Policy paper

Legislating the Double Taxation Dispute Resolution (EU) Regulations 2020

Updated 1 December 2020

Who is likely to be affected

Any person who is resident for tax purposes in a Member State of the EU (Member State) and whose taxation is directly affected by the interpretation and application of tax treaties between the UK and any other Member State which results in double taxation for that person.

General description of the measure

No new MAP claims will be accepted under either the Arbitration Directive or the Union Arbitration Convention from 1 January 2021.

This measure builds on the UK’s network of bilateral tax treaties with other Member States and on the existing Convention on the elimination of double taxation in connection with the adjustment of associated enterprises (90/463/EEC) [the Union Arbitration Convention] which provides a mechanism specifically for Member States to resolve disputes where double taxation occurs as a result of an upward adjustment of profits by one Member State in respect of a connected party transaction where the other enterprise is tax resident in another Member State.

The Union Arbitration Convention introduced a uniform system of mandatory and binding arbitration across the EU. Under the Union Arbitration Convention, affected persons can present a case, supported by evidence, to each of the Competent Authorities of each of the Member States concerned within 3 years from the receipt of the first notification of the action resulting in, or that will result in, the double taxation. If the case is admitted then the Member States are required to agree a solution which eliminates the double taxation.

It should be noted that in addition to the Union Arbitration Convention, taxpayers can also access tax dispute resolution mechanisms through the UK’s network of bilateral tax treaties. However, not all those bilateral tax treaties include a provision for mandatory and binding arbitration.

A 2015 review of the Union Arbitration Convention revealed some important shortcomings. In particular as regards; the scope of the mechanism; access to the mechanism; and the extent to which Member States were arriving at effective resolutions in a timely manner. Consequently, the Council of the EU issued Directive (EU) 2017/1852 on tax dispute mechanisms in the EU the Arbitration Directive.

Under the Arbitration Directive, the process for presenting a case (referred to as submitting a complaint) is similar to that laid down in the Union Arbitration Convention. However, the Arbitration Directive; has a wider scope, covering all disputes arising from the interpretation and application of tax treaties (not just questions around transfer pricing and permanent establishment); introduces means for affected persons to challenge decisions by Member States to refuse access to the mechanism; and introduces a role for domestic courts to oversee adherence to procedural requirements of the mechanism. It also introduces particular rules for SMEs and individuals designed to lessen the administrative burden associated with presenting a case.

The Arbitration Directive does not amend or replace the Union Arbitration Convention which is a standalone international agreement or the UK’s network of bilateral tax treaties.

Policy objective

Double taxation can create serious tax obstacles for businesses and individuals operating across borders by creating excessive tax burdens that are likely to cause economic distortions and inefficiencies and to have a negative impact on cross border investment and growth.

The aim of this measure is to introduce a more effective and efficient framework for the resolution of tax disputes arising between the UK and other Member States to ensure legal certainty and create a business-friendly environment for investments in order to achieve fair and efficient tax systems across the EU.

Tax dispute resolution mechanisms should also create a harmonised and transparent framework for solving disputes and thereby provide benefits to all taxpayers. The Arbitration Directive reflects significant changes in the nature of cross border trade and thinking around the international tax environment which encouraged the European Commission to revisit Member States’ approach to tax dispute resolution.

Background to measure

The Arbitration Directive was issued on 10 October 2017. Article 22 of the Arbitration Directive requires Member States to bring into force the laws, regulations and administrative provisions necessary to comply with the Arbitration Directive. The aims, objectives and methods of the measure have been well publicised by the EU.

Finance Act 2019 included the enabling legislation at Paragraph 83 empowering HMRC to produce detailed regulations to ensure the effective implementation of the Arbitration Directive under UK law.

Draft regulations were published on 1 July 2019 and a public consultation exercise ran from then until 27 August 2019.

Detailed proposal

Operative date

HMRC expects to lay the regulations in January 2020. The measure will apply to questions in dispute relating to income or capital earned in a tax year commencing on or after 1 January 2018.

