Proposal for a Council Directive on Transfer Pricing

The European Commission published on September 12, 2023, a proposal for a directive on transfer pricing which integrates key transfer pricing principles into EU law with the aim of putting forward certain common approaches for Member States.

This proposal is part of the package known as ‘Business in Europe: Framework for Income Taxation’ (or ‘BEFIT’) which also includes a second separate proposal to lay down a common set of rules for computing the tax base of large groups of companies in the EU.

I. Context

• This Directive applies to taxpayers that are registered in, or subject to tax in one or more Member States, including permanent establishments in one or more Member States.
• Each Member State enjoys large discretion in interpreting and applying the OECD Transfer Pricing Guidelines which gives rise to complexity and an uneven playing field for businesses. For example, domestic legislation of Member States shows differences in the definition of ‘associated enterprises’ and in particular, on the notion of ‘control’ which is normally the pre-condition to apply transfer pricing. Certain Member States apply a threshold of 25% while others apply a threshold of 50% shareholding when it comes to determining whether the control criterion is met. - this will be one of the changes in order to harmonize the TP rules.
• The risk of double taxation and over-taxation for businesses operating cross-border leads to a lack of tax certainty due to possible tax disputes between tax administrations of different Member States in cases where they take different views in relation to the treatment of a specific transaction within their corporate tax system.
• The complexity of the transfer pricing rules and their different implementation in national law of Member States gives rise to a number of other problems, such as: profit shifting and tax avoidance, litigation and double-taxation, high compliance costs.

II. Objective

• General objectives: Increase of tax certainty; the proposal aims at increasing tax certainty by introducing a clearer and more common approach to transfer pricing across the EU.
• Specific objectives:
  • Introducing the Arm’s length principle into EU legislation.
  • Clarifying the role of the OECD Transfer Pricing Guidelines.
  • Ensuring coherent application of the arm’s length principle across the EU.
  • Reduction of double taxation and double non taxation.

III. Specific provisions of the proposal

• The arm’s length principle and possible consequences of applying this principle – the proposal includes: the arm’s length principle*, adjustments (primary adjustments and corresponding adjustments**, voluntary adjustments);
  • (*) the 25% affiliation threshold is proposed for all Member States.
  • (**) the proposal suggests two key measures to handle corresponding adjustments without the need to open a MAP: (i) a “fast-track” procedure to be concluded in 180 days when there is no doubt that the primary adjustment is well founded; or (ii) joint audits or other collaborative approaches for handling cross-border tax matters.
• Core elements which are relevant for applying the arm’s length principle, such as: accurate delineation of the commercial and financial relations, transfer pricing methods, selection of the method (the proposal does not advocate any preference for any TP method), selection of the most appropriate method, comparability analysis, establish the arm’s length range.
• Mechanism for establishing further common rules covering a limited set of subjects that will provide further simplification and tax certainty for taxpayers on the interpretation and application of the arm’s length principle.

IV. Timeline

• Entry into force: The Directive shall enter into force on the twentieth day following its publication in the Official Journal of the European Union.
• Date of implementation: Member States shall adopt and publish the directive by December 31, 2025, at the latest. Those new provisions shall apply starting with January 1, 2026.

V. Results

Having the same rules and implementing a common mechanism, which will ensure the coordination of views of interpretations of the OECD TP Guidelines among Member States.

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