Transfer pricing has long been seen as a frequently abused tool for companies, especially multinationals, to reduce their tax liability. But what is it? And how does the EU plan to tackle inconsistencies at national level in the EU? Find out from the interview below with Marc Clercx, Lukas Seemann and Mauro Faggion, the experts in charge of defining the new legislation proposed by the European Commission back in September.
Q: Let’s start with the basics: What is transfer pricing?
Marc: Transfer pricing is a rule that was designed in international taxation to establish which part of the income within a multinational enterprise needs to be allocated between two companies in the same group if they have a transaction between them. The rule, in general, is that they need to act as if they were third parties in order to establish the third-party price. That is not always very easy, and therefore the OECD has developed a whole set of guidelines on how to establish this price.
Q: And what are the problems with transfer pricing in general?
Mauro: I think the problems are three-fold. Because transfer pricing it is not an exact science, it is sometimes exploited for tax avoidance. Some multinationals manipulate the transfer price in order to allocate profit where it is more convenient. At the same time, we should not forget that transfer pricing is also a source of double taxation and litigation.
It's a problem also from this perspective, because even if you want to be compliant with the transfer pricing rules, sometimes you don't know how to be. So, businesses and Member States spend a lot of time and resources in solving double taxation issues.
Q: What did the Commission propose to solve these problems?
Lukas: I would say the proposal is based on four main building blocks, the first one being the introduction of the arm’s length principle, which is the cornerstone principle of transfer pricing. This is basically saying that one needs to price the transactions as if the companies were independent from each other.
The second building block is that we wanted to introduce a set of common rules which we believe are the core rules that one needs to apply every time a company performs a transfer pricing analysis, which are, for example, how to identify the commercial or financial relations as well as which transfer pricing method to apply.
Then the third big building block is consistency with the OECD transfer pricing guidelines, where we want to ensure that we are using the OECD transfer pricing guidelines as an interpretive tool to apply our core rules across the EU.
And then our fourth building block revolves around the further simplification we envisage. We will do this through delegated acts that further standardise transfer pricing documentation in the Union and through Council implementing acts, where we will provide further rules on specific transactions or dealings in certain topics of transfer pricing.
Q: How has this proposal been received so far, both at Member State level and among businesses?
Marc: I think overall businesses have shown positive attitude to our proposal. They see the merits of reaching a common understanding on how to apply the arm’s length principle across the EU.
Member States have raised questions on what the impact will be for them. So we still have to do a bit of work to clarify what the impact will be for tax administrations.
Lukas: This proposal could be of great help to taxpayers and tax administrations alike, in the sense that they could rely on simplification, but also on tax certainty.
Q: Do we have any statistics on how this proposal will help businesses in practice?
Marc: We do, we have numbers on the number of disputes. At the moment, there are more than 2,300 disputes outstanding and we expect this number to grow. So that is an enormous number of disputes linked to transfer pricing.
We know that the resolution of these disputes can be extremely burdensome and costly, because also they cover multiple years on average. These resolution procedures could last for between five to 10 years.
Lukas: I would also add that, for the Council Implementing Act, we envisage, amongst other things, safe harbours that we believe can also reduce the compliance costs for businesses across the Union, because it will give them more certainty for their transfer pricing analysis.
Q: So what are the next steps now?
Mauro: Next we will further discuss the proposal with Member States. Following the Spanish Presidency, we’ll have the Belgian Presidency in the first half of 2024, and we look forward to collaborating with Belgium to bring forward this proposal.
Marc: Indeed, we will conduct consultations and bilaterals with Member States, but we will also continue to discuss and reach out to business organisations to hear their views about the proposal.
And then hopefully we will continue, in the beginning of next year in Council, and see how we can take in all the feedback that we received and incorporate it into that discussion.
Details
- Publication date
- 10 November 2023
- Author
- Directorate-General for Taxation and Customs Union