OECD Arbitration in Tax Treaty Law

1. S. 448Introduction

This thesis investigates the resolution of tax disputes in light of the EU Dispute Resolution Directive (DRD). In this context, the main purpose is to determine whether or not the problems encountered by the EU Arbitration Convention are definitely solved. First, to answer the question, it is noteworthy to analyse objectives, scope, and functioning of the DRD in order to identify the main features of the new system.

Once a clear picture of the working of the DRD procedures has been established, the main focus will be on a comparison between existing and new mechanisms. The result of this analysis will show whether or not the DRD is capable of overcoming the issues faced by the EU AC.

In the end, since the new DRD still does not seem to be a satisfactory tool for the taxpayer to solve double taxation issues, it is useful to make a list of its shortcomings with a couple of suggestions as to how such situations could be dealt with in the future. In fact, the European legislator might be required to amend the DRD or at least to provide some clarifications so as to render this instrument a more effective and efficient tax dispute resolution tool at the disposal of all European taxpayers.

2. The Dispute Resolution Directive

2.1. Objectives

The DRD belongs to the Corporate Tax Reform Package, a project that has a main purpose to combat tax avoidance and to create a simple and pro-business tax environment. Next to the DRD, it includes the Common Consolidated Corporate Tax Base and the amendments of the Anti-Tax Avoidance Directive concerning hybrid mismatches with third countries. Indeed, the EU is trying to enhance the attractiveness of the Single Market to investment by means of creating a fair and effective tax system that favours businesses, reduces compliance costs and administrative burdens deriving from improper coordination of Member States’ interpretation of bilateral tax treaties and the EU AC, and ensures legal certainty. The taxing power S. 449(tax sovereignty) of the Member States (MSs), on the one hand, and the taxpayer’s rights to an effective double taxation relief, on the other, should be balanced.

In recent years, many projects have been adopted to fight base erosion and profit shifting by way of attributing stronger powers to tax authorities. In contrast, these programmes do not provide for an effective double taxation dispute resolution mechanism at the taxpayer’s disposal.

Since the existing mechanism that is provided by the EU AC does not always lead to or grant a double taxation relief in a timely manner and “the persistenceof situations of unresolved double taxation is an obstacle to the functioning of the single market”, the main purpose of the DRD is to improve the instruments already existing with regard to access, coverage, timeliness, and conclusiveness. In particular, businesses and citizens shall have the opportunity to solve the question in dispute “more swiftly and effectively”. Since the DRD concerns the introduction of an indispensable, effective, and efficient dispute resolution mechanism, according to the Commission’s opinion, it also complies with the European principles of subsidiarity and proportionality.

In order to reach this goal, the DRD aims at improving existing mechanisms for resolving tax disputes between MSs that arise from the interpretation and application of double tax treaties and other international agreements by means of two different approaches: it improves access to and the effectiveness of the MAP, on the one hand, and establishes procedures for mandatory resolution of all tax treaty related disputes by way of arbitration within a fixed timeframe, on the other.

2.2. Scope

2.2.1. Temporal scope

As noted above, one of the main objectives is to improve and facilitate access to the MAP which is achieved by covering a wider range of cases under the DRD as S. 450opposed to the EU AC in which the scope is limited to transfer pricing issues and to the attribution of profits to a permanent establishment (PE). Nevertheless, the wording of the DRD’s provisions relating to scope is not clear enough, which may cause issues in its application.

The DRD shall be implemented by each MS by the end of June 2019 and will apply to all complaints submitted as of 1 July 2019. The question in dispute shall concern income or capital earned as of 1 January 2018. Nevertheless, pursuant to Article 23(2) DRD, if agreed between the competent authorities, the DRD may also apply to complaints submitted prior to July 2019 or concerning earlier tax years. However, problems may arise from the non-implementation into national law within the given time limit given by Article 22(1) DRD. Is the DRD self-executing or does it need further legislation and legal steps to be given effect?

In order to determine this, one needs to focus on the precision of the wording and on how the DRD affects the rights of the taxpayer in relation to the MSs. The uniformity of EU law may be threatened by the way an MS transposes a directive into national law. Thus, irrespective of the correct or incorrect implementation of EU secondary law, individuals should always be granted the possibility “to rely on the true meaning of a provision”. The CJEU emphasised the right of EU citizens to rely on any “unconditional and sufficiently precise” directive provision. However, the DRD, as opposed to the Parent-Subsidiary Directive, contains procedural rather than substantive provisions, which are not always precise enough. Thus, it is unlikely that it fulfils the requirements established by the CJEU.

