This article explains the possibilities of resolving tax disputes on applying international conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital and avoidance of double taxation.
About the taxation of income derived from foreign states
Basis for tax treaty related disputes
Making a MAP request
Time limits for submitting a MAP request
Minimum information required in a MAP request
Stages of the MAP procedure
Implementation of the agreement between competent authorities
Estonia has concluded bilateral conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital (tax treaties) with many states.
Social security taxes and payments and the avoidance of double taxation in the European Economic Area are regulated by the EU regulation (Council Regulation (EC) No 1408/71) and are not covered by tax treaties.
In case an Estonian resident finds that the tax treaty was not followed correctly when his/her income was taxed, he/she can submit a request to the state of residency for clarifying the circumstances and for application of the tax treaty according to the mutual agreement article.
Taxation in a foreign state cannot be avoided by explaining that taxes have already been paid in Estonia when the legislation of the other state and the tax treaty give the right of taxation to this foreign state. A person cannot choose in which state he/she wishes to pay taxes.
Taxation in a foreign state may be allowed in case Estonia has concluded a tax treaty with another state.
When it comes to international taxation, in most states the origin of income, occurrence of business activity and the actual presence of the person in another state have decisive importance. The citizenship of a natural person or the place of establishment of a legal person are not as important in taxation as is usually thought. In case the source of income is in a foreign state or the person stays in a foreign state for the purpose of doing business or working long enough, income tax liability also arises in this foreign state.
Specific taxation of certain income is based on the tax legislation of a certain state and the tax treaty, which limits the taxation of an Estonian resident’s income in this other contracting state to avoid double taxation, according to the rules prescribed in the tax treaty.
Avoidance of double taxation does not mean that a person is automatically released from the declaration obligation in one or other state.
The fact, that there is a declaration obligation established to a non-resident in a foreign state, does not automatically mean the breach of a tax treaty. It may happen, that the same income has to be declared in several states. A tax resident has to declare his/her income in Estonia even if income tax has been paid on the same income in a foreign state. Only income, which is exempt from taxation according to the Income Tax Act and on which there is no individual declaration obligation established by legislation, may be left undeclared in Estonia (for example, daily allowance of a business trip). Tax authorities of many foreign states also expect non-residents to declare taxes.
All states do not apply tax treaties automatically at the moment of making a payment, declaring or collecting advanced payments of income tax. Every state has the right to establish suitable formal requirements for application of tax treaties. In Estonia, for example, a non-resident has to submit a certificate of residency confirmed by the tax authority of the state of residency in order to use the tax exemptions and incentives arising from tax treaties. There are states, which firstly apply their own tax legislation and incentives of tax treaties are applied later, when the beneficiary has submitted a request for application of a tax treaty with other necessary certification according to which the overpayment is refunded. There also may be other methods of calculating tax incentives. Until these formal requirements are not fulfilled, it is not usually possible to talk about non-application of a tax treaty.
We recommend the taxpayer to ask for precise information on procedures for application of a tax treaty from the tax authority of the foreign state before filing a request for mutual agreement procedure assistance.
Tax treaties affect the calculation of income tax of an Estonian resident in a foreign state. If income tax has been calculated and paid in a higher amount in a foreign state than the tax treaty allows, then this is considered non-application of the tax treaty. Such overpaid income tax is refundable to the Estonian resident by the foreign state.
Another matter is, when the requirements for applying a tax treaty are disproportionate compared to incentives, and lead to non-application of tax treaty. In this case, disputes may be justified.
Still in those cases, double taxation can be avoided. Estonia as a state of residence takes non-refundable income tax already paid in a foreign state, which is in accordance with the tax treaty, into account in calculating the Estonian tax obligation or depending on the situation, exempts income, which is already taxed with final non-refundable income tax in a foreign state, from taxation in Estonia.
A person the foreign tax authority has begun to recover tax arrears from, can appeal a document on which the claim is based on only in the state the foreign request was sent by. For example, when a person worked in Norway and did not pay taxes there and the Norwegian tax authority sent a request for collection of taxes to the Estonian Tax and Customs Board, based on which the tax authority began recovery, the person may dispute the document in Norway, not in Estonia. Although, it is possible to dispute non-application of the tax treaty with the help of the Estonian tax authority.
The tax treaties also state that the avoidance of final double taxation has to be ensured by the state of residency. Therefore, in case Estonia is a person’s state of residency, Estonia has to ensure the avoidance of double taxation. If Estonia has concluded a tax treaty with a certain foreign state, then the means of avoiding double taxation are greater, although the respective provisions also exist in the Income Tax Act.
If a tax treaty has not been concluded, then only the foreign state’s legislation is applied to tax an Estonian resident’s income in the foreign state. The Estonian resident is obliged to declare and pay income tax in Estonia on all his/her worldwide income. The avoidance of double taxation is ensured by Estonian Income Tax Act (in case there is no tax treaty concluded between Estonia and this other state).
