Eu urope Ecofin considers draft Transfer Pricing Code of conduct The draft Transfer Pricing Code of Conduct will improve how the EC Arbitration Convention works. Heinz-Klaus Kroppen and Stephan Rasch of Deloitte assess the progress made by the TPF and the impact of the draft Code on new EU member states he European Commission pro-(Commission Study), that transfer pricing Ecofin adopt the proposed code as it should posed a draft Transfer Pricing issues represent a major tax obstacle in resolve a number of the deficiencies of the Code of Conduct on April 23 establishing the Internal Market. To analyze Arbitration Convention that are identified in 2004(COM(2004)297 final), and develop pragmatic improvements to the Commissions Study. The Commission is based on recommendations made by the specific EU transfer pricing issues, the also of the opinion that the Code of Conduct EU Joint Transfer Pricing Forum (JTPF). European Commission established the JTPF should be helpful in the practical implemen The Code of Conduct specifically would in 2002, consisting of experts from the tax tation of the Arbitration Convention provisions of the EC Arbitration authorities of each EU member state Notably, to date, only one full proceeding ntion that have been subject to dis- (including the new member states) and 10 including both the MAP and the arbitration d differing interpretations experts from the business community. The phase (in a case involving France and Italy) The Arbitration Convention entered TPF met during 2002 and 2003 to examine has been finalized under the Arbitration into effect in 1995 for an initial five-year the practical functioning of the Arbitration Convention. The experience of the French period as a mechanism to resolve cross- bor- Convention and to tackle the problems that and Italian competent authorities in that der transfer pricing disputes within the EU. have arisen in the last few years because not case clearly illustrate many of the adminis- The primary benefit of the Convention is all member states have ratified the trative obstacles inherent in the Convention that, unlike a mutual agreement procedure Accession Convention of Austria, Finland (MAP)under a tax treaty, resolution of a and Sweden (Accession Convention) and Application of Convention until it dispute under the Convention is guaran- the Protocol amending the original re-enters in force teed. The Arbitration Convention gives the Convention(Prolongation Protocol As mentioned above, the Arbitration competent authorities two years to resolve (Greece has not ratified the Accession Convention, which has been the subject a dispute; if no resolution is reached, the Convention, and italy and Portugal have not of discussion at various levels for nearly case then may be referred to an arbitration ratified the Protocol). The JTPF also con- three decades, has not been in effect panel, which must render a decision within sidered the following issues related to the since December 31 1999. The lapsing of six months. The panel's decision is binding Arbitration Convention: the Convention at the end of 1999 has unless the competent authorities have the need to clarify the deadline for sub- created issues relating to applicable pro- pproved an alternative settlement elimi- mitting a case to competent authority cedures during the period in which not all nating double taxation. (that is, when the three-year period member states have ratified th The Convention expired at the end of starts) Prolongation Protocol 1999, and although the Council of the start of the two-year period for pur The jTf has achieved considerable Economic and Finance ministers of the poses of the MAP progress and has developed some practic (Ecofin) agreed to extend the Arbitration procedural aspects of the MAP, solutions for proceedings during the interim Convention in 1998, the ratification proceedings during the arbitration period that the Convention not has been in process of the extending Protocol did not phase; and effect. with the exception of Denmark, all take place in time giving rise to issues dis-. the interaction of the MAP and arbitra- member states are willing to conclude cases sed below. In addition, because the tion proceedings with domestic adminis- initiated before January 1 2000 under the Convention is worded in broad and general trative and judicial procedures rules of the Arbitration Convention terms, the member states'interpretation The JTPF concluded that the Convention Denmark will resolve such cases under the has differed, and sometimes conflicted, could best be implemented by the introduc- applicable tax treaty. For requests made resulting in potential double taxation and tion of a Code of Conduct setting out com- after January 1 2000, there is a consensus legal uncertainty taxp mon standards and guidance for all EU that the Arbitration Convention is still The Commission had highlighted in its member states. The European Commission valid, although member states differ 2001 study, Company Taxation in the supports the conclusions and recommenda- regarding the deadlines for the MAP and Internal Market(COM(2001)582 final) tions of the JTPF, and has requested that the the arbitration phase 46Jne2004