On the other hand, MSs cannot apply a non-implemented directive against EU citizens. In fact, the addressees of a directive are the MSs thus only they can be bound by a direct application. In addition, the principle of legal certainty prevents persons from relying upon law that has not yet been implemented into national law.

The DRD is meant to ensure a certain degree of coordination, homogeneity, and harmonization within the European Union and avoid discrepancies among MSs as to the interpretation and application of law that is encountered in the application of transfer pricing methods by creating a common system of dispute resolution. The adoption of a directive by the EU Council is the result of the MemS. 451ber States’ willingness to transfer legislative power to the EU institutions. Consequently, “Member States cannot unilaterally decide not to be bound by the directive” as it may happen in the case of international agreements. At the same time, a certain degree of flexibility is granted since, as long as national laws comply with the DRD’s objectives, MSs are not prevented from implementing it, attributing more rights to taxpayers in terms of deadlines and consultation. Nevertheless, if that is the case, all of the competent tax authorities involved in the proceedings must recognize the favourable treatment.

Since the object and purpose of the DRD is to grant taxpayers more rights and legal certainty, this may not be an obstacle at first glance. However, the DRD also imposes strict obligations on the taxpayer. This would be an indication against its direct effect, at least as a whole.

However, according to the CJEU jurisprudence, irrespective of the implementation date, national courts shall grant the full effectiveness of EU secondary law so as to comply with “the principle of interpretation in conformity with EU law”.In this respect, it is questionable whether Article 25(4) of the OECD MC concerning the agreement to be found among the competent authorities can be extended by means of interpretation to require the implementation of an arbitration procedure in those scenarios when the DRD is not implemented within the prescribed time-limit.

In addition, in interpreting and applying the DRD, MSs are obliged to comply with the fundamental rights and principles of EU law, among which “the right to an effective remedy and to a fair trial” provided by Article 47 of the Charter of Fundamental Rights of the European Union.

2.2.2. Personal scope

The DRD applies to any person engaged in cross-border relations who is, according to the underlying double tax treaty or EU AC, resident of an MS for fiscal purposes and whose taxation is directly affected by the question in dispute according to its Article 1. The benefits that a resident can draw from the DRD are closely linked to those provided by the underlying tax treaty for a resident of one of either Contracting State. Since a definition of “residence” is not contained in the DRD, S. 452this term assumes the meaning given by the tax treaty or the EU AC or, as a last resort, national law according to Article 2 (2) DRD.

Nevertheless, DTCs contain some provisions in which the application does not require residency, such as Article 24(1) of the OECD MC which applies to nationals of a Contracting States regardless of residency. Consequently, the DRD’s procedure cannot be initiated based on that specific tax treaty. However, the person can initiate the procedure under a treaty of the country in which he or she is a resident, and many of the non-discrimination situations would likely be covered by other EU law provisions such as the fundamental freedoms.

Moreover, in the event of a non-discrimination dispute concerning the taxation of non-nationals by domestic law, the competence to solve these cases should be attributed to either national or EU courts and not to an advisory commission that does not operate under the political control “of a democratically elected government”.

The term “person” includes individuals, companies, and partnerships. In contrast, PEs that are not considered as separate entities and transparent entities in which the income is directly imputed to their members are excluded.

On the other hand, eminent scholars sustain the applicability of the DRD also to PEs whereby the head office is located within the EU or in a third State. Indeed, enterprises having a PE in a foreign State are often subject to the same income taxes as those applicable to resident taxpayers. A different treatment would go against the general principle of non-discrimination according to which same situations shall be treated in the same way whereas different situations shall be treated in a different way.

A further doubt exists in respect of hybrid entities considered transparent by one MS and opaque by another. The affected person would be entitled to benefit from the DRD only in the latter case. Since these mismatches may lead to double non-taxation, the best way to solve the problem is to analyse the definition of “double taxation” in detail in order to understand whether the DRD focuses on the identity of subject or on the identity of income.

The DRD provides for a broad definition of “double taxation” including both juridical and economic double taxation. In fact, it neither requires the taxation of the same income in the hands of the same person nor the MSs’ imposition of taxation in the same fiscal year. Moreover, according to Article 2 (1c) DRD, referring to S. 453the “[…] imposition by two or more Member States […]”, it is evident that cases of multiple taxation are intended to fall within the scope of the DRD.

