INSIGHT: New Dutch 2020 Decree on Mutual Agreement Procedures

On June 22, 2020, the Dutch Deputy Minister of Finance published an update of the Decree on Mutual Agreement Procedures (Besluit Onderlinge overlegprocedures), the 2020 MAP Decree.

The 2020 MAP Decree entered into force on June 23, 2020, and has retroactive effect to June 11, 2020, thereby replacing the previous MAP Decree from 2008. It was published in the Official Daily Gazette, June 22, 2020, no. 32689. The 2020 MAP Decree is in line with recent international developments, such as the establishment of minimum standards for dispute resolution as described in OECD BEPS Action 14, the introduction of the EU Arbitration Directive and the implementation of the Multilateral Instrument. From a Dutch perspective, the 2020 MAP Decree provides a detailed explanation and interpretation of the implementation of mutual agreement procedures (MAPs) as regulated in the Tax Dispute Resolution Mechanisms Act (Wet fiscale arbitrage; WFA), the bilateral tax treaties, and the EU Arbitration Convention.

Main Changes 2020 MAP Decree Compared to the 2008 Decree

The most important changes compared to the previous decree are that the 2020 MAP Decree contains the following:

• The procedure for mutual agreement procedures under the new Tax Dispute Resolution Mechanisms Act has been included (sections 2 and 3).

• The distinction made in the 2008 Decree between the regular, early, and extra early mutual agreement procedure ceases to apply (section 4).

• It contains a concession policy for the situation in which no outcome can be reached in the mutual agreement procedure due to the overlap with international court judgments (section 5).

• It contains a concession policy under which conditions the Dutch tax inspector may make a corresponding adjustment after the expiry of the deadline (section 6).

• A description is included of how the Dutch competent authority deals with agreement procedures in triangular relationship situations (section 7).

• It contains policy on the terms and conditions when applying for a Bilateral Advance Pricing Agreement (BAPA) or a Multilateral Advance Pricing Agreement (MAPA), which are the same as the terms and conditions when applying for a unilateral Advance Pricing Agreement (APA) as described in the Dutch 2019 APA Decree.

• Policy is included concerning interest on tax due and late payment interest in mutual agreement procedures (section 8) and on penalties (section 9).

Legal Basis to Start a MAP

From a Dutch perspective, a MAP request can be submitted on three legal bases:

• the Dutch Tax Dispute Resolution Mechanisms Act;

• a Tax Treaty; and

• the EU Arbitration Convention.

The administrative procedures relating to these three different legal bases are different. As such when filing for a MAP, the taxpayer must mention the specific applicable legal basis in the request. If multiple legal bases are applicable, it is up to the Dutch taxpayer to choose the legal basis it would like to apply. The 2020 MAP Decree contains two appendices that provide an overview of the information that should be included when filing a ‘complaint’ based on the WFA (Annex A) and what information should be included when filing a request based on a tax treaty or the EU Arbitration Convention (Annex B). When a request relates to transfer pricing disputes, a taxpayer is obligated to fill an additional online form describing the intercompany transaction under discussion.

In case a MAP request does not contain all required information, a request may be denied by the Dutch competent authority. However, the taxpayer is provided an opportunity to submit the missing information.

A request can be withdrawn through a written notice to the Dutch competent authority. In case a request has been filled in two countries, the written notice should be sent to both competent authorities.

Tax Dispute Resolution Mechanisms Act

The Tax Dispute Resolution Mechanisms Act entered into force on July 16, 2019. This is the Dutch implementation of the EU Arbitration Directive for settling tax disputes (including transfer pricing) to prevent double taxation within the EU. The WFA contains the procedure concerning EU-cross border tax dispute resolution cases involving the Netherlands. The new law will apply to all complaints submitted on or after July 1, 2019, onwards provided that the complaint relates to income or capital attributable to a taxable year commencing on or after Jan. 1, 2018. However, the Dutch Ministry of Finance and the competent authority of the other state involved may agree to apply the WFA to complaints submitted earlier or with respect to earlier tax years.

The purpose of the EU Arbitration Directive is to resolve disputes through mutual agreement procedures between the competent authorities of EU Member States. A complaint must be made within three years, starting on the date of which a taxpayer has received the first notification leading to the dispute. Within six months after the receipt of the complaint the Ministry of Finance decides on accepting or rejecting the complaint. In case the complaint is rejected by both competent authorities, the taxpayer has the opportunity to file an administrative appeal against that decision.

If such appeal is rejected, then the taxpayer subsequently has the option to bring the case before a tax court. If the authorities fail to reach an agreement within 24-30 months, an Advisory Commission may be installed at the request of the interested party. The Advisory Commission is composed of representatives of the EU Member States involved, leading independent persons and a chairman. The Advisory Commission shall provide advice on how to settle the point of dispute. This advice can be followed up by the EU Member States, but they can also deviate collectively from it within a certain period. However, if they fail to reach an agreement, the advice of the Advisory Commission becomes binding. In addition, the Arbitration Directive provides for a procedure whereby, in certain cases, disputes regarding access to the mutual agreement procedure can be settled by arbitration.