Europe 46 June 2004 www.internationaltaxreview.com The European Commission proposed a draft Transfer Pricing Code of Conduct on April 23 2004 (COM (2004) 297 final), based on recommendations made by the EU Joint Transfer Pricing Forum (JTPF). The Code of Conduct specifically would address provisions of the EC Arbitration Convention that have been subject to dispute and differing interpretations. The Arbitration Convention entered into effect in 1995 for an initial five-year period as a mechanism to resolve cross-border transfer pricing disputes within the EU. The primary benefit of the Convention is that, unlike a mutual agreement procedure (MAP) under a tax treaty, resolution of a dispute under the Convention is guaranteed. The Arbitration Convention gives the competent authorities two years to resolve a dispute; if no resolution is reached, the case then may be referred to an arbitration panel, which must render a decision within six months. The panel’s decision is binding unless the competent authorities have approved an alternative settlement eliminating double taxation. The Convention expired at the end of 1999, and although the Council of Economic and Finance Ministers of the EU (Ecofin) agreed to extend the Arbitration Convention in 1998, the ratification process of the extending Protocol did not take place in time, giving rise to issues discussed below. In addition, because the Convention is worded in broad and general terms, the member states’ interpretation has differed, and sometimes conflicted, resulting in potential double taxation and legal uncertainty for taxpayers. The Commission had highlighted in its 2001 study, Company Taxation in the Internal Market (COM (2001) 582 final) (Commission Study), that transfer pricing issues represent a major tax obstacle in establishing the Internal Market. To analyze and develop pragmatic improvements to specific EU transfer pricing issues, the European Commission established the JTPF in 2002, consisting of experts from the tax authorities of each EU member state (including the new member states) and 10 experts from the business community. The JTPF met during 2002 and 2003 to examine the practical functioning of the Arbitration Convention and to tackle the problems that have arisen in the last few years because not all member states have ratified the Accession Convention of Austria, Finland and Sweden (Accession Convention) and the Protocol amending the original Convention (Prolongation Protocol) (Greece has not ratified the Accession Convention, and Italy and Portugal have not ratified the Protocol). The JTPF also considered the following issues related to the Arbitration Convention: ● the need to clarify the deadline for submitting a case to competent authority (that is, when the three-year period starts); ● the start of the two-year period for purposes of the MAP; ● procedural aspects of the MAP; ● proceedings during the arbitration phase; and ● the interaction of the MAP and arbitration proceedings with domestic administrative and judicial procedures. The JTPF concluded that the Convention could best be implemented by the introduction of a Code of Conduct setting out common standards and guidance for all EU member states. The European Commission supports the conclusions and recommendations of the JTPF, and has requested that the Ecofin adopt the proposed code as it should resolve a number of the deficiencies of the Arbitration Convention that are identified in the Commission’s Study. The Commission is also of the opinion that the Code of Conduct should be helpful in the practical implementation of the Arbitration Convention. Notably, to date, only one full proceeding including both the MAP and the arbitration phase (in a case involving France and Italy) has been finalized under the Arbitration Convention. The experience of the French and Italian competent authorities in that case clearly illustrate many of the administrative obstacles inherent in the Convention. Application of Convention until it re-enters in force As mentioned above, the Arbitration Convention, which has been the subject of discussion at various levels for nearly three decades, has not been in effect since December 31 1999. The lapsing of the Convention at the end of 1999 has created issues relating to applicable procedures during the period in which not all member states have ratified the Prolongation Protocol. The JTPF has achieved considerable progress and has developed some practical solutions for proceedings during the interim period that the Convention not has been in effect. With the exception of Denmark, all member states are willing to conclude cases initiated before January 1 2000 under the rules of the Arbitration Convention. Denmark will resolve such cases under the applicable tax treaty. For requests made after January 1 2000, there is a consensus that the Arbitration Convention is still valid, although member states differ regarding the deadlines for the MAP and the arbitration phase. Ecofin considers draft Transfer Pricing Code of Conduct The draft Transfer Pricing Code of Conduct will improve how the EC Arbitration Convention works. Heinz-Klaus Kroppen and Stephan Rasch of Deloitte assess the progress made by the JTPF and the impact of the draft Code on new EU member states
