Introduction to European Tax Law on Direct Taxation

I. S. 258Aim and History

752

The aim of the Arbitration Convention is to establish a procedure to eliminate double taxation resulting from a profit adjustment by the competent authorities in one contracting state without a corresponding adjustment in the other contracting state.

753

The following simplified example illustrates the issue:

A group of companies is operating in State A and State B. State A’s tax rate is 20 % whereas the tax rate of State B is 40 %. A parent company in State A is engaged in the production of certain products in State A whereas the wholly owned subsidiary, resident in State B, is responsible for the sales function and the customer reS. 259lationship management. Products are purchased by the subsidiary and further on sold to final customers. The costs of production of the products in State A amount to 100. They are sold to the sales company in State B for a price of 500. The sales price for third-party customers of the subsidiary for subsequent sales is 600. Thus, 400 of the overall profit of 500 (600 sales price − 100 costs of goods sold) are taxed in State A, only 100 of the profits are considered to arise from sales and customer relationship management in the subsidiary in S...