2.2.3. Subject-matter scope

With regard to the income, as opposed to the first proposal, all items of income are covered. In fact, an exclusion of non-business income would have led to discrimination because unrelieved double taxation, notwithstanding the income in question, limits European citizens to benefit from the fundamental freedoms and, therefore, their access to the internal market. However, those persons that are engaged in business that is not defined in the DRD (Article 3) are considered to be the main stakeholders in respect of double taxation cases.

The taxes covered are those covered by the applicable tax treaty or by the EU AC according to Article 2 (1c) DRD. Double tax treaties normally cover personal and corporate income taxes and withholding taxes on dividends, interests, and royalties. In regards to local income taxes as well as capital taxes, if they are included in the material scope of a tax treaty, they are also covered. Penalties and indirect taxes are excluded. The reference to taxes already covered by an agreement or convention grants legal certainty while also allowing for the flexibility to cover any “identical and similar”.

The conflicts covered by the EU AC are intra-EU disputes arising “from the interpretation and application of agreements and conventions that provide for the elimination of double taxation of income and, where applicable, capital”. The terms “interpretation” and “application” refer to any controversy arising from the meaning given to a specific word, from its application to a specific subject matter, or from a combination between both issues. Moreover, “agreements” and “conventions” include bilateral and multilateral treaties such as the EU AC, double tax treaties, and the Multilateral Instrument signed as a result of BEPS Action 15. As can be seen, the scope of the DRD strictly depends on the scope of the underlying international agreement.

In the absence of a definition within the treaty, Article 2(2) of the DRD and Article 3(2) of the OECD MC refer to national interpretation rules except if the context otherwise requires. The context, which is related to the overall objective of the DRD may also be inferred from “its preamble and recitals, as well as from its preparatory documents”.

S. 454Thus, interpretation issues can also derive from a meaning given by domestic law. However, this kind of controversy does not involve the interpretation or application of double tax treaties. Instead, it is a pure national fact pattern to which it is questionable whether the DRD is applicable or not. These doubts lead to exclude the disputes at stake from the competence of an advisory commission because national courts should have the exclusive power to judge over the interpretation and application of domestic laws.

Further doubt arises from the possibility to apply the DRD to disputes arising from the interpretation or application of domestic anti-avoidance rules. In most cases, these provisions cause treaty-override and taxation not in accordance with the double tax agreement. However, this is not the result of a dispute on the interpretation or application of the treaty. Therefore, according to some scholars, the affected person cannot rely upon the DRD to solve this problem. Other scholars are in favour of the application of the DRD to such provisions because the proposal itself does not prohibit their concurrent use.

The question in dispute does not necessarily need to involve double taxation to be claimed. In fact, as can be derived from Article 25(1) of the OECD MC, the elimination of double taxation is not the only purpose of a double tax treaty but, instead, the latter may also concern the elimination of double non-taxation and the non-discrimination clause.

However, although Article 3 of the DRD regulating the conditions of submission of the complaint does not require the existence of double taxation, the competent authorities may still deny access under Article 16 (7) DRD.

2.2.4. Exceptions and limitations

Article 16 (6) and (7) DRD contain several exceptions from its scope of application. Their application is up to the MS which “may deny access to the dispute resolution procedure […] in cases where penalties were imposed in that Member State in relation to the adjusted income or capital for tax fraud, wilful default and gross negligence” or “where a question in dispute does not involve double taxation”. Moreover, tax authorities are allowed to suspend the procedure in the event of pending administrative or judicial proceedings that may lead to the penalties mentioned above.

Consequently, exempt or zero-rated income or capital can fall out of the scope of the DRD. However, partially exempted income is covered by the DRD as long as it is subject to an income tax included in the underlying international agreement S. 455or convention. Although tax authorities may justify their denial upon the existence of double non-taxation, the latter is not always linked to aggressive tax planning but, instead, it may be lawful and justifiable upon the mere application or interpretation of DTCs.

Since the terms in Article 16 (6) DRD are not defined, they assume the meaning provided by the national law of the State imposing the penalty. The absence of a homogenous definition gives the competent authorities more leeway to deny access to arbitration even in bona fide cases.

Nevertheless, since, in this case, the advisory commission is not set up, the affected person has the right to appeal in front of a national court or judicial body which, if necessary, may refer to the CJEU for the interpretation of the terms “tax fraud”, “wilful default”, and “gross negligence”.