Europe Table 1: Requests for arbitration after January I 2000- MAP eriod is the date of the " first notification of the action resulting in taxation not in Member state position Member state Comments ccordance with the provisions of the Continue the procedure as fore- Germany the other member state does the way most favourable to the taxpayer. seen in the Convention if the not agree, with the taxpayers This red nt should be met by ref other member state agrees. consent, those member states ring to the first tax assessment. will initiate a MAP procedure It has been claimed that member states Netherlands under the relevant tax treaty. interpretations of the starting point of the two-year period differ significantly Taxpayers also have asserted that the posi tion of certain member states interferes Most member states consider the Austria Belgium, Finland, France, ith the Convention, because such mem- Convention, or rather the two.Belgium Portugal, Sweden initiate MAP ber states have adopted the view that the ar period for the MAP, to be Denmark automatically. Austria, Denmark two-year period does not start until the suspended. These states will initi. Finland and Italy only upon the request of other member state has issued a formal ate a MAP but under the tax France the taxpayer. notification that it does not accept an treaty with the other member adjustment. The draft Code of Conduct state proposes that the two-year period start on the later of the date of the tax assessment notice(that is, a final decision of the tax administration) and the date on which the Table 2: Requests for arbitration after January I 2000-arbitration procedure competent authority receives the request and specific minimum information. The Member state positio Member state Comments minimum information would include among other things, identification of the Continue the arbitration proce- Germany If the other member state does taxpayer, details of the relevant facts and dure as foreseen in the ot agree,continue the MAP pro. circumstances of the case and an explana Arbitration Convention if the Ireland cedure under the relevant tax tion as to why the taxpayer believes that other member states agrees treaty(Spain only if so requested). tax is being levied other than in accordance Netherlands with the Convention The draft Code of Conduct also address- es administrative issues that should ensure the practical functioning of the Convention Arbitration phase of the Austria Arbitration procedure may be and improve transparency. Although these used only when the Convention items may appear a matter of course,it re-enters into force. Italy will use should be noted that the member states do the arbitration procedure onl not have much experience, particularly upon a new request. with respect to the arbitration phase of the Italy Convention. The Code proposes a common Portugal working language to conduct the exchange Sweden of position papers and the proceedings, spe- cific time-frames to carry out obligations under the Convention and that the taxpay Several member states have adopted a three years of the first notification of action er be kept fully apprised of significant progressive approach and are prepared to that results in, or is likely to result in, dou- developments during the proceedings apply the Arbitration Convention, includ- ble taxation. The competent authorities To ensure that cases are processed expe- g the arbitration phase, when the other then have two years in which to reach an ditiously, the Code of Conduct recom- member state involved has ratified the agreement that eliminates double taxation. mends that the competent authority Prolongation Protocol. Therefore, for The JTPF has reached consensus that acknowledge the delivery of the taxpayer's example, it should be possible for a the starting point of the three- year period request within one month and request any German taxpayer to submit an application should be the date of the first tax assess- additional information it deems to be nec- for an arbitration procedure with the UK ment notice or an equivalent that is, or is essary for further clarification within two even though the Arbitration Convention is likely to, lead to double taxation. The draft months of the taxpayer's initial application not in force(see Tables 1 and 2) Code of Conduct also recommends that With respect to the exchange of position member states apply this definition to the papers, the competent authority of the Code of conduct three-year period included in article 25 of member state of the applicant taxpayer One of the impediments identified in the the OECd model treaty and implemented should see that the paper is sent out within Commissions 2001 Company Taxation in tax treaties concluded by the member four months following the date of the tax Study relates to various time periods pro- states. The JTPF essentially based its con- assessment notice or the date on which the vided in the Arbitration Convention. To clusions on the Commentary on the oecd competent authority received the request. qualify for arbitration, a taxpayer must model treaty, which explicitly provides that To ensure a consistent approach, the draft request competent authority relief within the starting point of the three-year time Code recommends that the parties apply Jne200447
