Amendments to the Mutual Agreement Procedure Regulations

On 9 June 2021, the Official State Gazette published the Royal Decree 399/2021, of 8 June, which proposes specific changes to the Mutual Agreement Procedure Regulations in the field of direct taxation, approved by Royal Decree 1794/2008, of 3 November, and other tax rules (hereinafter, “Royal Decree 399/2021”).

The mutual agreement procedure is the traditional instrument through which tax administrations consult with each other to resolve disputes relating to the application of double tax treaties (or other international agreements). This procedure can be used to eliminate double taxation that may arise, for example, from a transfer pricing adjustment.

In particular, this Royal Decree completes the incorporation into Spanish law of Council Directive (EU) 2017/1852 of October 10, 2017, on tax dispute resolution mechanisms in the European Union (hereinafter, "Directive 2017/1852"), which had already been partially incorporated by Royal Decree-Law 3/2020, of February 4.

The Royal Decree 399/2021 has a threefold purpose:

• the incorporation of a European Union (EU) Directive in the field of tax dispute resolution mechanisms into domestic regulations;
• the introduction of specific measurements derived from the Final Report of Action 14 on dispute resolution mechanisms of the G20/OECD BEPS (Base Erosion and Profit Shifting); and
• the resolution of certain issues identified during the course of mutual agreement procedures, thus ensuring greater legal certainty.

Despite the amendments resulting from the Royal Decree 399/2021, the Mutual Agreement Procedure Regulations maintains their original structure:

• Title I: sets out the common provisions to the mutual agreement procedures developed in the Regulations;
• Title II: regulates the mutual agreement procedure stipulated in the double tax treaties applicable to Spain:
• Title III: develops the procedure foreseen in the Convention 90/436/EEC of 23 July 1990 concerning the elimination of double taxation in connection with the adjustment of profits of related enterprises (hereinafter, "Convention 90/436/EEC" or "European Arbitration Convention"); and
• Title V (previously Title IV): establishes the regime for suspending the recovery of debt when a mutual agreement procedure has been requested.

As a main novelty, a new title is introduced in the Regulations, Title IV, which discusses the dispute resolution mechanisms set out in the Council Directive (EU) 2017/1852.

In this sense, the main reforms resulted from the Royal Decree 399/2021, in this matter (the regulation also includes some provisions relating to other issues) can be grouped in two typologies as follows:

1) Changes related to the mutual agreement procedure foreseen in the double tax treaties applicable to Spain and in the Convention 90/436/EEC

The changes introduced in Titles I, II and III are intended to encourage the adaptation of the provisions established in the Council Directive (EU) 2017/1852 in order to make the various mutual agreement procedures governed by the Regulations as uniform as possible:

• The minimum content that must be included in the request for initiation, the documents that must be submitted with it, the acknowledgement of receipt of such request, the deadlines established for carrying out and responding to the petitions for relief and improvement and the deadline for considering the request for initiation tacitly accepted are modified.
• The taxpayer is granted the option of requesting the initiation of a mutual agreement procedure under the regulation of Council Directive (EU) 2017/1852 (in accordance with its development in the new Title IV of the Royal Decree 399/2021) in those cases in which a mutual agreement procedure has already been initiated and is in progress driven by either of the two previously existing channels (i.e. mutual agreement procedure contained in the double tax treaties or mutual agreement procedure contained in Convention 90/436/EEC). In this case, the current procedure shall terminate on the date of the first receipt of such a request by any of the competent authorities of the States concerned.
• The possibility of issuing requests for relief and improvement when the mutual agreement procedure has been initiated with a competent authority of another State is granted. The reason behind this is the need to expedite the processing of mutual agreement procedures and to achieve a better understanding of the subject matter of the procedure itself by the competent authority.
• The penalties and sanctions preventing the initiation of the procedure stated in Title III are updated considering the first additional provision of the revised text of the Non-Resident Income Tax Law, approved by Royal Legislative Decree 5/2004, of March 5, 2004.
• In accordance with the commitment assumed by Spain in the minimum standard established in section 1.2 of the Final Report of Action 14 of the BEPS Project, the case in which the initiation of a mutual agreement procedure could be refused when it was known that the taxpayer's actions were aimed at avoiding taxation in some of the States concerned, has been eliminated.
• Given the international experience since the entry into force of Royal Decree 1794/2008, the reference to the non-accrual of interest for late payment for the duration of the mutual agreement procedure has been removed.
• A specification is included indicating that an agreement between the competent authorities will not set a precedent.
• For clarification purposes and to ensure legal certainty, an option for the taxpayer to tacitly reject the agreement reached between the competent authorities has been included.

2) Inclusion of the dispute resolution mechanism indicated in Council Directive (EU) 2017/1852

As previously mentioned, the new Title IV regulates the dispute resolution mechanisms indicated in Council Directive (EU) 2017/1852. As such, Title IV establishes a procedural framework for the resolution of tax disputes within the Member States, provided that the disputes arise from the application of the tax treaties and arrangements that endorse the elimination of double taxation of income and, where appropriate, capital (i.e. bilateral or double tax treaties and Convention 90/436/EEC).

These resolution mechanisms will only be applicable to requests for initiation filed on or after July 1, 2019, in respect of matters relating to income or assets obtained in a tax year starting on or after January 1, 2018. However, this procedure envisages the possibility to agree, with the other Member States concerned, the inclusion of income obtained in tax years prior to January 1, 2018.

Accordingly, the mechanism of a double procedure is preserved: mutual agreement and dispute resolution, which was already present in the European Arbitration Convention. However, new features are introduced in terms of the regulation of time limits and subsidiary action mechanisms aimed at avoiding delays or the inapplicability of decisions.

The most significant developments can be grouped as follows:

• Extension of the scope of action, including the mechanisms referred to in Council Directive (EU) 2017/1852 for the resolution of the disputes with other EU Member States arising from international conventions and tax treaties that endorse the elimination of double taxation of income and, where appropriate, capital. In other words, the scope is not limited to disputes within EU Member States over transfer pricing and the attribution of profits to permanent establishments (as in the European Arbitration Convention).
• Reduction of administrative burdens for the taxpayers and businesses.
• Limitation of the duration of dispute resolution procedures.
• Substantial alteration to the regulatory regime, including its development and possibilities of prosecution, as a consequence of the legal formula utilized (i.e. directive). Given that the directive constitutes derivative law and forms part of the Community acquis, these matters are subject to the jurisdiction of the Court of Justice of the EU.

In the procedural framework provided in the Council Directive (EU) 2017/1852 and set out in Title IV, it is worth highlighting the possibility of referral to an Advisory Committee. This option can be used not only for the resolution of the case (subject of the proceedings), but also for the admission or rejection of the initiation of proceedings.

On the other hand, the Title also discusses the functions of the Central Economic-Administrative Court in relation to the constitution and functioning of the above-mentioned Advisory Committee. In practice, the possibility of appeal to national courts is expected to result in a more efficient procedure.

Finally, it regulates the possibility of the competent authority for mutual agreement procedures to agree with the competent authorities of the other Member States concerned, on the constitution of an Alternative Resolution Committee in accordance with Article 10 of Council Directive (EU) 2017/1852.

In sum, the Royal Decree 399/2021 highlight the efforts being made to provide taxpayers in Spain with alternatives for resolving tax disputes between Member States more quickly and effectively, thereby harmonizing the framework for the resolution of mutual agreement procedures and strengthening legal certainty in cross-border transactions within the EU.