The EU Arbitration Directive builds on the existing EU Arbitration Convention, which already provides for a mandatory binding arbitration mechanism, but broadens its scope to areas which were not covered (i.e. tax and not only transfer pricing aspects); and adds enforcement options to address the shortcomings, as regards enforcement and effectiveness, which is shown in the graph below. (The flow chart is a simplification of the dispute resolution process as depicted on pages 8,9 and 10 of the EU Arbitration Directive (COM(2016) 686 final).

The flow chart is a simplification of the dispute resolution process as depicted on pages 8,9 and 10 of the EU Arbitration Directive (COM(2016) 686 final.

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Time Limits

For each legal basis, specific timing terms are applicable for filing a MAP request:

• WFA: the complaint must be submitted within a period of three years starting on the day on which the taxpayer has received an indication that a dispute has arose or might arise;

• Tax treaties: depending on the term mentioned in a tax treaty, which is at least three years. A request must, in most cases, be submitted within three years (or more, depending of the treaty) after a taxpayer has received notice that taxation might not be in line with the tax treaty. In cases where the tax treaty foresees a different term, this different term shall apply;

• EU-arbitration convention: the request must be submitted within a period of three years starting on the day on which the taxpayer has received an indication that double taxation as meant in article 1 of the EU-arbitration convention.

For all legal bases it is relevant to assess whether a request has been submitted on time. As moment of first notice, in any case the date of the tax assessment that has led to the dispute shall be considered. However, it may also occur that a request is submitted prior to a tax assessment, for example if a report after a tax audit has been received already by the taxpayer, but the additional tax assessment has not been imposed yet. In the 2008 MAP Decree, these scenarios were categorized as regular, early, and extra early mutual agreement procedures. These three categories have been removed from the 2020 MAP Decree as they were merely an interpretation of the Dutch Ministry of Finance, which did not apply for the Competent Authorities of other states.

For clarification purposes these time limits may schematically been shown as follows and it was not mentioned in the 2020 MAP Decree. For clarification purposes these time limits may schematically been depicted as follows:

Dutch 2008 Decree on Mutual Agreement Procedures – section 5.3

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Scenarios in Which No Outcome Can Be Reached Due to Local Court Decisions Abroad

In some countries the competent authority is not allowed to deviate from (irrevocable) national court judgments. If a court decision on a national level has been ruled on the matter that is been discussed under a MAP, the ongoing procedure may be terminated. In this case, the Dutch competent authority may conclude that the court decision is in line with the applicable tax treaty. Ex officio reduction of the tax assessment is therefore possible. Under the 2020 MAP Decree, the Dutch competent authority is able to apply the ex officio reduction after the five-year period in the Netherlands if:

• the MAP ends because the judicial authority in the other Member State has taken a decision on the point of dispute that cannot be waived under the national law of that Member State; and

• the Dutch competent authority believes that the correction or tax imposed in the other state gives rise to a revision of the Dutch corporate tax assessment.

Corresponding Adjustments After the Limitation Period

If another state makes a correction to a local corporate tax assessment, where the assessment in the Netherlands has already been finally imposed by the Dutch tax administration, the Dutch taxpayer can request a corresponding adjustment in the Netherlands. The Dutch tax inspector will review and assess whether a reduction should be made. However, all requests must be mandatorily submitted to the Transfer Pricing Coordination Group of the Dutch tax authorities for binding advice.

If the Dutch tax inspector deems the foreign adjustment to be justified, the inspector can impose a corresponding adjustment. Ex officio reduction of the corporate tax assessment through a corresponding adjustment is possible, with a limit of five years. Per the 2020 MAP Decree, it is possible to apply the ex officio corresponding adjustment after the five-year period if:

• the interested party was not reasonably able to make the request for a corresponding adjustment within the five-year period,

• the interested party had access to the MAP at the time of submitting the request for a corresponding adjustment; and

• a MAP would have led to the same outcome, and the Dutch competent authority would have authorized the corresponding correction for that amount without further consultation with the other state. This seems to allow subjective interpretation by the Dutch tax inspectors and hence a potential discussion with the taxpayer on this point.

Triangular Relationship Situations

The 2020 MAP Decree includes wording on how the Dutch Competent Authorities handles triangular relationship situations. These situations could arise when a Dutch entity (NL2) is party to an incoming and outgoing intercompany transaction with affiliated entities (P1 & S3), both located in different states. If due to an outcome of a MAP, the pricing of the intercompany transaction between NL2 and S3 is adjusted, the profit reported in NL2 could no longer be ”at arm’s-length.” However, this cannot be resolved unless the third competent authority (P1) is involved in the discussions. In such cases, the Dutch taxpayer must submit an additional MAP request to the third competent authority as there is no direct intercompany transaction between P1 and S3. Therefore, a MAP between these two states will not be possible.

