The draft rules are now out for consultation and are set to go into statute in Finance Bill 2018-19 once the draft legislation, issued on 6 July, has been reviewed and consulted on. The rules will take immediate effect once the Bill is given Royal Assent.

The rules are designed to improve dispute resolution in cases of double taxation affecting businesses operating across borders which currently can create excessive tax burdens leading to inefficiencies and an economic disincentive to trade.

The European Council issued Council Directive (EU) 2017/1852 on 10 October 2017 on tax dispute resolution mechanisms across the 28 EU member states. Article 22 of the Directive requires member states to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 30 June 2019 at the latest. This would fall after the Brexit date but could still come into UK law depending on the final agreement.

The enabling powers for HMRC to operate the Arbitration Convention are contained in sections 126 to 128, Taxation (International and Other Provisions) Act 2010 (TIOPA), which will be amended.

The Directive is meant to introduce an effective and efficient framework for the resolution of tax disputes which ensures legal certainty and a business-friendly environment for investments. This will build on the existing EU Arbitration Convention, which established a procedure to resolve disputes where double taxation occurs between enterprises of different member states as a result of an upward adjustment of profits of an enterprise of one member state.

While most bilateral tax treaties included a provision for a corresponding downward adjustment of profits of the associated enterprise concerned, they did not generally impose a binding obligation on the contracting EU states to eliminate the double taxation.

Following a review of existing bilateral tax treaties and the Arbitration Convention, the EU concluded that the mechanisms currently available were not achieving effective resolution of double taxation disputes in all cases in a timely manner.

Consequently the Directive was adopted, to build on existing systems in the EU, including the Arbitration Convention. As the Arbitration Convention is a standalone international convention, this measure will not replace it.

This measure introduces the primary legislation needed to allow implementation of the Directive in the UK, subject to approval of the draft rules.

HMRC policy paper, Implementing a directive on tax dispute resolution mechanisms in the EU

Draft legislation, Clause 39, Resolution of double taxation disputes

Report by Sara White