EUROPEAN COMMISSION Strasbourg, 25.10.2016 SWD(2016) 343 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a COUNCIL DIRECTIVE on Double Taxation Dispute Resolution Mechanisms in the European Union {COM(2016) 686 final}

{SWD(2016) 344 final}



Contents 1. Introduction, Background 2. Policy Context, Drivers, Problem Definition and Subsidiarity 2.1 Policy context 2.2 Scope of this impact assessment 2.3 Drivers 2.4 The problems identified 2.5. Consequences 2.6 Baseline Scenario 2.7 The EU's right to act 3. The Objectives 3.1 General 3.2 Specific objectives in detail 3.3 How the objectives are linked to the problems 4. Options 4.1. Baseline scenario - Status-quo/No Action 4.2 Option A - improving implementation of the existing DTDRMs 4.3. Option B – Establishing an enabling legal framework for broadened DTDRM 4.4. Option C – A comprehensive new EU-specific double taxation resolution mechanism

5. Analysis of Impact 5.1 Impact on the problems encountered 5.2 Economic impacts 5.3 Social and societal impact 5.4 Impact on third countries 6. Comparison of options 6.1 Comparison of Effectiveness 6.2 Comparison of efficiency 6.3 Coherence with the Commission's overall objectives but also with the international developments 6.4 Comparison of options (summary) 6.5 Preferred Option 7. Monitoring and Evaluation 8. Glossary 9. References Annex A – Procedural information 1. Lead DG, Agenda Planning and Work Programme 2. Organisation and Timing 3. Consultation of the Regulatory Scrutiny Board 4. External Expertise Annex B – Stakeholder consultation

1. Introduction 2. Breakdown of Participants 3. Analysis of responses Annex C - Who is affected by the initiative and how Annex D - Estimation of double taxation disputes for corporate taxpayers 93 1. Development of cases under the EU Arbitration Convention 2. Estimation of cases addressed in the MAP under DTC (i.e. cases not falling under the AC) and total number of disputes 3. Cases where no remedies are sought Annex E - Estimation of amounts of tax involved in DTDRM 1. Responses received from MS on amounts of tax involved in cases pending under the AC 31.12.2014: 2. Estimation of amounts involved in cases pending under DTC Annex F: Shortcomings identified in detail and for the DTDRM in the EU A. Shortcomings identified for DTDRM in the EU in detail B. Shortcomings identified for DTDRM in the EU overview Annex G: verview of cases initiated under the AC vs. cases completed per Member State Annex H: Assessment of Data Collection on Improving Double Taxation Dispute Resolution Mechanisms A. Information About You B. Your Opinion 6. The Implications of Double Taxation Disputes on Your Worldwide Operations Annex I: Consultation Strategy

A. Origin/Past Consultation B. Ongoing/Future Consultations Annex J: UNCITRAL Model Law on Commercial Arbitration (2006) – EU28 - Overview Annex K: Impact on fundamental rights 132 Annex L Template for Monitoring 133

1. Introduction, Background It has been demonstrated as far back as 1923 that the imposition of comparable taxes by two (or more) tax jurisdictions in respect of the same taxable income or capital ('double taxation/multiple taxation') has a negative impact on cross-border investment and leads to economic distortions and inefficiencies. As a consequence the League of Nations and later on other international organisations like the Organisation for Economic Cooperation and Development ('OECD') and the United Nations ('UN') have been working on establishing mitigating measures which strike the right balance between supporting undistorted cross-border economic activities and a country's right to levy taxes on profits from these activities. As the most practical solution, models for bilateral agreements between states for the avoidance of double taxation situations, the so called Double Taxation Conventions ('DTC'), have been developed. There is now a long history of such DTCs between numerous jurisdictions across the world. Within the EU, most Member States have concluded a DTC with each other, which allocate taxing rights, contain approaches on how to relieve double taxation when it occurs, and include procedures to resolve disputes created by the existence of divergent interpretation of the respective DTC ('double taxation disputes'). These mechanisms are called double taxation dispute resolution mechanisms ('DTDRM'). 2. Policy Context, Drivers, Problem Definition and Subsidiarity 2.1 Policy context The context described below is expected to result in a continuously high and even increasing number of situations where Member States exercise their taxing rights in a way that can result in double taxation disputes. 2.1.1 National tax sovereignty of EU Member States The EU Treaty freedoms allow individuals and businesses to move and operate freely in the Internal Market without discrimination. At the same time, the EU Member States have the right to exercise their sovereignty in direct taxation. As a result, a company operating cross-border may find itself in a situation where different Member States decide to levy taxes on the same income or capital. This situation gives rise to double taxation. Direct taxation is not harmonised in the EU and the EU’s role in the area is limited to certain competences. EU Member States are largely free to design their direct tax systems and procedures and to decide what to tax, when to tax it, and at what rate, as long as their rules are not discriminatory or otherwise contrary to the EU Treaties. The EU Treaties include no explicit provision for EU legislative competence in the area of direct taxation. Under Article 115 of the Treaty on the Functioning of the European Union (TFEU), the Commission has the power to propose EU legislation to improve the functioning of the Internal Market, but the proposals will only become EU law subject to unanimous support in Council. On that basis, and in the context of the Capital Markets Union (CMU) Action Plan, the EU Commission has started mapping and discussing with EU Member States on the best ways to remove restrictions linked to the existence of burdensome withholding tax procedures. 2.1.2 Double taxation and double taxation dispute resolution mechanisms The DTDRM provided in DTC is a State to State procedure to mutually agree on how to solve the double taxation dispute, usually in the form of Mutual Agreement Procedures ('MAP'). Under a 'classical' DTDRM the taxpayer can request the initiation of a DTDRM with the competent authority (usually a special unit in the tax administration or the ministry) of the Residence State within three years from the first notification of the action, which he considers as not being in accordance with the DTC. The competent authorities of the States will then have to contact each other and negotiate how to solve the double taxation dispute. The taxpayer is not directly participating in this State to State procedure. Under DTCs including the 'classical' DTDRM, the States are not obliged to reach a solution and shall just endeavour to reach an agreement, which is a rather vague objective. Therefore it can happen, and it does happen in practice, that the States are not in a position to solve the double taxation dispute with the effect that the double taxation persists. Figure 2: A typical MAP common in classical DTCs (Commission services)

The problem of unresolved double taxation disputes is widely recognised. In 2007 the OECD issued a report on improving the resolution of tax treaty disputes. It concluded that it is inevitable that MAPs do not achieve a satisfactory result in cases where States cannot agree. To ensure a resolution of such disputes, the 2008 revision of the OECD Model Tax Convention introduced an arbitration clause for cases where competent authorities cannot agree in the context of a MAP. Such a clause provides that if negotiations between the competent authorities do not result in a solution within a certain time period (usually two years), an independent body is established ('advisory commission') to issue a decision on how to solve the disputes which is binding for the States involved ('mandatory binding arbitration'). In the EU, such a mandatory resolution by way of arbitration was already agreed in the 1990s on the basis of the EU Arbitration Convention ('EU AC') on the elimination of double taxation in connection with the adjustment of profits of associated enterprises , an area commonly referred to as transfer pricing. It provides that if no agreement is reached between the competent authorities within two years after the initiation of the MAP procedure, an advisory commission should be established by the States within six months . The advisory commission has to decide within six months how to resolve the transfer pricing dispute. Figure 3: The proecedure laid down in the EU Arbitration Convention (Commission services) Source: European Commission As with any tax assessments, a taxpayer has also the possibility to appeal before national courts. However, these domestic judicial proceedings do not aim at eliminating double taxation. Instead they rather address the question regarding whether domestic law has been correctly applied. In doing so, it may happen that the courts in both States involved confirm the correct application of domestic law with the effect that the double taxation situation remains, which is not satisfactory from the perspective of the taxpayer. An appeal in front of the Court of Justice of the European Union ('CJEU') would require an EU legislative instrument, one of the options assessed in this impact assessment. 2.1.3 OECD BEPS project and Anti-Tax Avoidance Package ('ATAP') The work on solving double taxation disputes should be seen in the context of the OECD's work on the Base Erosion and Profit Shifting (BEPS) project. While this project predominantly aims at closing existing loopholes that facilitate avoidance of corporate taxes, and to find solutions to today's tax challenges, including those linked to the expansion of the digital economy, it also contains an action on improving double taxation dispute resolution mechanism (Action 14). In September 2013, the G20 Leaders approved the OECD Action Plan on BEPS comprising of 15 actions which were finally endorsed in October 2015. However, addressing aggressive tax planning structures and complex cross-border arrangements through domestic rules creates significant additional risk of double taxation if new rules are not implemented in a harmonised way . At EU level, the Anti-Tax Avoidance Package (ATAP) was presented in January 2016. It ensures a coordinated implementation of BEPS measures in the EU but does not cover all BEPS Actions (e.g. transfer pricing). Improving double taxation dispute resolution mechanisms therefore complements the anti-tax-avoidance measures. There are Member States expectations to raise additional tax revenues resulting from the application of the BEPS measures, particularly for the transfer pricing cases where the statistics collected by the EU Joint Transfer Pricing Forum ('EU-JTPF') a Commission expert group advising the Commission on transfer pricing matters already confirm that this area of taxation is sensitive to disputes. The two combined can put further strain on the occurrence of double taxation. Improving dispute resolution mechanisms is therefore an integral component of the work on BEPS. 2.1.4 The June 2015 Action Plan On 17 June 2015 the Commission presented an Action Plan to reform corporate taxation in the EU which sets out a series of initiatives to tackle tax avoidance, secure sustainable revenues and strengthen the Single Market for businesses . In order to create greater certainty for companies, the Commission announced in this Action Plan that by 2016 it will propose improvements to the current DTDRM. 2.1.5 The CCCTB The CCCTB is a single set of rules that companies operating within the EU could use to calculate their taxable profits. That way, each Member State can then tax the profits of the companies in its state at their own national tax rate (just like today). The Commission's June 2015 Action Plan sets out a staged approach for the implementation of the CCCTB. In practical terms, the Commission is planning to table two new Proposals: the first instrument will lay down the provisions for a Common Corporate Tax Base (CCTB) whilst the second will add the elements related to consolidation (i.e. CCCTB). . It can be expected that by providing for a common and consolidated tax base for the EU companies, instances of double taxation will significantly be reduced. Remaining differences in the interpretation of provisions in the Directive would be subject to the jurisdiction of the CJEU. However, the first step (developing a set a rules for the determination of a common tax base) will not make tax disputes disappear and will not tackle at all the functioning of the DTDRM. That is because even with a common tax base the possibility of differences between States on the allocation of taxing rights under their domestic law and DTC, e.g. a transfer pricing dispute, will not disappear until the second step is taken. In addition, the full CCCTB is suggested to mandatorily apply only to large multinational groups . For groups below the threshold the CCCTB would not be mandatory. Their position in case of a cross-border double taxation dispute would remain unchanged. For this reason the initiative on improving double taxation dispute resolution mechanisms rather supplements the CCCTB for situations where it does not (yet) apply. For those businesses and periods where the CCCTB does not apply the initiative has the same goal: improving the business environment in the Single Market by making it simpler and cheaper for companies to operate cross border. 2.2 Scope of this impact assessment This impact assessment examines the possible measures to provide more efficient and better functioning DTDRMs. Which taxpayers are affected by shortcomings of DTDRM

