Solving Double taxation cases in the EU arbitration

Solving Double taxation cases in the EU: arbitration as a solution? Juan López Rodríguez DG TAXUD Directorate D - Direct taxation, Tax Coordination, Economic Analysis and Evaluation 1

Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee – Double Taxation in the Single Market – COM (2011) 712 2

Our sources of information: q q q q Company tax study Public consultation on factual cases of double taxation in 2010 Fiscalis seminar with Tax Administrations from the Member States 2012 External study with a consultant in 2013 Working Party IV with delegates from Member States 2013 Meeting with stakeholders in 2013 Platform for tax good governance 2013 – 2014 input from Business Europe and MEDEF 3

The current scenario § Tax systems in the EU do not contribute to simplify the present legal framework § Double taxation is a major impediment and a real challenge for the internal market § In the current state of EU law and in the absence of an EU initiative, Member States are not obliged to prevent double taxation The ECJ ruled that, in so far as EU law does not lay down any general criteria for the attribution of areas of competence between the Member States in relation to the elimination of double taxation within the Community, they are not obliged to prevent the resulting juridical double taxation (ruling 16. 7. 2009, case C 128/08, Damseaux) 4

The problem to be addressed, according to the results of the public consultations: § Double taxation is one of the issues of most concern for EU citizens and business § There are diverging interpretations of the rules intended to eliminate double taxation § It is a source of legal uncertainty § Unrelieved double taxation increases the overall tax burden and can have a negative impact on capital investment. This suggests that it may discourage investment and jeopardize the competitiveness of EU enterprises 5

Preliminary view: § Only 6% of the corporate taxpayers that participated in the public consultation indicated that they had never encountered a dispute concerning double taxation in cross-border situations § The scale of tax involved is significant: by average, more than 20% of the cases are above 1 million € for corporate taxpayers and more than 35% of the cases are above 100. 000€ for individuals (public consultation) § Most cases reported in public consultation are transfer pricing cases (34%) out of our current project. Arbitration Convention § Member States do not see much of a problem § Stakeholders: business and tax practitioners there is a problem inconceivable in the single market requiring action 6

The problem to be addressed double taxation suffered by economic agents and not adequately relieved by the existing legal instruments: 1. There is no DTC applicable between the relevant Member States. The resulting double taxation is not always solved by unilateral relief measures 2. In cases where there is a DTC between the relevant Member States it may not provide that the MS in which the taxpayer resides is unconditionally obliged to prevent the resulting juridical double taxation 3. DTCs do not completely solve the problem of double taxation in an EU context, i. e. ; triangular cases 4. Even when a DTC can solve the problem, the solution may be quite burdensome in terms of time and money which may constitute a problem in itself 7

1. There is no DTC applicable between the relevant Member States. The resulting double taxation is not always solved by unilateral relief measures Ø No DTC CY-HR, CY-LV, CY-LU, CY-NL, DK-ES, DK-FR, HR-LU and HR-PT Ø No DTC and unilateral measure do not relieve double taxation in certain cases DK-FR and NL-CY 8

• 1&2. Problems with the tax credit method, either in DTC or in domestic law: § Source and resident States attribute income to different tax periods § Tax credit calculated on the basis of net income § Insufficient tax liability to deduct tax credit without carry forward (losses) § Formal requirements – foreign tax certificate 9

4. The most typical cases resulting in double taxation (according to public consultation and questionnaire): § § § § § Double tax residence Conflicts on the entity classification Disputes over the existence of a permanent establishment Conflicts in the attribution of profits to permanent establishments Conflicts on the qualification of the income and, as a result: § On the source State right to charge a withholding tax according to the double taxation convention § On the resident State obligation to apply a method to eliminate double taxation The lack of coordination to charge exit taxes (value of the assets) Capital gains Pensions Stock options Income from employment: the conditions for source taxation 10

4. The most typical cases resulting in double taxation • Ø Public consultation: § In 85, 4% of the cases companies have sought remedies to eliminate double taxation, so that 14, 6% of them did not seek a remedy; in the case of individuals, 69% seek a remedy (public consultation). Reasons: – Insufficient resources to launch an action (6%) – Too time consuming (9%) – No expectation of successful result (19%) – Not enough information on the possibilities of remedy (9%) § The costs of the procedures: 38% of the cases amounted between € 10. 000 and € 100. 000; in 38% of the cases amounted between € 1. 000 and € 10. 000 Ø External contractor: remedy only in 41% of the cases 11

