Brexit impact on EU dispute resolution mechanisms

HMRC has announced that, from 1 January 2021, it will no longer accept applications to resolve double tax treaty disputes under either the EU Arbitration Convention or the Arbitration Directive. From this date, taxpayers will need to rely on the provisions (if any) in an available double tax treaty.

The EU Arbitration Convention and Arbitration Directive contain significant administrative benefits over many of the UK's biliateral treaties and affected taxpayers should consider ensuring that any applications are made before the end of 2020 deadline.

Background

The EU Arbitration Convention provides a mechanism for Member States to resolve disputes where double taxation occurs as a result of an upward adjustment of profits by one Member State in respect of a connected party transaction where the other enterprise is tax resident in another Member State. It is particularly relevant to transfer pricing disputes and enables taxpayers to file for relief of double taxation to the extent that an adjustment is required or an assessment has been issued challenging the transfer pricing method applied.

At present, affected persons can present a case to the Competent Authorities of each of the Member States concerned within 3 years of notification of the measure giving rise to double taxation and the Member States are required to agree a solution which eliminates the double taxation. The Arbitration Directive essentially extended the scope of the Arbitration Convention by providing for an additional procedure applying to all disputes arising from tax treaties (not just questions around transfer pricing).

It should be noted that in addition to the EU Arbitration Convention, taxpayers can also access tax dispute resolution mechanisms through the UK's bilateral tax treaties. However, not all of those bilateral tax treaties include a provision for mandatory and binding arbitration, which provides added certainty that relief of double taxation will be obtained.

2020 deadline

As a result of the end of the transition period, HMRC has now announced that it will no longer accept applications to use the EU Arbitration Convention or the Arbitration Directive procedures from 1 January 2021.

Requests may still be filed before 1 January 2021, however, and will still qualify to be handled under the EU Arbitration Convention or the Arbitration Directive. As stated, the significant benefit in this respect is that if a case is filed under these procedures, then there is access to mandatory arbitration if the Competent Authorities are unable to reach an agreement within a two-year period.

It may still be possible to request arbitration under the UK's domestic bilateral treaties after 1 January 2021, however not all of these treaties provide for mandatory and binding arbitration.

Simmons & Simmons' experienced transfer pricing team is available to assist with determining if and to what extent filing a request for Competent Authority assistance before calendar year-end will be beneficial for you, depending on the individual facts and circumstances of the case.