Framework for UK/EU double taxation dispute resolution

HMRC has outlined proposals for new regulations designed to provide a more efficient framework for the resolution of double taxation disputes arising between the UK and other member states post-Brexit

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.

The new regulations do not replace the existing bilateral tax treaties or the Union Arbitration Convention, but are another option for businesses and individuals to consider.

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, together with 64 requests from business relating to transfer pricing issues and a further eight business requests for other reasons.

Unlike existing bilateral tax treaties, the new measures include a provision for mandatory and binding arbitration.

HMRC says the new regulations build on the UK’s network of bilateral tax treaties with other member states, and on the existing Union Arbitration Convention which provides a mechanism for member states to resolve disputes where double taxation occurs as a result of an upward adjustment of profits by one member state.

This can be applied in respect of a connected party transaction where the other enterprise is tax resident in another member state.

A 2015 review of the Union Arbitration Convention revealed a number of shortcomings regarding the scope of the mechanism, the ability to access it and the length of time taken to resolve disputes.

As a result, the Council of the EU issued Directive (EU) 2017-1852 on tax dispute mechanisms in the EU, known as the Arbitration Directive.

It is this directive which forms the basis of the new regulations. 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).

It 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 was issued on 10 October 2017. 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.

Legislating the Double Taxation Dispute Resolution (EU) Regulations 2020 

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