Round-up of the latest EU Transfer Pricing updates

On 6 March 2024, the European Parliament Research Service released a briefing providing an update on the European Union progress on ‘Harmonising transfer pricing rules within the EU’. The EU commission’s objective is to establish a common approach regarding TP at EU level by defining a number of key TP principles and enshrining them into EU law. We have summarised below all you need to know about the proposed new EU TP Legislation.

Firstly, we look the key issues that were to be addressed:

• There is no common binding TP regulation at EU level, rather the OECD TP guidelines are non-binding and recommendatory in nature;
• Though all EU Member States are members of the OECD, it is not always clear from their national legislation whether a Member State is following the latest version of the OECD Guidelines or whether they follow the Guidelines as interpreted at a specific point in time;
• Clarity on related party definition as the control thresholds vary significantly between EU Member States. For example in Germany a company is considered to be an ‘associated entity’ to another party if the company holds a stake of at least 25% in the other party (voting rights, company assets, etc.). In Greece, this level is set at a stake of at least 33% while it is at least 50% in Finland;
• Solving TP disputes requires a lot of time and effort for both the business and the tax authorities involved.

Next, we look at what was actually in the Proposal:

• The proposal put forward a series of definitions covering key TP concepts (Article 3) to be brought under EU law to streamline these definitions with those of the OECD Guidelines;
• It lays down a common definition of ‘associated enterprises’ in Article 5 i.e. 25% shareholding threshold or having ‘significant influence’ over the business, above which companies would be deemed to be associated entities;
• It establishes the five recognised OECD transfer pricing methods in EU law under Article 9(1);
• It envisages to achieve a common approach to TP documentation requirements through EU-wide templates, harmonised linguistic requirements, etc;
• It establishes that an arm’s length range should be determined using the 25% to 75% interquartile range of the results of the uncontrolled comparables, and states that arm’s length results that fall outside that interquartile range should be subject to an adjustment by Member States;
• A key provision is the introduction of a new ‘fast-track procedure’ through which Member States can perform the corresponding adjustment within 180 days to replace the lengthy MAP process;
• It sets out common rules as to when and how both corresponding adjustments (Article 6) and compensating adjustments (Article 7) should be performed.

Good news in general in terms of getting greater clarity, and our conclusion is that some of the proposed EU rules would be stricter than the OECD’s TP Guidelines, and that there are a few differences between OECD TP Guidelines and EU’s proposed directives, for example the proposed control threshold of 25% would bring many companies under TP law.  In terms of next steps, the proposal is subject to the special legislative procedure, requiring unanimous support in the Council, following consultation of the European Parliament and the European Economic and Social Committee.

Rules are getting stricter but at least it’s on a consistent basis! It’s a good move towards tax certainty but there is a long road ahead. Contact us to discuss any matters with respect to your EU transfer Pricing Headaches.