and of a Problematic Swiss Law Feature”, in S. BESSON et al. (eds.), Human Rights at the Center, Basel, Schulthess, 2006, 73-101: S. BESSON, “Arbitration and Human Rights”, ASA Bulletin 2006, 395-416; T. SCHULTZ, “Human rights: a speed bump for arbitral procedures? An exploration of safeguards in the acceleration of justice”, International Arbitration Law Review 2006, 8-23; A. JAKSIC, “Procedural Guarantees of Human Rights in Arbitration Proceedings“, Journal of International Arbitration 2007, no. 2, 159-171. 49 This seems to be the position that is (implicitly) adopted in tax literature, see e.g. P. BAKER and P. PISTONE, “BEPS Action 16: The Taxpayer’s Right to an Effective Legal Remedy Under European Law in Cross-Border Situations”, EC Tax Review 2016, 343 who submit that their proposals to augment the protection of taxpayer rights in the MAP is based on “the need to comply with the requirements of primary EU law and the current developments that are taking place at the level of interpretation also in connection with the case law on the EU Charter” and K. PERROU, Taxpayer Participation in Tax Treaty Dispute Resolution, Amsterdam, IBFD, 2014, e.g. sec. 7.3.2.2: “The current level of taxpayer participation does not […] satisfy the requirement of “access” to an effective remedy.”. Also in favour of bringing tax arbitration within the scope of fair trial guarantees, e.g. G. MAISTO, “The Impact of the European Convention on Human Rights on Tax Procedures and Sanctions with Special Reference to Tax Treaties and the EU Arbitration Convention”, in G. KOFLER, M. POIARES MADURO and P. PISTONE (eds.), Human Rights and Taxation in Europe and the World, Amsterdam, IBFD, 2011, section 21.5.3 (more cautiously: D. RAMOS MUÑOZ, “A Game of Snakes and Ladders – Tax Arbitration in an International and EU Setting” in D. SARMIENTO and D. JIMÉNEZ-VALLADOLID DE L'HOTELLERIE-FALLOIS (eds.), Litigating EU tax law in international, national and non-EU national courts, Amsterdam, IBFD 2014, section 7.5.2.2.3). Some seem to insinuate that international tax arbitration may constitute a form of compulsory arbitration (to which fair trial guarantees apply, see supra), e.g. (with respect to arbitration in bilateral investment treaties) A. PINNA, Réflexions sur l’arbitrage forcé”, Gazette du Palais 2008, no. 351, 6 et seq. (“l’arbitrage deviant de facto forcé […]; l’investisseur se trouve donc en presence d’un choix – entre l’arbitage et les juridictions de l’État […] – qui n’en est réalité pas un. C’est donc sans excès que l’on peut inclure dans l’arbitrage force […]”. In the same vein, BAKER seems to (implicitly) argue that the domestic court option is not a ‘real option’ for an effective remedy, hence suggesting that international tax arbitration is compulsory arbitration (P. BAKER, “Double Taxation Conventions and Human Rights” in C. BOBBETT and P. BAKER (eds.), Tax polymath : a life in international taxation : essays in honour of John F. Avery Jones, Amsterdam, IBFD, 2010, 68: “There are some issues where the only effective method of resolving the dispute is recourse to competent authority proceedings […]”.
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2.2 SCOPE 2.2.1 General Article 1, para. 1 of the proposed DDTDRM provides that the Proposal lays down rules “to resolve disputes between Member States on how to eliminate double taxation of income from business the rights of the taxpayers in this context”. 2.2.2 Personal scope The Proposal applies to all taxpayers “that are subject to one of the taxes on income from business listed in Annex I” (Article 1, para. 2). This obviously includes taxpayers that are residents of a Member State. While some doubt might arise regarding the applicability of the Proposal to physical persons, it is clear from the list of the taxes in Annex I50 that both legal and physical persons are covered. Since permanent establishments (PEs) of non-resident taxpayers are usually subject to the same taxes on income from business as residents in a given Member State, it is no surprise that the personal scope is extended to “permanent establishments situated in one or more Member State whose head office is either in a Member State or in a jurisdiction outside the Union”. This also follows from the definition of “taxpayer” in Article 2 (4) of the Proposal.51 Whilst the personal scope of the Proposal may at first sight appear straightforward, some issues may nevertheless arise. A first one concerns the issue of entities enjoying objective52 or subjective exemptions53. The authors submit that taxpayers enjoying objective exemptions are still within the personal scope of the Proposal; however, an objective exemption would nevertheless preclude reliance on the Proposal since such exemption generally falls outside the material scope of the Proposal (infra). Within the category of subjective exemptions, the authors would distinguish total exemptions from partial54 exemptions. In this respect, it is clear that extending the benefits of the Proposal to taxpayers enjoying total subjective exemptions would run counter to its objectives; such taxpayers should therefore be excluded from the personal scope. On the other hand, taxpayers enjoying partial subjective exemptions (such as specific regimes for financial institutions) should in our view still be included within the scope, as long as their tax base is subject to one of the taxes listed in Annex I to the Proposal. Related to the former, a second issue is whether hybrid entities – i.e. entities that are considered as transparent in one Member State and as opaque in another Member State – are within the personal scope of the Proposal. If the entity as such is subject to one of the taxes listed in Annex I in the Member State in which it is treated as opaque, the entity prima facie qualifies for the benefits of the Proposal. However, such entity will not be recognised as a separate taxpayer in a Member State in which it is considered as tax transparent; hence, the entity as such will not be subject to taxation in both of the Member States. 50
For instance, for Belgium, the following taxes are covered: (i) personal income tax (impôt des personnes physiques/personenbelasting); (ii) legal entities tax (impôt des personnes morales/rechtspersonenbelasting); (iii) non-resident income tax (impôt des non-résidents/belasting der niet-verblijfhouders) and (iv) corporate income tax (impôt des sociétés/vennootschapsbelasting). 51 Which provides that such term captures “any person or permanent establishment subject to income taxes listed in Annex I to this Directive”. 52 Objective exemptions concern items of income which would normally be subject to tax, but which are exempt because of a provision of the state's domestic law. 53 Subjective exemptions concern taxpayers enjoying a favourable tax regime, further to which their income is (wholly or partly) tax exempt. 54 E.g. a tax base that is composed of very limited items that are unrelated to income items.
