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New international tax dispute resolution mechanisms with the DRM Directive

by Valeria Tempesti | Jul 7, 2021 | Blog

Legislative Decree No. 49 of 10 June 2020, which implemented Directive (EU) 2017/1852 of 10 October 2017 concerning tax dispute resolution mechanisms in the European Union, has now been in force for a year. The Directive – known as the Dispute Resolution Mechanism (DRM) Directive – was intended to create, within the European Union, a more favourable environment for businesses and those engaged in cross-border activity, reducing costs and administrative burdens and, as a result, promoting investment and stimulating growth.

In order to enhance legal certainty in tax matters, the DRM Directive establishes an effective, binding, and mandatory mechanism to resolve disputes between Member States that may arise from the interpretation and application of Double Taxation Agreements and Treaties.

This action was also necessary in the light of the large number of tax disputes existing in Europe: estimates made before the entry into force of the Directive showed numbers of over 2,000 disputes in the Union, 45% of which had been initiated more than two years earlier. There was a clear need to strengthen the instrument of the so-called Mutual Agreement Procedure (MAP), which, although functioning, nevertheless entailed some criticalities, among which the limited scope of application (MAP was in fact applicable only to disputes concerning transfer pricing and the attribution of profits to permanent establishments), the difficult access to the procedure and its uncertain duration.

Such criticalities could only indirectly penalise companies and their development plans, thus implying additional costs, the reprogramming of business plans, the redefinition of investments, or even the suspension of certain business activities.

In this respect, the new mechanism ensures that companies can resolve more quickly and effectively disputes related to tax treaties, in particular those concerning double taxation, which is a significant obstacle for companies as, in addition to generating uncertainty for taxpayers, it can also lead to financial problems.

Let us try to better understand the scope of the DRM Directive.

Double taxation occurs when two or more countries claim the right to tax the same income or profits of a taxpayer. For example, it can occur through a mismatch between the domestic laws of different jurisdictions, or in a divergent interpretation of the same provision of a bilateral tax treaty. Until now, only a multilateral convention was in force which gave the tax authorities the possibility to submit the dispute to arbitration, but the taxpayer could not always have the means to initiate the procedure himself, nor were the tax authorities obliged to reach a final agreement as there were not an official deadline.

The DRM Directive, therefore, introduces the following innovations with a view to overcoming the critical issues highlighted:

  1. the introduction of mechanisms of arbitration (if any) and of the appealing to the competent national courts that can be activated by the taxpayer;
  2. the introduction of an active role of the taxpayer, with wide-ranging powers to intervene in case of inertia of the competent authorities involved, or to counter refusals by the latter to proceed to the subsequent stages of the procedure;
  3. possibility for the taxpayer to protect himself in the appropriate courts, through the establishment of proper procedures to guarantee his rights;
  4. the introduction of a common standard at international level for international tax disputes in the Treaties and Conventions in force.


One of the main novelties: the widening of the subjective and objective scope

Among the many new features of the procedure provided for by the DRM Directive, it is worth mentioning the widening of the subjective and objective scope of application.

With regard to the subjective scope, the DRM Directive is addressed to any natural or legal person, whether or not carrying on a business activity, provided that he is resident for tax purposes in the territory of the State or in another Member State and always provided that the issue concerns a double taxation matter.

In the objective sphere, on the other hand, the proceedings in addition to the  transfer pricing and attribution of profits to permanent establishments issues, also include the following:

  • the contestation of the tax residence of individuals, companies or other foreign entities (phenomena of dual residence and foreign investment);
  • the contestation of concealed permanent establishments of non-resident companies;
  • debts for foreign taxes under a Convention against double taxation in order to benefit from the tax credit under Article 165 Tuir;
  • disputes relating to withholding taxes on cross-border flows (royalties, interest, dividends) of Italian source, pursuant to Conventions against double taxation;
  • bilateral APAs (Advanced Pricing Agreements).




How the dispute settlement mechanism works

The international dispute resolution mechanism consists of the following main steps:

  • taxpayers can initiate a mutual agreement procedure whereby the Member States in question must attempt to resolve the dispute within 2 years;
  • If no solution is reached at the end of this period, the taxpayer may request the establishment of an advisory commission to give an opinion. In the event of non-compliance by Member States, the taxpayer may take legal action before a national court to compel Member States to act. The advisory commission will be composed of 3 independent members appointed by the Member States involved and is required to deliver an opinion within 6 months, which Member States must comply with unless they agree otherwise within 6 months of the opinion;
  • Member States must publish the final decision, which must be communicated to taxpayers. If, once the decision has been taken, it is not implemented by the State, the taxpayer may request its implementation before the national court.



The DRM Directive represents an important step forward in the resolution of international disputes, also in order to overcome the inefficiencies of the previous instruments. The attribution of a broad power of impulse in favour of the taxpayer, which aims at overcoming the inertia of the Administrations involved, and the extension of the subjective and objective scope of application make it easier to achieve the objectives of eliminating double taxation.

Tax Administration should adequately apply the rationale of the EU regulations, supporting an interpretation and application of Legislative Decree 49/2020 that implements it, in such a way as to favour the comparison between international Administrations without denying the rights and expectations of taxpayers.



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