The measure received far less press than the relaunch of the common consolidated corporate tax base (CCCTB), but was no less keenly anticipated by businesses. On Tuesday 25 October, the Commission proposed a directive aiming to create a robust mechanism for the resolution of tax disputes arising from double taxation affecting companies of several member states. Currently, the EU is armed only with an arbitration agreement of limited effectiveness and with fairly long procedures (that can take up to 10 years).
If the member states manage to agree on a common corporate tax base, without the consolidation aspect – a possibility provided for de facto by the Commission, which is anticipating a two-stage approach – the number of tax disputes may increase, hence the need for an effective and speedy mechanism.
The directive proposed by the Commission would aim to extend the scope of the tax dispute resolution mechanism to all cross-border situations in which a company's profits are taxed twice (with the exception of VAT). The Commission explains that the directive would add an explicit obligation of result for member states and would define a time limit (a maximum of 45 months). Furthermore, it excludes situations of double non-taxation, fraud and negligence.
Like the arbitration agreement, the directive allows for a mutual agreement procedure (MAP) triggered by a complaint from a taxpayer, whereby the member states must cooperate freely and reach an agreement within two years. If this procedure breaks down, it will move across to a dispute resolution procedure in which the competent authorities of the member states involved will ultimately issue a binding decision. Articles 6 and 7 of the proposed directive provide for an automatic arbitration procedure within a period of 15 months if the states fail to reach an agreement amongst themselves.
In the event that one of the two member states rejects the taxpayer's complaint, on the grounds that it does not recognise the existence of double taxation, a panel made up of between three and five independent individuals will be appointed (one or two members for each state and an independent president) with two representatives of each member state. This 'consultative committee' will then make a final decision on eliminating the double taxation, which will be binding on the member states, unless they agree on an alternative solution.
The state may decide to set in place an alternative committee to resolve a tax dispute, but they will be required to prove that it is able to provide an effective and rapid results. This committee may be composed differently from the consultative committee and apply conciliation, mediation or other techniques to resolve the dispute.
The procedural costs, either for a consultative committee or an alternative committee, will be borne equally between the member states.
The European Commission also proposed amendments to the anti-tax avoidance directive (ATAD2). These aim to respond to hybrid mismatch situations between the member state and a third country, whilst ATAD dealt only with situations between member states. The proposal was not available as EUROPE went to press.
The proposed common corporate tax base includes the provisions of ATAD. It stipulates that if the hybrid mismatch involves a third country and the payment has its source in the member state, the member state must refuse the deduction. If the payment has its source in the third country, the member state concerned must ask the taxpayer to include this payment in its taxable base, unless the third country has already granted the deduction or has asked for the payment to be included. Several specific different situations are dealt with, such as if the company has its tax residence in a member state or in a third country.
Lastly, as EUROPE reported in detail last week (see EUROPE 11647), the Commission has relaunched its proposal for a common consolidated corporate tax base (CCCTB). The commissioner responsible for the dossier, Pierre Moscovici, was to speak at the plenary session of the European Parliament in the early evening. He will present his proposal to the press this Wednesday 26 October.
The Commission now wants major groups to be obliged to subscribe to the CCCTB, which was only optional in 2011. The threshold to define major groups is that of the OECD and its country-by-country reporting to the tax administrations, or consolidated annual turnover of €750 million. Other companies may opt in.
Initially, the Commission intends to define the common base, with the option for a group to consolidate its results as the subject of a separate proposed directive. At this stage, the Commission is looking at 2020 for the new rules to enter into force, with consolidation to follow in 2022.
All revenue would be considered taxable unless it is explicitly exempted. This means that revenue consisting of dividends or generated from the sales of shares of companies outside the group (for stakes of at least 10%) will be exempted, in order to present the risk of double taxation of direct foreign investments.
The Commission is considering an extremely generous regime to promote research and development and to move the member states away from 'patent boxes'. Within the Commission, questions have been raised as to the actual benefits of these tax regimes in favour of intellectual property, which are frequently used to avoid tax. If the CCCTB sees the light of day, major groups will no longer have access to these patent boxes and would come under a regime that will be advantageous but also help fight abuse. The same applies to 'notional interest', which the Commission plans to roll out in order to rebalance the tax treatment between indebtedness (for which interest is deductible) and equity financing. EUROPE will return to this. (Original version in French by Élodie Lamer)