On 12 September 2023, the European Commission proposed new rules to harmonise transfer pricing and ensure a common approach when tackling transfer pricing problems.
Transfer pricing is a mechanism to determine the pricing of transactions between companies that are part of the same group. A significant volume of global trade consists of international transfers of goods, services, capital and intangibles such as intellectual property within a multinational group. These are called intra-group transactions.
According to the current international standards, the OECD's arm's length principle - transactions between related entities of a multinational group - must be priced on the same basis as transactions between third parties under comparable circumstances. This arm's length principle is further elaborated in the OECD's Transfer Pricing Guidelines.
Why harmonise transfer pricing?
In the EU, transfer pricing rules among Member States are currently not harmonised through legislative acts.
All Member States have domestic legislation in line with the arm’s length principle, but its application is not identical. Furthermore, the definition of associated enterprises and the notion of control, which are pre-conditions to applying transfer pricing, differ between Member States.
Certain Member States apply a threshold of 25% shareholding to determine whether the control criterion is met, while others apply a threshold of 50%. The complexity of transfer pricing rules also causes other problems, such as:
- Profit shifting and tax avoidance, as transfer prices can be easily manipulated to shift profit and be used in aggressive tax planning schemes
- Litigation and double taxation, as transfer pricing is more subjective than other areas of taxation and is thus sensitive to disputes, with tax administrations not always sharing a common interpretation
- High compliance costs, resulting from businesses having to determine what prices could be regarded as arm's length, conducting studies, as well as compiling, maintaining and updating related documentation
incorporate the arm's length principle and key transfer pricing rules into EU law
clarify the role and status of OECD Transfer Pricing Guidelines
create the possibility of establishing common binding rules on specific aspects of transfer pricing within the Union
The proposal will increase tax certainty, mitigate the risk of litigation and double taxation and reduce the opportunities for companies to use transfer pricing for aggressive tax planning.