Europe Several member states have adopted a progressive approach and are prepared to apply the Arbitration Convention, including the arbitration phase, when the other member state involved has ratified the Prolongation Protocol. Therefore, for example, it should be possible for a German taxpayer to submit an application for an arbitration procedure with the UK even though the Arbitration Convention is not in force (see Tables 1 and 2). Code of Conduct One of the impediments identified in the Commission’s 2001 Company Taxation Study relates to various time periods provided in the Arbitration Convention. To qualify for arbitration, a taxpayer must request competent authority relief within three years of the first notification of action that results in, or is likely to result in, double taxation. The competent authorities then have two years in which to reach an agreement that eliminates double taxation. The JTPF has reached consensus that the starting point of the three-year period should be the date of the first tax assessment notice or an equivalent that is, or is likely to, lead to double taxation. The draft Code of Conduct also recommends that member states apply this definition to the three-year period included in article 25 of the OECD model treaty and implemented in tax treaties concluded by the member states. The JTPF essentially based its conclusions on the Commentary on the OECD model treaty, which explicitly provides that the starting point of the three-year time period is the date of the “first notification of the action resulting in taxation not in accordance with the provisions of the Convention” and should be interpreted in the way most favourable to the taxpayer. This requirement should be met by referring to the first tax assessment. It has been claimed that member states’ interpretations of the starting point of the two-year period differ significantly. Taxpayers also have asserted that the position of certain member states interferes with the Convention, because such member states have adopted the view that the two-year period does not start until the other member state has issued a formal notification that it does not accept an adjustment. The draft Code of Conduct proposes that the two-year period start on the later of the date of the tax assessment notice (that is, a final decision of the tax administration) and the date on which the competent authority receives the request and specific minimum information. The minimum information would include, among other things, identification of the taxpayer, details of the relevant facts and circumstances of the case and an explanation as to why the taxpayer believes that tax is being levied other than in accordance with the Convention. The draft Code of Conduct also addresses administrative issues that should ensure the practical functioning of the Convention and improve transparency. Although these items may appear a matter of course, it should be noted that the member states do not have much experience, particularly with respect to the arbitration phase of the Convention. The Code proposes a common working language to conduct the exchange of position papers and the proceedings, specific time-frames to carry out obligations under the Convention and that the taxpayer be kept fully apprised of significant developments during the proceedings. To ensure that cases are processed expeditiously, the Code of Conduct recommends that the competent authority acknowledge the delivery of the taxpayer’s request within one month and request any additional information it deems to be necessary for further clarification within two months of the taxpayer’s initial application. With respect to the exchange of position papers, the competent authority of the member state of the applicant taxpayer should see that the paper is sent out within four months following the date of the tax assessment notice or the date on which the competent authority received the request. To ensure a consistent approach, the draft Code recommends that the parties apply www.internationaltaxreview.com June 2004 47 Table 1: Requests for arbitration after January 1 2000 – MAP Member state position Continue the procedure as foreseen in the Convention if the other member state agrees. Most member states consider the Convention, or rather the twoyear period for the MAP, to be suspended. These states will initiate a MAP but under the tax treaty with the other member state. Member state Germany Greece Ireland Luxembourg Netherlands Spain UK Austria Belgium Denmark Finland France Italy Portugal Sweden Comments If the other member state does not agree, with the taxpayer‘s consent, those member states will initiate a MAP procedure