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Whether or not the dispute resolution mechanism could apply in this situation, depends on how the notion of ‘double taxation’ is construed, and in particular whether it requires a strict identity of the taxable subject (infra) and/or whether it requires a strict identity of the taxable object (infra). 2.2.3 Geographical scope The proposed DDTDRM applies to “disputes between Member States”. Hence, whilst PEs of taxpayers of jurisdiction outside the Union may be involved in the dispute resolution process, taxation by foreign jurisdictions on their own will not fall under the scope of the Directive. 2.2.4
Material scope
2.2.4.1 Definition of double taxation According to Article 1, para. 1 proposed DDTDRM, the Proposal aims at setting up mechanisms on how to eliminate “double taxation of income from business”. The latter term is defined in Article 2 (3) of the Proposal, and covers situations in which the following requirements are cumulatively fulfilled:
the imposition of taxes in Annex I of the Directive; in two (or more) tax jurisdictions; by the national or judicial authorities; in respect of the same taxable income or capital; giving rise to either (i) additional tax, (ii) increase in tax liabilities, or (iii) cancellation or reduction of losses, which could be used to offset taxable profits.
When comparing the Proposal’s definition of the term ‘double taxation’ with those espoused in doctrine55 and the OECD56 (hereafter: standard definition), it is abundantly clear that the Proposal’s definition is a broad one. According to the standard definition, double taxation requires the presence of the following five elements: (i) the imposition by at least two different states; (ii) an identical or comparable tax; (iii) within the same taxable period; (iv) on the same taxable subject (taxpayer); and (v) on the same taxable object (subject matter). A comparison between the standard and the Proposal’s definition reveals some interesting differences. In what follows, the meaning of the term “double taxation” in the Proposal will be elucidated on the basis of its differences with the standard definitions of the term. Ordinary definition (majority doctrine / OECD) Imposition of a tax in two (or more) states Identity or comparability of the tax Identity of the taxable period Identity of the taxable subject Identity of the taxable object
Proposal Imposition of a tax by two (or more) tax jurisdictions Taxes mentioned in Annex I / / The same taxable income or capital
55
A.A. KNECHTLE, Basic problems in international fiscal law, Deventer, Kluwer, 1979, 29-30; A.H. QURESHI, The Public International Law of Taxation, Graham & Trotman Ltd, 1994, 369. 56 The OECD Commentary defines (juridical) double taxation as “the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods” (OECD MC Comm. Introduction, §1).
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2.2.4.2 Imposition of a tax by two (or more) tax jurisdictions The first criterion is very similar to the standard definition, and is self-explanatory. For international double taxation to exist under the proposed DDTDRM, (i) at least two tax jurisdictions (ii) must impose tax.57 With respect to the first requirement58, it is important to note that the Proposal refers to “tax jurisdiction” instead of Member State. In our view, this terminology allows the avoidance of potential interpretative issues that might arise when autonomous regions (e.g. decentralized governments in federal states and other politically linked regions) are entitled to levy taxes, apart from the Member State to which it belongs.59 For instance, where taxes are imposed in Gibraltar and Germany, double taxation in the sense of the Proposal arises. Regarding the second requirement, it is abundantly clear from the Proposal that the “imposition of taxes” (listed in Annex I) does not mean that a positive amount of tax is effectively levied. Indeed, the Proposal60 makes clear that such term does not only cover situations resulting in (i) an additional amount of tax, but also situations where (ii) tax liabilities are increased, or (iii) losses are cancelled or reduced.61 However, there are still some interpretative issues:
Firstly, the differences between these various listed instances is unclear, the main issue being the demarcation of situation (ii) from the other listed situations.62 In this respect, the authors would submit that these situations are all examples of a general theme: what is important is that the (current or future) tax position of the taxpayer is in some way negatively impacted. Secondly, the three listed situations all seem to require a standard of comparison (“additional” amount of tax; “increase” of tax liabilities; “reduction” of tax liabilities). The question is what the benchmark for double taxation should be. According to the authors, the only logical conclusion would be that the ‘counterfactual’ situation is the absence of taxation under the domestic legislation of the particular Member State.
57
Although double taxation could also very well arise within one and the same state, see A.A. KNECHTLE, Basic problems in international fiscal law, Deventer, Kluwer, 1979, 29. 58 According to the proposed DDTDRM’s wording, taxes must be levied by the relevant jurisdictions’ “national or judicial authorities”. The authors submit that this requirement is (at the very least) ambiguous. Indeed, according to the constitutional traditions of many if not all of the EU Member States, taxes can only be levied on the basis of tax legislation voted by a democratically elected parliament (“no taxation without representation”). The Executive and Judiciary, on the other hand, cannot levy taxes and are bound to apply the legislation as voted by the Legislative (principle of legality). 59 The situation where international double taxation arises due to tax claims by state A and a sub-state entity of state B, is sometimes referred to as ‘diagonal international double taxation.’ 60 Article 2(3) proposed DDTDRM. 61 Which could otherwise be used to offset taxable profits. 62 It seems fair to state that situation (i) refers to any situation where the application of tax legislation by a Member State results in the effective payment of a tax, and that situation (iii) refers to a situation where the application of tax legislation by a Member State does not result in an effective payment of tax, but to a negative adjustment of tax losses (carried forward). It is unclear how situation (ii), which refers to an increase of tax liabilities, relates to the above situations. The term “tax liability” has been defined in Black’s Law Dictionary as “[t]he amount that a taxpayer legally owes after calculating the applicable tax; the amount of unpaid taxes”. From that perspective, situation (ii) (increase in tax liability) does not seem to differ from situation (i) (additional amount of tax). However, in line with the effet utile principle, a provision of a law cannot be given the same meaning as another provision belonging to the same normative text but should be given a systematic interpretation (K. LENAERTS and J.A. GUTIÉRREZ-FONS, “To Say What the Law of the EU Is: Methods of Interpretation and the European Court of Justice”, EUI Working Papers, AEL 2013/9, 13-14). According to the authors, the term could have an independent meaning to cover future additional taxes. In this sense, it would partly overlap with situation (iii), but there may also situations other than the reduction of losses that may trigger additional future taxation.
