New regulations in the UK implement the EU Arbitration Directive and are expected to help with effective resolution of double tax disputes.
Regulations to give effect to the 2017 Arbitration Directive build on the existing EU Arbitration Convention. They broaden the scope of eligible disputes to include any issues arising from the interpretation of tax treaties. In addition to broadening the scope of mandatory binding arbitration, they also allow taxpayers to challenge decisions of EU Member States that 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 significant issue for business. The UK’s action to implement the Arbitration Directive may be beneficial, even if for UK taxpayers, the regulations only apply until the end of the Brexit transition period. The UK rules build on the improvements already made as a result of the base erosion and profit shifting (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, are viewed as giving taxpayers better prospects of achieving resolution of double taxation issues than ever before.
HM Revenue & Customs (HMRC) recently published transfer pricing statistics that show that MAP applications and settlements are at record levels, with 91 new cases admitted and 95 cases settled in 2018/2019. 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.
Together with HMRC’s track record in operating MAP and arbitration (confirmed in the OECD’s peer review), the regulations introduce an opportunity to apply to the domestic courts to determine that taxpayers have access to the process and that the procedural mechanisms set out in the directive are properly followed. Tax professionals believe it is unlikely that many taxpayers will have to resort to using these measures, but their existence could help to determine 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 stated its commitment to updating the operational guidance to explain how these measures will apply in practice, and that could shed more light on their future application. In the meantime, taxpayers need to consider making the best use of the transition period to submit applications.
In conclusion, these measures add to the improvements to existing cross-border dispute resolution mechanisms and may give business additional confidence that engaging in the MAP/arbitration process will deliver timely and effective results.
Read a February 2020 report prepared by the KPMG member firm in the UK
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