As can be seen, the effort of the EU legislator to overcome the interpretation issues arisen from the term “serious penalties” in the EU AC has not yet come to a satisfactory solution.

2.2.5. Interaction with other instruments

Pursuant to Article 16(5), the procedures provided by the DRD are an alternative to those contained in double tax treaties and in the EU AC. Indeed, in the event of submission of a complaint under the DRD, the competent authorities shall terminate all of the other pending mutual agreement procedures or dispute resolution procedures regulated by international agreements or conventions and give priority to the DRD. Thus, there is no risk that two simultaneous proceedings would result in “two alternative final and binding decisions”. However, since the provision only mentions “ongoing proceedings”, it is questionable whether or not this paragraph also applies to situations where the proceedings under the DRD are initiated before those regulated by international agreements or by the EU AC.

Article 16(5) demonstrates the supremacy of EU law over internal law and, therefore, over international agreements transposed into domestic law. In fact, two simultaneously running proceedings would not comply with the DRD and would result in a contrast that shall be solved, according to the CJEU jurisprudence, in favour of the application of EU law.

S. 456In relation to the EU AC, it is not clear whether the DRD will be only used as residual means for those cases not covered by the EU AC or as substitute of it. Some scholars prefer the latter solution and consider both the DRD and international double tax treaties as the only available instruments providing for dispute resolution mechanisms.

On the other hand, there is a line of thought in favour of the EU AC’s applicability. The DRD does not contain an explicit provision pursuant to which the EU AC is replaced. In addition, the Explanatory Memorandum only mentions an “additional” dispute resolution mechanism that improves existing mechanisms. This means that MSs have enough leeway to make their own evaluations as to the most appropriate mechanism to apply to the question in dispute. This solution is also supported by Article 3(3d) that requests the taxpayer to indicate the underlying agreement or EU AC in the complaint. A further argument in support of this thesis is contained in Article 16(5), pursuant to which, as already stated above, all “ongoing proceedings” regulated by international agreements are terminated in the event that a procedure provided by the DRD is initiated.

Moreover, although the DRD is an instrument of harmonization, MSs are not prevented from relying upon the EU AC or concluding double tax treaties containing arbitration clauses. To sum up, the EU AC must be relied upon at least in procedures that are still pending, although affected persons will probably benefit much more from the DRD because of the broader scope, mandatory arbitration, and default mechanisms.

As soon as the DRD is converted into domestic law, most of the intra-EU disputes will be governed by it. So, dispute resolution mechanisms contained in DTCs will play a residual role in case of controversies with third States.

According to some authors, it is questionable whether the mandatory arbitration procedure contained in the DRD only replaces existing tax treaty mandatory arbitration clauses or whether it applies irrespective of the kind of arbitration provided for by the DTC. Thus, it is desirable that the European legislator clarifies this issue. The second alternative was deemed preferable by the authors in question.

Apart from that, in some cases, the only means of protection at the disposal of the taxpayer is the tax treaty since Article 25(1) of the OECD MC has a broader scope S. 457than the DRD. Consequently, it is recommendable to consider the question in dispute when determining the available procedures.

The relationship between the MLI and DRD is also not immediately evident since the impact of Article 26 (2) and (3) MLI may be different on a case by case basis. The scope of the MLI may also be broader or more restricted than that of the DRD depending on the choices of the individual Contracting States with respect to reservations pursuant to Article 28 (2) MLI. Many reservations include disputes involving the interpretation or application of anti-avoidance provisions. In these cases, the affected person can only rely upon the DRD. In contrast, MAPs with respect to dual-resident companies under the new Article 4 (3) OECD Model are not covered by the OECD arbitration clause or the MLI but would fall under the scope of the DRD.

As noted above, the interaction of the DRD with other existing instruments encounters several doubts of interpretation. Thus, it is desirable that the EU legislator clarifies its position in relation to these issues so as to really grant an efficient and effective dispute resolution mechanism. The truth is that the affected person is free to decide which procedure to initiate.

2.3. Functioning (stages)

2.3.1. General considerations

The procedures provided by the DRD are divided into three stages: the complaint phase, the MAP, and the dispute resolution procedure. The unilateral relief procedure that is a first step in the EU AC is no longer provided by the DRD. The issue may, nonetheless, be solved unilaterally by one of the competent authorities involved at the complaint stage (Article 3 (5) DRD). Each single step is governed by a fixed timeframe and by default mechanisms that permit the taxpayer to appeal in front of a national court or a judicial body in the event that the competent authorities do not fulfil their obligations within the prescribed time-limits. This is intended to incentivize the tax authorities to properly fulfil their obligations to solve the question in dispute and, when possible, to reach an agreement under the MAP. The result is the guarantee of legal certainty through the creation of an S. 458MSs´ legal duty to take conclusive and enforceable decisions under the improved dispute resolution mechanism.