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In light of the foregoing conclusion as regards the ‘counterfactual’, the Proposal logically excludes some situations. Indeed, where (i) a tax exemption or (ii) a zero rate applies under national rules, there is no difference with the ‘counterfactual’ and hence, an “imposition” of taxes is deemed not to occur.63 The Directive does not explicitly exclude situations where a zero rate applies under treaty rules (i.e. a zero rate included in a double tax convention), but logic requires that the same reasoning should be applied in the latter case.64 Since taxpayers enjoying subjective exemptions have already been carved from the scope of the Proposal (supra), these exclusions are only relevant for other exemptions. Indeed, the authors would argue that in case of objective exemptions (and de facto exemptions, i.e. taxation at 0%) of certain tax base elements, the benefits of the Proposal would not be available. It is unclear as to whether taxpayers enjoying partial subjective exemptions (in the context of which no direct link can be established between the item of income and the determination of the tax base, supra) are within the scope of the Proposal. 2.2.4.3 Identity or comparability of the tax The standard definition of double taxation requires an identity or comparability of the taxes being levied, which often gives rise to difficulties. Indeed, since income tax systems extremely differ, there will never be a full identity of the type and nature of the taxes being levied, the maximum achievable is that the taxes are ‘comparable’. The Proposal avoids such difficulties, by specifying that double taxation exists where the taxes being levied are the ones that are listed in Annex I to the Proposal. In such case, the requirement of the comparability of the tax is deemed fulfilled. Since the taxes listed in Annex I to the Proposal are all income taxes, it is abundantly clear that the proposed DDTDRM does not apply to double taxation resulting from the imposition of at least one non-listed tax (e.g. indirect, gift or inheritance taxes).65 2.2.4.4 Identity of the taxable period Contrary to the standard definition, no identity regarding the taxable period is required by the proposed DDTDRM. This approach, which was also followed in the UN Model Commentary, can be applauded. The facts giving rise to the tax liability may indeed be tied to different tax years in various jurisdictions. 66 Hence, dropping this requirement will broaden the scope of situations potentially falling within the scope of the Proposal. This interpretation is in line with the overall aims of the Proposal (supra, no. 2.1.2). 2.2.4.5 Identity of the taxable subject It is common ground that the same-taxable-subject criterion allows one to differentiate between situations of juridical and economic double taxation. In this respect, the standard definition espoused in doctrine and the OECD Commentary only addresses international juridical double taxation, which looks at 63
Article 1, para 3 proposed DDTDRM. This is supported by the position that the CJEU, when examining the compatibility of national law with EU law, considers tax treaties to take the same position as national rules, i.e. takes tax treaties into account as “part of the overall legal framework” (B. TERRA and P. WATTEL, European Tax Law, Deventer, Kluwer, 2012, 944, with reference to e.g. ECJ, 8 Nov. 2007, Amurta, C-379/05, §79-80). 65 Although there is also an apparent need for resolution of double taxation in those fields of taxation, see for example European Commission, Tackling cross-border inheritance tax obstacles within the EU, COM(2011) 864 final. Reasons for omitting other taxes (including inheritance taxes) are given in the impact assessment, 10-11. Various stakeholders have criticised the limitation of the proposed DDTDRM’s scope to taxes on income. 66 See e.g. H. SCHAUMBURG, Internationales Steuerrecht – Außensteuerrecht & Doppelbesteuerungsrecht (2. Auflage), Köln, Verlag Dr. Otto Schmidt, 1998, 589,. The Commentary to the UN Model Convention also does not include such reference. 64
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double taxation from the perspective of the same taxpayer (i.e. identity of tax subject). The OECD Model, apart from its Article 9, in principle only deals with the prevention of juridical double taxation.67 Conversely, the Proposal at first sight does not explicitly require the taxation in the hands of one and the same taxpayer. Hence, it seems that double taxation from the perspective of multiple taxpayers (i.e. international economic double taxation) is also covered by the Proposal. This interpretation would in our view be supported by (i) the Proposal’s aim to extend the possibilities for the elimination of double taxation that is not already resolved under the existing procedures (supra, n° xx)68 and (ii) the aims of the Proposal to provide an effective solution for all cases of double taxation (supra, n° **). Hence, a whole range of situations that can in essence be subsumed under the notion of economic double taxation may be covered by the Proposal (provided that all other requirements are met, infra). However, one could raise the question whether economic double taxation is not (unintentionally) carved out from the scope of the Proposal. Article 3 (1) of the Proposal (infra) indeed seems to limit the circle of taxpayers that are eligible to submit a complaint requesting the resolution of double taxation to “any taxpayer subject to double taxation”. If it is the taxpayer that must be subject to double taxation, it seems that such complaints may only be launched where juridical double taxation arises. However, in the light of the proposal’s aim (supra), such interpretation should not be upheld. 2.2.4.6 Identity of the taxable object69 The standard definition requires the tax in the states concerned to be levied on the same taxable object (i.e. subject matter). In the same vein, the Proposal refers to the “same taxable income or capital”.70 However, the text of the Proposal indicates that only double taxation of “income from business” is covered.71 Although crucial for delimiting the scope of the Proposal, the expression “income from business” is not defined. The latter expression is to be regarded as a second-level term that requires a previous interpretation of its component parts (i) “income” and (ii) “business”.72 As to the concept of “income”, the question is how strict one should construe the condition that the same income item must be taxed. This is important in at least two respects.
67
Cf. OECD MC Comm. Introduction, §1, 3 and 17 and G. KOFLER, "Article 9 OECD and UN MC" in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 7. However, it has been argued in doctrine that “[a]pplication of tax treaties […] is merely a matter of interpretation of the respective treaty. What conceptually is – and what is not – ‘double taxation’ is therefore of no importance for the treaty's application” (K. VOGEL & A. RUST, "Introduction" in E. REIMER en A. RUST (eds.), Kluwer Law International, 2015, (1-72), m.no. 5). 68 Explanatory Memorandum, 3. 69 The potential scope of application of the proposed DDTDRM will diminish after the CCCTB enters into force (since the tax base (cf. taxable object) will then become harmonised and double taxation will in principle no longer occur). However, the proposed DDTDRM will continue to have merit, also after the entry-into-force of the CCCTB since (i) the consolidation (the third C) of the common corporate tax base will only be implemented in a second stage and (ii) in any case, the mandatory personal scope of application of the CCCTB is, in essence, limited to entities that are part of a consolidated group for financial accounting purposes with a consolidated group revenue exceeding EUR 750m (and hence does not include all taxpayers that may benefit from the (proposed) DDTDRM) (cf. Explanatory Memorandum, 3). 70 Article 2(3) proposed DDTDRM. 71 Article 1, first paragraph, proposed DDTDRM. 72 P. PISTONE, “’Enterprise’, ‘Business’ and ‘Business Profits’ in EU Tax Law”, in G. MAISTO (ed.), The Meaning of ‘Enterprise’, ‘Business’ and ‘Business Profits’ under Tax Treaties and EU Tax Law, Amsterdam, IBFD, 2011, sec. 1.6.