Current law

This is a new measure which will build on, but not amend or replace, the legislation covering the Union Arbitration Convention or the UK’s network of bilateral tax treaties with other Member States. The detailed text of the Union Arbitration Convention can be found in the Official Journal of the European Communities and through the EU website.

Proposed revisions

As the Union Arbitration Convention is a standalone international convention, this measure will not revise it. Instead, additional legislation was inserted at section 128A-C TIOPA 2010 by virtue of paragraph 83 of Finance Act 2019. This additional legislation empowers HMRC to introduce detailed regulations to effectively implement the Arbitration Directive.

Summary of impacts

Measuring the likely take up of this measure by businesses and individuals is challenging.

First, new cases will be triggered at the request of taxpayers inside and outside the UK so the number of cases submitted is not controlled by HMRC.

Second, the two existing tax dispute resolution mechanisms (the Union Arbitration Convention and the UK’s network of bilateral tax treaties) will be unaffected by the introduction of this new measure. So, taxpayers may continue to use these pre-existing mechanisms in preference to the new measure.

As a broad indicator of the number of taxpayers who may consider using this new measure, the following table details new cases started (by category) in the last 3 years by category.

Cases taken up (involving other Member States) in the previous 3 years

	2016	2017	2018
Individuals	27	149	154
Businesses - Transfer Pricing	36	73	64
Businesses - Other cases	20	33	8

Exchequer impact (£m)

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025
-	-	-	-	-	-

This measure is not expected to have an Exchequer impact.

Economic impact

The measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure expands access to EU double taxation arbitration to include individuals. However, it should be noted that such individuals already have access to the mutual agreement procedure via the UK’s network of bilateral tax treaties with other Member States. This measure is expected to have a positive impact on individuals as this measure will improve the efficiency and effectiveness of existing arbitration procedures and the specific provisions in respect of SMEs and individuals are intended to simplify the process for those persons.

The measure is triggered at the behest of an individual, not HMRC. In 2018, HMRC received 154 requests for assistance with double tax dispute resolution where the treaty partner was another Member State.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that this measure will have adverse impacts on groups with protected characteristics.

Impact on business including civil society organisations

This measure will affect significantly less than 1% of businesses resident for tax purposes in the EU and who are directly affected by double taxation involving the UK and any other Member State. It will sit alongside the Union Arbitration Convention.

This measure is designed to assist with the avoidance of double taxation. Improving the process of addressing double taxation should have a positive impact on businesses affected and more generally should reduce negative impacts that double taxation may have on cross border activities. The measure will improve the efficiency and effectiveness of existing arbitration procedures and the specific provisions in respect of SMEs and individuals are intended to simplify the process for those persons.

The impact on administrative burdens is expected to be negligible as the process of submitting a complaint under the Arbitration Directive is similar to that required when presenting a case under the Union Arbitration Convention. One –off costs include familiarisation with the new procedures. It is not expected that there will be any on-going costs as the measure will not require any business or individual to maintain or retain any documentation or other records beyond those that they are already required to do.

To the extent that most civil society organisations do not participate in cross border activities within the EU which may attract a tax charge, it is unlikely that this measure will have any impact.

Operational impact (£m) (HMRC or other)

No significant operational impacts have been identified.

The measure should not impact on the number of persons requesting assistance. The measure is designed to help address a pre-existing situation – double taxation. It cannot increase or reduce the number of instances. Broadening access to include individuals may result in a number of affected persons requesting assistance under this measure where previously they would have sought assistance under the specific bilateral treaty between the UK and the other Member State.

HMRC already has the teams and structures in place to deal with requests for the elimination of double taxation.

Once the regulations have been brought into force, HMRC’s published guidance will be updated to explain how the measure is applied in practice.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored and assessed by the European Union Commission. The Arbitration Directive requires evaluation by 30 June 2025.

Further advice

If you have any questions about this change, contact Martin O’Rourke, Business Assets and International on Telephone: 03000 515912 or email: martin.orourke@hmrc.gov.uk.