EU-Wide Harmonisation of Transfer Pricing Regulations in Sight

Specifically, the EU Commission presented on 12 September 2023 a draft directive for an EU Transfer Pricing Directive as part of a broader concept for the EU-wide harmonisation of the tax base for the corporate taxation of large companies, officially named "Proposal for a Council Directive on Business in Europe: Framework for Income Taxation (BEFIT) and Proposal for a Council Directive on Transfer Pricing".

Although there are already substantial similarities in the transfer pricing regulations of EU member states, as they often align with the OECD Transfer Pricing Guidelines, the OECD recommendations regularly allow for significant discretion and room for interpretation, which can be differently implemented in the national provisions of EU member states and other OECD countries. Compliance with transfer pricing regulations across various EU countries thus leads to considerable administrative effort for multinational corporate groups and significant risks of double taxation, which can only be eliminated through time-consuming and costly mutual agreement procedures. The EU Commission aims to counteract this within the EU.

Therefore, the draft directive includes, among other things, the following provisions, which unlike the BEFIT proposals are intended not only for large corporate groups, i.e., those with a group turnover of more than 750 million euros, but rather for all internationally operating corporate groups with activities in the EU:

• Mandatory prescription and uniform implementation of the arm's length principle/mandatory application of the OECD Transfer Pricing Guidelines as a benchmark,
• a common definition of related parties, in particular by setting minimum participation of 25% and adopting the so-called Authorized OECD Approach (AOA) for permanent establishments,
• application of the most appropriate transfer pricing method out of the five established OECD methods (no hierarchy of methods),
• standardized regulation for narrowing the range of comparable arm´s length values (interquartile examination),
• creation of a standard process for the swift implementation of corresponding adjustments to eliminate double taxation resulting from transfer pricing corrections ("fast track"),
• harmonisation of procedures for year-end adjustments,
• provision for the EU Commission to propose detailed regulations on specific topics, including EU-wide Safe Harbour Rules (e.g., for routine distribution activities and routine manufacturing activities).

Note: To give EU member states sufficient time to implement the directive into national law, the legislative process for an EU Transfer Pricing Directive would need to proceed swiftly. So far, no negotiation results with the EU member states have been reported, which may be due to the integration into the much more comprehensive BEFIT concept.

From a German perspective, the proposed EU harmonisation is certainly welcome, as a large part of the proposed regulations is already included in a comparable form in the national law. Moreover, a unification of transfer pricing regulations is likely to significantly relieve compliance burdens for corporate groups and their activities within the EU space and reduce the risks of double taxation from transfer pricing corrections.

However, until the EU Transfer Pricing Directive is adopted and implemented in the EU, it is necessary to continue working with the existing regulations of the individual countries and to take them into account in the determination and documentation of transfer prices.

Learn more about the current challenges and expected developments in the transfer pricing area in our webinar "Transfer Prices - Update on Practically Relevant Developments and Innovations" on 19 March 2024.