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First, if one concludes that economic double taxation is covered by the Proposal, the requirement that it must concern the same “income” can be somewhat relaxed. This is because where (at least) two taxpayers are involved, there will never be a complete identity of the facts giving rise to a tax liability. In the authors’ view, if economic double taxation is within the scope of the Proposal, the requirement that the “income” element being taxed must be the same should be construed broadly. Stated otherwise, the requirement should not preclude the Proposal to apply in case of economic double taxation, simply because the “income” being taxed in the hands of the taxpayers involved is not the same. In our view, substantial similarity of the income would suffice in such case. Some examples (see also infra) may clarify the authors’ position. For instance, double taxation resulting from the attribution of the same income item to different taxpayers under the domestic legislation of the Member States involved (‘double attributions’)73 constitutes, in our view, a form of economic double taxation where the taxable object is the same or substantially similar. However, the same cannot – in our opinion – automatically be said of business profits earned by a subsidiary (and taxed at that level) and distributed to the parent (and taxed at that level). Here, there would presumably be insufficient similarity of the taxable objects being taxed at the level of the parent and the subsidiary. Second, one could go further and also wonder whether some forms of (mostly economic) double taxation resulting from (i) situations of ‘non-deduction / inclusion’74 and (ii) ‘double non-deductions’.75 The authors concede that the term “income” should be construed so as to give effect to the Proposal’s aim to provide relief for double taxation sensu lato. Interpreting the term “income” by reference to for example the SCHANZ-HAIG-SIMONS concept of income would achieve such objective. According to the latter concept, “income” includes all items of revenue and all items of expenditure arising out of an income-generating activity.76 Hence, recognising that the tax base consists of both positive and negative elements, the authors submit that double taxation does not only include an integration of positive income elements in the tax base, but also the exclusion of negative income elements from the tax base. This means that double taxation resulting from (i) situations of ‘non-deduction / inclusion’ and (ii) ‘double non-deductions’ should be included, provided that it concerns the same or a substantially similar taxable object, which will normally be the case whenever it concerns taxation related to a specific transaction (supra).77
The interpretation of the term “business” is equally important. Indeed, it is not the taxation of any income that is (potentially) caught by the Proposal, but only “income from business”. It is therefore crucial to understand how one should construe the term “business”. At least two routes may be followed to arrive at an interpretation of the term:
73
For instance, in hybrid entity scenarios, the income would be attributed to the entity in one Member State and to an individual in the other Member State (the assumption is made here that the entity and the individual are each subject to one of the taxes mentioned in the Annex, see supra). As long as the income of both is taxed as “business income”, it would seem that the double taxation resulting from double attributions is covered by the Proposal. 74 I.e. the combination of non-deductibility (of an expense or loss) and taxability (of the corresponding income). 75 I.e. the combination of non-deductibility (of an expense or loss) and non-deductibility (of the same cost or loss). 76 See K. HOLMES, The Concept of Income, Chapter 2, Online Books IBFD. 77 Additional guidance.
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Firstly, inspiration may be drawn from the OECD Model Tax Convention and accompanying Commentaries’ definition of “business”. Indeed, the CJEU78 has often referred to OECD guidance when being confronted with international tax queries, as a sort of ‘better law’ approach.79 As such, the definition of Article 3(1)(h) OECD MC may trickle down in the Proposal. According to this provision, the term business refers to “the performance of professional services and of other activities of an independent character”. The term business is related to the adjacent term “enterprise”80, which can be considered as the medium through which the business is carried on.81 Scholars have argued that the terms “business” and “enterprise” should be construed in an inclusive manner, and capture all types of independent activities.82 Importantly, activities that are prima facie only of a passive nature (share investments, real property investments, financing and licencing activities, etc.) could also be deemed a business, provided that the related activity is not ‘purely passive’.83 The term business being broad, only (dependent) employment activities, purely passive private investment activities and activities solely conducted for pleasure would be excluded.84 Income from business could therefore comprise passive investment income and even certain (capital) gains85, which is evidenced by the fact that Article 7(4) OECD MC (which carves out certain income elements from the scope of Article 7, “business profits”) would be superfluous if such income items would ab initio not constitute income from business; a similar reasoning applies for Article 10(4), 11(4) and 12(3) OECD Model Convention.86 A second route is to give the term “business” an EU-autonomous meaning, an approach which is in principle favoured, as evidenced by a different line of CJEU case law.87 In giving the term an
78
E.g. ECJ, 14 Feb. 1995 Finanzamt Köln-Altstadt v Schumacker, Case C-279/93, §32; ECJ, 12 May 1998, Gilly v Directeur des services fiscaux du Bas-Rhin, Case C-336/96, §24 and 31-32; ECJ, 19 Jan. 2006, Margaretha Bouanich v Skatteverket, Case C-265/04, §51-52; ECJ, 23 Feb. 2006, van Hilten-van der Heijden, Case C-513/03, §48; ECJ, 7 Sep. 2006, N v Inspecteur van de Belastingdienst Oost/kantoor Almelo, Case C-470/04, §45-46; ECJ, 13 Mar. 2007, Test Claimants in the Thin Cap Group Litigation, Case C-524/04, §49; ECJ, 18 Dec. 2007, Skatteverket v A, Case C-101/05, §54; ECJ, 16 Jul. 2009, Damseaux, Case C-128/08, §33; ECJ, 12 Feb. 2009, Cobelfret, Case 138/07, §56. 79 J. WOUTERS and M. VIDAL, “The OECD Model Tax Convention Commentaries and the European Court of Justice: Law, Guidance, Inspiration?” in S. DOUMA et al. (eds.), The Legal Status of the OECD Commentaries, Amsterdam, IBFD, 2008, sec. 6: “A ‘better law’ approach implies that there is no big underlying theory why a certain rule is preferred to another by a judge or why […] the Commentaries are used by the Court of Justice in a case, but that referral to such rule is ‘not [...] the result of the automatic operation of a rule or principle of selection but of a search for a just decision in the principal case’”. 80 This term is defined in Article 3(1)(c) OECD Model Convention by reference to “the carrying on of any business”. 81 A.P. DOURADO, G. KOFLER, E. REIMER and A. RUST, "Article 3 OECD and UN MC" in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 39-40. 82 Id., m.no. 47 et seq. and 93. 83 Id., m.no. 48. 84 Id., m.no. 93 and references there. 85 This is contested, see E. REIMER, "Article 7 OECD and UN MC" in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 39 and 173. The latter m.no. seems to imply that items that fall within the scope of Article 13 (“capital gains”) cannot also be brought under Article 7 on “business profits”. 86 A.P. DOURADO, G. KOFLER, E. REIMER and A. RUST, "Article 3 OECD and UN MC" in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 93; E. REIMER, "Article 7 OECD and UN MC" in E. REIMER en A. RUST (eds.), Klaus Vogel on double taxation conventions, Alphen aan den Rijn, Kluwer Law International, 2015, m.no. 173. 87 E.g. ECJ, 26 Apr. 2012, DR and TV2 Danmark, C-510/10, §33 and the case-law cited; ECJ, 9 Jun. 2016, EGEDA and Others, C-470/14, §38: “it follows from the need for uniform application of European Union law and from the principle of equality that the terms of a provision of European Union law which makes no express reference to the law of the Member States for the purpose of determining its meaning and scope must normally be given an autonomous and uniform interpretation throughout the European Union”.
