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Member States have sovereignty in designing their own direct tax systems and procedures. Consequently, 28 different national tax regimes can potentially apply to the same transaction in the European Union (EU) and may result in the imposition of comparable taxes by two (or more) tax jurisdictions in respect of the same taxable income or capital (Double Taxation). For example, a company being resident in a Member State can perform activities in a second Member State, which characterize a Permanent Establishment and be taxable in the two Member States on the same income deriving from the Permanent Establishment. Another example would be a company located in a third State and doing business in several Member States and being taxed on the same income by these Member States.
So far, the EU Member States are trying to resolve double taxation cases based on bilateral double tax convnetions (DTC) or multilateral conventions. The OECD Model Tax Convention on Income and on Capital (MTC) is the most frequent tool used in this field. DTCs assign taxing rights between the Residence State and the Source State. DTCs regularly provide for a mutual agreement procedure (MAP) to solve differences arising between States in their application, whereby the corresponding competent authorities shall discuss the issue to solve it but are under the basic form of this procedure not bound to reach a solution. In its 2008 update, the MTC suggest supplementing the MAP with a clause that requires agreeing on a solution by way of arbitration.
The uptake of such arbitration clauses in DTC is until now rather limited. In the EU, the MS already in the 1990th have agreed a multilateral convention foreseeing such a process (the EU Arbitration Convention "AC") which, however, applies only to a limited area of corporate taxation (transfer pricing and profit attribution to permanent establishments).
The issue of double taxation of business activities has continuously gained importance. The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules which were designed more than a century ago. Opportunities for cross border tax avoidance and evasion resulting from this situation need to be closed. A further aspect to be considered is the increased attention in public debate about taxation, especially in the context of corporate tax and Multinational Enterprise Groups (MNEs).
With the Anti Tax Avoidance Package which was published just recently in the context of the June 2015 Action Plan Action Plan for Fair and Efficient Corporate Taxation in the EU, the EU Commission calls on Member States to take a stronger and more coordinated stance against companies that seek to avoid paying their fair share of tax and to implement the international standards against base erosion and profit shifting.
This most recent context of measures taken to fight tax evasion and avoidance, as well as the ongoing globalisation and digitalization of the economy require to consider the obstacle of double taxation with even greater attention given a possible exponential increase of tax disputes. Double taxation is in itself a source of legal uncertainty for taxpayers as frequently pointed out by business associations and representatives of taxpayers and can have impact on business decisions, mobility and functioning of the market.
Why it matters?
Double or multiple taxation results in a higher tax burden, cash-flow disadvantages, higher administrative and compliance costs and burdens. This may deter affected citizens from taking full advantage of their right to operate freely across borders in the EU's Internal Market. Entrepreneurs in the EU may need to comply with up to twenty-eight different sets of rules. Taking into account that these companies increasingly target the EU as one market, such a situation often conflicts with economically efficient business plans and structures. The multiplicity of tax laws, DTCs and practices entail substantial compliance costs and represent a barrier to cross-border economic activity. If combined with limited solutions to resolve double taxation cases, the negative consequences become an unwelcome permanent feature that necessitates attention.
Therefore there is still a need to find a balance between the legitimate exercise by Member States of their national sovereignty in direct taxation, including by establishing measures to prevent tax avoidance and evasion, and the requirement to remove barriers to cross-border economic activity in the EU's Internal Market.
Previous consultation and research
A public consultation on double taxation conventions and the internal market was launched by the Commission in 2010 (the 2010 public consultation). The consultation confirmed that despite the advantageous situation in the EU as regards the availability of DTC in the area of direct taxation, the instruments to relieve double taxation were regarded as still not functioning properly. The consultation identified that most of the issues arise in the context of business taxation.
This result of the 2010 public consultation is in line with the findings of the OECD in the context of its Project on Dispute resolution, which resulted in updating the OECD MTC with an arbitration provision applicable to all disputes in July 2008. However, the arbitration provisions are not regularly inserted into the double tax conventions. The issue therefore persists as confirmed in the context of the OECD project on Base Erosion and profit shifting, Action 14, "Making Dispute Resolution Mechanisms more Effective".
Based on the outcome of the 2010 public consultation the Commission undertook various measures to examine the scope and magnitude of the problems and, particularly, what exactly prevents the existing double taxation dispute resolution mechanisms from a smooth functioning. Action taken by the Commission as a follow up to the public Consultation were
- November 2011: Communication from the Commission on Double taxation in the Single Market (COM (2011) 712 final)
- March 2012: Change of Statistics on functioning of the EU Arbitration Convention
- December 2012: Organisation of a inter governmental seminars on double taxation issues and insufficiency of international agreements
- March 2013: Launch of Study to identify and describe most frequent double taxation cases in the internal market (delivered in June 2013)
- April 2013: discussion incl. questionnaires to MS and stakeholder meetings
- October 2013 to March 2015: Discussion in EU Joint Transfer Pricing Forum, (a Commission Expert Group) on improving the functioning of the Arbitration Convention
- June 2014: creation of Expert Group on cross border tax obstacles for individuals within the EU
- June 2014: creation of Expert Group on inheritance tax obstacles within the EU
- March 2015: Report of the EU JTPF on Improving the functioning of the Arbitration Convention.