The EU Commission is involved throughout the procedure in order to ensure its smooth running, e.g., by maintaining an up-to-date list of the independent persons of standing nominated by each MS (Articles 9 and 19 (1) DRD) and providing standard rules concerning both the information that the affected person is demanded to include in the complaint and the rules of functioning. “[T]he standard rules of functioning shall apply in cases where the rules of functioning are incomplete or were not notified to the affected person” (Article 11 (3) DRD). The Commission also maintains an online archive regarding all of the information about the published final decision taken by the competent authorities at the end of the dispute resolution procedure (Article 19 (3) DRD).

Taxpayer´s rights and transparency are two fundamental tools to avoid corruption and a two-tiered tax system. Besides the above-mentioned online archive, the DRD increases transparency compared to the EU AC by instituting an obligation for the tax administration to notify taxpayers at every step in the procedure. The overall involvement of the affected person in the procedure has increased next to the taxpayers’ certainty about how specific double taxation issues are addressed.

2.3.2. The complaint phase

The major differences between the EU AC and the DRD may be inferred from the new complaint stage provided for by the latter which improves the taxpayer’s access to the MAP and grants more legal certainty.

As soon as the taxpayer receives the administrative act or becomes aware of the behaviour of the tax authorities giving rise to the question in dispute, it has the right to submit a complaint over the next three years (Article 3(1) DRD). Both competent authorities shall be addressed except if the affected person is an individual or a small business (Article 17 DRD). The complaint shall contain prescribed information about the question in dispute so as to facilitate the tax administrations’ obligation to come to an agreed solution in a short time. The completeness of the information that is provided is a condition for the acceptance of the complaint. In particular, the affected person is required to furnish personal data as well as any other information on relevant facts, circumstances, tax assessment, applicable rules, S. 459and pending proceedings, among others. Since the list of information required is pretty long, there is a risk of abuse by the competent authorities in so far as they may discretionally reject the complaint whenever a lack of information occurs, thereby creating a so called “blocking method”.

Moreover, the length of this phase is maintained within fixed deadlines that are valid not only for the submission of the complaint but also for the acceptance or rejection of it by the competent authorities (six months). The rejection shall be reasoned by the lack of the information required, by the absence of the question in dispute, or by the failure to meet the three-year deadline for the submission of the complaint (Article 5 DRD). This provision ensures that “valid complaints are not unduly rejected”. The affected person has, as a last resort, the possibility to appeal in front of a national court or to ask for the appointment of an advisory commission.

When the taxpayer’s request is rejected by at least one but not all of the competent authorities, these shall set up an advisory commission upon request of the affected person. The advisory commission will take a decision as to the admissibility of the complaint within six months of its establishment. In the case of a positive decision, the competent authorities are obligated to initiate the MAP within another six months. If they do not, the advisory commission shall provide an opinion on the question in dispute. If the advisory commission confirms the rejection, the DRD does not provide for another remedy.

If, however, the complaint is rejected by all of the competent authorities, the taxpayer can appeal before the respective national courts (Article 5 (3) DRD). When none of the national courts accepts the complaint, the procedure cannot go further. Thus, the DRD does not always overcome cases of double taxation.

The termination may also derive from the withdrawal of the taxpayer or from the extinction of the question in dispute.

2.3.3. The MAP

Once the complaint has been accepted by all of the competent authorities (or all of the national courts), the mutual agreement procedure is initiated.

S. 460Pursuant to Article 4 DRD, this stage is provided in order to permit the tax administrations to find an agreement in respect of the question in dispute within two years, extendable by up to one year. However, there is no obligation to find a solution.

As soon as the agreement is reached, the competent authorities shall notify the affected person. The decision is binding on the MSs and enforceable by the taxpayer provided that the latter accepts it and renounces any other remedy. The agreement shall be implemented notwithstanding the time limits provided by domestic law.

On the other hand, in the case of failure, the competent authorities are required to inform the taxpayer and justify their inability to find a solution. Unfortunately, the failure-notification is not subject to a time limit.

2.3.4. The dispute resolution procedure

The dispute resolution procedure is initiated through the establishment of an advisory commission which may occur in the case of rejection of the complaint (see above) or in the case of failure of the MAP (Article 6 DRD).