under the relevant tax treaty. Belgium, Finland, France, Portugal, Sweden initiate MAP automatically. Austria, Denmark and Italy only upon the request of the taxpayer. Table 2: Requests for arbitration after January 1 2000 – arbitration procedure Member state position Continue the arbitration procedure as foreseen in the Arbitration Convention if the other member states agrees. Arbitration phase of the Convention is suspended. Member state Germany Greece Ireland Luxembourg Netherlands Spain UK Austria Belgium Denmark Finland France Italy Portugal Sweden Comments If the other member state does not agree, continue the MAP procedure under the relevant tax treaty (Spain only if so requested). Arbitration procedure may be used only when the Convention re-enters into force. Italy will use the arbitration procedure only upon a new request
Eu urope Vienna Convention on the law of Accession of new eu member states The jtF also assessed whether Treaties The JTPF examined ways to prevent a tive procedures might be available prolonged ratification process with respect dite the entry of the new member states. Article 24- Entry into force to the member states that joined the eu However, even the "entry in force upon sig- A treaty enters into force in such manner and on May 1 2004. The European nature"or the"provisional application"pro- upon such date as it may provide or as the Commission itself specifically noted that vided in articles 24 and 25 of the UN negotiating states may agree the jTPF had to spend considerable meet- Vienna Convention on the Law of Treaties ing time addressing issues related to the (see box would -at least -require ratifi- failure of all of the member states to rati- cation by the majority of the old and new Article 25-Provisional application fy the extending Protocol as well as the member states. Based on experience thus e A treaty or a part of a treaty is applied provi- Accession Convention for Austria, Finland far, it is unlikely that such procedures ally pending its entry into force if: and Sweden. The benefit of the would advance ratification (a)the treaty itself so provides; or Arbitration Convention -that is, the abo- (b)the negotiating states have in some other lition of double taxation -would be seri- Future work programme of the JTPF manner so agreed ously jeopardized by another protracted It remains to be seen whether the o Unless the treaty otherwise provides or the procedure Council will follow the recommendations negotiating states have otherwise agreed, the Furthermore, the Commission expressed of the Commission. Nevertheless, the provisional application of a treaty or a part of a concern that the lack of a tax treaty network JTPF, whose mandate officially expires at treaty with respect to a state shall be terminated between the new member states and the old the end of 2004, is examining its work f that state notifies the other states between member states could exacerbate the situa- programme, including transfer pricing which the treaty is being applied provisionally of tion. As taxpayers will not have access to a documentation requirements and poten ts intention not to become a party to the treaty. MAP or the Arbitration Convention, taxpay- tial approaches to standardizing these Text: United Nations, Treaty Series, vol. 1/55. p 331. ers may face a risk of unresolved double tax- rules in the EU. The JTPF also will ana- the above measures in the context of maps The draft code recommends that member under tax treaties The draft Code further sets out useful states introduce measures so that taxpayers phase, including the list of potential arbi- can obtain a suspension of tax collection it is to function and the form of the during a MAP and or arbitration procedure panels opinion Finally, the draft Code of Conduc cludes a recommendation on the suspen- ation. Following the JTPF's recommenda- lyze whether advance pricing agreements sion of tax collection during the proceed- tion, the Commission has urged the member could be a helpful tool to improve coop- ings.The JTPF analyzed existing rules in states to commit themselves to ratifying an eration between the tax authorities of the the member states and concluded that in accession convention for the new member member states and to reduce administra almost all member states, suspension of tax states as soon as possible at the latest with- tive burdens and compliance costs for is subject to national law although the rules in two years. The Commission would prefer taxpayers differ significantly. These rules generally a provision in this Accession Convention that Deloitte Touche Tohmatsu, Duesseldorf. relate to domestic procedures and do not would allow for an intermediate application Heinz-Klaus Kroppen(kroppen@ deloitte. de) encompass MAP or arbitration procedures. of the Arbitration Convention between the is one of the business experts of the Forum The draft code recommends that member member states that have ratified it. For and Stephan Rasch(srasch@deloitte. de)is states introduce measures so that taxpayers future enlargements, the introduction of an his scientific assistant for the EU JTPF work can obtain a suspension of tax collection automatic or unilateral accession process Both are with the European transfer pricing during a MAP and/or arbitration procedure. should be considered. group of deloitte, headed by kroppen TRMa,6552下95673 367535242065664393002 043773053921711325:175752348748 5485037577034778960916371872 40495063105079229689458923542019956 05awww.internationaltaxreview.com 931595024455 36g63ue22k0z5 48Jne2004
