Standardization of Transfer Pricing Practices in the European Union

February 7, 2024

Introduction to Transfer Pricing Standardization

Simplifying and harmonizing taxation within the European Union to promote competitiveness and efficiency are the goals of the legislative proposals included in the package called “Framework for Income Taxation or BEFIT” issued by the European Commission on September 12, 2023. This package addresses the following issues: (i) A framework for income tax which seeks to discuss the complexity and high costs faced by multinational companies in their European operations, and (ii) A Directive on Transfer Pricing which proposes the introduction of a common approach in the EU for the application of the arm’s length principle.

Current Challenges in Transfer Pricing

It is important to mention that almost all States, being part of the Organisation for Economic Co-operation and Development, have committed to follow its principles and recommendations; however, even with the existence of a political commitment, the status and role of its Guidelines on transfer pricing currently differ among member states.

Need for Harmonization

On the other hand, as the norms on TP are not harmonized through legislative acts, this is not total even though the member states have national legislation that provides a common approach to basic principles. Then, the fact that each member state has its own judgment to interpret and apply the OECD Guidelines creates “complexity” and unfair competitive conditions for companies.

Transfer Pricing Directive Proposal

The goal of this proposal is to codify the OECD principles and guidelines into the internal laws of the member states, providing clarifications and processes to ensure aligned administration. This would increase tax security for multinational companies in the EU by minimizing the risk of disputes over transfer pricing, double taxation, as well as a reduction of tax evasion through the use of “aggressive tax planning” systems.

Key Aspects of the Transfer Pricing Directive Proposal

Therefore, the proposed Directive is applicable to all taxpayers registered or subject to taxes in a member state in order to ensure that the arm’s length principle and its interpretation in the OECD TP Guidelines become part of the legislation of all member states within the EU, providing: (i) a common definition of related enterprise (ii) a process to apply the corresponding adjustments to cross-border transactions (iii) a framework through which year-end adjustments on associated transactions within the EU are recognized both by the member state where the upward adjustment is made and by the member state where the downward adjustment is made (compensatory adjustments).

Implementation and Timelines

According to the proposal, the Transfer Pricing Directive will be implemented on December 31, 2025, coming into force from January 1, 2026; it should be noted that these deadlines may undergo modifications until its approval and entry into force, either due to political and economic factors that influence the economy of the European Union.