The Dutch competent authority will try to involve both states (P1 and S3) during the consultations in order to avoid double taxation for NL2 as much as possible. If double taxation arises, the Dutch competent authority will only apply a corresponding adjustment in the Netherlands if it is in accordance with the arm’s-length principle.

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Policy Relating to Tax and Recovery Interest During MAPs

National tax and interest recovery legislation of the involved states may lead to a disproportionate increase of the interest burden for a (Dutch) taxpayer (also) during a MAP. From a Dutch perspective, the competent authority may reduce this accrued interest in line with the principles of reason and fairness (in Dutch “redelijkheid en billijkheid”). This principle only applies on the amount that is under discussion between the Competent Authorities during a MAP.

Settlement Agreement and Fines

The Dutch competent authority is not bound to settlement agreements of Dutch taxpayers which have been concluded with local (Dutch) tax inspectors. In the Netherlands, these settlement agreements are usually the result of tax audits.

From a Dutch point of view, a criminal offence must be punished through criminal law and should not lead to double taxation or refusal from MAP programs. However, based on the WFA (art. 68 of the General tax Act) and the EU Arbitration Convention (art. 69 of the General tax Act), access can be denied if penalties have been imposed relating to tax evasion, deliberate default or gross negligence. If, however, the competent authority of another state is willing to initiate the MAP despite a sanction imposed by that state as referred to above, the Dutch competent authority will in principle cooperate in this.

OECD 2018 Dutch MAP Statistics

The OECD released the latest MAP statistics for FY 2018 and showed for the Netherlands the average time taken to close Dutch MAP cases that started before Jan. 1, 2016, where the:

(1) start date is the date of filing of the MAP request; and

(2) end date is the date of the closing letter/agreement based on the taxpayer’s approval of the agreement reached between the 2 countries.

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Note: The average time to close MAP cases that startes as from Jan. 1, 2016, were computed according to the MAP statistics reporting framework available at https://www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics-reporting-framework.pdf.

For Dutch MAPs it took on average 51.04 months for transfer pricing cases and 42.49 months for cases on other issues. In terms of case load per 2018, the Netherlands had most MAP transfer pricing cases pending in order of size with: tax treaty partners, Italy, Germany, Spain, France, Denmark and Belgium etc., whereas in other transfer pricing cases in order of size it is Belgium, Germany, treaty partners, the U.K., and others. The label “Treaty Partners (de minimis rule applies)” applies to treaty partners with which the number of cases in start inventory plus the number of cases started is at least 5. The relevant MAP statistics are aggregated under this category.

For MAP cases started from Jan. 1, 2016, this reduced, from start to end, to 12.21 months for transfer pricing cases and 4.07 for MAP cases on other issues. These shorter time periods are on the one hand the result of a new OECD method of processing time measurement. On the other hand, the general expectation is that because of all the OECD Base Erosion and Profit Shifting action items the global number of MAP cases will substantially increase, hence also for the Netherlands.

General Observations

This 2020 MAP Decree provides a welcome explanation and clarification of the existing Dutch tax legislation and regulations regarding mutual agreement procedures. Dutch taxpayers now have a better idea of the legal remedies available to prevent double taxation. An important acknowledgment in this 2020 MAP Decree is the explicit reference to a judgment of the Amsterdam District Court dating from 2017, in which the Dutch tax authorities’ initial refusal to admit the taxpayer in a MAP procedure was characterized as a decision. Such a refusal is consequently admissible for objection and appeal before the Dutch tax court. Therefore, according to the Deputy Minister, legal action can be taken outside the Tax Dispute Resolution Mechanisms Act.

Despite the above, in our professional experience the Dutch tax authorities generally encourage Dutch taxpayers to request a MAP in an early stage in order to avoid double taxation. This 2020 MAP Decree reflects the Dutch interpretation of mutual agreement procedures, which may obviously be interpreted differently by another country. Within the EU, MAP procedures may enjoy mandatory binding arbitration. Existing Dutch tax treaties already may contain a binding arbitration clause. In addition, the MLI may in some cases also provide a binding arbitration alternative, if implemented by countries (this is not applicable for example for Brazil, China, India, and Russia). A case-by-case Dutch analysis would be required to determine which conflict resolution tool is best for a particular case and for a particular country.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Eduard Sporken is a director, and Adriaan Bijleveld is a consultant, at KPMG Meijburg & Co. in the Netherlands. This article represents the views of the authors only, and does not represent the views or professional advice of KPMG Meijburg & Co.