Company taxation: The European Commission proposes guidelines to avoid transfer pricing disputes
The EU Commission has adopted a Communication based on the work carried out by the EU Joint Transfer Pricing Forum. The Commission and the Forum consider that Advance Pricing Agreements (APAs) are an appropriate tool to increase legal certainty and to lessen transfer pricing burdens on taxpayers. Therefore the Commission has drafted guidelines for APAs which will make it easier for companies to avoid some of the problems caused by different transfer pricing rules in Member States. Transfer pricing rules aim at ensuring that in cross-border situations related companies allocate the correct tax base to the countries where they trade.
"I am very pleased with the works carried out in cooperation with tax administrations and private sector on transfer pricing issues. The guidelines we propose will facilitate advance agreements between tax administrations and tax payers and therefore increase the legal certainty for taxpayers" said Taxation and Customs Union Commissioner László Kovács. "I now urge Member States to quickly implement in their legislation or administrative rules the recommendations included in the Guidelines ".
APAs are agreements between the tax administrations of EU Member States concerned defining how and where future transactions between related taxpayers established in two or more Member States will be taxed. They may be an effective tool for avoiding disputes between taxpayers and tax administrations, since tax administrations, with the agreement of the companies involved, have agreed in advance a mechanism for calculating how the profits of the companies will be split. All parties gain considerable certainty from this and significant time and resources can be saved.
The Commission therefore is proposing Guidelines for Advance Pricing Agreements within the EU. These APAs Guidelines describe how Member States should conduct the APA procedure and provide guidance for taxpayers involved in the process. The Guidelines set out the framework for the over-all procedure and also provide details of how some specific problems could be resolved. They also provide examples of the necessary time frame and the types of areas which would need to be covered by the APA. Following the Guidelines will result in a quicker and more efficient agreement of the APA and in turn should encourage the use of APAs in the EU, leading to more dispute avoidance and less double taxation.
Background
When associated companies trade across borders, it is not always easy for the companies or tax administrations to determine the prices to be used. Differences between Member States' transfer pricing rules may lead to inconsistencies in the internal market and additional administrative burdens on taxpayers, where the taxpayer may be taxed twice on the same income – so called double taxation. Specifically, double taxation arises from disputes between taxpayers and tax administrations, over what amount of profit should be taxed followed by a dispute between the tax administrations involved over where the tax should be paid. Double taxation is a drain on investment ability and as such is a burden on growth and jobs.
The Commission therefore created in 2002 the EU Joint Transfer Pricing Forum on business taxation in order to reduce the high compliance costs and to eliminate the double taxation that often arises in the case of cross-border inter-group transactions.
The Forum is composed of experts from national tax administrations and the business sector, under an independent Chairman. The mandate of the Forum was extended for two more years at the end of 2006.