The Estonian tax authority cannot refund taxes paid in a foreign state or exempt Estonian residents from foreign tax liabilities.
Estonian tax authority’s participation in negotiations may achieve a situation where the foreign tax authority is obliged to refund overpaid income tax to the Estonian resident tax payer. It is possible that the tax calculation in the state of residency (Estonia) also has to be changed because of the foreign recalculation of taxes and additional tax amount will be due in Estonia. In Estonia, only the final foreign income tax amount is taken into account in the Estonian income tax calculation, according to the taxation rates or rights agreed in the tax treaty.
In opposite situation, where income tax was imposed on the same income according to foreign state’s tax recalculation, then Estonia as the state of residency is obliged to ensure avoidance of double taxation and income tax overpaid in Estonia is refunded to the tax payer.
In case of questions or doubts, whether the taxation of income derived from a contracting state corresponds to the tax treaty, it is always possible to request explanation from the Estonian Tax and Customs Board. It is certainly necessary to also try to communicate with the foreign tax authority for explanations.
In case routine activities described above have been done and requirements are fulfilled for application of the tax treaty and the applicant finds the taxation of income not to be in accordance with the tax treaty, then according to the mutual agreement article of the tax treaty, the income receiver has the right to submit a request to the state of residency for bringing taxation into conformity with the tax treaty.
Examples on disputes arising from the application of the tax treaty
Estonia and the other contracting state both determine a person to be the resident of their state according to the tax treaty, because it is not possible to identify the state which the person has a stronger connection to. Dual residency can be avoided as a result of negotiations between the contracting states (article 4, subsection 2 of the tax treaty).
A foreign state has withheld income tax in a higher rate than prescribed in the tax treaty for certain income types (for example, articles 10 to 12 of the tax treaty) and the overpaid income tax is not refunded after the formal requirements necessary for application of the tax treaty have been fulfilled.
The other contracting state taxes Estonian resident’s income, although, this state does not have the right to do so according to the tax treaty (for example, there was no permanent establishment in another state, articles 5 and 7 of the tax treaty).
Different states may interpret tax treaties differently. There have been misunderstandings with definitions or determining income type.
- Other occasions, which cause double taxation, which are in conflict with the tax treaty.
Taxpayers may request mutual agreement procedure (MAP) assistance under the terms of the relevant tax treaty and/or the EU Arbitration Convention (European Union Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, 90/463/EEC) in order to resolve international tax disputes. A MAP request can be made when a person considers that actions of one or both countries’ tax administrations result or will result in taxation not in accordance with the relevant tax treaty.
If the request appears to be justified, the Estonian tax authority will first attempt to resolve the matter unilaterally. If Estonian tax authority is not itself able to arrive at a satisfactory solution to avoid double taxation in accordance with the provisions of the tax treaty, it will contact the other jurisdiction to set in motion the bilateral stage of the MAP process.
Most of Estonian tax treaties require that the taxpayer approaches the competent authority of their country of residence to present the case. Some treaties allow taxpayers to approach the competent authority of either jurisdiction.
Taxpayers should consult the relevant tax treaty when making a MAP request.
MAP requests made on the basis of the EU Arbitration Convention should be submitted to the competent authorities of both jurisdictions at the same time.
MAP is also available in cases of:
bona fide foreign-initiated self-adjustments
multi-year resolution of recurring issues through MAP
transfer pricing disputes (including both under the provisions of tax treaty or/and EU Arbitration Convention)
advance pricing agreements (APA, including roll-back)
application of anti-abuse provisions (Access to MAP is given in cases concerning whether the conditions for the application of a treaty anti-abuse provision have been met or whether the application of a domestic law anti-abuse provision is in conflict with the provisions of a treaty.)
domestic judicial remedies, although decisions of courts are binding to the result. It is recommended that taxpayer makes a protective request to stay within the time limits of both instruments and asks the competent authority not to proceed before the other party has terminated.
In order to request MAP assistance, a taxpayer must submit the MAP request in writing, providing the required information as specified below, of the action that has resulted or will result in taxation not in accordance with the relevant tax treaty and/or the EU Arbitration Convention.
Suspension of tax collection, issues of interest and penalties may be discussed during MAP.
In order to make a MAP request a taxpayer should contact the Estonian Tax and Customs Board:
Estonian Tax and Customs Board
MAP requests regarding general tax treaty interpretation issues may be addressed also to:
Ministry of Finance of Estonia
Tax Policy Department
The MAP request must be submitted within the time limit specified in the applicable tax treaty and/or the time limit specified in Article 6 of the EU Arbitration Convention.
It is important to submit the MAP request within the deadline determined by the relevant tax treaty. Therefore, in most cases the request has to be submitted within 3 (three) years from the first notification of the action resulting in taxation not in accordance with the provisions of the tax treaty (paragraph 1 of the mutual agreement article of the tax treaty).
Where taxpayers request a MAP assistance under the EU Arbitration Convention, article 6 (1) provides that a MAP request must be presented within three years from the first notification of the action which results or is likely to result in double taxation.