The results of the public consultation conducted in 2010 demonstrated that 94 % of the corporate taxpayers, which participated in this consultation, indicated that they had encountered a double taxation dispute as regards their business income. In the 2010 public consultation 30% of double taxation cases were reported by individuals (58 cases) of which 69% sought remedies. The mutual agreement procedure was invoked in only 7 of these cases. In 2013 the Commission set up an Expert Group to evaluate the issue of double taxation for individuals. The Group concluded its work in November 2015 with the adoption of a report with recommendations for the main areas of concern, i.e. cross border workers, characterisation mismatches. The most relevant recommendations in this report are to develop a multilateral tax treaty, to recommend common approaches and processes in the EU, to harmonise forms and procedures within the EU and, as only one aspect, an amendment of current rules for mutual agreement procedures which would also allow mediation procedures to better address the problems encountered by individuals. From 87 respondents to the public consultation in 2016, 10 were from private individuals. However, from the 10 individuals who responded only 2 could be considered as being private individuals/sole traders while the rest were consultants (2), academics (2), or were responding on behalf of their companies (2). The fact that only corporate taxpayers responded to the 2016 data collection can be taken as a further indication that corporate taxpayers are predominantly subject to double taxation disputes. Why focussing on business profits of corporations and not on individuals? The main problems with the existing DTDRM are encountered by companies. In this area there are currently various efforts at MS and international level to ensure taxation of companies' cross border activities. This adds to the fact that disputes already arise mainly from the application of the current company targeted rules like transfer pricing. Theoretically individuals may also face double taxation issues as regards other kinds of income (e.g. employment income). Although it was confirmed by the Expert Group that double taxation disputes arise, it was not possible to find tangible and quantitative evidence on whether the existing DTDRM are problematic and have shortcomings for other kinds of income than business income. Therefore, the other recommendations of the Expert Group, for example the development of EU wide conflict rules, recommendations and procedures are expected to be more proportionate for addressing the double taxation issues encountered for individuals and should be addressed with priority. This is confirmed by the 2016 stakeholder consultation in which only a proposal providing for the harmonisation of conflict rules was seen as fully appropriate to address the issue. On the other hand there is the political and economic urgency of adopting measures in the field of business profits of corporations. Given the stronger evidence of the magnitude and the consequences of the problems with ineffective DTDRMs in the corporate area, this initiative focusses on corporate taxation of business profits. However, nothing prohibits the extension of the rules developed under this initiative to issues encountered to the cross border tax obstacles of individuals as identified by the Expert Group once the magnitude and the extent of the problem as well as the proportionality can be established. Why not cover inheritance tax? Attempts have been made by the Commission in the context of the study on inheritance taxation to establish the magnitude and extent of the problem for inheritance tax but only anecdotal data was gathered to support the potential call for action in this area. As far as the discrimination problem is concerned, the study concluded that a number of discrimination elements have been eliminated from certain Member States' jurisdictions and new case law by the CJEU was developed. Despite the need for progress and a potential for double taxation persisting, the impacts of the remaining discrimination from the inheritance taxation rules did not seem to cause a significant impact on the functioning of the single market as a whole. Moreover, the study concluded that, as far the data would permit, that the situation has neither worsened nor improved over the last decade. Some Member States have in fact eliminated inheritance taxation altogether thereby reducing the potential for double taxation. In general, the Member States did not conclude as many bilateral conventions on inheritance taxation as in corporate taxation. Consequently a commonly accepted set of rules for allocating taxing rights/removing double taxation ('conflict rules') is missing. To address this, many Member States grant unilateral relief for double taxation which is effective in many cases. The starting point for double taxation disputes for inheritance tax where the size of the problem and the effect of various recommendations has not yet been assessed is different to that for business taxation where the EU can review a longer history of recommendations, compile a detailed assessment of the number and kind of cases, and has implemented increasing measures to ensure taxation. Why not cover VAT? When it comes to indirect taxation (notably the VAT) double taxation risks can exist and trigger consequences for the single market. The public consultations and previous work conducted by the Commission in the VAT area have led it to consider and consult on a VAT-specific mechanism for eliminating double imposition of VAT in individual cases , including an arbitration procedure. The Commission will facilitate this process by running or sponsoring concrete projects in the future. However, the present impact assessment does not cover double imposition of VAT issues for the following reasons: situations and causes creating double imposition of VAT are radically different from the ones triggering double taxation in the income tax area. They relate to characterising or interpreting the place of supply of goods and services ; the legal framework significantly differs and has an impact on how to envisage an effective dispute resolution mechanism. Indeed, the mechanism and the underlying procedure would require to be enshrined in the existing VAT legal framework. There would be a need to provide for specific provisions in order to exclude situations related to different interpretations for which prevailing power would be with the VAT Committee established under Article 398 of the VAT Directive and the CJEU . Furthermore, in the VAT area, there are no provisions for the elimination of double taxation similar to a DTC in the field of direct tax for cases which do not relate to the interpretation of the VAT Directive;



Figure 1: Intervention logic the report issued by the Commission further to the 2007 Consultation showed little evidence on the materiality and magnitude of existing VAT double imposition issues which may be referred to such mechanism (i.e. not involving interpretation of a provision of the EU VAT legislation).