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autonomous meaning, regard should be had to the context of the term (systematic interpretation) and provision and the objectives which it pursues (teleological interpretation).88 From a systematic perspective, one may argue that the term “business” should be interpreted by reference to similar concepts employed in e.g. EU competition law. In that branch of law, the concept of “undertaking” is consistently defined as “any entity engaged in an economic activity, irrespective of its legal status and the way in which it is financed”. 89 An undertaking is therefore a medium through which an “economic activity” is carried on (cf. the distinction between “enterprise” and “business” supra). In this respect, “the activity consisting in offering goods and services on a given market that is the characteristic feature of an economic activity”.90 Like the term “business”, an economic activity is also defined broadly and could – subject to some conditions – also cover intragroup activities, non-profit activities, (active) shareholding activities, etc.91 Regardless of the approach, the conclusion should be that the terms “income” and “business” both separately and combined should be interpreted in a broad manner.
2.3 PROCEDURE In this section, the authors will first analyse the proposed three-step dispute resolution mechanism laid down in the Proposal (infra, n° 2.3.1). Subsequently, the authors will discuss the result to be obtained when the dispute resolution mechanism is completed, i.e. the elimination of double taxation (infra, n° 2.3.2). Finally, the authors will describe the relationship between domestic remedies and the Proposal’s dispute resolution mechanism (infra, n° 2.3.3). 2.3.1 Three-step procedure As highlighted supra, the double taxation dispute resolution mechanism consists of three procedural steps, i.e. (i) the complaint stage; (ii) the mutual agreement procedure (MAP) stage and (iii) the dispute resolution stage.92 Illustration 1 - Overview of procedure
88
Settled case law, see e.g. ECJ, 6 Oct. 1982, CILFIT v Ministero della Sanità, Case 283/81, §20 and ECJ, 28 Jul. 2016, Association France Nature Environnement, Case C-379/15, §49: "every provision of EU law, including the case-law of the Court in the relevant area, must be placed in its context and interpreted in the light of the provisions of EU law as a whole, regard being had to the objectives thereof and to its state of evolution at the date on which the provision in question is to be applied”. 89 Settled case-law, e.g. ECJ, 23 Apr. 1991, Höfner and Elser v Macrotron, Case C-41/90, §21; ECJ, 17 Feb. 1993, Poucet and Pistre, Joined Cases C-159/91 and C-160/91, §17; ECJ, 16 Nov. 1995, Fédération française des sociétés d'assurance and Others, Case C-244/94, §14; ECJ, 12 Sep. 2000, Pavlov and Others, Joined Cases C-180/98 to C-184/98, §74; ECJ, 10 Jan. 2006, Cassa di Risparmio di Firenze SpA and Others, Case C-222/04, §107; ECJ, 5 Mar. 2015, Commission and Others v Versalis and Others, Joined Cases C-93/13 P and C-123/13 P, §52. 90 Settled case-law, e.g. ECJ, 16 Jun. 1987, Commission v Italy, Case C-118/85, §7; ECJ, 12 Sep. 2000, Pavlov and Others, Joined Cases C-180/98 to C-184/98, §75; ECJ, 1 Jul. 2008, MOTOE, Case C-49/07, §22; Aéroports de Paris v Commission, Case C-82/01 P, §79; ECJ, 19 Dec. 2012, Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission, Case C-288/11 P , §40. 91 See K. BACON, European Union law of state aid, Oxford, Oxford University Press, 2013, 25, no. 2.10; C. QUIGLEY, European state aid law and policy, Oxford, Hart Publishing, 2015, 59. 92 Explanatory Memorandum, 7.
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2.3.1.1
Complaint stage (Articles 3 & 5)
Any taxpayer falling within the scope of application of the Proposal is entitled to submit a complaint requesting the resolution of double taxation. The complaint can be submitted to one competent authority or to all competent authorities involved93 (the latter being preferable to ensure consistency). After having received the complaint, the competent authorities will provide confirmation of receipt within one month to both the taxpayers and other competent authorities involved.94 For the complaint to be acceptable, it is required that the taxpayer (i) is subject to double taxation95 and (ii) introduces his complaint within a term of three years starting from the receipt of the first notification of the action resulting in double taxation.96 The Proposal does not lay down a condition of prior exhaustion, i.e. an eligible taxpayer’s complaint may be launched irrespective of whether that taxpayer has used or uses the remedies available in the national laws of any of the Member States concerned. In addition, recourse may be had to the Proposal’s dispute resolution mechanism, irrespective of whether a Member State’s decision causing double taxation has become final under national law97, with one exception.98 For the complaint to be admissible, the following items of information must be provided: (i) the identification of the taxpayer/complainant (and of any taxpayer directly involved); (ii) the taxable periods under consideration; (iii) the facts and circumstances of the case; (iv) the applicable domestic tax and tax treaty rules;99 (v) the reasons why the taxpayer/complainant considers double taxation to exist; (vi) pending or 93
Article 3(1) proposed DDTDRM (implicitly). Article 3(2) proposed DDTDRM. 95 See our comments supra. 96 Article 3(1) proposed DDTDRM. 97 Article 15(1) proposed DDTDRM. 94
98
However, a case will not enter the dispute resolution stage (infra) where a taxpayer has launched a judicial action concerning the double taxation and the national law of the Member State law concerned does not allow a dispute resolution decision to derogate from the decisions of their judicial bodies, except where no final decision has been rendered and the taxpayer withdraws its action (Article 15(4) proposed DDTDRM). 99 Note that in principle the state should be aware of the applicable laws (application of ‘iura novit curia’), which is evidenced by the fact that in a later stage of the proceedings, the state involved (at the moment the AC or ADRC is being set up) should also communicate to the taxpayer a reference to any applicable legal provision. We assume that the obligation on the side of the taxpayer to provide information at this stage merely aims to clarify the situation of the taxpayer.