Why business focus?
Given the relevance of the issue in the context of business taxation which persists despite the broad availability of DTC and the Arbitration Convention, the Commission decided to first focus on addressing the shortcomings identified for the situation of business taxation. It will then assess whether the solutions under reflection would be appropriate for being extended to other areas of taxation.
The corporate taxpayers who took part in the 2010 consultation reported that the amounts involved in double taxation disputes, amplified by administrative and legal costs, are sometimes so high that they create serious economic risks for companies.
Accordingly, the Commission included the objective of improving double taxation dispute resolution mechanisms in its Communication of an Action Plan for a Fair and Efficient Corporate Tax System in the EU. The Action Plan focusses strongly on measures to avoid base erosion and profit shifting ("BEPS"), but it is also recognised that these efforts must be complemented by improving mechanisms for the elimination of double taxation to ensure certainty and predictability for business as double taxation in the Single Market has a negative impact on cross border investment and leads to economic distortions and inefficiencies.
The Action Plan foresees that in order to create greater certainty for business the Commission will propose improvements to the current mechanisms to resolve double taxation disputes in the EU, by summer 2016. The aim is to create a coordinated EU approach to dispute resolution, with clearer rules and more stringent timelines, building on the systems already in place. This will inter alia review how the scope of advanced mechanisms (e.g. the EU Arbitration Convention) can be extended (broaden the scope) within the Union and how to make the existing mechanisms enforceable (i.e. be effective as regards the goal of solving double taxation disputes) and more efficient (i.e. achieving this goal in an optimal way as regards time, costs and burden for all stakeholders) to improve the functioning of the Single Market.
In summary, the key objectives of the initiative focus on Scope, Enforceability and Efficiency.
Purpose of this consultation
This consultation wants to gather all stakeholders' views in particular on:
- the relevance of removing double taxation for enterprises operating cross border;
- the objectives which are suggested to be pursued at the EU level and which are aiming at fulfilling the Action Plan commitment of an improved dispute resolution mechanism;
- the solutions which are discussed.
According to the OECD glossary of tax terms, this term is used for the determination of a dispute by the judgment of one or more persons, called arbitrators, who are chosen by the parties and who normally do not belong to a normal court of competent jurisdiction. A specific clause on arbitration is provided for by the OECD Model Tax Convention (Treaty) under Article 25 of the said OECD Model Tax Convention (Treaty).
According to the OECD glossary of tax terms, generally speaking, enterprises are associated where the same persons participate directly or independently in the management, control or capital of both enterprises, i.e. both enterprises are under common control.
Base Erosion and Profit Shifting. The term is hereafter referred to in the context of the OECD Base Erosion and Profit Shifing 15-point Action Plan published in 2013 (see OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD BEPS Action Plan)
In the Commission Communication on Double Taxation in the Single Market (C(2011)712 final), double taxation is defined as the imposition of comparable taxes by two (or more) tax jurisdictions in respect of the same taxable income or capital. Although double taxation can also occur in purely domestic situations, in particular as far as it concerns economic double taxation, this Consultation focuses on cross-border situations only.
Traditionally, double taxation is divided into two kinds, juridical double taxation and economic double taxation. In the case of juridical double taxation two comparable taxes are applied to the same taxpayer in respect of the same income or capital. Generally the expression economic double taxation is used when different taxpayers are taxed in respect of the same income or capital.
Double Tax Conventions, DTC (treaties)
According to the OECD glossary of tax terms, a Double Tax Convention (Treaty) is defined as an agreement between two (or more) countries for the avoidance of double taxation. A tax treaty may be titled a Convention, Treaty or Agreement.
EU Arbitration Convention, AC
The term "Arbitration Convention" shall be construed hereafter as the Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises, which is a multilateral instrument establishing a procedure to resolve disputes where double taxation occurs between enterprises of different Member States as a result of an upward adjustment of profits of an enterprise of one Member State (transfer pricing and allocation of profit to Permanent Establishments).
Model Tax Conventions, MTC (treaties)
According to the OECD glossary of tax terms, a model tax convention (treaty) is designed to streamline and achieve uniformity in the allocation of taxing right between countries in cross-border situations. Model tax treaties developed by OECD and UN are widely used and a number of countries have their own model treaties. When it is referred to "Model Tax Convention(s)" hereafter, it should be narrowly construed as the OECD Model Tax Convention(s).
Multilateral Instrument or Agreement
A written agreement between three or more sovereign States establishing the rights and obligations between the parties. It can refer hereafter to a specific clause in a multilateral convention (treaty) or to the multilateral convention (treaty) itself.
Mutual Agreement Procedure (MAP)
A means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorized notably by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment.
According to the OECD glossary on tax terms the term is used in double taxation agreement (although it may also be used in national tax legislation) to refer to a situation where a non-resident entrepreneur is taxable in a country; that is, an enterprise in one country will not be liable to the income tax of the other country unless it has a "permanent establishment" through which it conducts business in that other country. Even if it has a PE, the income to be taxed will only be to the extent that it is 'attributable' to the PE