There is a particular kind of pressure in a cross-border tax examination that a domestic one never produces: two authorities, in two countries, looking at the same transactions from opposite sides, each with an incentive to tax the same profit. Handled well, it resolves. Handled badly, it produces the outcome a cross-border structure most fears, which is the same income taxed twice with no relief.
The two authorities want opposite things
When a group prices a transaction between two of its entities, one country’s authority may argue the price was too high, shifting profit out of its jurisdiction, while the other argues it was too low, shifting profit into the first. Both cannot be right, but both can assess, and if they do, the group is taxed twice on the same margin. This is the structural risk of a transfer pricing examination that spans borders, and it is why the two examinations cannot be handled as if they were separate. What is conceded to one authority may be handed as a weapon to the other.
Within the European Union the arm’s length principle carries its own dedicated instrument. Article 4 of the Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises, which the directive calls the Union Arbitration Convention, states it for both associated enterprises and the attribution of profits to a permanent establishment, and article 5 of that convention requires a state intending to adjust to inform the enterprise in due time so that the other enterprise and the other state can be told, while stating expressly that giving that information does not prevent the adjustment being made anyway. Article 14 then defines the only two outcomes that count as relief: the profits are included in the computation of taxable profits in one state only, or the tax chargeable on those profits in one state is reduced by an amount equal to the tax chargeable on them in the other.
Consistency is the first discipline
The group’s position has to be the same in both countries, because the fastest way to lose is to tell two authorities two different stories. A transfer pricing policy that reflects the real functions, assets and risks, documented consistently, is the foundation, and a group that has that documentation enters the examination defending a position rather than inventing one. We set out what that documentation requires in our note on master file and local file in the Netherlands, and what an authority looks for in our note on what the Belastingdienst looks for in a transfer pricing review.
Two authorities examining the same margin is not two problems. It is one problem seen from both ends, and it has to be answered with one consistent story.
The mechanisms to resolve double taxation
Where both authorities do assess, there are routes to relief that exist precisely for this situation. The mutual agreement procedure allows the two tax authorities to negotiate between themselves to eliminate the double taxation, and within the European Union there are dispute resolution mechanisms with binding timelines. These are not automatic and they are not fast, but they exist, and a group facing double taxation should invoke them rather than absorbing the cost. The existence of these routes is also why advance certainty, through an advance pricing agreement, is so valuable, as we describe in our note on advance pricing agreements and rulings.
The treaty route is the oldest and the least prescriptive, and its wording matters more than its label. Under article 25, paragraph 1 of the convention between the Netherlands and the United Kingdom signed on 26 September 2008, a person who considers that the actions of one or both states result or will result for him in taxation not in accordance with the convention may present his case to the competent authority of the state of which he is a resident, and may do so irrespective of the remedies provided by domestic law. That convention sets the window at three years from the first notification of the action resulting in the taxation, or, if later, six years from the end of the taxable year or chargeable period in respect of which the taxation is imposed or proposed. Other treaties word their window differently, and paragraph 3.4 of the Besluit Onderlinge overlegprocedures, the Dutch policy decree on mutual agreement procedures, states that where the term in a Netherlands treaty departs from the general three-year term it is the treaty term that applies.
What paragraph 2 of that article promises is effort, not outcome. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the other competent authority. There is no obligation to reach one. The clause with real value is the closing one, under which any agreement reached is implemented notwithstanding any time limits in the domestic law of the contracting states, which is how a settlement reopens years that domestic law had closed. Where the treaty carries an arbitration clause, as paragraph 5 of that article does, unresolved issues go to arbitration at the person’s request where the authorities have not agreed within two years from the presentation of the case to the competent authority of the other state, and the decision binds both states unless a person directly affected declines to accept the mutual agreement implementing it.
The directive puts a clock on every step
The improvement that Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the European Union brought is that each stage has a stated period and a stated consequence for missing it. The complaint goes to each competent authority at the same time, with the same information, within three years from receipt of the first notification of the action giving rise to the dispute, and article 3, paragraph 1 states that this applies regardless of whether the taxpayer has recourse to national remedies. Each authority acknowledges receipt within two months and informs the other authorities within the same two months under article 3, paragraph 2. Each then decides on acceptance or rejection within six months of receiving the complaint, or within six months of receiving the additional information requested under point (f), whichever is later, under article 3, paragraph 5. Silence favours the taxpayer here: article 5, paragraph 2 provides that where an authority has not decided within that period, the complaint is deemed accepted by it.
Acceptance starts the mutual agreement period. Article 4, paragraph 1 gives the authorities two years from the last notification of an acceptance decision, extendable by up to one year at the request of one of them if that authority provides written justification. Where they agree, article 4, paragraph 2 makes the agreement binding and enforceable by the taxpayer, but subject to the taxpayer accepting it and renouncing any other remedy, and where proceedings on such other remedies have already begun, the decision becomes binding only once the taxpayer has produced evidence that action has been taken to terminate them, which must be provided not later than sixty days from the date the decision was notified. The agreement is then implemented irrespective of any time limits prescribed by national law. Where they do not agree, article 4, paragraph 3 obliges each authority to give the taxpayer the general reasons for the failure.
The advisory commission stage is where the timetable becomes enforceable against the administrations. Under article 6, paragraph 1 the taxpayer requests the commission in writing not later than fifty days from receipt of the relevant notification, and it must be set up not later than one hundred and twenty days from receipt of that request. Article 14, paragraph 1 gives the commission six months from its establishment to deliver its opinion, extendable by three months where the question needs longer. Article 15, paragraph 1 then gives the authorities six months from notification of the opinion to agree, and paragraph 2 provides that they may deviate from the opinion but, if they fail to agree, are bound by it. The final decision is binding on the Member States concerned, does not constitute a precedent, and under paragraph 4 is implemented subject to the taxpayer accepting it and renouncing any domestic remedy within sixty days of notification.