Where the time limit specified in a tax treaty and/or EU Arbitration Convention has not been met, a request for MAP assistance will not be accepted.
There is no required form for presentation of the MAP request. Taxpayer must submit sufficient information to enable Estonian tax authority to fully assess the request of MAP.
If an Estonian resident has made a request indicated in the mutual agreement article of the tax treaty, the Estonian tax authority will determine according to facts indicated in the request, whether the objection raised in the MAP request is justified. Therefore, the tax payer has to include all evidence and sufficient explanations in the request.
The request for MAP (mutual agreement procedure) should include:
identification data (name, address, tax registration code) of taxpayer involved and of a related taxpayer (if applicable);
name of the foreign country;
explanation of the exact situation details of the relevant facts and circumstances of the case copies of any tax assessment notices, tax audit reports or equivalent documents leading to the alleged double taxation;
reference to the provision of the tax treaty which the taxpayer regards not being correctly applied;
explanation, on how this affects the taxation of related persons in the other contracting state, if it depends on the non-application of the tax treaty;
description on what has been done so far in order to apply the tax treaty;
description on the arguments of the other contracting state on not applying the tax treaty, details of any appeals and litigations initiated by the taxpayer or other parties to the relevant transactions;
tax payer’s opinion and suggestions on how to solve the situation;
whether the request was also submitted to the competent authority of the foreign country;
whether the issue(s) involved were dealt with previously.
The taxpayer must also undertake to respond as completely and quickly as possible to requests by the tax authority for further information. Responses to requests for additional information should be complete and submitted within the time stipulated in the request for such information or documentation (usually 30 calendar days). If the data submitted with the request is not sufficient, tax authority may be unable to resolve disputes.
While a MAP request will be regarded as presented for time limit purposes and where the information set out above has been provided, the Estonian Tax and Customs Boars will not commence the MAP process until a complete request for MAP assistance is received.
In order for a MAP request to be considered complete, taxpayers must provide the relevant information.
The Estonian Tax and Customs Board will notify the taxpayer in writing, where possible, within 30 days of receipt of the taxpayer’s complete MAP request, whether their request has been accepted or rejected.
If the request appears to be justified, tax authority will first attempt to resolve the matter unilaterally. If Estonian tax authority is not itself able to arrive at a satisfactory solution, it will contact the other jurisdiction to set in motion the bilateral stage of the MAP process.
The competent authorities of contracting states will start to negotiate with a view to the avoidance of double taxation.
When the competent authorities of the states have reached an agreement on applying the tax treaty, then the negotiations will be closed and the applicant will be informed on the results.
Where MAP agreement is finalised between relevant competent authorities, the taxpayer is notified within 30 calendar days in writing of the decision and is provided with an explanation of the result.
According to the reached agreement, recalculation of taxation will be done in one or both of the states to ensure correct application of the tax treaty.
If the request appears not to be justified, bilateral stage of MAP procedure will not be started, but tax authority will notify the other competent authority concerned about the MAP request received, which allows the other competent authority to provide its views.
In order to come to an agreement, the competent authorities of contracting states may communicate directly or form a joint committee, if needed (article 25 of the tax treaty).
Taxpayers are usually not involved in the actual MAP discussions between competent authorities, their involvement is limited to presenting its views to both competent authorities and providing the relevant information. However, if participants find it necessary, the applicant may be included in the negotiations.
As MAP proceedings on applying tax treaties include authorities from several states and negotiations are across state borders, time limits valid in Estonia cannot be followed. Respective deadlines and possibilities of other states are equally important.
The time of reaching to an end result depends on the complexity of the case, rules of procedure, the administrative systems and different possibilities and resources of different states. Therefore, the procedure may take time.
However, in the absence of mandatory binding arbitration there is no guarantee that the case will be successfully resolved. MAP agreement might not be reached or the agreement might eliminate double taxation only partially.
Most tax treaties concluded by Estonia do not indicate a time limit for reaching an agreement between competent authorities. In line with OECD BEPS Action 14, the Estonian tax authority is committed seeking to resolve MAP cases within average timeframe of 24 months of the receipt of the MAP request.
A taxpayer will be notified of the result of MAP agreement via a letter from Estonia’s Tax and Customs Board within 30 calendar days after the agreement has been reached. This letter contains information on the result of the MAP discussions and the content of the MAP agreement.
In order to have a MAP agreement implemented, taxpayers need to file an amended tax return reflecting the content of MAP agreement. The period for such filing is 30 calendar days after the date of notification of the MAP agreement. The period for filing may be extended upon reasonable request by the taxpayer. If the taxpayer has not submitted the requested amended tax return within 30 calendar days after the date of notification to him of the MAP agreement, the Estonian Tax and Customs Board will contact the taxpayer. If the taxpayer does not submit such tax return, MAP agreement cannot be implemented.
Based on this amended return, the taxpayer may, when applicable, receive a refund of overpaid taxes.