Europe the above measures in the context of MAPs under tax treaties. The draft Code further sets out useful and detailed guidance on the arbitration phase, including the list of potential arbitrators, how the panel is established, how it is to function and the form of the panel’s opinion. Finally, the draft Code of Conduct includes a recommendation on the suspension of tax collection during the proceedings. The JTPF analyzed existing rules in the member states and concluded that in almost all member states, suspension of tax is subject to national law although the rules differ significantly. These rules generally relate to domestic procedures and do not encompass MAP or arbitration procedures. The draft code recommends that member states introduce measures so that taxpayers can obtain a suspension of tax collection during a MAP and/or arbitration procedure. Accession of new EU member states The JTPF examined ways to prevent a prolonged ratification process with respect to the member states that joined the EU on May 1 2004. The European Commission itself specifically noted that the JTPF had to spend considerable meeting time addressing issues related to the failure of all of the member states to ratify the extending Protocol as well as the Accession Convention for Austria, Finland and Sweden. The benefit of the Arbitration Convention – that is, the abolition of double taxation – would be seriously jeopardized by another protracted ratification procedure. Furthermore, the Commission expressed concern that the lack of a tax treaty network between the new member states and the old member states could exacerbate the situation. As taxpayers will not have access to a MAP or the Arbitration Convention, taxpayers may face a risk of unresolved double taxation. Following the JTPF’s recommendation, the Commission has urged the member states to commit themselves to ratifying an accession convention for the new member states as soon as possible, at the latest within two years. The Commission would prefer a provision in this Accession Convention that would allow for an intermediate application of the Arbitration Convention between the member states that have ratified it. For future enlargements, the introduction of an automatic or unilateral accession process should be considered. The JTPF also assessed whether alternative procedures might be available to expedite the entry of the new member states. However, even the “entry in force upon signature” or the “provisional application” provided in articles 24 and 25 of the UN Vienna Convention on the Law of Treaties (see box) would – at least – require ratification by the majority of the old and new member states. Based on experience thus far, it is unlikely that such procedures would advance ratification. Future work programme of the JTPF It remains to be seen whether the Council will follow the recommendations of the Commission. Nevertheless, the JTPF, whose mandate officially expires at the end of 2004, is examining its work programme, including transfer pricing documentation requirements and potential approaches to standardizing these rules in the EU. The JTPF also will analyze whether advance pricing agreements could be a helpful tool to improve cooperation between the tax authorities of the member states and to reduce administrative burdens and compliance costs for taxpayers. Deloitte Touche Tohmatsu, Duesseldorf. Heinz-Klaus Kroppen (hkroppen@deloitte.de) is one of the business experts of the Forum and Stephan Rasch (srasch@deloitte.de) is his scientific assistant for the EU JTPF work. Both are with the European transfer pricing group of Deloitte, headed by Kroppen. 48 June 2004 www.internationaltaxreview.com Article 24 - Entry into force ● A treaty enters into force in such manner and upon such date as it may provide or as the negotiating states may agree. ● … Article 25 - Provisional application ● A treaty or a part of a treaty is applied provisionally pending its entry into force if: (a) the treaty itself so provides; or (b) the negotiating states have in some other manner so agreed. ● Unless the treaty otherwise provides or the negotiating states have otherwise agreed, the provisional application of a treaty or a part of a treaty with respect to a state shall be terminated if that state notifies the other states between which the treaty is being applied provisionally of its intention not to become a party to the treaty. Text: United Nations, Treaty Series, vol. 1155, p.331. Vienna Convention on the Law of Treaties The draft code recommends that member states introduce measures so that taxpayers can obtain a suspension of tax collection during a MAP and/or arbitration procedure