This initiative acknowledges the discretionary interpretations and implementations of the principle-based OECD Transfer Pricing Guidelines by Member States, resulting in tax uncertainty, escalated compliance costs, legal disputes, and associated fees. Together, these constitute a high risk for double and over-taxation for cross-border businesses and, therefore, act as a barrier within the Single Market. Accordingly, the TP Proposal aims to harmonize transfer pricing rules across EU Member States by incorporating the arm’s length principle into EU law. The context for the TP proposal can be better understood when also reading the proposal for Corporate Income Taxation.
What does ''the TP Proposal'' entail?
Key highlights of the Proposal at a broad level include:
Standard definition of “associated enterprises”
By adhering to 25% ownership, right to profit and/or voting rights, the Proposal effectively imposes the broadest definition found within the EU on all Member States going forward. This would likely increase the pool of taxpayers required to adhere to transfer pricing compliance.
Cumulative conditions for Compensating Adjustments
The Proposal introduces five cumulative conditions that would have to be met by taxpayers to be able to make year-end adjustments to profits, with reference to transfer pricing. A positive description of situations in which a taxpayer is entitled to make an adjustment was not previously available in all Member States and thereby these conditions will help provide clarity. However, if these conditions were to become the de facto threshold for all compensating adjustments, it may entail an increase in compliance burden.
Inclusion of Industry Analysis
The Proposal introduces a common requirement to prepare a high-level industry analysis to identify commercial and financial relationships between related parties. From a Dutch perspective, this is currently not a requirement for local file documentation. As such, MNEs and transfer pricing practitioners must be mindful of this additional requirement in the future.
Need for harmonization of documentation requirements within the EU
Currently, EU Member States maintain divergent thresholds for formal documentation requirements, imposing an elevated compliance burden on taxpayers. It is worth noting that the Proposal does not address the standardization of documentation requirements at this stage. Nevertheless, given the Proposal's objective of harmonizing transfer pricing rules, it is hoped that the Commission will address this matter in the future.
In conclusion, while we appreciate the aspirations and objectives of the BEFIT transfer pricing proposal, its successful implementation and its effectiveness in fostering a more business-friendly transfer pricing compliance landscape remain subjects of keen interest.