• 4. The most typical cases resulting in double taxation • Most typical remedies to solve double taxation (public consultation): § Appeal to local authorities 16% of cases § Domestic court appeal 13% of cases § MAP provided for in DTC 60% of cases § Other 8% 12

• 4. The most typical cases resulting in double taxation (questionnaire to Member States) Ø MAP to solve divergent views on the application of a DTC § 40% of cases initiated 3 years before had not finished with an agreed solution § over 20 months to agree to a solution § 10 DTC include arbitration (BE-FR, BE-EL, BE-UK, DE-IT, DE-LU, DE-NL, DEUK, EL-UK, IT-NL, NL-UK), but only 6 DTC with mandatory arbitration (BE-UK, DE-LU, DE-NL, DE-UK and NL-UK) § No arbitration has been reported 13

• 4. The most typical cases resulting in double taxation (questionnaire to Member States) Total Finished Duration of finished MAPs Number of MAP initiated in 2009 Average of 12, 41 Average of 6, 53 (52, 61%) Average of 20, 8 months Number of MAP initiated in 2010 Average of 9, 53 Average of 6 (62, 95%) Average of 21, 3 months Number of MAP initiated in 2011 Average of 12, 41 Average of 6, 53 (52, 61%) Average of 12, 6 months Number of MAP initiated in 2011 Average of 11, 76 Average of 5, 82 (49, 52%) Average of 9, 66 months 14

• 4. The most typical cases resulting in double taxation (questionnaire to Member States) Ø Could you indicate the typical cases object of MAPs where an agreement was not possible? § § Double tax residence Cases where fraud was involved Qualification questions No sufficient documentation 15

• Possible solutions – tax policy options: • Ø Providing for an EU arbitration procedure to solve conflicting cases deriving from the interpretation and application of DTCs • § Improving the dispute resolution mechanisms provided in the DTCs § Currently, most DTC include a dispute resolution mechanism based on mutual agreement, as provided in the past by the OECD Model Tax Convention on Income and on Capital (article 25), but without any arbitration mechanism § According to the older versions of the OECD Model, the competent authorities were not obliged to close the procedure with an agreed common position § The OECD introduced in the 2008 edition of the Model Tax Convention a new version of Article 25 (adding a paragraph 5) which proposes an arbitration procedure for solving unresolved issues, if the competent authorities are unable to reach an agreement after two years from the presentation of the case, if the concerned person so requests 16

• Possible solutions – tax policy options: • Ø Proposing EU Legislation – directive – providing for an arbitration procedure to solve conflicting cases deriving from the interpretation and application of DTCs § A directive could complement or eventually replace the Arbitration Convention aiming at extending its procedure to juridical double taxation arising on any type of income § This directive would establish a mutual agreement procedure between competent authorities from the Member States § If no agreement is reached after a reasonable period – for example two years – the dispute would be referred to a panel, whose decision should lead to a binding final decision 17

• Possible solutions – tax policy options: • Ø Proposing EU Legislation – directive – providing for the obligation by the Resident State to eliminate international double taxation § Where there is no applicable DTC or the DTC does not provide for the residence Member State to eliminate double taxation § The directive would impose on the Member State of residence the obligation to eliminate double taxation in all circumstances in the case of EU crossborder activities § This Directive would provide two options: § An ordinary credit method § The exemption with progression method § This option would include a tie-breaker rule similar to article 4 of the OECD Model Tax Convention in cases of double tax residence 18

• Possible solutions – tax policy options: • Ø Proposing EU Legislation distributing taxing rights between the source State and the resident State and providing for a tax credit in the latter State where taxing rights are shared § This option would be applicable only in absence of a DTC between Member States § A directive would allocate the taxation rights between Member States combined with an obligation for the State of residence to eliminate double taxation in the cases where taxation rights would be shared § The allocation of taxation rights could be based on the criteria proposed by the OECD Model Convention, despite the taxing rights limitations deriving from the existing EU Directives harmonizing partly corporate taxation § The elimination of double taxation by the State of residence will be made 19 through either the credit method or the exemption method

Thanks for your attention 20