The advisory commission includes one chair, one or two representatives for each competent authority, one or two independent persons of standing appointed by each competent authority, and a substitute for each of the latter. With regard to the independent persons of standing, objectivity, neutrality, and impartiality are granted to the extent that the competent authorities have the possibility to make objections to the appointment made by the other party. Independent persons of standing are selected according to agreed rules or by drawing lots (Article 8 DRD).

The competent authorities have 120 days to set up the advisory commission. If the appointment does not take place on time, the affected person has thirty days to require national courts to select the missing members of the advisory commission. When the request is rejected, the applicant has the right to appeal pursuant to national provisions. On the other hand, the appointment made by national courts may be contested by the competent authority that initially failed to designate the independent persons of standing.

This remedy guarantees continuity, efficiency, and certainty to the procedure even in cases when the competent authorities do not act within the prescribed timeframe.

The competent authorities may also opt to set up an alternative dispute resolution commission (ADRC) under Article 10 DRD which can use any means of dispute resolution, including baseball arbitration, mediation, conciliation, adjudication, or the opinion of an expertise. The composition and form of the ADRC may differ from that of the advisory commission. However, there are some rules that cannot be circumvented such as those provided by Article 8 on the independence of the members of the advisory commission.

S. 461Once either type of commission has been set up, they are obligated to deliver a reasoned opinion to the competent authorities within six months, extendable by three, of the date on which they were set up. The opinion shall be based on applicable national laws, double tax treaties, and conventions between the States that are involved (Article 14 DRD).

After the opinion is notified, the national authorities shall take a decision – following the opinion or deviating from it – on how to resolve the question in dispute within six months. If an agreement is not reached, the competent authorities are bound by the opinion. The final decision shall be notified to the affected person within thirty days. If not, the taxpayer has the possibility to appeal in front of a national court or body so as to obtain an order to give a final decision (Article 15 DRD).

The final decision is binding on the competent authorities and shall be implemented within sixty days of its notification provided that the affected person accepted it and renounced any domestic remedy. The implementation occurs irrespective of any time limits provided by national law and obligates the States concerned to change their taxation. However, this does not occur if there is a lack of independence among the members of the advisory commission or alternative dispute resolution commission.This will be assessed by a national court or body as a consequence of an action brought in front of it by one of the competent authorities. If the latter fail to implement, the affected person may apply to national courts.

Subject to the consent of the taxpayer, the final decision may be published in its entirety. Otherwise, only an abstract shall be published. The affected person may request the competent authorities to refrain from publishing information concerning professional and personal secrets or contrary to public policy. This provision prevents the system of publicity from being a double-edged sword. In fact, even if, on the one side, it grants legal certainty, transparency, and taxpayer’s trust in the system, on the other, it may have negative effects on the affected person with regard to its business in terms of corporate social responsibility.

2.4. Role of the CJEU

In regards to the functions of the CJEU in respect of the application of the DRD, both certainties and doubts arise.

Since the DRD is part of EU secondary law, it will be subject to a standardized interpretation given by the CJEU in cases when national courts will refer to it for a preliminary ruling on the interpretation of unclear terms. Thus, all shortcomings encountered with the EU AC resulting from the lack of definitions of several terms and from the resulting different interpretation given by the competent authorities S. 462of the MSs concerned will be overcome since the CJEU will have the control over the implementation of the DRD. However, the reference to the CJEU for a preliminary ruling may cause a delay in the resolution of the question in dispute. Moreover, the CJEU cannot decide on the substance of the disputes themselves. Even if double taxation is an obstacle to the functioning of the single market, the CJEU has repeatedly stated its inability to solve double taxation issues in several judgements. This is due to the fact that direct taxation is not harmonized at the EU level since MSs have preferred to maintain tax sovereignty in this field. Indeed, the power to remove double taxation is maintained by the latter that may use unilateral measures or double tax treaties to overcome these issues. In addition, as can be inferred from CJEU case law that the latter neither have jurisdiction in relation to infringements of DTCs nor in respect of the relationship between tax treaty provisions and national rules except in the case of the DTC between Austria and Germany. Furthermore, the DRD does not contain substantive rules attributing “taxing powers and responsibilities for eliminating double taxation”. Instead, it provides for a procedural mechanism. Thus, the CJEU can only determine “whether the procedure has been properly followed and whether the outcome to eliminate double taxation has been achieved within the specific timeframe”, but not how the dispute should have been solved.

