The European Union’s Arbitration Convention entered into force on 1 January 1995. The purpose of this convention is to eliminate double taxation. This can happen when tax authorities correct the profit of affiliated companies, because transactions have not taken place in accordance with the ‘at arm’s length’ principle. This often leads to complex disputes. Meijburg & Co’s specialists are here to help you with such disputes.
Arbitration Convention invocable to eliminate double taxation in transfer pricing cases
When a tax authority corrects the profits of affiliated companies in order to meet transfer pricing standards, this can lead to double taxation. Tis may occur when one member state decides to adjust the business’s profits upwards, while the other member state is not prepared to accept a corresponding adjustment downwards. At this point, the Arbitration Convention may be invoked.
Attempts to eliminate double taxation
In such situations, the business may submit the case to the competent authority. This must happen in the member state where the business is established, within three years of the first tax return in respect of which the double taxation has been the consequence. What if the member states concerned fail to reach agreement on double tax credits within two years? Then an advisory commission is appointed. The commission must present its recommendations within six months. At a certain point, these recommendations on double tax credits can acquire a binding effect.
In practice, the Arbitration Convention has proven inadequate. Legal proceedings tend to take a very long time. In many cases, the solutions are not enforceable either. In addition, the Arbitration Convention fails to offer any remedies for double taxation, which are not a consequence of transfer pricing corrections. Moreover, as a consequence of the measures to counter BEPS, many more cases of double taxation will occur.
For these reasons, on 10 October 2017, the Arbitration Directive was adopted. This directive enables obligatory and binding arbitration in case of disputes. Such disputes may concern the explanation and application of tax treaties. In other words, they are not restricted to transfer pricing. An important part of the Arbitration Directive is the possibility for businesses to enforce arbitration in certain cases. This directive applies to qualifying complaints you submit from 1 July 2019. The complaint must relate to a dispute, which has taken place since 31 December 2017.
Need help with the application of the Arbitration Convention?
Do you need help in applying the Arbitration Convention in case of double taxation? Would you like advice on how best to use the Arbitration Directive? Meijburg & Co’s professionals are here to help you. We can assist you with your complaint and provide assistance where necessary. Feel free to contact us.