Given the above-described characteristics and particularities, developing a combined effective and efficient mechanism for both VAT and direct tax does not appear to be feasible. If proven relevant, a specific approach for the area of VAT should be explored and assessed. 2.3 Drivers 2.3.1 Globalisation and changing business models (External driver) For companies that are highly integrated internationally as it is the case in most EU Member States, activities are not limited to one jurisdiction only. Current business models used by multinational companies have become more complex, intra-group transactions have multiplied , and multinationals' integrated value chains make it increasingly difficult to determine where profits are created. These aspects have an impact on taxation. For example, while between the associated enterprises within a MNE group, the (re-)location of intangible assets is easier than for tangible assets (e.g. machinery, factories), estimating their true economic values and the real values of payments for their use is very complicated in practice. Sometimes pricing is even impossible given the lack of similar transactions occurring between third parties to which these intra group transactions can be compared. It is not only the rise in economic integration and the increase of capital flows which causes conflicting situations of double taxation. Also the complexity of business models and the new features they incorporate (like the presence of the digital economy) are not aligned with the current international taxation standards often agreed a long time ago. Therefore mechanisms which properly solve double taxation disputes that may arise because of that are required. 2.3.2 Priority for tax collection vs. solving double taxation disputes (Internal driver) States need to safeguard taxation and collection of tax on cross-border transactions especially at a time where there is a multiplication of financial, trade and investment flows combined with full integration of business models by companies. Securing tax revenue in cross-border situations through stricter taxation rules as well as tougher tax collection and audit practices on cross-border transactions is the immediate priority for Member States. This is reinforced by the fact that taxpayers play with loopholes of the existing rules and set up schemes which need to be immediately addressed and taxed in cross border situations (see BEPS project). The increased focus on safeguarding taxation in cross border situations can conflict with other States’ sovereignty which then may create double taxation and disputes between States on how to remove them. In the long term, unresolved double taxation has detrimental effects on growth and investment (a long established fact, see above) but these negative effects are not immediately visible. The impact assessment shows that the current DTDRM have some elements which do not work well, make them resource-intensive for the States, and don’t have enough guarantees of success (long, costly, ineffective, resource-intensive procedures). The impression is that there is a greater interest in collecting taxes than solving a double taxation dispute. This is assumed to drive the problems encountered with the current DTDRM. 2.4 The problems identified 2.4.1 Double taxation disputes a) General Nearly every cross border business transaction is at risk of causing double taxation due to the fact that the State where the taxpayer is resident usually taxes the world wide income and the State where the company generates business income taxes the income generated in its territory. The DTC concluded between States ensure that in the overwhelming majority of those cross border business transactions a double taxation conflict does not arise (first layer: The Double Taxation Convention). Nevertheless, in some instances a double taxation conflict arises despite such a DTC, e.g. in a situation where States interpret the DTC concluded differently. For these cases it is important that there is a possibility that allows MS to get in touch and encourages them to solve the double taxation dispute. Nearly all DTCs actually provide for such a possibility (Second layer: DTC providing for a classical Mutual Agreement Procedure, MAP). As a classical Mutual Agreement Procedure only provides that States endeavour to reach an agreement, it is important to have an agreement between the States that obliges them to reach an agreement. Mandatory binding arbitration is seen as the strongest tool that achieves this (third layer: mandatory binding arbitration). The situation in the EU is characterised by the fact that with the EU AC a large majority of double taxation disputes are covered by a dispute resolution mechanism which requires mandatory binding arbitration. It is widely recognised that the EU AC provides significant improvement compared to situations where there is only a classical MAP. Furthermore, the simple fact of such an arbitration clause gives an incentive to States to solve the disputes before it goes to arbitration. The fact that only a few cases under the AC finally went to arbitration should therefore be seen as confirmation of this assumption rather than as a failure of the EU AC. It is not possible to reliably establish how the situation would have been without the existence of the EU AC, i.e. to quantify for instance the number of cases which would not be solved and their duration. However, the fact that the OECD and the UN both aim at implementing mandatory binding arbitration on a broader level confirms the positive impact of the EU AC. In addition it needs to be stressed that there are clear indications that the problem is growing in size and magnitude due to several factors: globalisation and increased audit practices of tax administrations. This effect is not limited to the EU but rather observed worldwide. It is therefore the right time to act before the risks encountered actually materialise in the EU. The current mechanisms (EU Arbitration Convention 1990/463/EEU and bilateral tax treaties) need to be strengthened through a common framework to address these developments at least at EU level. Given MS' sovereignty for their bilateral relations with third countries the problem can only be addressed at EU level for MS intra EU relations. However, well-functioning DTDRMs within the EU are expected to have positive effects also in relation to third countries, especially in multilateral situations where part of the stakeholders are resident in the EU. Although it is commonly recognised that the EU AC clearly improves the situation compared to a situation without mandatory binding arbitration, stakeholders criticise that the EU AC does not work to its full extent and is only applicable to disputes on transfer pricing and attribution of profits to permanent establishments. This criticism gave rise to the comprehensive monitoring of DTDRM in the EU, finally resulting in this initiative.

b) Estimation of the number of double taxation disputes by the end of 2014 Over recent years international organisations and the European Commission monitored developments related to double taxation dispute resolution. On this basis, the Commission took various actions to (i) estimate the magnitude and impacts of the problems, and (ii) to develop possible solutions. At the end of 2014 there is an estimated number of around 910 cases of double taxation disputes pending under the EU AC (transfer-pricing disputes) and DTCs (non-transfer pricing disputes) within the EU. This conservatively calculated number is estimated to represent at minimum around 50% of Member States' total double taxation disputes worldwide. The 2016 data collection indicated that remedies before domestic courts are regularly sought in parallel to remedies available under the EU AC or DTC. There is some reason to believe that every year in a number of cases no remedies are taken by taxpayers which are subject to double taxation (this number is conservatively estimated at around 120 cases in 2014). Based on the data available, the input received from stakeholders and views expressed in various articles, the number of double taxation disputes is expected to increase in the future. The statistics on double taxation disputes at OECD level show that the problem is also emerging at a global level. The inventory of cases at the level of OECD Member States more than doubled from 1176 bilateral cases at the end of 2006 to 2711 bilateral cases at the end of 2014. c) Estimation of the amounts involved in double taxation disputes by the end of 2014 The total amount of tax disputed involved in the cases pending at the end of 2014 is estimated at 8 billion Euro in the area of transfer pricing and at 2.5 billion Euro for other cases, a total of EUR 10.5 billion by the end of 2014, of which there is a quarter where the taxpayer did not seek the remedies. Putting the estimated number of EUR 10.5 billion Euros in relation to the total corporate income tax levied in the EU for the year 2014 (EUR 351 billion) would result in a percentage of 3%. In this context, however, it needs to be recalled that the amount for a company affected by a double taxation dispute can be significant. Figure 4: Estimation based on 2014 figures for illustration only Source: European Commission Notes: *) The number of 1821 cases is calculated as the number of cases reported by EU MS to the OECD MAP Statistics 2014 divided by 2 for arriving at the number of bilateral cases. There is a certain degree of uncertainty due to the fact that it is not clear from the statistics whether cases pending under the EU Arbitration Convention are included in the numbers reported by MS or not. d) The spread of the problem within EU MS As regards the spread of cases between Member States the statistics on cases under the EU AC show in absolute numbers a higher number of cases for MS with a bigger economy than for smaller economies. However, some MS manage to keep a relatively low inventory of pending cases despite the size of their economy (while for other MS it is relatively high). Figure 5: cases under the EU Arbitration Convention per MS Source: European Commission e) Taxpayers affected by double taxation disputes The problem of a double taxation dispute is directly linked to cross-border business activity, i.e. it is not limited to certain industries nor is it dependent on the size of company acting cross border (e.g. SME or MNE). Therefore, all business sectors and businesses are affected by the problem depending on the degree of their cross border activity. However, the data available allows only assessing the problem at MS level but not between industries or kinds of taxpayers. The comments received in the 2010 and 2016 public consultations and the input received from stakeholders confirm that when acting cross border, SME's are in the same way affected. However, there are no figures available on the exact number of double taxation cases or the amounts involved for SMEs. There is more cross border trade of MNEs in absolute numbers but we also know – and the EU actually promotes – that SMEs take advantage of the single market. Given that a double taxation dispute causes a certain amount of fixed costs (see section on inefficient procedures below) and assuming that the amounts of double taxation involved for SMEs are expected to be lower. Therefore one can assume that the initiative would be especially beneficial to SMEs.

2.4.2. The problems of DTDRM in the EU The problems of DTDRM in the EU were identified based on the monitoring of the EU AC, empirical evidence from statistics on cases under the EU AC as the most developed DTDRM in the EU, and by the 2016 public consultation conducted by the European Commission. The following table illustrates the aspects of the EU AC which have been identified as causing issues: Figure 6: Aspects identified in the EU AC which do not work well Procedural phase laid down in the EU Arbitration Convention Identified weaknesses of the EU AC Potential consequence Mutual Agreement Procedure (First stage of the procedure during which Member States shall endeavour to settle the dispute and eliminate double taxation on an amicable basis) - lack of clarity on terms and conditions under which the complaint filed by the taxpayer to launch the procedure can be considered as 'well-founded' - terms and conditions as well as formalisation of the acceptance or rejection of the complaints are not explicitly provided - limitation of scope to transfer pricing Can result in: - unjustified denial of access - blocked procedures Arbitration Procedure (Second stage of the procedure during which Member States shall set up an advisory commission to give an opinion on how to solve the dispute which then will have to be implemented by Member States) -Absence of enforcement mechanism or default appointment mechanism in the following cases: - delay in or absence of establishing the advisory commission - one or 2 Member States failing to appoint an independent person member in the advisory commission - Non agreement on the appointment of the Chair of the Advisory Commission - Non implementation of the final arbitration decision other issues: - Absence of provisions detailing the secretarial, administrative and internal rules of functioning of the advisory commission (eg working languages, calendar, hearings, etc) - Limited provisions related to the contents and form of the opinion of the Advisory Commission - Limited provisions on costs and management of costs of the procedure Can result in: - blocked procedures - delayed procedures - non conclusive decisions - unnecessary costs and compliance burden Scholars and practitioners identified similar problems for DTC in general, i.e. MAP is time consuming (and thus expensive), with cases lasting often two years but also much longer. In some instances it gives no guarantee of resolution of the double taxation dispute, adding to uncertainty and consequently in distorted economic decisions. The global political and economic circumstances described above, which can lead to possible instances of double taxation, are considered to be beyond the scope of EU legislation. Therefore, in addition to encouraging Member States to reduce the cases of double taxation, for instance by improving the existing burdensome withholding tax procedures, a future initiative should focus on making sure that there are effective DTDRMs in place. The shortcomings and problems encountered with the current DTDRMs can be clustered under three main categories: (i) lack of enforceability, (ii) inefficient procedures, and (iii) instances where there is no mandatory binding dispute resolution. 2.4.2.1 Lack of enforceability There are three main issues identified with relation to enforceability of the existing DTDRMs: a)Taxpayers do not request for a DTDRM and accept double taxation ('Implicit denial of Access') The taxpayers stressed the instances where they were effectively deprived from invoking an applicable procedure ('implicit denial'). The drivers of such situation are essentially two-fold. According to the opinions of stakeholders (businesses, tax consultancies, tax and commerce institutes notably) which took part in the OECD's discussion on the BEPS Action 14, there is a generalised perception that tax administrations are not motivated to resolve double taxation disputes. Instead, they offer the taxpayers settlements, in which they propose tax adjustments under the condition that no DTDRM is sought. In the absence of data from the Member States administrations, we can consider that the reasons triggering such behaviour could include: (a) the intention to avoid administrative costs (e.g. translations, coordination of actions between the administrations of the States involved, sheer length and complexity of the case requiring allocated resources, etc.), (b) reputational risks resulting from obligations to report open cases combined with expected negative impact on the tax environment. On the taxpayer's side, it has been noted that they consider accepting double taxation as less costly and less burdensome compared to engaging in a DTDRM. Some companies reported having a preference for accepting double taxation rather than spending even more money and many more years trying to avoid it. The costs and burdens arising are described in detail under the consequences in the next section. Following the 2016 data collection, in the 30% of double taxation cases where no remedies were taken, these two drivers were mentioned in 60% and 50% of the cases as at least one of reasons. The right of claiming for remedies should apply irrespective from whether the claim is finally justified or not and the question of whether there is a legal justification for an implicit denial of access or is not relevant. b)Cases are not accepted by Member States under available dispute resolution procedures ('Explicit denial of Access'); Taxpayers report that in a number of cases access to a dispute resolution procedure is denied by tax administrations, i.e. a request for initiating a DTDRM is refused ('explicit denial of access'). In 2014 MS reported that access to the EU Arbitration Convention was explicitly denied in 14 cases . Roughly extrapolated to the total number of double taxation disputes for corporations, there would be 25 instances with an explicit denial of access in 2014. It is not possible to assess and affirm whether the reasons presented by the tax administrations for denying access were valid, correct and duly justified. Therefore it is not the denial of access itself which is considered to be problematic but rather the fact that access to DTDRM may be denied in cases where it would not be justified and thus creates a situation of legal uncertainty. However, the underlying issue remains the same – there is the risk that in justified cases the double taxation burden is not lifted from the taxpayer's shoulders and the enforceability of theoretically available remedies is limited. c)Cases are blocked or delayed within the applicable procedure ('Blocked/Delayed Procedure'), At the outset it should be recalled that in cases where the available DTDRM does not provide for timelines in which the dispute shall be solved or does not require a mandatory resolution of the cases at all, there is no breach of timelines. However, in these circumstances the issue would rather be an inappropriate duration up to a non-resolution of the case, i.e. the situation would be worse. For instances where there are fixed timelines for a resolution of a double taxation dispute like in cases under the EU AC, it was identified that in a significant number of cases the timelines are not followed; the procedure is either blocked or delayed and the resolution, if any, takes much longer than provided for.

