Following the Portuguese government's initiative of May 2 2019 (Proposed-Law 201/XIII), Parliament adopted legislation in July to implement Council Directive (EU) 2017/1852 of October 10 2017 on tax dispute resolution mechanisms in the European Union. Against the backdrop of similar legislation being adopted by all other member states, this will certainly enhance taxpayer protection in cross-border tax disputes, providing a much-needed instrument to effectively enforce the double tax treaty network between EU member states.
In the wake of BEPS Action 14 (making dispute resolution mechanisms more effective), the outspoken goal of the EU Directive is none other than to "introduce an effective and efficient framework for the resolution of tax disputes which ensures legal certainty and a business-friendly environment for investments in order to achieve fair and efficient tax systems in the Union". It must be said from the onset that the Directive falls short of accomplishing such an ambitious goal, clearly leaving room for future improvement. Nevertheless, the Directive does bring the somewhat neglected issue of taxpayer protection to the forefront of the EU's initiatives in the tax field.
Aware of the need to provide an effective procedure to tackle the risk of double taxation within the EU, this initiative clearly intends to offer a valid alternative to the traditional mutual agreement procedure available under double tax treaties. Unlike the existing procedure, the Directive binds the opposing tax authorities to reach a common solution under a strict timeframe. If the authorities fail to meet the deadline, the taxpayer is then able to trigger a binding arbitration procedure; a solution clearly inspired by the existing EU Arbitration Convention on transfer pricing adjustments between enterprises of different member states.
The Directive, however, significantly expands on the EU Arbitration Convention, primarily because its scope is not limited to transfer pricing but aims instead at double taxation in general. Secondly, the Directive addresses, in much greater detail, its interaction with national appeal procedures and even, in some circumstances, foresees resorting to national courts to address the delicate issue of admissibility of claims. Last, but not the least, the fact that the Directive forms part of EU Law brings its interpretation directly under the jurisdiction of the Court of Justice of the European Union (CJEU) – a major weakness of the EU Arbitration Convention and arguably one of its shortcomings.
Applicability and the role of national courts
The dispute resolution procedure introduced by the Directive can apply, in principle, to any dispute regarding the interpretation and application of double tax treaties. However, a significant caveat on this is the possibility of tax authorities denying, on a case-by-case basis, the resolution procedure whenever the disputed question does not involve a risk of double taxation. Because of this, although a disputed question may arise from the interpretation and application of any provision in a given double tax treaty, the crucial concept to ascertain with a fair degree of certainty whether the dispute resolution procedure will actually apply is double taxation. The latter is defined in the Directive as: 'the imposition by two or more member states of taxes […] in respect of the same taxable income or capital when it gives rise to either: (i) an additional tax charge; (ii) an increase in tax liabilities; or (iii) the cancellation or reduction of losses that could be used to offset taxable profits'.
The Portuguese Implementing Act remains largely faithful to the structure and terms of the Directive. The taxpayer, via a formal complaint lodged before the relevant tax authorities of all the member states concerned and within three years of the first notification of the action underlying the disputes question, triggers the dispute resolution procedure. The formal requirements for the complaint are thoroughly detailed. Apart from these requirements, the tax authorities are entitled to request additional information. Small businesses and individuals have access to a less stringent regime: not only are the complainant's formal requirements lighter but it is possible to lodge the complaint solely before the tax authorities of the member state of residence (which is then responsible for informing ex-officio their counterparts in the other member states concerned).
Upon receiving a complaint, each tax authority of a member state concerned will have six months to decide, separately, on the corresponding formal admissibility. If all tax authorities hold the complaint formally admissible, a mutual agreement procedure is initiated with the goal of finding a common solution for the disputed question within a two-year timeline, extendable by one additional year.
Should no common solution be reached, the taxpayer is entitled to request the establishment of an advisory commission, formed by both independent persons and representatives of the member states concerned. Once formed, the task of the Advisory Commission is clear: to issue an opinion on the matter within six months – extendable by three additional months – based on the provisions of the applicable double tax treaty, as well as on any applicable national rules. As an alternative to the advisory commission, member states' tax authorities may agree instead to set up an alternative dispute resolution commission, which may employ any dispute resolution process or technique to solve the dispute (for example, an independent opinion, final offer arbitration, etc.). Member states may also agree to set up an Alternative Dispute Resolution Commission with a permanent nature: a standing committee.
Once issued, the opinion of the advisory commission (or the decision of the alternative dispute resolution commission) becomes binding to the member states in six months, unless they agree on a deviating solution before this deadline passes. In any case, the final output of the procedure will not constitute a precedent. The solution is notified to the taxpayer and becomes effective subject to the taxpayer's acceptance and renunciation of their right to any domestic remedy.
