The convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (the Arbitration Convention) comes into force in Finland on May 1 1999. This relates to Denmark, Italy, Luxembourg, the Netherlands, Portugal and the UK.
The old member states of the EU (ie member states other than Austria, Finland and Sweden) concluded the Arbitration Convention on July 23 1990 on the basis of Article 220 of the Rome Treaty. This has been in force between the old member states since the beginning of 1995.</.P>
The purpose of the Arbitration Convention is to implement an arbitration procedure in transfer pricing cases concerning associated enterprises. If the profits of a company in one member state are also taxed through another member state, and company, and the two companies have been acting at arm's length, one member state must make a proper adjustment on the tax imposed on the profits.
Where an enterprise considers that the taxation has not been made in accordance with the principles set out in the Arbitration Convention, it may present its case to the competent authority of the member state in which it is resident. The case must be presented within three years of the first notification of the action, which results or is likely to result in double taxation. If the competent authority is not able to arrive at a satisfactory solution, it shall endeavour to resolve the case by mutual agreement with the competent authority of any other member state concerned with a view to the elimination of double taxation. If the competent authorities fail to reach an agreement that eliminates the double taxation within two years of the date on which the case was first submitted to one of the competent authorities, the case will be solved in the arbitration procedure.
The arbitration procedure will be handled by an advisory commission consisting, of a chairman, two representatives of each competent authority and an even number of independent specialists. The advisory commission will deliver its opinion, adopted by a simple majority of its members, not more than six months from the date on which the matter was referred to it.
The party to the arbitration procedure must eliminate the double taxation within six months of the date on which the opinion was delivered. The competent authorities may take a decision which deviates from the advisory commission's opinion. If they fail to reach agreement they are obliged to act in accordance with that opinion.
Under Article 8 of the Arbitration Convention the competent authority of a member state is not obliged to initiate the mutual agreement procedure or the arbitration procedure where legal or administrative proceedings have resulted in a final ruling that by actions giving rise to an adjustment of transfers of profits under Article 4 of the Arbitration Convention one of the enterprises concerned is liable to a serious penalty. In Finland this means criminal administrative sanctions which result from breach of tax law.
Article 2 of the Arbitration Convention lists the taxes to which the convention applies. With respect to Finland the Arbitration Convention applies to the state income tax, the corporate income tax, the municipal tax, the church tax, the final tax on interest income and the tax at source for persons or entities with limited tax liability.
The competent authority referred to in Article 3 of the Arbitration Convention means in Finland the Ministry of Finance or a reprsentative authorized by it.
Taina Tuohino
