Successive Maltese governments have sought to conclude double tax treaties with important trading partners as well as with emerging countries, in order to encourage the growth of international trade, including that of financial services.

To date, Malta has over 70 double taxation treaties in force and this policy is expected to continue in the future. Most of these treaties are based on the Organisation for Economic Co-operation and Development (OECD) model.

However, the circumstances in which different Member States interpret or apply the provisions of bilateral tax agreements, or the Convention on the elimination of double taxation in connection with the adjustments of profits of associated enterprises (‘the EU Arbitration Convention’), can create cumbersome tax obstacles for businesses operating across borders.

Tax obstacles may go on to create an excessive tax burden for businesses and are likely to cause economic distortions and, in turn, have a negative impact on cross-border investment and growth. It is thus necessary to have EU mechanisms in place to ensure the effective resolution of disputes concerning the interpretation and application of such bilateral tax treaties and the EU Arbitration Convention.

Malta has now recently adopted The European Union Tax Dispute Resolution Mechanisms Directive Implementation Regulations amending the Income Tax Act, and laying down rules on a mechanism to resolve tax disputes between Malta and other Member States, in line with the vision of the Implementing Regulation (EU) 2019/652 laying down standard Rules of Functioning for the Advisory Commission or Alternative Dispute Resolution Commission and a standard form for the communication of information concerning publicity of the final decision in accordance with Council Directive (EU) 2017/1852. The new regulations also lay down the rights and obligations of the affected persons when such disputes arise.

EU Tax Dispute Resolution Mechanisms

Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the European Union, introduces a mechanism for the effective resolution of tax disputes between Member States. The Directive concerns the interpretation and application of agreements and conventions that provide for the elimination of double taxation of income and capital, where applicable.

Advisory Commission/Alternative Dispute Resolution Commission

The resolution of disputes should apply to different interpretations and application of bilateral tax treaties and of the EU Arbitration Convention; in particular, to different interpretations and applications leading to double taxation. This is to be achieved through a procedure under which, as a first step, the case is submitted to the tax authorities of the Member States concerned, with a view to settling the dispute by using a mutual agreement procedure.

Member States should be encouraged to use non-binding alternative dispute resolution forms, such as mediation or conciliation, during the final stages of the mutual agreement procedure period. In the absence of an agreement within a certain time frame, the case should be submitted to a dispute resolution procedure.

The choice of the method for dispute resolution should be flexible, which could be either through ad hoc structures or through more permanent structures. Dispute resolution procedures may take the form of an Advisory Commission, consisting of both representatives of the tax authorities concerned and independent persons of standing. They could also take the form of an Alternative Dispute Resolution Commission, which would provide for flexibility in the choice of dispute resolution methods.

The Rules of Functioning

The Rules of Functioning are intended to establish a comprehensive procedural framework for dispute resolution procedures to run without obstacles and to guarantee the rights of any affected persons. It is therefore important that such Rules are established by the competent authorities of Member States in order to achieve the continuity and effectiveness of the dispute resolution procedure.

The Commission established that the standard Rules of Functioning are to apply where the Rules have not been notified to the affected persons within the prescribed timeframe or, are incomplete.

The Rules of Functioning must be signed between the competent authorities of the Member States involved in the dispute. These Rules will include:

(a) the description and the characteristics of the question in dispute;

(b) the terms of reference on which the competent authorities of the Member States agree as regards the legal and factual questions to be resolved;

(c) the form of the dispute resolution body, which shall be either an Advisory Commission or an Alternative Dispute Resolution Commission, as well as the type of process for any Alternative Dispute Resolution, if the process differs from the independent opinion process applied by an Advisory Commission;

(d) the time frame for the dispute resolution procedure;

(e) the composition of the Advisory Commission or Alternative Dispute Resolution Commission (including the number and names of the members, details of their competence and qualifications, and disclosing any conflicts of interest of the members);

(f) the rules governing the participation of the affected person/s and third parties in the proceedings, exchanges of memoranda, information and evidence, the costs, the type of dispute resolution process to be used, and any other relevant procedural or organisational matters;

(g) the logistical arrangements for the Advisory Commission’s proceedings and delivery of its opinion.

The European Commission has recently delegated Implementing Regulation (EU) 2019/652 which aims to lay down the standard Rules of Functioning for the Advisory Commission or Alternative Dispute Resolution Commission. It also envisions a uniform and standard form for the communication of information concerning publicity of the final decision in accordance with Council Directive (EU) 2017/1852.

Article written by Dr Cherise Abela Grech and Legal Trainee Ms Emma Sammut.

For more information, please contact Dr Robert Tufigno on rtufigno@gtgadvocates.com

Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.