Figure 7: Number of cases under the EU AC pending more than 2 years Source: European Commission Figure 8: Duration of cases under the EU AC pending more than 2 years Source: European Commission A blockage or delay may occur at several steps of the process, starting with the risk that a long time period passes until a procedure is finally initiated by the Member States up to the moment of resolution. The stakeholders report a long lead-time before a conclusion is reached, even in cases where a particular DTDRM requires a mandatory resolution within a certain timeline. The long duration, the non-conclusiveness of DTDRM and the absence of clear timelines to be followed under a DTDRM are encountered as a crucial shortcoming calling for clearer rules and more stringent timelines. As taxpayers are not a party to a dispute, they are confined to merely follow the actions between competent tax administrations. However, the latter are accused as being more committed to combatting tax avoidance rather than the avoidance of double taxation. That results in a low commitment to endeavour to remove double taxation, to the point of refusing to take part in the resolution dispute mechanism. The EU Arbitration Convention and most of the few (14 out of 370 bilateral treaties) DTCs with an arbitration clause requiring a resolution of the dispute within three years from the initiation. The overall real lead-time until these cases are concluded varies. While the majority of these cases seem to be concluded within three to four years from the initiation, some cases are taking considerably longer to resolve to an extent that it seems they might never be resolved. Often it remains open whether such a delay is always legitimate, creating a lack of legal certainty of the DTDRM currently in place. 2.4.2.2 Inefficient procedures The 2010 publication, the 2016 data collection and especially the work done at the level of the EU JTPF have identified two main issues regarding efficiency and economy of the existing DTDRM: a)High complexity of procedures and compliance burden ('Complexity and Compliance') Taxpayers report that they regard the current DTDRM as complex and creating a significant compliance burden which is not balanced with the actual results that can be expected . In practice it is also observed, for example. in transfer pricing for taxpayers' planning, implementation and documentation are occurring in a shorter amount of time while the time spent on controversy and dispute resolution is expanding. The efforts taken are measured against the benefit to be expected. As regards the DTDRM currently available, these efforts are measured against a procedure which does involve a risk of complete or partial non-success and even if successful, having a duration which exceeds what is considered appropriate . These risks are further exacerbated by the fact that the taxpayer takes no part in the dispute process and has no influence on how his case advances. However, it needs to be stressed that the efforts and compliance requirements are not solely associated with the design of the DTDRM itself but may also be a result of the complexity of tax matters, language barriers, as well as different legal and accounting rules in place in different Member States. b) Non- homogenous uptake of DTDRM ('Non Homogenous Uptake') The problem of non-homogenous uptake of DTDRM in the EU is two-folded, i.e. it relates to the differences between the DTDRM available and in the way an identical DTDRM are actually applied.

There are bilateral double taxation disputes within the EU which are covered by mandatory binding arbitration (either the EU AC or a DTC with arbitration) and for which Member States shall only endeavour to reach an agreement. On the other hand, there are very few situations where there is no dispute resolution mechanism at all. In the EU only 8 out of 378 bilateral relations between Member States are not covered by a DTC. For double taxation disputes on transfer pricing the EU AC applies. Furthermore, the statistics available for the EU AC show how an identical DTDRM is applied with different success in Member States. While some Member States manage to keep their inventory (i.e. number of active cases) stable and at a relatively low level over the years, for other Member States a continuous mismatch between cases initiated and cases solved is encountered resulting in an increasing inventory of cases. Given the bilateral nature of DTDRM this means that even if one MS has established a framework allowing an effective application of DTDRM, it will not be able to conclude cases if the other Member State does not effectively manage its case-load. The driver behind the different levels of actual applications by Member can be assumed to be differences in the way Member States organise these procedures, the level of resources which are invested, or legal impediments applying in some Member States, e.g. internal processes to be followed between different authorities. 2.4.2.3 No mandatory binding dispute resolution The DTDRM traditionally laid down in DTC requires the States involved in the dispute only to 'endeavour reaching an agreement' on how to eliminate double taxation. Due to this rather vague objective, in many cases disputes are not resolved with the consequence that the taxpayer is left with a situation of double taxation, a problem which cannot be addressed by an ordinary court (see section 1.2 above). Since 2008 the OECD Model Tax Convention provides for extending the MAP with a mandatory binding arbitration procedure for cases where the competent authorities cannot reach an agreement on one or more issues so that the resolution of the case is prevented. However, the uptake of arbitration procedures in DTCs within the EU is rather limited; as of today an arbitration clause was agreed only in 14 out of 370 bilateral DTC within the EU . It is widely recognised that the EU AC as multilateral convention providing one mandatory binding dispute resolution mechanism which also became part of the 'Acquis' is a major achievement which significantly improves the situation compared to the DTDRM traditionally laid down in DTC. One can assume that the slow uptake of arbitration clauses is driven by the priority of MS for tax collection rather than on agreeing on an obligation to solve disputes instead of just endeavouring to resolve a double taxation dispute. In addition the fact that the implementation of an arbitration clause in a DTC is often part of a comprehensive renegotiation of a DTC, a process which often takes years, 2.4.2.4 Confidentiality of DTDRM proceedings The MAP and the arbitration proceedings are currently kept confidential in order to protect business and commercial secrecy and also to ensure flexibility and efficiency for the governments . This lack of transparency differs substantially from what prevails under judicial proceedings and is described by some academics as the 'Achille’s heel' of the MAP . By this, the DTDRM is criticised as being contradictory to the overall increased demand and legitimate public interest for more transparency regarding companies’ tax affairs . 2.5. Consequences 2.5.1 Consequences for companies Enforcement and administrative costs related to DTDRM Different kind of costs may arise in the context of DTDRM at different stages of a double taxation dispute. It was difficult to obtain detailed information from stakeholders on the costs involved in a DTDRM as they are not recorded separately, i.e. traced to a specific case. Furthermore, it is not possible to distinguish these costs between what is directly related to the DTDRM and which costs are related to the underlying issue, e.g. transfer pricing. Thirdly, the costs vary on a case by case basis, i.e. the complexity of the issue underlying the dispute, the Member States involved and the amounts at stake are non-comparable. The subsequent analysis is therefore largely qualitative. -legal, advisory and procedural cost – companies bear costs of consultancy on legal tax matters both to avoid disputes (e.g. the 'forced' cost as described below) and to ensure their resolution should they occur (e.g. cost of assessing the choice of available dispute procedures, costs of extensive data collection required by the tax authorities to compose and follow a dossier, and costs for translations especially in fact intensive cases such as transfer pricing, etc.). In some cases these costs will go towards recruitment or dedicating of specialised company staff to assess the company's standing from the tax point of view or cover the dispute case; in others, towards an external consultancy to provide sustained service. These costs are decreasing the available resources for focusing on profitability to hedging their bets on potential tax disputes. Moreover, the input received from stakeholders and publications also reveal that often various procedures are taken in parallel. Naturally, this multiplication of procedures multiplies the otherwise avoidable costs for choosing, launching and following the case. -interest cost – these costs usually arise for the suspension of the tax which is imposed double, or if the tax is already paid, to obtain liquidity from third party providers. the amounts at stake vary in relation to the amounts disputed the duration during which the dispute is going on. -secondary costs – whereas largely intangible, these are the costs arising from how the functioning of DTDRM is perceived, irrespective of whether this perception is based on actual experience or not . For these costs, the duration of the procedure has a further damaging direct impact as they are assumed to increase proportionate to the duration of the procedures. Despite the difficulties of estimating the actual costs, the majority of stakeholders regard the costs associated with DTDRM as excessive/significant. Cost reduction has been quoted systematically as one of the areas where improvements to the DTDRMs were necessary . An E&Y survey revealed that companies were unlikely to invoke a subsequent arbitration procedure once they have experienced it once. Stakeholders in the 2016 data collection also reported that as a result of a lack of trust in the current DTDRM they map tax risks and try to prevent disputes by getting ex ante certainty by tax administrations via rulings. These efforts are naturally connected with the same kind of costs which are similar to those of a double taxation dispute.

Finally, when a double taxation dispute is not solved, the double taxes imposed become the company's operational costs. Figure 9: Enforcement and administrative costs associated with DTDRM and costs of double taxation non-eliminated Source: European Commission Notes: Higher level of provisions in financial statement to reflect risks underlying double taxation disputes Nearly all accounting standards require that liabilities or provisions have to be recognised in financial statements in order to give a true and fair view of the economic reality. This includes uncertain tax positions which may result from ineffective DTDRM and cover liabilities in case of non-full recovery of the amounts in dispute, also taking into consideration the uncertainty in terms of timing and amount. A majority of stakeholders mentioned that these reserves or provision would not be booked otherwise and would have an impact on earnings and possibly share values . This has also attracted the attention of accounting standards setters The existence of mandatory arbitration and effective DTDRM would mitigate the above-mentioned risks and may help taxpayers to better estimate them for financial reporting purposes. The related compliance costs under the international accounting standards such as International Accounting Standard IAS 12 (respectively FAS 109/Fin 48/ASC 740 under US Generally Accepted Accounting Principles) should also decrease. Investment decisions There is no conclusive evidence as to the effects of DTCs on FDIs ('Foreign Direct Investments'). However, promoting investment has been for long one of their declared objectives and DTCs are de facto valued by countries and governments as a means to advance their economic development: From this perspective, DTCs and particularly DTDRM contribute to creating a favourable investment climate. According to some authors, this is all the more important that in the current global environment where most non-tax barriers to cross-border trade and investment have been removed, tax is viewed as 'the last trade and investment barrier'. Furthermore at the level of the investors, the shortcomings highlighted above have direct negative consequences on investment decisions for the following reasons: -the lack of certainty and predictability as regards potential excessive taxation and the corresponding remaining cash ultimately assigned to the financing of the investment and the period needed to achieve neutralisation of the excessive taxation, are key for FDIs; -a non-effective DTDRM triggers additional tax cost for the investors which cannot be neutralised with sufficient predictability and puts at risk the part of remaining cash which can be repatriated. When deciding upon an investment, if an investor is aware that a decision involves a risk of a double taxation dispute and uncertainty particularly as regards the time frame in which such dispute can be resolved between the States, he will take these considerations into account and potentially not invest. Good practices of investment planning in a context of financial crisis and globalisation where investment cycles are significantly shortened refer to a period of three years. Several sources and the public consultation confirm that multinational companies based in major trade countries consider that, to enhance direct investment in the EU, measures to reward risk taking associated with cross-border investment are essential. Merger and Acquisitions and implications on strategic intangibles Responses to the 2016 questionnaire show that a risk of double taxation and the lack of effective DTDRM arising in jurisdictions trigger certain arrangements in cases of Mergers and Acquisitions (e.g. the inclusion of warranty clauses, price increases, reorganisations). The likelihood of unsolved disputes in this context have led multinationals to set up contingency plans for materialising risk which can impact business decisions: these models aim in particular at selecting and assessing transactions being at risk of double taxation in order to revise or even 'scrap' them . The consequences described above, i.e. the enforcement and administrative costs, economic costs and considerations of investments apply irrespective of the size of an enterprise, i.e. also for SMEs. However, the enforcement and administrative costs linked to the assessment of the procedure, its initiation and management, can be disproportionately higher for the SMEs, in particular when set against the absolute amount of tax amount disputed being relatively small when compared to the disputed tax amounts reported by some multinationals. At the same time, the economic costs (to be) borne by the SMEs can still be gravely detrimental to their economic activity; the shifts in their balance-sheet ratios triggered by higher (and uncertain) tax provisions can have a far higher impact on their financial condition and cash flow. With costs of access to capital already relatively high and investment decisions inherently more risky in terms of potential negative consequences this would further hinder the SMEs operations, investment and expansion. 2.5.2 Consequences for the Member States The costs associated with solving a double taxation dispute for companies are mirrored to some extent in the costs arising at the level of the Member States. A long duration of a case, ongoing information gathering or bilateral negotiations between Member States increase these costs significantly and bind human recourses.

Jurisdictions that do not ensure an efficient and effective DTDRM in place to counterbalance the effects of increased scrutiny on aggressive tax planning, increased tax audit policy and risk of diverging interpretation, will face negative consequences in terms of foreign investments at least in the medium term. Additionally, at the international level and particularly when establishing relationships with third countries, having effective DTDRM in place in an EU Member States is considered as being a cornerstone to ensure a friendly business and investment tax environment. Another point to consider is that a non- functioning DTDRM is expected to result in companies mapping their tax risks and engage in structures to minimise their taxes which may emerge to shifting of profits away from States with a risk of double taxation remaining (Tax planning and base erosion). The shortcomings identified above increase the respective administrative burden and costs. A long duration of a proceeding ties up resources and causes costs which cannot be reclaimed and which, in the worst case scenario, can exceed the amount of tax at issue. Furthermore, in cases where tax payments have to be reimbursed as a result of the DTDRM, interest may have to be paid by the State for the kept tax payments. This applies especially in times where the interest rate for kept tax payments may be higher than the current market rate. 2.5.3 Consequences for the society Unresolved double taxation disputes are not in the interest of any stakeholder . The absence of consideration of taxpayers' rights in most of the currently used DTDRM has been recently underlined by surveys and scholar publications, particularly as regards the recognition of taxpayers as an interested party, the absence of appeal rights in case of non-activity of the Competent Authorities or denial of access, the ability for taxpayers to participate in the procedure, the lack of publicity of the decisions and transparency. A non-efficient DTDRM has also indirect consequences such as reduced trust in tax administration and lower voluntary compliance resulting in reduced tax collection. 2.6 Baseline Scenario The baseline scenario starts with the status quo as regards the DTDRM available in the EU as described in section 2.3.1 and their problems as identified in section 2.3.2 above. It is expected that within the following years the few bilateral relations which are currently not yet covered by a DTC will be covered in the mid-term. This assumption is based on common recognition of the benefit of DTC and the continuously growing network of DTCs worldwide. For the same reason it is not expected that a DTC between MS will be terminated in future, although it can of course not be excluded. The baseline scenario is therefore that a 100% coverage of bilateral relations between MS with DTC will be achieved. The economic environment in the baseline scenario is characterised by a further increase of globalisation and cross border trade. However, to keep the estimation rather conservative, a specific factor for increasing cross border business activity is not taken into account. As regards the availability of mandatory binding arbitration in DTC, the baseline scenario takes into account the other developments on improving DTDRM, e.g. in the context of Action 14 of the OECD BEPS project. The efforts at the level of the OECD are expected to increase the number of bilateral DTC between MS with mandatory binding arbitration. However, given the slow uptake of these clauses in the past shows a certain reluctance of at least some MS, it is not expected to achieve 100% coverage. For a DTC where such a clause is newly implemented such a clause would provide an incentive for States to more quickly resolve double taxation disputes not yet covered by the AC. On the other hand, the fact of being bound to agree may make some Member States more reluctant to accept cases. It is not possible to quantify these two effects. More important is, however, the expectation that the issues which are encountered for DTDRM containing mandatory binding arbitration clauses will remain/occur also for the new treaties. For this reason, the estimation of the future development is made on the basis of the numbers reported for the EU AC, and a DTDRM with mandatory binding arbitration. As a further aspect the CCCTB proposal needs to be taken into account. It is assumed that the implementation of a CCCTB in the EU will reduce the number of double taxation disputes for corporate taxpayers subject to the CCCTB or opting for the CCCTB. However, the CCCTB comes to its full effect only if the rules for consolidation apply, Given that the CCCTB is suggested to be implemented in 2 steps with consolidation to be achieved in the second step and that double taxation disputes arise mostly several years after the respective tax period it is expected that the full effect of the CCCTB as regards a reduction of double taxation disputes is not expected to occur in the short term. Furthermore, the full CCCTB is suggested to mandatorily apply only to large multinational groups . For groups below the threshold the CCCTB would not be mandatory. Its adoption will help to reduce the number of disputes arising for those companies to which it will apply. Due to a lack of data it is difficult to estimate the percentage of companies with a turnover above EUR 750 million facing double taxation issues. An indication may be taken from the 2010 public consultation where 37 % of the respondents were companies with a turnover of more than EUR 1 billion. For the reasons elaborated above, the estimation of the number of cases pending and the amounts involved by 2020 does not take into account effects of an eventual implementation of the CCCTB proposal but rather on an environment which is comparable to the status quo. Development of pending dispute cases Statistical data on cases pending under the EU AC as reported by MS on a yearly basis since 2004 until 2014 is considered as a reliable starting point for estimating the future development of double taxation disputes in the EU. Historical data shows a continuous and accelerated increase of pending double taxation disputes. This is confirmed by the stakeholders input from the 2016 consultation according to which 64 % of the respondents expect a significant increase of disputes. Moreover, there has been a significant increase of audits in the field of transfer pricing with an expected increase of the amount of taxes to be reassessed . Such trends make it justified to expect that pending double taxation cases will continue to increase in the future. Starting from 640 double taxation disputes on transfer pricing and profit attribution to Permanent Establishments pending under the AC at the end of 2014, it is conservatively estimated that the total number of double taxation disputes will increase to around 1 200 by the end of 2020. . Amounts involved Starting from an estimated amount of tax amount of tax involved in the estimated number of 910 double taxation disputes at the end of 2014 and an estimated number 1200 of pending cases at the end of 2020 the amount of taxes involved in these disputes is conservatively estimated with EUR 15 billion. This amount does not take into account the expected increase of taxes disputed in these cases where the amounts at stake reach a size creating economic risks for the company affected. Denial of access to DTDRM and duration of procedures The aspects of enforceability are implicit denial of access, explicit denial of access and blocked or delayed procedure. As the kind and application of DTDRM are not expected to change without EU action, it is expected that the number of case where taxpayers are deprived from access ('implicit denial of access') or where access is actually denied ('explicit denial of access') will increase proportionately to the increase of double taxation disputes. The same applies for cases which are blocked or delayed. Based on the observations on the duration of AC cases available for 2012 – 2014 it is assumed that at a minimum around 20% of the total cases will take longer than 2 years to be solved, with a tendency of a longer duration in general and with some of them taking significantly longer and involving substantial amounts of taxes. The uncertainty created in these cases will require taxpayers to allocate significant provisions in their balance sheets and indirectly affect their competitiveness. Given the unchanged procedures of the DTDRM and the fact that various recommendations which aimed at reducing enforcement and administrative burden associated with DTDRM did not have a significant impact in the past, it is expected that they will not be reduced in short and mid-term if no action is taken. To the contrary, the growing number and complexity of business models and cross-border integrated value chains could only result in an increase of the overall time needed to resolve a tax dispute. In the US for example, the processing time for resolving cases through the use of the MAP has increased from almost 16 months on average in 1971 to almost two years in 1980 and 2.4 years by 1995 to 2.6 years in 2015. The same information emerged from the EU AC statistics which show that the percentage of cases older than 2 years vs. total cases pending cases rose from 37.5 % in 2012 to 40.5 % in 2014.

