New regulations to give effect to the EU Arbitration Directive will offer additional scope to achieve effective resolution of double tax disputes.
Regulations to give effect to the 2017 Arbitration Directive build on the existing EU Arbitration Convention. They widen the scope of eligible disputes to include any issues arising from the interpretation of tax treaties. In addition to widening the scope of mandatory binding arbitration they also allow taxpayers to challenge decisions of Member States which refuse access to the process through the domestic courts. These rules will apply through the UK’s Brexit transition until the end of 2020 but their status thereafter is currently unclear.
Effective resolution of transfer pricing and other cross border disputes remains a very significant issue for business. This action to implement the Arbitration Directive is very welcome, even if for UK taxpayers, the regulations may only apply until the end of the Brexit transition period. It builds on the improvements already made as a result of BEPS Action 14, and the strengthening of the Mutual Agreement Process (MAP) through the operation of the OECD Multilateral Instrument. These measures, together with binding arbitration provisions coming into UK bilateral treaties, give taxpayers better prospects of achieving resolution that effectively relieve double taxation than ever before.
HMRC’s recently published transfer pricing statistics show that MAP applications and settlements are at record levels with 91 new cases admitted and 95 cases settled in 2018/19. Improving the infrastructure to better support the process contributes to this growth as business makes more frequent use of better access to MAP with greater certainty of a successful outcome. Equally, tax administrations, facing arbitration if they cannot reach a negotiated settlement, are under increased pressure to conclude timely agreements.
The Arbitration Convention applies quite narrowly to disputes only relating to the allocation of profits between associated enterprises or to branches. These regulations extend that scope significantly to include any issues arising from the interpretation and application of tax treaties; for example to include issues such as whether a permanent establishment exists not just the amount of any profits attributable to it.
Whilst HMRC have an excellent track record in operating MAP and arbitration – as confirmed in the OECD’s peer review – the regulations also introduce the opportunity to apply to the domestic courts to ensure that taxpayers have access to the process and that the procedural mechanisms set out in the Directive are properly followed. It is unlikely that many taxpayers will have to resort to using these measures but their existence should help to ensure that HMRC, and other tax administrations, apply the rules correctly.
The regulations apply to disputes relating to accounting periods commencing on or after 1 January 2018. As noted previously, the regulations will continue to apply through the Brexit transition period until the end of 2020, however their application thereafter is uncertain. HMRC have committed to updating their operational guidance to explain how these measures will apply in practice and hopefully that will shed more light on their future application. However taxpayers should make best use of the transition period to submit applications.
In conclusion, these measures add to the raft of improvements to existing cross border dispute resolution mechanisms we have seen over recent years and should give business additional confidence that engaging in the MAP/arbitration process will deliver timely and effective results.
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