With regard to the possibility of the advisory commission to refer to the CJEU for a preliminary ruling, it is necessary to analyse the nature of this body. According to Article 267 of the TFEU, those who are in charge of referring questions to the CJEU are courts or tribunals of a MS. These are characterized by independency and permanency, they follow the rule of law, derive their powers by law, and take binding decisions. The advisory commission is not independent in its entirety, and the competent authorities may deviate from its opinion. In addition, the body in question is not an institution of an MS but, instead, the outcome of an appointment made by two or more States. Therefore, it is unlikely to qualify it as a national court or tribunal in the sense of Article 267 of the TFEU and would be able to solve interpretation issues without making any reference to the CJEU. This may lead to discrepancies in the common interpretation of EU law.

3. S. 463Comparison to the EU Arbitration Convention

The EU AC has been frequently criticized for its inability to provide the taxpayer with an efficient and effective means that solves double taxation issues within a specific timeframe.

In the following subchapters, some of the main shortcomings, addressed by eminent scholars, will be briefly analysed.

The main feature/flaw of the EU AC is its limitation in scope to transfer pricing issues and the attribution of profits between a PE and foreign head office.

A further flaw of the EU AC is the absence of time-limits and consequences when these are not respected. Even if the taxpayer can call on national courts, this remedy does not represent a valid tool for eliminating double taxation. Thus, businesses “are not left with any certainty to if and when their cases will be resolved”.

Thirdly, in cases when terms are not defined by the EU AC, a common interpretation is not available since the CJEU does not have jurisdiction over the EU AC. Thus, this situation leads the competent authorities to, e.g., easily refuse the application of the EU AC due to “serious penalties” since one interprets the penalties as “serious”, and the other does not.

One of the main novelties of the DRD is the introduction of strict and enforceable deadlines. In particular, as already mentioned, the affected person now has the possibility to apply in front of a national court, judicial body, or the advisory commission itself whenever the competent authorities do not act within the prescribed time-limits. There are two positive sides to this provision: firstly, the guarantee that the procedure comes to an end irrespective of the behaviour of the competent authorities; and, secondly, the provision of enforcement through national tools may incentivize the tax authorities to properly fulfil their obligations. At each single stage of the proceedings, the DRD ensures that a slowdown cannot occur. However, delays may still derive from the recourse to national courts or bodies.

3.1. Taxpayer’s rights

One of the most important novelties of the DRD concerns the increased access to and the participation of the taxpayer in the proceedings even if the affected person is still not considered as a party to the procedure. This is clear from the very beginning of the complaint phase.

S. 464Another important point regards the rules of functioning that shall be notified in order to inform the taxpayer, i.a., about the rules concerning the participation in the proceedings, the exchange of information, and the kind of dispute resolution process. Additionally, to the extent that this is permitted by the competent authorities, the affected person has the right or, when requested, the obligation to “provide the advisory commission or the alternative dispute resolution commission with any information, evidence or documents that may be relevant for the decision” (Article 13 DRD).

4. Flaws and areas for improvement

4.1. Unsatisfactory interaction with available domestic remedies

Even if the DRD represents, as opposed to the EU AC, a great step forward for the protection of the taxpayer, there are still some flaws that the European legislator will need to overcome in the near future.

The main problem, born in the 1990s with the EU AC, which has yet to be resolved concerns the relation between domestic judicial remedies and those provided by the DRD. Even though it might first appear that the DRD provides a further instrument additional to those contained in national law, in practice, the affected person is induced to choose only one between these two remedies. This is due to the fact that domestic procedures and those ruled by the DRD cannot run simultaneously.

First, when domestic proceedings are initiated, the beginning of the time periods of both the complaint phase and the mutual agreement procedure is postponed to the date on which the national procedures are suspended or become definitive.

Second, a judicial decision that, according to national law, cannot be derogated, prevails on the proceedings of the DRD, causing the termination of the mutual agreement procedure or dispute resolution procedure or limiting the taxpayer’s right to initiate the dispute resolution procedure when no agreement has been found within the MAP. In regards to the termination of the MAP, Article 16(4)(a) DRD seems to be in contrast with BEPS Action 6 pursuant to which getting into a discussion to endeavour to find an agreement even in the case of final domestic court decisions is better than nothing.

