Why a new arbitration procedure?
Because the existing international tax dispute resolution mechanisms appeared not to be sufficient, the OECD included Action 14 ‘on more effective dispute resolution mechanisms’ in the ‘BEPS’ report (Base Erosion and Profit Shifting).
Action 14 contains a minimum standard which obligates the OECD member states to foresee in effective and efficient dispute resolution mechanisms, and to ensure the timeliness of the resolution of such (tax) disputes.
The willingness of Belgium to provide efficient tax dispute resolution mechanisms is particularly illustrated by the fact that Belgium goes beyond the minimum standard imposed by BEPS. Belgium is one of the 20 countries which have explicitly included an arbitration procedure in their double taxation treaties, through the MLI (multilateral treaty implementing BEPS and indirectly modifying certain double taxation treaties).
The most important bilateral tax dispute resolution mechanism is the mutual agreement procedure included in most double taxation treaties. This mutual agreement procedure is, however, less than perfect, since there is no commitment to result. In other words, the tax payer is not guaranteed a (satisfactory) decision. Furthermore, procedures can become very lengthy, since oftentimes fixed deadlines or timeframes are missing.
Within the European Union there is also the Union Arbitration Convention (90/435 EEG). This convention does commit itself to an actual result (decision), but its scope is limited to transfer pricing issues. A new instrument with a much wider scope, and with a commitment to result, now exists in the form of Council Directive (EU) 2017/1852 of 10 October 2017. This directive has been implemented into Belgian legislation with the law of 2 May 2019.
Who can use the new arbitration procedure?
Any ‘affected person’ has access to the new arbitration procedure. ‘Affected persons’ are all the persons, including individuals, companies, associations, foundations, … which are tax resident of a member state and whose taxation is directly affected by a question in dispute.
Which disputes can be resolved?
The new procedure aims to resolve European disputes as a consequence of a difference in interpretation and/or application of tax treaties.
More specifically, the dispute resolution mechanism aims to resolve disputes relating to income taxes, but also disputes concerning taxes on wealth or capital, for example certain financial taxes (stock exchange tax, tax on securities accounts) and the tax for compensation of inheritance taxes (patrimony tax) for associations.
Even if no double taxation occurs, the new dispute resolution mechanism can apply. For example, if one member state taxes certain income or capital contrary to a tax treaty, while the other member state involved does not tax at all. Or, in disputes concerning tax residency.
When can you call upon the new procedure?
You can use the new procedure for every complaint submitted from 1 July 2019 onwards relating to questions of dispute relating to income or capital earned in a tax year commencing on or after 1 January 2018.
The new arbitration procedure introduces an efficient framework for the resolution of European tax disputes which ensures legal certainty and a business-friendly (international) environment for investments. This is crucial for the European legislator since it is of the opinion that the number of double or multiple taxation disputes will increase.
The procedure specifically aims to:
- Reduce the administrative burdens for individuals and SME’s;
- Improve the dispute resolution procedure, by providing for a time limit for the duration of the procedures and by establishing clear terms and conditions for the taxpayers.
The procedure in a nutshell
The full arbitration procedure can be divided into three phases:
- Mutual agreement procedure
- Dispute resolution procedure
To initiate the new arbitration procedure, the taxpayer should submit a complaint both to the Belgian competent authority (to be indicated by a Royal Decree) and to the foreign competent authority. There is a fixed period of 3 years as of the time of receipt of the first notification of the action resulting in the question in dispute during which the complaint can be filed. The reduction of the administrative burden is realised by offering individuals and SME’s the opportunity to submit their complaint only to the Belgian competent authority.
The competent authorities of each of the member states concerned take a decision on the acceptance or rejection of the compliant within 6 months from the receipt of the complaint. There are three possible subsequent scenario’s:
1. Rejection of the complaint by both the Belgian and the foreign competent authorities
In case all competent authorities reject the complaint, the affected person can only file an appeal with the Court of First Instance. If the Court also rejects the appeal, the proceedings under this procedure are terminated. If the Court however accepts the appeal, the affected person can request the set up of an Advisory Commission, composed of representatives of the competent authorities concerned and of independent persons. The Advisory Commission will judge the complaint again, independently.
2. Rejection of the complaint only by the Belgian competent authority
If only the Belgian competent authority rejects the complaint, the tax payer can immediately, without having to recourse to the court of first instance, request the set up of an Advisory Commission, which will then further decide whether to accept or reject the complaint.
3. Acceptance of complaint
In case the complaint is accepted, the mutual agreement is initiated. The mutual agreement procedure is also automatically initiated when the affected person does not receive a decision concerning his complaint within 6 months.
Finally, it is also possible that a competent authority of one member state unilaterally takes a decision concerning the dispute without involving the other member states concerned. In such a case, the former competent authority immediately informs the affect person and the other competent authorities concerned. After this notification, the proceedings under this procedure are terminated.
Mutual agreement procedure
The mutual agreement procedure endeavours to resolve the question in dispute by mutual agreement within 2 years. This is a strict deadline, which can, however, be extended by one year. The mutual agreement procedure can indeed lead to an agreement, binding to all member states concerned. It is, however, also possible that no agreement is reached, in which case the dispute resolution phase is initiated.
The dispute resolution procedure can be initiated by setting up an Advisory Commission, on request of the affected person. The Advisory Commission applies the ‘independent opinion’ dispute resolution process, whereby the commission analyses the facts and gives a duly motivated verdict.
If no agreement is reached, the competent authorities of the member states concerned can set up an Alternative Dispute Resolution Commission. The directive sets the example of the ‘final offer’ arbitration process. This form of arbitration imposes on both parties involved, tax payer and member states, to make a final offer. The Alternative Dispute Resolution Commission then chooses one of these two offers. This is an incentive for the parties involved to make a reasonable offer, if not they are exposed to the risk of the counterparty’s offer being chosen. This final offer arbitration is also the preferred arbitration procedure by BEPS, implemented through the MLI. Taking into account the advice of one of the commissions – Advisory Commission or Alternative Dispute Resolution Commission - the competent authorities make a decision concerning the dispute.
Efficient procedure to combat double taxation
The new arbitration procedure meets specific needs which have surfaced in practice following the use of the existing arbitration procedures. Tax payers now dispose of an efficient and decisive procedure, with the guarantee of a motivated outcome within a fixed timeframe, to oppose double taxation.
A possible side effect of the multiple terms, fixed periods and steps in the process may be that the procedure is lacking transparency and may be considered less user friendly. If a fixed term is missed, this may immediately result in the complaint being rejected or being considered as inadmissible.
The publication of the final decision can, as such, also form a barrier for the use of this arbitration procedure.
It remains to be seen which effects this procedure will have in practice, taking into account the fact that Belgium has committed itself to implement an arbitration procedure in its double taxation treaties, through the MLI. This procedure will have an impact internationally, since it will be used through international bilateral double taxation treaties, whereas the law of 2 May 2019 will necessarily be limited to fully European tax disputes.
Questions regarding this subject can be addressed to your regular BDO contact or to our International Corporate Tax Team: