With effect from the end of the Brexit transition period, the UK will revoke the Double Taxation Dispute Resolution (EU) Regulations 2020 which had come into effect on 14 February 2020. The Regulations implemented the EU Directive on tax dispute resolution mechanisms which sets out an enforceable timeline and binding mechanism for the resolution of disputes under bilateral tax treaties and the Union Arbitration Convention. Under the arrangements for the withdrawal of the UK from the EU, the Convention and the Directive continued to apply to the UK until the end of the transition period (unless a continued application or replacement was agreed between the EU and the UK as part of any agreement on their future relationship).

Looking at three key elements of the Directive in the context of the mutual agreement procedure (MAP) under a bilateral tax treaty, the revocation would appear to limit taxpayers’ procedural safeguards. On a practical level, one could, however, argue that there is reason to hope that, all things being equal, the impact of this may be limited, given the UK’s practice and good track record on MAP resolution.

MAP access

The MAP minimum standard developed by the OECD under Action 14 of the BEPS Project includes a requirement that bilateral tax treaties should allow submission of MAP requests in either jurisdiction or include a bilateral consultation or notification process which allows the other jurisdiction to provide its views on a MAP case which has been rejected by the jurisdiction where the request was submitted.

Going further than this minimum standard, the Directive requires that the MAP request is simultaneously submitted in both jurisdictions and sets out a dispute resolution process in case one, but not both, jurisdictions refuse access to MAP.

Whilst the availability of such a dispute resolution process may be advantageous from a taxpayer’s perspective, the dual submission requirement makes the process rather more cumbersome. Provided that the UK complies with the MAP minimum standard, the falling away of the Directive should not have a significant adverse effect on MAP access.

The OECD’s most recent review of UK compliance with the minimum standard (MAP Peer Review Report (Stage 2)) did not make any recommendations for improvements in respect of MAP access, even though not all of the UK’s bilateral tax treaties include requirements compliant with the minimum standard. This is because HMRC’s internal guidance commits it to inform the relevant bilateral treaty partner if a MAP request is rejected “setting out the reasons why the UK Competent Authority believes the request is invalid and invite the other Competent Authority to provide its views before making a decision on whether to accept or reject the request.” Moreover, during the review period from 1 January 2015 to 31 August 2018, no MAP request had been rejected by HMRC.

MAP timeline

It is said that one advantage of the Directive is that is sets clearly defined and enforceable MAP timelines. While the UK does not, as such, set a particular MAP timeline, the OECD’s MAP 2019 Awards revealed that the UK was the jurisdiction with the shortest average time to close MAP cases (21 months for transfer pricing and 6 months for other cases). The UK was also within the top ten jurisdictions with the smallest portion of pre-2016 cases in their MAP inventory at the end of 2019.

Given that the Regulations implementing the Directive came into force only in February 2020, they cannot have had an impact on this great track record. It can, therefore, hardly be considered crucial to HMRC’s timely resolution of MAPs to have a stringent legislative timeline (although the fact that HMRC would be held to a legislative timeline would be of comfort to a taxpayer).

The timely resolution of MAP disputes also depends, however, on other national tax authorities’ cooperation and the Directive’s deadlines may impact EU Member States’ resource allocation such that intra-EU MAP disputes are prioritised over non-EU, including UK, cases, but there is, as yet, no data to confirm whether there is any such impact and how significant it would be. So, one might be cautiously optimistic; at least, it seems unlikely that HMRC would take the revocation of the implementing regulations as an occasion to let slide the standards in its work towards the timely resolution of MAP disputes.

Dispute Resolution

The Directive includes a mechanism to resolve MAP cases where the relevant national authorities are unable to reach agreement, with an Advisory Commission opinion as the default. Following the issue of such an opinion, the relevant national authorities have six months to agree a solution (which may deviate from the opinion). If no agreement is reached, they will be bound by the opinion.

Not all of the UK’s tax treaties include provisions for the resolution of MAP disputes where the relevant authorities cannot agree. HMRC’s internal guidance, however, notes that the UK is in favour of MAP arbitration and that it is “UK policy to include a provision for arbitration in its double tax treaties”.

When the UK signed the Multilateral Instrument (MLI), it opted for part VI, which would include a mandatory and binding arbitration provision in any bilateral tax treaty between the UK and a another jurisdiction that has also opted for part VI when it signed the MLI.

Moreover, the introduction of a broader mandatory resolution mechanism in respect of international tax disputes is under discussion as part of the OECD’s international tax reform project – although political agreement on the scope of this mechanism is still outstanding (see page 13 of the OECD’s Pillar One Blueprint).