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closed litigations related to the relevant transaction; (vii) documents (assessment notices, audit reports, etc.) leading to the disputed double taxation and (viii) any specific additional information requested100 by the authorities.101 The complaint also has to indicate which other Member States are involved.102 In the complaint, the taxpayer must also commit to respond as completely and quickly as possible to all appropriate requests made by a competent authority. 103 Such information requests may be launched within a period of two months following the receipt of the complaint. It is unsure whether the competent authorities are bound to limit the use of the information received in this context for the purposes of the dispute resolution (i.e. whether they are subject to a so-called ‘purpose specification’, which might be relevant in the context of data protection rules). The competent authorities of the Member States concerned will take a decision on the acceptance and admissibility of the complaint within six months of the receipt thereof. The decision must be communicated to both the taxpayer(s) and competent authorities involved.104 The competent authorities may decide to either accept the complaint (hereafter: positive decision)105 or reject the complaint (hereafter: negative decision).106 A negative decision must be open for appeal in the domestic courts.107 When the decisions of all Member States involved are combined, a number of situations can be distinguished:
The simplest situation is where all Member States involved adopt positive decisions, i.e. decide to accept the complaint. In that case, a MAP will be initiated.108 The second situation is where one of the Member States involved issues a negative decision. In that case, an Advisory Commission (AC) will be set up by the competent authorities within fifty calendar days after the end of the abovementioned six-month period.109 The proposed DDTDRM also contains rules on the composition of the AC (infra)110, and requires Member States to provide for judicial protection where the AC is not timely or duly set up.111 The AC will take a decision on
100
The Dutch Orde van Belastingadviseurs (NOB) has rightly argued that some of these admissibility requirements are too ‘open ended’. In particular, the fact that a taxpayer must submit – under penalty of inadmissibility – all information requested by the tax authorities without a requirement that such information be relevant, can hardly be considered proportionate. This may trigger issues in terms of effective legal protection of the taxpayer (http://www.nob.net). 101 Article 3(3) proposed DDTDRM. 102 Article 3(1) proposed DDTDRM. 103 Article 3(3)(e)(iii) proposed DDTDRM. 104 Article 3(5) proposed DDTDRM. 105 Article 4(1) proposed DDTDRM. 106 Article 5(1) proposed DDTDRM. A rejection may be based on grounds of acceptability (e.g. the time-limit has lapsed or there is no double taxation) or admissibility (e.g. the requested information has not been provided). Where the competent authorities do not take a decision within six months following the receipt of the complaint, the decision is deemed a negative one (Article 5(2) proposed DDTDRM). 107 Article 5(3) proposed DDTDRM. 108 Article 4(1) proposed DDTDRM. 109 Article 6(1) jo. Article 6(4), para 1 proposed DDTDRM. 110 However, the rules of procedure of the AC may differ whether the AC is handling a complaint versus whether it is opining on the resolution of double taxation (Article 10(2), para 2 proposed DDTDRM). 111 Where (i) the AC is not set up within the fifty-calendar-day period or (ii) the competent authority has failed to appoint at least one independent person of standing and its substitute, taxpayers must be able to refer to the competent national court (Article 7(1), paras 1-2 proposed DDTDRM). This referral to a national court must occur in the timeframe between (i) the end of the fifty-calendar-day period and two weeks after the end of that period (Article 7(2) proposed DDTDRM). The competent national court’s decision will be notified to the taxpayer and the competent authorities involved; an appeal may be brought to positive or negative decisions of the court (as the case may be, by the administration or the taxpayer), in accordance with domestic law (Article 7(3) proposed DDTDRM).
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the acceptability and admissibility of the complaint within six months starting from the date of the last negative decision. In case of a positive decision, the MAP will be initiated (infra) at the request of one of the competent authorities involved; absent such request, the (same) AC will directly deliver its own opinion on the elimination of double taxation without passing through the MAP phase (infra). In case of a negative decision, the procedure will end.112 The third situation is where all Member States involved decide to reject the complaint. In that case, the procedure under the Proposal will end.113
2.3.1.2 Mutual Agreement Procedure (Article 4) Under the Proposal’s MAP, the Member States concerned shall endeavour to resolve the double taxation within two years starting from the last notification of one of the Member States’ decision to accept the complaint.114 The ultimate goal of the MAP is to come to an agreement on the resolution of the double taxation concerned (infra, n° 2.3.2 for more details). The Member States may either reach an agreement or not:
In case of an agreement, the competent authorities must transmit the agreement to the taxpayer as a decision. Importantly - subject to the taxpayer renouncing the right to any domestic remedy115 -, the decision will be binding on the authorities and enforceable by the taxpayer, and must be implemented in national law.116 In case of a failure to reach an agreement, the taxpayer shall also be informed with the reasons no such agreement was reached.117 In the latter case, the dispute resolution stage will start118, except in cases of tax fraud, wilful default and gross negligence.119/120
2.3.1.3 Dispute resolution (Articles 6-16) The dispute resolution stage will be entered in two cases. The most obvious case is when no agreement is reached in the MAP stage.121 The second case is where a complaint has been rejected by one Member State on the acceptance and/or the admissibility thereof, which has been reversed by the AC, but subsequent to which none of the competent authorities have requested a MAP (supra). 112
It is unclear whether this decision can be appealed by the taxpayer, and where such appeal should be lodged. In light of fair trial guarantees, the possibility for an appeal may need to be required. 113 Id. 114 Article 4(1) proposed DDTDRM. The period of two years may be extended with 6 months, upon agreement of all parties involved (see Article 4(1), para 2 proposed DDTDTRM). 115 Whether such waiver is compatible with fair trial guarantees falls outside the scope of this contribution. In principle, it would seem recommendable to offer an option to appeal even where an agreement was reached that offers a solution for the double taxation, since the solution may only be partial or deviate from the taxpayer’s request (see also the Dutch NOB’s comments, http://www.nob.net). 116 Article 4(3) proposed DDTDRM. 117 Article 4(4) proposed DDTDRM. 118 Article 6(3) proposed DDTDRM. 119 Article 15(6) proposed DDTDRM. Although denying the benefits of the procedure in cases of fraud, willful default or gross negligence seems acceptable, the authorities’ assessment that one of such situations is present should preferably be subject to appeal. Otherwise, the effectiveness of the procedure can be entirely eroded by recalcitrant tax authorities (similarly, see the Dutch NOB’s comments, http://www.nob.net). 120 Finally, the Proposal clarifies that recourse to the Proposal’s dispute resolution mechanism does not prevent a Member State from initiating or continuing (i) judicial proceedings or (ii) proceedings for administrative and criminal penalties in relation to the same matters (Article 15(2) proposed DDTDRM). 121 Article 6(3) proposed DDTDRM.