As regards consistent uptake in Member States, past experience shows that the guidance and the recommendations that were developed by the EU or OECD did not significantly impact the way the DTDRMs are handled in different Member States. Unless the Member States take more unilateral (or bilateral) efforts to enforce the speedy and least burdensome DTDRM procedures, it is not expected that a more homogenous application of the mechanisms will be ensured in the future. 2.7 The EU's right to act 2.7.1 Legal basis Article 115 of the Treaty on the Functioning of the EU (TFUE) is the legal basis for legislative initiatives in the field of corporate taxation. Although no explicit reference to direct taxation is made, Article 115 refers to directives for the approximation of national laws where their differences directly affect the establishment or functioning of the internal market. Naturally, double taxation disputes are not limited to intra-EU situations. Effective and efficient prevention of double taxation are recognised as critical to building an international tax system that supports economic growth and a resilient global economy. The OECD has for a long time acknowledged the shortcomings of the DTDRM under the model tax treaty (the Mutual Agreement Procedure in Art 25 OECD MTC) and has since recommended a series of improvements, including a recommendation for Member States to agree on mandatory binding arbitration in their DTCs. The most recent BEPS Action Plan also envisages making dispute resolution mechanisms more effective. OECD / G20 countries participating in the BEPS project agreed on a minimum standard, best practices and a process for monitoring the number of cases, their duration and the amounts of tax involved. However, although the business community and a number of countries consider that mandatory binding arbitration is the best way of ensuring that tax treaty disputes are effectively solved through MAP, there was no consensus between the OECD and G20 countries regarding the adoption of a mandatory binding arbitration. Nevertheless, a limited number of OECD and G20 countries, including 13 Member States, are taking forward the work on such a mandatory binding arbitration mechanism. In addition even a common multilateral instrument like the EU AC still encounters the shortcomings identified in section 2.4 above. A future EU initiative shall address precisely the shortcomings of the existing DTDRMs. 2.7.2 Subsidiarity Double taxation as discussed in this impact assessment concerns cross-border situations where two (or more) Member States are involved. It can happen that two jurisdictions correctly claim corporate income tax on the same profit (a double taxation dispute). The Commission is not proposing to eliminate such cases per se, but to provide a mechanism for taxpayers in such situation to achieve effective tax relief by having the dispute solved. As already mentioned in the problem analysis, the shortcomings of the DTDRM in the EU are a serious impediment to a well-functioning Internal Market; on the one hand, it is distortive to the tax-neutral economic decisions of the European businesses and prohibitive to investment, creating market access barriers also for foreign investments. On the other hand, it is costly for the Member States in terms of lost value stemming from the foregone economic activity of companies which decide to opt out of economic operations in their territory. Furthermore, both parties suffer from avoidable administrative costs and burdens of ineffective dispute resolution mechanisms. Whereas the content and interpretation of the provisions of tax treaties between Member States remain within their sole competence, it is important to guarantee taxpayers an effective mechanism to resolve cross-border double taxation disputes, should they occur. As revealed by the consultation of stakeholders underlying this impact assessment, bilateral DTC adopted by Member States and even a multilateral agreement such as the EU AC alone do not provide effective solutions for the effective and efficient resolution of such disputes. This equally applies to other kind of international agreements which are structured in a similar way. The design of a more enforceable and efficient DTDRM at EU level is expected to limit the duration, the costs and uncertainty associated with the resolution of double taxation disputes in cross border situations. It is also expected to significantly limit the number of cases of double taxation in the EU which remain unresolved for non-justified reasons. By this, uncertainty on the side of taxpayers facing double taxation will be removed and the implications of a negative perception eliminated. DTDRM are by nature bi- or multilateral procedures, requiring coordinated action between the Member States. Consequently, if only one Member State is willing to effectively solve the tax dispute and even if relevant procedures are available in the applicable DTDRM, the disputes will not be solved if the other Member States does not agree or do not act as set out in the DTDRM. The problems cannot be addressed by Member States working individually. A common procedure between States requires that the procedure is applied in the same way in both States. This needs to be ensured for the functioning of DTDRM. The experience gained from monitoring of the functioning of the EU AC, a DTDRM agreed between MS by way of a multilateral convention without involvement of the EU, confirms that the issues will persist if double taxation disputes remain left to be solved by/within Member States alone, i.e. the procedure is implemented and designed individually. The same applies for the ongoing international activities in this field which aim at promoting bilateral agreements between MS. Furthermore, uncoordinated action by Member States will at best fail to achieve the intended improvements and, at most, deepen the problems identified through enlarging the schism between Member States. In summary, the need for EU action is well-founded and confirmed by evidence over the last decades which show that no EU action, i.e. leaving the resolution of intra EU disputes between Member States to Member States only has not and is unlikely to solve in the future the problems currently encountered. 3. The Objectives 3.1 General The general objective is to contribute to an improved EU business environment, contributing to boost of investment, the creation of jobs and to maintain the trust of businesses and citizens in public administration. This general objective translates into ensuring a well-functioning Internal Market, with no distortive legal or factual arrangements for the market operators in the area of taxation of corporate income. Competitiveness of the companies should be preserved through reduced/removed costs and risks of double taxation disputes and/or litigation procedures. Removing (some of) the concerns related to a possible tax dispute for the companies, by promoting an EU wide coherent approach of treatment of such disputes, should ultimately contribute to the completion of a fair and predictable tax system in the EU which also safeguards the interests of MS Specific objective is to ensure legal certainty and a level playing field for EU businesses. In addition the settlement of disputes should be made sufficiently transparent to ensure the trust of citizens and business in the public system. 3.2 Specific objectives in detail 3.2.1 Ensure legal certainty

It should be ensured that there is defined access to the available DTDRM in justified cases and for eligible taxpayers. This includes making sure that taxpayers being subject to a double taxation dispute are not deprived from effective access to these remedies and are protected from an unjustified denial of access (i.e. covering both implicit and explicit denial of access). The procedure should be not be delayed or blocked in unjustified cases, i.e. is followed. On the other hand, enforceability should not be applicable when a MS would be obliged to solve the double taxation dispute if it is not justified, e.g. in cases where the action giving rise to an adjustment of transfers of profits of the enterprises concerned is liable to a serious penalty. Consequently, the objective is to increase legal certainty by ensuring that DTDRM in the EU work in practice as they should and by providing an independent review of any action/non-action taken. The existing DTDRMs in the EU should be improved with the view to ensure that they are conclusive, i.e. the dispute is settled. The improvements should ensure a settlement of double taxation disputes by mandatory binding arbitration for all parties involved and corporate tax issues. 3.2.2 Ensure a level playing field for EU business A well-functioning DTDRM should be improved in a way that an appropriate balance is achieved between effort and the expected outcome, i.e. solving the double taxation dispute. Costs and administrative burden for all stakeholders should be balanced towards the expected outcome. The objective is to design DTDRM in the EU in such an efficient way that results in a cost benefit ratio which makes it a valuable and sustainable way to address double taxation disputes for all stakeholders. One aspect of this is to achieve a resolution of the dispute within an appropriate time frame (Duration). As DTDRMs are procedures which involve two or more Member States, ensuring that the applicable DTDRM are available and applied in a homogenous manner throughout the EU would not only help to reduce economic and administrative costs and burdens, but also remove some of the uncertainties that companies face in their cross-border situations (e.g. with regard to investment decisions). 3.2.3 Ensure transparency A further specific objective is to address the criticism expressed towards the existing DTDRM as being a 'black box' for taxpayers and the public. Tax dispute resolution procedures, particularly arbitration, should be public, i.e. not confidential and private, as long as (i) the issue presented is of public interest, (ii) affects the society and (iii) 'transparency would assist other(s) … in understanding the issues involved and would permit more widespread and effective participation in the system' as well as more confidence in it .It should be ensured that the procedures set out a degree of transparency which contributes to increasing the trust of citizens and businesses in the public system. 3.3 How the objectives are linked to the problems Figure 10: linking the objectives to the problems General objectives Specific objectives Link to the problem An improved EU business environment, contributing to boost of investment, the creation of jobs and confidence of business and citizens in public administration Ensure legal certainty Avoid explicit denial of access to DTDRM in cases where it is not justified Make accepting an implicit denial of access to DTDRM less attractive for the taxpayer Avoid that procedures are unjustified delayed of procedures Avoid that disputes are not resolved and double taxation remains Ensure a level playing field for EU business Avoid inappropriate costs and compliance burden Remove the differences of application encountered in MS Ensure an appropriate level of transparency Avoid that the level of transparency is below other judicial proceedings 4. Options As regards the choice of options it should first be recalled that the initiative is a follow up of earlier initiatives, e.g. the 1976 directive proposal, which resulted in the EU Arbitration Convention in 1990. Already this initiative was based on the long standing approach of addressing double taxation by way of bi- or multilateral agreements which set out rules for the allocation of taxing rights and a dispute resolution mechanism. An alternative to this approach is the CCCTB proposal providing for a harmonised tax base with consolidation which would, as demonstrated above, not address all situations and all taxpayers. There are therefore good reasons to continue following the traditional mechanisms and try to improve them where necessary. For this improvement all considerable options have been evaluated which were suggested during the monitoring of previous instruments as well as those received from stakeholder consultations. An option which combines different forms of legal instruments, e.g. a combination of recommendations and a directive, was discarded due to the fact that a DTDRM only works if it has no weakness, i.e. all problems are addressed with the same strength. Otherwise there would be a risk that the problems would emerge where the DTDRM is weak. All options are also closely linked to the procedures established by EU Arbitration Convention. Although shortcomings have been encountered it should be recalled that the EU AC is a well-established instrument working properly in the majority of cases. Starting from scratch would therefore not be justified. All options will envisage the use of tools available in the EU for exchanging of information under the Directive on Administrative Cooperation (DAC). 4.1. Baseline scenario - Status-quo/No Action If no action is taken at EU level the situation will develop as described in the baseline scenario. This means that it is expected that the uptake of mandatory binding arbitration in DTC will continue at a low level allowing Member States not being obliged to resolve double taxation disputes. In instances where mandatory binding arbitration is agreed like for cases covered by the EU AC, the positive effect of such an agreement compared to a situation with no mandatory binding resolution will remain. However, there will also be situations remaining where due to a lack of enforceability timelines are not respected or disputes not resolved at all. The consequences of the shortcomings described in section 2.3 above will remain for taxpayers facing double taxation disputes and the negative perception of this situation with its detrimental effects for Member States will continue. The expected significant increase of double taxation disputes will further exacerbate this situation in the future. 4.2 Option A - improving implementation of the existing DTDRMs Option A1 and Option A2 build around improved use, implementation and enforcement of the existing DTDRMs. They aim to maximise the utility and benefits of amicable dispute resolutions. All of them would require different actions to be taken at the Member State level. As the DTDRMs currently agreed in the EU are in DTC and in the EU AC, i.e. are not part of EU legislation, all actions could only be recommended rather than legislated by the EU. 4.2.1. Improve the functioning of DTCs and the EU AC and supplement DTC with mandatory binding ad hoc arbitration (Option A1) Under this option, the EU would recommend to the Member States to

to adopt recommendations developed by the OECD on best practice to make dispute resolution mechanisms in bilateral DTCs more effective; in the context of the EU AC, to adopt recommendations developed by the EU JTPF in its proposal for a revised Code of Conduct; to provide for mandatory binding arbitration by supplementing the MAP provided for in bilateral DTCs with an arbitration clause along the lines of Article 25 (5) of the OECD MTC. to start negotiation for extending the scope of EU AC beyond the area of transfer pricing disputes. 4.2.2. Arbitration by the CJEU (Option A2) Under this option, the EU would encourage Member States to introduce a specific enforcement mechanism in their bilateral DTCs which refers to Article 273 TFEU and provides powers to the CJEU jurisdiction to ultimately decide on any remaining double-taxation dispute between EU Member States after a defined period of time. An example of such a mechanism can be found in Art. 25 of the German-Austrian tax treaty. Options A1 and A2 would aim at reinforcing the messages of the OECD and supplement the international developments in the area of double taxation disputes. The suggested policy instrument is a Commission Recommendation. 4.3. Option B – Establishing an enabling legal framework for broadened DTDRM Under this option, mandatory binding arbitration mechanisms would be extended to areas where they are not yet available, and the shortcomings identified as regards enforcement and effectiveness of these mandatory binding arbitration mechanisms are individually targeted. The suggested policy instrument for Option B is an EU Directive. The suggested policy instrument for Option C is an EU Directive. The nature of an EU legislative instrument in form of a directive would also allow for a possibility to have the implementation and application by Member States monitored by the European Commission and eventual non-compliance of a certain Member State addressed. This option builds on the current mechanism of the EU AC. It establishes by way of an EU directive the procedure which is already laid down in the EU AC, i.e. providing for a Mutual Agreement Procedure (MAP), initiated by the taxpayer, under which the Member States shall freely cooperate and reach an agreement on how to solve the double taxation dispute within 2 years. If Member States do not reach an agreement within the 2 years, an arbitration procedure is set out which solves the dispute by way of arbitration. Under this supplementary arbitration procedure, a panel of 3 or 5 independent persons/arbitrators will be appointed by the Member States (one or two for each Member State appointing one independent chairman), together with two representatives of each Member States ('the advisory commission'). Member States will provide the rules of functioning of the advisory commission. If they fail to do so, the rules of functioning will be agreed by the advisory commission itself. This advisory commission would issue a final opinion on eliminating the double taxation in the disputed case, which would be binding for Member States, unless they finally agree to a different solution. It also extends the scope of the EU AC beyond transfer pricing to all cross-border situations subject to double income tax imposed on business profit, and provides for a default fast-track enforcement mechanism by the competent National Courts of each Member State: the National Court act on behalf of the Member States in order to appoint the independent persons. The latter enforcement mechanism is modelled after the UNCITRAL Model Law on International Commercial Arbitration as regards the pivotal role of 'Court or other authority for certain function of arbitration assistance and supervision' (so-termed 'Juge d'appui' functions) and limited in the cases at stake to the shortcomings specifically identified as part of the present assessment, i.e. denial of access and prolonged procedure exceeding 2 years. 4.4. Option C – A comprehensive new EU-specific double taxation resolution mechanism Option C would go beyond the improvement of the existing DTDRMs as described in option B. It would contain the same dispute resolution mechanism but in addition propose by way of an EU Directive a new set of specific and targeted rules on how to solve instances of double taxation for all identified conflicting tax legislations triggering double taxation for corporate cross-border situations at EU level. The rules would have to be developed and will identify conflicts that may arise and at the same time provide a solution in a sense of providing which State would be allowed to tax and how double taxation would have to be removed. 5. Analysis of Impact 5.1 Impact on the problems encountered An important aspect for the analysis of impacts is that an option would only have an impact if it is capable to solve all the procedural problems encountered for the current DTDRM. The monitoring of an existing DTDRM in the EU did show that if a shortcoming remains, the reluctance encountered with respect to the application of the DTDRM would move to this element. For example: a mechanism that ensures the resolution of a double taxation dispute may put higher burdens on the acceptance of the case, i.e. access may more often be denied if not justified, strong rules for accepting a case alone will not help if it is not ensured that the procedure is also completed in time or at all or