In the Netherlands, the Wet fiscale arbitrage and where access stops
The Dutch transposition is the Wet fiscale arbitrage, in force since 16 July 2019, and it mirrors the directive period by period with its own numbering. The three-year filing term is in article 2.1, paragraph 2, the two-month acknowledgement in article 2.1, paragraph 4, and the six-month decision on acceptance in article 2.5, paragraph 1, which also states that no appeal lies against a decision to accept or reject the complaint. Article 2.5, paragraph 2 supplies the deemed acceptance where no decision is taken in time. The mutual agreement period of two years is in article 3.1, paragraph 1, extendable by at most one year on a written and reasoned request under paragraph 3. The fifty-day term to request an arbitration commission is in article 4.1, paragraph 4 and the one hundred and twenty day term to constitute it in paragraph 5, and where it is not constituted, article 4.2 allows the taxpayer to apply to the interim relief judge of the rechtbank, with a thirty-day term for serving the writ.
The grounds for refusing access are the part worth reading before the complaint is drafted, because several of them cannot be appealed. Article 2.5, paragraph 3 rejects the complaint where there is no question in dispute or where the information duties of articles 2.1 to 2.4 have not been fully met. Article 2.5, paragraph 4 lets the Minister decide, within the same six months, to resolve the point unilaterally, which terminates the proceedings under the act immediately and against which no appeal lies. Article 4.1, paragraph 3 allows a request for an arbitration commission only where the taxpayer declares that no objection or appeal can be brought, that none is pending, or that the right to bring one has been formally renounced. Article 5.2, paragraph 1 permits the Minister to refuse access to the arbitration commission where a penalty for an offence under articles 68 and 69 of the Algemene wet inzake rijksbelastingen, relating to income corrected by the inspector, has become irrevocable and is directly connected to the question in dispute, and again no appeal lies against that refusal. The directive’s own version is article 16, paragraph 6, which lets a Member State deny access where penalties were imposed for tax fraud, wilful default and gross negligence.
Manage the two timelines
Two examinations run on two timetables, with two sets of deadlines, information requests and procedural rights. Missing a deadline in one country can prejudice the position in both, and information given to one authority may reach the other. The examinations have to be coordinated as a single exercise, with advisers in both countries working to one strategy rather than each defending its own front. This is the same coordination discipline we describe across our cross-border work.
The most expensive misunderstanding is that invoking one of these procedures stops the bill. It does not. Article 16, paragraph 2 of the directive states that submitting the question to the mutual agreement procedure or to the dispute resolution procedure does not prevent a Member State from initiating or continuing judicial proceedings or proceedings for administrative and criminal penalties on the same matters, and article 7, paragraph 2 of the Union Arbitration Convention says the same of its advisory commission. In the Netherlands article 9, paragraph 1 of the Invorderingswet 1990 makes a tax assessment collectable six weeks after the date of the assessment notice, and paragraph 2 makes an additional assessment collectable one month after that date and a naheffingsaanslag fourteen days after it. Deferral is a separate act: article 25, paragraph 1 provides that the receiver may grant deferral of payment by decision, for a fixed time and on conditions he sets, and that enforced collection does not begin or is suspended while it lasts. Paragraph 10.1 of the Besluit Onderlinge overlegprocedures states that where the Netherlands is the state causing the double taxation, deferral will be granted at the taxpayer’s request for the part of the tax connected with that double taxation, and that it follows automatically only where the mutual agreement request is made while an objection is pending.
The domestic clocks keep running in parallel, and they do not wait for the bilateral one. Article 2.1, paragraph 3 of the Wet fiscale arbitrage states plainly that bringing an objection or appeal against an assessment covering a question in dispute does not suspend the three-year filing term. Article 16, paragraph 3 of the directive works the other way and is easy to misread: national remedies remain available, but where the taxpayer has started proceedings, the periods in article 3, paragraph 5 and article 4, paragraph 1 begin only from the date the judgment becomes final, or the proceedings are otherwise definitively concluded, or they are suspended. The real trap is article 16, paragraph 4, mirrored in article 5.3 of the Wet fiscale arbitrage: where a court in one Member State has ruled and that state’s law does not permit derogation from the ruling, that state may terminate the mutual agreement procedure, disregard a request for an advisory commission, or end a commission already running. A domestic case pressed to judgment in one country can close the only route that would have removed the charge in the other.
What to have done before it happens
The groups that come through a dual examination well are the ones that prepared for it before it arrived: a defensible transfer pricing policy, consistent documentation, and where the stakes justify it, advance certainty from the authorities. The groups that struggle are the ones whose intercompany pricing was never documented and is now being reconstructed under examination. Our note on our auditor has flagged our intercompany pricing deals with the earlier warning that often precedes exactly this situation.
Preparation also means knowing when the clock started, because the filing window runs from an event that is usually earlier than the final assessment. Paragraph 3.5 of the Besluit Onderlinge overlegprocedures records the Dutch position that a request is in any event timely where it is received within three years of the date of the assessment giving rise to the dispute and, in transfer pricing cases, of the assessment in which the correction is processed, or of the moment the correction is substantiated, for example by an audit report, if that is later. The same paragraph accepts that a request can be filed before a final assessment exists, on the basis of an audit report or a letter from the Belastingdienst, where it can reasonably be concluded that taxation contrary to the treaty will arise. The documents that fix that start date are the same ones article 3, paragraph 3 of the directive requires to be filed with the complaint, so they belong in one set from the day they arrive.
If you are facing this, we can help. Montclare handles exactly these situations for international businesses and families. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or financial advice. The right course depends on the facts. Each engagement is subject to scope and applicable regulation.