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The dispute resolution will be handled by (i) an Advisory Commission or, alternatively, by (ii) an Alternative Dispute Resolution Commission (ADRC), which will deliver an opinion on the elimination of double taxation.122
As to the first scenario, the AC is to be set up no later than 50 calendar days after the 2-year time limit for the MAP (supra).123 This Commission is headed by (i) one chair; (ii) two representatives of each of the competent authorities;124 and (iii) one or two independent persons with sufficient standing.125 Where the AC is not timely set up or the competent authority has failed to appoint at least one independent person of standing and its substitute, taxpayers must be able to refer to the national court.126 As to the second scenario, it is worth mentioning that the ADRC may differ regarding its composition and may apply other dispute resolution techniques such as conciliation or mediation.127 Moreover, the Member States can decide on different majority rules when opting for an ADRC instead of an AC.128 Although the proposal is silent on this issue, it would be logical to require that the ADRC must be set up within the same time limits as the AC.
Prior to setting up the AC or ADRC, the Member States shall notify the taxpayers (i) the date at which the opinion on elimination of double taxation will be adopted129, (ii) a reference to any applicable legal provision (both domestic and treaty-based), and (iii) the rules of functioning for the AC or ADRC.130 The rules of functioning shall be agreed upon by the competent authorities involved and shall include, inter alia, the description and the characteristics of the case, the timeframe, the composition of the commission and the terms of reference on which the competent authorities agree as regards the questions to be resolved.131 In the absence or incompleteness of the rules, the independent persons or the chair of the commission will complete the rules of functioning; when these persons do not reach agreement or do not notify the rules, the taxpayers can again refer to the competent national courts.132 During the procedure before the AC or ADRC, the taxpayer(s) may provide the relevant bodies with any information that may be relevant for the decision.133 The taxpayer(s) may furthermore launch a request
122
Article 6(2), para 3; Article 6(3), para 2 and Article 9(1) proposed DDTDRM. It appears that the choice for adopting one of these alternatives lies in the hands of the competent authorities themselves. 123 Article 6(4), para 2 proposed DDTDRM (which however, erroneously, refers to Article 6(2) proposed DDTDRM). 124 This may be reduced to one by mutual agreement, cf. Article 8(1), para 2 proposed DDTDRM). Note that problems might prima facie arise regarding compatibility with the impartiality and independence requirement imposed by the right to a fair trial (see supra) due to the fact that the counterparty (i.e. the government of the member states involved) are actually also acting as judges in their own case. 125 Article 8(1) proposed DDTDRM. 126 Article 7(1), paras 1-2 proposed DDTDRM. This referral to a national court must occur in the timeframe between the end of the fifty-calendar-day period and two weeks after the end of that period (Article 7(2) proposed DDTDRM). The competent national court’s decision will be notified to the taxpayer and the competent authorities involved; an appeal may be brought to positive or negative decisions of the court (as the case may be, by the administration or the taxpayer), in accordance with domestic law (Article 7(3) proposed DDTDRM). 127 Article 9 proposed DDTDRM. 128 Article 9(4) proposed DDTDRM. 129 This date may be set no later than 6 months after the setting up of the AC or ADRC. 130 Article 10(1) proposed DDTDRM. 131 Article 10(2) proposed DDTDRM. 132 Article 10(3) proposed DDTDRM. 133 Article 12(1) proposed DDTDRM.
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to appear or be represented before the AC or ADRC.134 The AC or ADRC may also compel the taxpayer(s) or competent authorities involved to produce any relevant documents to it. Although the members of the AC and ADRC are in principle bound by professional secrecy rules135, the competent authorities may refuse to provide such information in a number of listed circumstances.136 It is clear from the above that the taxpayer, whilst given additional rights as compared to the existing instruments, still does not enjoy full party status and does not, as suggested by some stakeholders, serve as an amicus curiae in the procedure between the tax authorities involved.137 The AC or ADRC will deliver its opinion on the elimination of double taxation (infra, n° 2.3.2) within six months after the date it has been set up.138 This opinion will be adopted by simple majority vote of its chairs; in the absence of a majority the vote of the chair will be decisive; subsequently, the opinion will be notified to the competent authorities involved.139 These competent authorities will then take their own decision on the elimination of double taxation within six months after the foregoing notification.140 In arriving at their decision, the competent authorities may deviate from the AC or ADRC’s opinion, although they are bound by it when they fail to reach an agreement on the elimination of double taxation.141 After the adoption thereof, the competent authorities will transmit the decision to the taxpayer(s) involved142 within a period of 30 calendar days.143 That final decision will - subject to the taxpayer renouncing the right to any domestic remedy - be binding on the authorities and enforceable by the taxpayer, and must implemented in national law irrespective of any time limits.144 Taxpayers must be able to refer to the national court in case of a failure to implement.145 2.3.2 Elimination of double taxation As highlighted supra, the ultimate goal of the Proposal’s dispute resolution mechanism is the elimination of double taxation. A crucial question is therefore when double taxation can be considered to be resolved. According to the Proposal, this will be the case if (i) income subject to double taxation is included in the computation of the taxable income in one Member State only, or (ii) tax chargeable on this income in one Member State is reduced by an amount equal to the tax chargeable on it in any other Member State.146 This seems to correspond to the relief mechanisms usually applied in domestic and/or tax treaty law: whereas (i) refers to the exemption method, (ii) refers to the granting of a tax credit. Whether this tax credit implies a full or an ordinary credit, is open for discussion (although the wording seems to imply the latter).