Perhaps the most innovative feature of the Directive is the role attributed to national courts in enhancing the protection of taxpayers' rights at different stages throughout the Directive's dispute resolution procedure. For instance, if all member states concerned hold a complaint formally inadmissible, the decisions are open to challenge before the corresponding national courts, which are capable of reversing the tax authorities' decision. Moreover, national courts provide a safeguard should the procedure come to a halt. As such, pursuant to appeals under national rules, national tax courts may appoint the advisory commission if the concerned member states' tax authorities fail to do so within the established timeline. Likewise, national courts may be relied-on to implement the solution resulting from the dispute resolution procedure if, and to the extent, the tax authorities fail to do so.
Room for improvement
Despite all its merits, the Directive does have some pitfalls. In addition to the above-mentioned case-by-case decision on admissibility (whenever the question in dispute does not concern double taxation), as a derogation expressly permitted to member states, Portugal will deny access to the Directive's dispute resolution procedure in cases where penalties are imposed for tax fraud, wilful default and gross negligence in relation to the disputed question.
According to the Portuguese Implementing Act, the offenses at stake are not limited to those deemed as tax crimes but will extend to serious tax misdemeanours. To put this into perspective, under Portuguese Law, a tax misdemeanour is deemed serious when punishable by a maximum fine of more than €15,000 ($16,800) and errors or omissions in filed tax returns, when tax is due, are punishable by a maximum fine of up to €22,500. Whenever judicial or administrative proceedings that potentially lead to such penalties are pending, the Directive's dispute resolution procedure will be stayed until such proceedings are final and a conclusion may be drawn as to the Directive's applicability to the case at stake.
On the other hand, the Directive dictates that taxpayers wishing to rely on its procedure can do so while simultaneously resorting to national administrative or judicial means of defence – even going as far as stating that the three-year deadline for filing a complaint will only start when those national proceedings are concluded or suspended. However, it is clear that in practice, a crucial choice will ultimately have to be made. Indeed, also under a derogation permitted by the Directive, Portugal will be taking the view that its tax authorities may not conflict with a decision on a disputed question rendered by a national court. This means that taxpayers will be inhibited from resorting to the Directive's dispute resolution procedure should a national court rule on the matter.
The years ahead will show whether the Directive is capable of living up to its potential. A lot will hinge on how different tax authorities will interpret and apply the rather formalistic admissibility requirements of the procedure, and how different national courts will effectively safeguard taxpayer's rights in this regard. It is true that all this will play out under the potential scrutiny of the CJEU but it is doubtful whether this will suffice to ensure the Directive's ultimate goal of creating a harmonised and transparent framework for solving disputes and thereby provide benefits to all taxpayers.
Initiatives such as this, which aim to boost taxpayers' rights in the international setting, are imperative in light of the developments taking place in international tax law. Long gone is the traditional approach that dictated that, as a rule, states did not assist each other in the task of collecting taxes. Indeed, with taxpayers acting and moving globally it is in a state's best interest to secure the possibility of collecting its taxes from taxpayers that are or have gone beyond its borders and therefore remain under the sovereignty of another state. This explains why states feel more and more compelled to cooperate. They forego their natural reluctance to engage in the displeasing task of collecting revenue for others, in exchange for a similar benefit regarding taxpayers located in the other states concerned.
However, such a predisposition to handle foreign taxes as if they were their own relies on the assumption that these taxes have been levied lawfully. Accordingly, augmenting the tax authorities' reach with tax transparency and anti-abuse measures, calls for an increased awareness of the role of proper taxpayer protection in ensuring that tax law is applied in a fair, reasonable and balanced manner. This is especially true in the EU context. EU-wide enforcement capability must be countervailed by adequate and effective cross-border tax dispute resolution mechanisms. Short of perfection as it may be, Council Directive (EU) 2017/1852 is a significant step towards that goal.
|Pedro Vidal Matos|
Tel: +351 21 355 38 00
Pedro Vidal Matos is a partner in Cuatrecasas. He focuses on tax litigation, both administrative and judicial. He has been a member of the Portuguese Bar Association since 2002 and is a member of the Portuguese Tax Association and the International Fiscal Association. He is a lecturer in the postgraduate programme in taxation at the Portuguese Catholic University.
Pedro obtained a law degree from Nova University of Lisbon (2002); a postgraduate degree in company law from the University of Coimbra (2004); a postgraduate degree in taxation from ISG – Business & Economics School (2005); a postgraduate degree in administrative and tax justice from University of Coimbra (2007); a master's in public law from Nova University of Lisbon (2009); and a master's in taxation from the Institute of Advanced Legal Studies of London University (2012).