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Persons of standing In November 2005, The European Commission published a list of independent persons of standing who are eligible to become members of an advisory commission which is better perhaps described as an arbitration panel. The five Irish members nominated were Marie Barr, Paul McGowan Feargal O'Rourke, Jim Tierney, and former Chairman of the Revenue Commissioners, Dermot Quigley. As readers can see, Chartered Accountants are well represented. The advisory commission is the last phase of a settlement process where, as a result of decisions taken by contracting States which are also member States, an enterprise may suffer double taxation through an adjustment of profits due to transfer pricing weaknesses.

Article 25 - OECD Model - Mutual agreement procedure Article 25 sets out a structure for contacting States to consult together as to the interpretation and application of a tax treaty, to seek to reconcile differences, and to avoid the costs of appeals and litigation which may otherwise fall on the parties.It is much broader in scope than the EU Arbitration Convention which is focussed on transfer pricing.

The double taxation referred to in the Convention is that which might arise when tax authorities adjust for tax purposes the profits declared by enterprises where such profits result from transaction between associated enterprises in different Member States.The double taxation targeted in the Convention is that which arises when one enterprise suffers an increased tax bill but where the other enterprise is not allowed a corresponding reduction in its profits by the other Member State. Because the Arbitration Convention simplifies the process, it is strongly recommended by the EC that member States apply the procedure to other double taxation issues involving member States.

Transfer pricing Wrestling with the problem of tax obstacles to the Single Market has led the European Commissions to concentrate on various issues. Recent editions of Accountancy Ireland have reported on aspects of the Common Corporate Consolidated Tax Base (CCCTB). This is seen by its proponents as taking care of various obstacles to developing the Market including transfer pricing.

That said, the Commission has separately reviewed the problem of transfer pricing. A Commission report in 2001 stressed the increasingly high compliance costs of documentation requirements imposed by Member States, the lack of certainty, and effective double taxation that can arise. The report estimated that SMEs spent up to €2 million annually just on compliance with larger multi-nationals incurring nearly three times that.

While it is no solution to the cost of documentary compliance, the Code of Conduct adopted by member States in December 2004 eases the costs of negotiating disputes and to some extent simplifies the process. In effect, the Code implements the EU Arbitration Convention which came into being on 23 July 1990. Incidentally, it was enacted at that time in ten languages one of which was Irish, the only Celtic language to be so recognised for official translation purposes.

It may seem strange that the Commissions should have such a major focus on transfer pricing since a CCCTB ought to deal with that problem. The fact that there is still a need to address the transfer pricing issue can be put down to several problems including perhaps that:

- The implementation of CCCTB is likely to be in the long term; - CCCTB will not apply to all companies; - CCCTB is to be optional thus permitting an opt-out for companies for whom CCCTB is designed. - If a minimum of 8 States join, there will still be transfer pricing issues.

So if CCCTB may not effectively address the transfer pricing obstacle, can we be sure that it addresses all other obstacles for which it is a claimed solution?

Profit shifting Transfer pricing is only part of the problem. If it is looked at in terms of shifting profits, it is evident that companies can and may locate operations and resulting profits in low tax States. Moreover, if enough of the ‘real’ activity of the group is so located, transfer pricing may not be a difficulty for the business in respect of tangible transfers. Significant profits may still end up located in the low tax jurisdiction. Intangible transfers such as internal use of R&D may be difficult to measure where there is no external or insufficient reference price.

As low tax policies are not to be attacked - we are regularly told that harmonisation of tax rates is definitely not on the agenda - transfer pricing must remain on the agenda for those States and companies who opt to stay out of CCCTB.

At the moment, profit shifting is significantly countered by transfer pricing regulation being ultimately based on the accounting return achieved for each profit centre. But if CCCTB were to be a basis for a re-shift of profits, there are some awkward aspects to any switch to a formula based allocation of profits.

One is the complexities of bases if one takes as a precedent those which are currently used in Federal States such as the US, Canada, Switzerland and of course Germany. Another is coming up with the trick to arrange a formula which cannot be manipulated by States or by companies.

A third point is that a group's consolidated base may come up with an overall profit while one or more individual centres make losses. The losses are smoothed out on the tax return and the State where the accounting losses were incurred now has profits allocated to it on which tax is paid to the benefit of that State's revenue.

ode of conduct for arbitration The Code establishes a uniform application by all member States of common procedures within the 1990 Arbitration Convention (90/436/EEC). The procedures run from the time that the double tax is first referred to a tax administration - the making of an appeal, if you will,- through the mutual agreement process and, if that fails, through the arbitration process which is where our independent persons of standing come in.

Making ‘appeal’ to the competent authority One has three years to make the ‘appeal’ to the competent authority. To put it another way, the first issue is to establish the starting point for a three year deadline by which the company suffering double taxation must present its case to the tax administration of the relevant Member State.

The Code establishes this as the date of the first tax assessment or equivalent which results or is likely to result in double taxation. In Irish terms this might be the date that the Revenue authority makes an additional assessment on company X say for the year 2002, the CT1 or equivalent having been lodged in say September 2003. If the assessment is made on 1 September 2004, the enterprise's deadline for presenting its case expires 31 August 2007.

If one does not wish to see the time limit being used up fruitlessly, it rather seems that even if the other contracting State has not formally rejected a corresponding deduction in profits, an enterprise should initiate the process as soon as the assessment is made on its associate.

Procedures to achieve mutual agreement Once a timely claim is in place, the Member States then have just two years to reach an agreement which will eliminate the double taxation being complained of. This period starts on the latest of two dates; - he date of the tax assessment notice, or - The date on which the competent authority receives the request from the tax payer including certain specified minimum information.

The information essentially comprises a brief history of the issue including any appeal processes commenced, as well as identifying the parties involved.

The mutual agreement proceedings are urged to be as expeditious as possible and at minimum cost to the parties. For example, if an authority believes that insufficient information has been provided, it must within two months of receipt of the request for mutual procedures to be initiated, invite the enterprise to furnish the specific further information needed.

It must keep the taxpayer informed at all times and, in particular, if the tax administration feels unable to settle the issue unilaterally, the taxpayer must be advised that mutual agreement procedures are being adopted.

Contracting States undertake in particular where one receives a position paper from the other to respond quickly (no later than 6 months from receipt of the position paper).

Invoking the panel If there is no mutual agreement possible between the tax authorities, the Code moves on to the next phase of the process; the establishment and functioning of the advisory commission which must then arbitrate in the case. The commission or panel will be activated normally by the State that issued the first tax assessment notice. It will usually consist of two independent persons of standing, its chairperson and the representatives of the competent authorities. Its decision is binding on the States.

Tax collection The Code recommends the suspension of tax collection during the dispute resolution procedure on the same basis as that applying in domestic appeals/litigation procedures. While this arbitration process is constructed in the context of tax pricing adjustments, the Commission recommends that Member States apply the process to dispute resolution in relation to double taxation treaties with each other.