As can be seen, if, on the one hand, national remedies may only result in an extended length of the overall proceedings, on the other, if the decision of the judicial body S. 465is negative, the affected person has no further remedy to solve the question in dispute. The problem, of course, only occurs in a case when domestic law does not allow a derogation from court decisions.

4.2. Taxes paid in the course of the proceedings, refunded?

Another important area for improvement is related to the fact that the national authorities’ power to impose sanctions and penalties is not limited by the initiation of the MAP or the dispute resolution procedure. Administrative sanctions and penalties are strictly linked to tax obligations deriving from the submission of the assessment notice that gave rise to the question in dispute. Unfortunately, pending the procedure regulated by Articles 4 or 6, the DRD does not provide for the suspension of the effects of the assessment. As a consequence of this, the affected person does not have any certainty that the dispute will be settled “before the deadline for compliance with tax obligations” has expired. Thus, although pending procedures may have a positive outcome, in order to avoid, at least, further administrative sanctions and interests, the taxpayer is induced to comply with the tax obligations. Subsequently, the fact that Article 15(4) obligates the MSs to amend their taxation as a result of the implementation of the final decision cannot represent a sufficient instrument to restoring certainty to the taxpayer. In fact, the latter would be granted only by the introduction of a new rule providing for an automatic entitlement to a refund of all taxes and interests paid by the taxpayer as a consequence of the assessment act that gave rise to the question in dispute. Furthermore, in order to avoid, on the one hand, a delay in refunding the amount paid and, on the other, to encourage the competent authorities to a “speedy resolution of disputes”, it is recommendable to provide the holding of the amount of taxes and interests due in a lodged account that becomes unblocked once a result has been achieved.

The best solution to this problem would be the direct introduction of a new provision pursuant to which the payment of taxes and interests is suspended during the course of the procedures regulated by the DRD. Nevertheless, the suspension at stake is only seen as a best practice in the international environment even under BEPS Action 14. In fact, there is no obligation of the EU legislator to regulate it. Therefore, it relies on the MSs to adapt internal laws to the DRD so as to continue ensuring this kind of protection at the national level.

4.3. S. 466Absence of a supervisory organ

The attribution of monitoring powers to national authorities does not always represent a valid and efficient tool to overcome the delays encountered in the procedures regulated by the DRD. National default mechanisms may cause further delays or may even lead to a negative outcome. For example, the time needed to settle the dispute may be additionally extended if requested by the national court with the preliminary ruling procedure in front of the CJEU. Furthermore, when the rejection is confirmed at the national level, the affected person has no further remedy to solve the question in dispute. In order to overcome this problem, the European legislator could amend the DRD and provide for a default mechanism by which the taxpayer, in the case of rejection of the complaint, may directly recur to the EU Commission that is entitled to ascertain the compliance of the competent authorities with the DRD. If the outcome is negative, the EU Commission will initiate an infringement procedure in front of the CJEU that, however, will only rule on procedural and not on double taxation issues. This also grants a harmonized interpretation of EU law.

Furthermore, eminent scholars recommend electing the EU Commission as a supervisory organ so as not to counter the sovereignty of the MSs in the area of direct taxation. In fact, the latter would be the most appropriate institution to monitor and enforce the compliance with the DRD since it enjoys the highest esteem among EU institutions. A central and permanent secretariat directed by the EU Commission would then function as an auxiliary organ during the dispute resolution procedure, ensuring compliance with the deadlines.

That said, the establishment of an independent international tax court functioning as a permanent arbitration court and the development of a corresponding set of harmonized rules will still remain technically unfeasible as long as the States are not inclined to give up their sovereignty in tax matters.

5. Conclusion

To conclude the analysis of the DRD, it is noteworthy to briefly summarise positive and negative outcomes.

In regards to the former, there is no doubt that the broadened scope of the DRD compared to the EU AC creates a clear additional tool at the disposal of the taxpayer to solve tax issues at the international level. Moreover, the strict and enforceS. 467able timelines characterizing the procedure from beginning to end, the possibility to use default mechanisms in the case that the deadlines are not respected and, finally, the high degree of information and engagement of the taxpayer throughout the proceedings are synonymous with legal certainty, efficiency, and effectiveness.

However, there are still some shortcomings, in particular in regards to the interaction with national proceedings and the absence of an independent supervisory organ that may cause an undesirable length of the dispute settlement procedure that, in some cases, does not even come to a satisfactory solution.

Therefore, it is advisable that the European legislator intervenes with the necessary amendments so as to render the existing DRD more efficient and effective in respect of any kind of question in dispute.