if the strong mechanism only applies to a limited set of issues, e.g. the attribution of profits to Permanent Establishments, the procedure would be blocked if there is no strong mechanism for solving a dispute on the existence of a Permanent Establishment. The following analysis of impact therefore distinguishes between a DTDRM that works, is capable of addressing all issues with sufficient strength and a DTDRM which is at risk of having shortcomings remaining. As options A1 and A2 take the form of a recommendation there is a risk that these recommendations are actually not followed while the nature of option B and C would ensure their actual implementation and application. The more detailed comparison of each option as regards their effectiveness, efficiency and coherence with the Commission's general objectives is reserved for section 6 below. 5.2 Economic impacts 5.2.1 Impact on the competiveness of companies An effective dispute resolution mechanism would have several implications for companies. A reduction of the compliance burden should allow a reduction of the costs associated with an actual double taxation dispute. The overall procedure should last less than three years, something which fits with currently recommended standards and expectations in terms of investment and transaction cycles of companies. Lastly, the setting up of an effective dispute resolution mechanism will reduce constraints and compliance burden for companies in terms of risk management which is linked to the necessity to publish warnings in case of high amount of double taxation positions and potential reputational costs . For example: Glaxo Case involving United Kingdom and the United States of America: it has been one of the largest tax disputes in tax authorities' history (USD 3.1 billion). The case dealt with transfer pricing related to a market intangible and patent royalty payments. The case is referred to as 'showcase example of MAP gone wrong'. Bertolini M.S. , Mandatory Arbitration Provisions within the Modern Tax Treaty Structure – Policy Implications of Confidentiality and the Rights of the Public to Arbitration Outcomes " University of Hartford, February 15, 2010 The obligation of results enshrined in all the options is intended to remove the most important drawback of the current system, which is that there is no certainty in the effective and full relief of double tax within a certain period , leading to the consequences described in section 2.4.2.1 above. A procedure that actually ensures that the double taxation dispute will finally be resolved should also remove the need for companies to initiate several procedures in parallel and hope that one of them would result in the elimination of double taxation, i.e. it would avoid duplication of procedures and time-consuming management of the corresponding litigation files. This should lead to a reduction of compliance costs, legal fees and cost of financing of disputes, and finally impact positively the companies' margins. Costs saved will increase companies' free cash flow which will then be available for investments in their profit generating activities. Especially the avoidance of duplication of procedures will have a direct effect which will not have to be counterbalanced with the increase of costs for the main DTDRM taken. The economic impact on competitiveness will therefore depend on the impact of the options on the problems encountered. Given that options A1 and A2 bear a higher risk of actually not being followed their impact on competitiveness is expected to be lower than for options B and C. on the problems encountered meaning. 5.2.2 Impact on the investment, growth and jobs At this point the reasoning which has led countries to conclude DTC with the aim to eliminate double taxation and to include a procedure for solving disputes should be recalled, e.g. the goal to remove impediments to international trade and investment by reducing the threat of double taxation that can occur when both contracting States impose tax on the same income. Solving disputes between Member States on how to remove double taxation will in the long term contribute to economic growth and remove barriers to the Internal Market. . For example: Company A in State A wants to distribute its products and establish client relationship in Member State B. Given an increased double taxation risk in Member State B it decides to mitigate the risk of double taxation by not incorporating a business in Member State B but rather to enlarge the existing distribution centre in State C which deliver its products to clients in Member State B via Member State C. The reluctance to incorporate a business in a MS with an increased risk of double taxation is confirmed by more than half of the businesses which indicated in the 2016 consultation that mandatory binding arbitration facilitates the incorporation of a business in another State . Consequently, the lower the risk of double taxation and the more effective the procedure for solving a dispute is, the better the perception will be and the more positive the impact on investment, growth and jobs is expected to be. Given that options A1 and A2 may be perceived as involving the risk of actually not being followed, their impact is expected to be lower than for options B and C. 5.2.3 Impact on tax revenues and tax administration efficiency There is a common acceptance that in the medium and long term, ensuring overall and consistently the actual elimination of double taxation through an effective dispute resolution mechanism increases the level of compliance with international obligations and the potential level of economic activity and tax collection . In the example above, there would be no taxable presence of company A in State B and the profits company A generates from selling its products to Member State A would be taxed in Member State C and/or Member State A. An effective dispute resolution mechanism with an obligation for a result is an incentive for administrations to design efficient and operational procedures. It has effects on reducing delays and thus administrative and legal costs to tax administrations resulting from long lasting and inefficient procedures. The same applies to the situation where the MAP would pre-empt a mandatory arbitration phase, this being a strong incentive for tax administrations to solve disputes in an efficient and time effective manner, before arbitration (i.e. 2 years). Lastly, a procedure containing arbitration or a dedicated Alternative Dispute Resolution mechanism: being confronted with experts in the domain, tax administrations would limit efforts and investment in preparation of briefs and establishing technical aspects . In summary, the stronger the obligation to resolve the dispute in a given time line is, the more efficiency is required from tax administrations. Due to a lack of an effective enforcement mechanism, Options A1 and A2 involve the risk of actually not being followed. Their impact on tax administrations' effectiveness is therefore considered to be lower than for option B and C. On the other hand Member States would need to assign additional resources in each of the options A - C.

5.2.4 Impact on capital markets The effective removal of double taxation ensured by a timeliness mechanism shall have positive effect at the level of shareholders: they should reduce both the level and number of warnings by stock listed companies as regards material increase in their tax costs and give investors more certainty in order to assess the related risks attached to their investment , thus facilitating the shareholders' investment decisions. Additionally, the introduction of an effective dispute resolution mechanism shall limit the recognition of uncertain tax positions (for transfer pricing and permanent establishment in particular) avoiding thus not only compliance costs, due to reporting requirements under the international accounting standards such as IFRS 109 and FIN 48, but also direct impact on the share value due to the recognition of losses or potential losses. Again, the lower the risk of double taxation and the more effective the procedure for solving a dispute is, the better the perception will be and the more positive the impact on the capital markets is expected to be. Given that options A1 and A2 may be perceived as involving the risk of actually not being followed, their impact is expected to be lower than for options B and C. 5.2.5 Impact in terms of level playing field – Implications for SMEs All options proposed benefit companies of all sizes but Option B and C are particularly relevant for SMEs as it facilitates recourses in case of blocked procedures and limits the administrative burdens in a timeliness framework. In particular, Option B aims at setting up an expedited arbitration process with some flexibility options, which are of particular interest for SMEs. First the MAP procedure is limited to 2 years. A shorter hearing and limited fees can be then be applied as the terms and conditions under which the recourse to the National Court and the submission to Arbitration Committee have been designed in such a way to nominate a sole arbitrator or even a mediator ,. For example: SME A in Member State A producing a specific product has many clients from its neighbouring Member State. The number of customers decrease with increasing distance between the customer's place of living and the business of SME A in Member State A. For an SME, especially if profit margins are relatively small, opening a second distribution/manufacturing facility is a significant investment. This risk of investment is proportionally higher for an SME than for a large MNE. A guarantee that the outbound investment will not result in double taxation and combined with an effective procedure will reduce the risks associated with this investment. 5.3 Social and societal impact The MAP and the arbitration proceedings are currently kept confidential in order to protect business and commercial secrecy, and also to ensure flexibility and efficiency for the governments . This lack of transparency differs substantially from what prevails under judicial proceedings and is described by some academics as the 'Achilles' heel' of the MAP . This creates issues in terms of overall fairness and effectiveness of the system and contradicts also the overall increased demand and legitimate public interest for more transparency regarding companies’ tax affairs . The dispute resolution mechanisms (i.e. both MAP and ADRM) enshrined in the proposed options, particularly in option B and C, are aligned with the most recently recommended standards in terms of transparency . In terms of impact, option A1 will not increase the overall confidence in the system while Option A2, provided it is actually followed, and options B and C will increase the consistency and the overall trust in the system at the level of the citizen . As regards mandatory arbitration specifically, it should also ensure sufficient accountability of the arbitrators towards governments at the stage of alternative dispute resolution ('ADR') and, broadly, hold governments to account to a certain extent vis-à-vis other governments and taxpayers . In the medium term, the effectiveness of the overall system will benefit from such publicity: it will result in increased availability of materials dealing with international dispute resolution within the EU, allow EU governments to assess whether tax treaties really accomplish its goals, and increase the pressure on the competent authorities to reach a negotiated settlement while also decreasing the incidence of double taxation at taxpayers' level . 5.4 Impact on third countries Such an initiative taken by the EU in order to improve the mechanisms is bound to have implications beyond the EU. It ensures an efficient and effective management of cases which can be enshrined in triangular situations. It also creates precedents and good practices, positioning the EU as a whole and the EU Member States positively towards other countries and particularly the EU major trade partners. Lastly, it is limiting the negative impact on the EU Member States reputations and avoids diplomatic costs and possible renegotiation of tax treaties. Some authors have demonstrated in this respect how an effective dispute settlement mechanism can positively impact such transaction costs: without such a mechanism, treaty rules are clarified only through renegotiating the treaties, something which is a resource-intensive, slow and cumbersome process . Accordingly, the same authors established that such an effective mechanism provides crucial 'assurance information' to governments regarding how other government's performance and intentions are positioned towards the application and interpretation of treaties: this is naturally fostering an effective and converging application of rules governing cross border transactions . Therefore, the better the respective options address all the problems encountered, the more positive is the impact. Options B and C as taking the form of a directive are expected to have a more positive impact. 6. Comparison of options The following comparison assesses the options against the following criteria: effectiveness - whether and how they achieve the objectives efficiency - how much costs and burden can be expected for the taxpayer the tax administration to implement the options, and coherence - with the Commission's overall objectives but also with the international developments. 6.1 Comparison of Effectiveness As far as effectiveness is concerned, the following tables assess how the options achieve the set of objectives compared to the baseline scenario by rating them as neutral/no change to the baseline (0), slightly positive, (+), positive (++) and negative (-).

6.1.1. Option 0, no change Objective Effect Explanation of impact Ensure legal certainty 0 With the EU AC a co