134
Article 12(2) proposed DDTDRM. Article 12(3) proposed DDTDRM. 136 Article 12(1) proposed DDTDRM. 137 Whether or not this violates the taxpayers’ access to justice falls outside the scope of this contribution. 138 Article 13(1) proposed DDTDRM. 139 Article 13(3) proposed DDTDRM. 140 Article 14(1) proposed DDTDRM. 141 Article 14(2) proposed DDTDRM. 142 One could wonder whether, in view of increasing transparency and equal treatment, the decisions of competent authorities should be made public (see also the Dutch NOB’s comments, http://www.nob.net). 143 Article 14(3) proposed DDTDRM. Absent such notification, taxpayers may appeal before a national court. 144 Article 14(4) proposed DDTDRM. 145 Article 14(4) in fine proposed DDTDRM. 146 Article 4(2) proposed DDTDRM. 135
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Another pressing issue is which rules should be applied to resolve the situation of double taxation. In this respect, no detailed allocation rules can be found in the Proposal. This is fully in line with the approach adopted by the Commission; in its view, the inclusion of “specific and targeted rules on how to solve instances of double taxation for all identified conflicting tax legislations […] is […] not proportionate to the problems encountered”.147 In the absence of specific criteria for alleviating double taxation, it is in principle up to the Member States involved to decide how they will eliminate the double taxation, thus still safeguarding their tax sovereignty.148 Nonetheless, the Proposal does offer some guidance in this respect, since it requires the AC and ADRC to take into account “the applicable national rules and double taxation treaties”.149 Absent tax or other treaties between the Member States involved, the AC or ADRC “may refer to international practice in matter of taxation such as the latest OECD Model Tax Convention”.150 The authors wonder whether the fact that administrative authorities151 are given significant discretion to decide on the rules and practices used to solve the double taxation at hand, may raise issues regarding the principle of legality and equality in tax matters. That being said, the authors also wonder whether the dispute resolution mechanism of the Proposal is effectively able to resolve situations of double taxation that are not contrary to domestic legislation or tax treaties (or the rules contained in the OECD Model). The latter instances mainly include all forms of economic double taxation (see the examples given supra), which arise due to the parallel, non-discriminatory application of domestic tax systems and for which tax treaties usually do not offer relief. Relying on the rules provided for by the OECD Model Tax Convention in these cases will not eliminate the double taxation. 2.3.3 Relation to other procedures After the directive has been transposed into national legislation, taxpayers are confronted with a plurality of measures to obtain relief for international double taxation: (i) tax treaty-based MAPs, (ii) the Arbitration Convention and (iii) the new double taxation dispute resolution mechanism. This multitude of procedures brings about at least two questions. A first query is whether a taxpayer can launch multiple proceedings at the same time (e.g. MAP under tax treaty and DDTDRM procedure) and if so, what is the fate of these parallel proceedings? This question is solved by the Proposal itself. In principle, the Proposal is not opposed to parallel proceedings. However, when a taxpayer decides to also submit his case to the dispute resolution procedure of the Proposal (Advisory Commission)152, this will put an end to any other parallel procedure regarding the same dispute in case the same Member States are concerned.153
147
Impact assessment, p. 39 and 58. One could argue that, on the basis of Article 11 proposed DDTDRM, all Member States should share the ‘cost’ of resolving double taxation equally. According to the authors, this conclusion would amount to a stretched reading of Article 11 which is not in line with its true purpose, which is merely to allocate the costs of the procedure (and hence, not to split the required relief for double taxation). 149 Article 13(2) proposed DDTDRM. 150 Ibid. 151 Which are part of the AC and are responsible for implementing the decision. 152 This should also apply to the ADRC mechanism (although the Proposal only makes reference to the AC mechanism under Article 6). This also follows from art. 15(5) in fine proposed DDTDRM. 153 Art. 15(4) proposed DDTDRM. This una via mechanism has effect as from the date of appointment of the AC or ADRC. The authors would cautiously conclude that the same mechanism applies when a case is admitted to the MAP stage. 148
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A second and more difficult question relates to a situation in which a taxpayer initiates a MAP on the basis of a tax treaty between two Member States or a procedure under the Arbitration Convention (whilst not relying on the proposed DDTDRM’s procedure).154 In that case, the question is whether taxpayers can oblige the Member States to extend the (per assumption) more taxpayer-friendly aspects of the DDTDRM proposal to such procedures (‘cherry-picking’). In our opinion, it appears logical that if the taxpayer voluntarily waives his right to submit his case to the Proposal’s procedure, the Member States cannot be criticised for not applying the procedural safeguards of the Proposal’s procedure in the context of such other procedures.
3 CONCLUSION With the Proposal, the EU has taken the first steps towards designing a comprehensive dispute resolution mechanism for international tax disputes, which seeks to balance the rights of the taxpayer and the sovereignty of the Member States involved. As far as the scope is concerned, the Proposal uses a broad concept of double taxation which – if interpreted in line with the Proposal’s object and purpose – could cover many instances of double taxation of business income that currently remain unresolved. The Proposal’s procedure aims at augmenting the protection of the taxpayer in the double taxation dispute resolution procedure, a goal which is already emphasized in the very first sentence of Article 1 of the Proposal. For example, at several stages, the taxpayer has to possibility to ‘unblock’ the procedure in case of lack of agreement between the competent authorities involved. Nonetheless, one could wonder whether the Proposal’s procedure complies with the fair trial standards of the Charter, which applies to (implementation of) the (proposed) Directive. At the same time, the procedure ensures that the sovereignty of the Member States is respected. The Proposal indeed ensures that competent authorities of the Member States involved will remain the primary actors in the dispute resolution proceedings and installs some critical safeguards to avoid that the procedure will be clogged with frivolous complaints. Overall, the Proposal is undoubtedly a welcome step forward in improving the position of the taxpayer in cross-border double taxation disputes. Nonetheless, some work still has to be done for the Proposal to come close(r) to BAKER and PISTONE’s proposed ‘BEPS Action 16’.155
154
If a taxpayer decides to launch a request under the proposed DDTDRM’s procedure, the abovementioned paragraph applies (i.e. the MAP and Arbitration Convention procedure will end once the case reaches the AC or ADRC; or, alternatively, the MAP stage). 155 P. BAKER & P. PISTONE, BEPS Action 16: The Taxpayers’ Right to an Effective Legal Remedy Under European Law in CrossBorder Situations, EC Tax Review 2016/5-6, p. 335-345.
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