Two Government Proposals on international taxation, focusing in particular on cross-border tax dispute rules, were issued on 13 December 2018. The Government Proposal regarding the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI Proposal”) implements the so called multilateral instrument (“MLI”) into Finnish legislation. The MLI is an instrument completing and amending certain provisions in majority of the existing income tax treaties. The Government Proposal on international tax dispute resolution mechanisms (“MAP Proposal”) provides procedural rules for Mutual Agreement Procedures (“MAP”) and processes where binding arbitration is available. Both of these Proposals are related to the implementation of different measures preventing Base Erosion and Profit Shifting (“BEPS”) and – as a balancing measure – implementation of more effective dispute resolution mechanisms to avoid international double taxation.
The MLI Proposal includes the implementation of the MLI’s minimum standards and one of the voluntary measures, namely binding arbitration. As expected, Finland does not implement the voluntary measures addressing certain hybrid mismatch arrangements or artificial avoidance of permanent establishment status offered by the MLI.
The tax treaties will effectively be modified by the MLI only if both parties to the tax treaty have decided that the tax treaty and its specific article are covered by the MLI. Similarly, the first tax year for which the MLI’s provisions are applied depends on the selections made by the parties to the tax treaty. In practice, most MLI triggered implications are applicable as of 2019. The MLI will not replace the bilateral tax treaties but it is applied along with the covered treaties. Basically, the MLI will cover nearly all tax treaties concluded by Finland. The tax treaties with Germany, Hong Kong and Bulgaria as well as the Nordic tax treaty will not be covered by the MLI. However, similar changes have or will be made directly to the above mentioned tax treaties excluding the treaty with Bulgaria.
Main changes to Finland’s tax treaties covered by the MLI are as follows.
- The purpose of the tax treaties is changed. According to the new preamble text, a tax treaty intends to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
- The principal purpose test (“PPT”) is included. The PPT is an anti-avoidance clause under which a tax treaty benefit is not granted if the obtained benefit is not in accordance with the purpose of the article and obtaining that benefit was one of the principal purposes of the relevant arrangement or transaction.
- The corresponding adjustment rule for transfer pricing adjustments is added to the tax treaties that do not include this rule already.
- MAP provisions will be added to the covered tax treaties in accordance with the revised OECD Model Tax Treaty Article. The changes mainly standardize the procedural rules regarding MAP. For example, taxpayers may file the MAP application to the competent authority of either the residence state or the source state.
- Inclusion of mandatory binding arbitration is a major addition to the covered tax treaties. This provision allows the taxpayers to submit unresolved MAP cases to an independent and impartial arbitration panel.
- The decision making model chosen by Finland is a “final offer” arbitration (also known as “baseball arbitration”). Under the “final offer” arbitration method, the panel can only choose between the offers presented to it by the competent authorities. The result of the panel is binding to the parties.
- Tax avoidance cases and criminal offences are out of the scope of the arbitration. Further, the dispute must relate to double taxation to qualify for arbitration.
While most changes provide additional safeguards to taxpayers, the introduction of PPT is expected to impact many common holding or financing structures where e.g. limited substance has been accepted in the past. It is therefore recommendable to review existing structures and ascertain that they are aligned with the business model, especially in relation to substance requirements.
As a result of the implementation of the MLI provisions, the practical direct application of double tax treaties becomes more complex. The applicability of the MLI provisions needs to be assessed together with the tax treaties and the applicability of MLI provisions is not always simple due to different choices made by the countries. At the same time, the possibility for a binding arbitration process in double taxation disputes improves the effectiveness of tax dispute resolution mechanisms.
The proposed law implements the Directive on Tax Dispute Resolution Mechanisms in the European Union (2017/1852, the “Directive”) which extends the binding arbitration process to all types of double taxation disputes involving EU countries. Currently such process is available in transfer pricing cases within the EU. Further, the proposal includes certain domestic procedural rules regarding processes under the EU Arbitration Convention, the MAP/arbitration under bilateral tax treaties and the above discussed MLI.
As opposed to the Draft Government Proposal published on 27 August, based on the MAP Proposal taxpayers are not obligated to choose between the MAP/arbitration process and the domestic appeal process. The Draft Government Proposal received exceptionally heavy criticism for the proposal that any decision issued in a domestic appeal process would prevent the MAP/arbitration process. The MAP Proposal provides for notably more effective legal remedies than the previous proposal since it would be possible to obtain a final decision within the Finnish courts and, if double taxation still exists, eliminate the double taxation under the MAP or arbitration process.
The MAP Proposal includes new rules regarding implementation of a MAP or arbitration decision. According to the current rules, a taxpayer can be exempted from tax as a consequence of implementation of MAP decision or arbitration decision. In accordance with the proposed rules, the taxation of the taxpayer would be reassessed. The proposal should remove challenges relating to implementation of a MAP or arbitration decision concerning a loss making year. Further, taxes are now refunded with interest. These changes have positive influence on the taxpayers’ legal protection.
However, the access to arbitration is limited in certain situations:
- the general or specific anti-avoidance rules, CFC rules, or Criminal Code provisions have been applied;
- the matter does not relate to international double taxation;
- the application to the arbitration was filed late or with incomplete information.
- In addition, the EU Arbitration Convention and the MLI arbitration provision limit the access to arbitration under certain circumstances.
The MAP Proposal does not propose extending the possibility to request temporary postponement of tax payment to MAP processes, which may reduce the feasibility of a MAP process in some cases. Further, it is important to note that the MAP Proposal includes strict non-disclosure obligations for the taxpayers. The legislation can generally be applicable to applications filed as of 1 July 2019.
We are happy to discuss the proposed changes and assess their applicability to your situation.