The UK ceased to be a Member State of the EU on 1 February 2020 and we are now in a period of transition which will end on 31 December 2020. During this period the UK continues to follow the EU rules on arbitration and dispute resolution. A common question from clients is how will this change when the transition period ends and should they be taking action now?
As the number of transfer pricing disputes with tax authorities increases, businesses should be prepared for the growing possibility that they will be facing double taxation. This might be resolved by making a Mutual Agreement Procedure (MAP) claim under a double tax treaty.
The MAP enables two (or more) tax authorities to seek to resolve the double taxation through discussion and correspondence. While there is no time limit for how long this process can take, many of the UK's double tax treaties, but not all, include a provision for setting up an arbitration panel if the dispute is not resolved within two years.
The European Union Arbitration Convention (EUAC), 90/463/EEC, a standalone international agreement, is available to residents of the EU and provides a complementary mechanism for MAP discussions, introducing a uniform system of mandatory and binding arbitration across the EU. The EAUC however only covers disputes arising under Articles 9 and 7, i.e. transfer pricing and the attribution of profits to a permanent establishment.
Additionally, the EU Dispute Resolution Directive (EUDRD) 2017/1852 provides a further alternative. This Directive brings a significant improvement to resolving tax disputes, as it has a wider scope than the EUAC and also gives taxpayers enhanced legal certainty when it comes to seeking a solution to their cross-border tax disputes. The EUDRD does not amend or replace the EUAC or the UK's network of double tax treaties, but is an additional instrument. The Directive came into force in the UK with effect 14 February 2020, in relation to accounting periods commencing on or after 1 January 2018.
