The European Commission’s proposal targets to harmonize Transfer Pricing rules within the European Union and ensure a common approach to Transfer Pricing issues. In this regard, this proposes to implement related regulations by January 1, 2026.
Transfer Pricing for the Commission
Transfer Pricing is a mechanism for pricing transactions between companies of the same group. Under current international standards, intra-group transactions must comply with the Arm’s Length Principle, i.e., related party transactions of a multinational group must be similar to third-party transactions in comparable circumstances.
One of the proposals is to incorporate the Arm’s Length Principle and the key Transfer Pricing rules into EU legislation and create the possibility of establishing common binding rules on specific aspects of Transfer Pricing rules.
Current Transfer Pricing Practices and Issues
Within the European Union, the Transfer Pricing rules are currently not harmonized by legislative acts. Although all Member States have domestic legislation providing for a certain degree of common approach under the Arm’s Length Principle. Some Member States apply a 25% threshold, while others apply a 50% equity stake threshold for determining whether the related party criterion is met.
In addition, other issues arise, such as:
- Profit shifting and tax avoidance, due to the easy manipulation of transfer prices to divert profits, using them in the context of aggressive tax planning plans.
- Litigation and double taxation, given that Transfer Pricing, can be more subjective than other taxation areas and, therefore, is susceptible to disputes, considering that tax administrations do not always agree on a common interpretation.
- High compliance costs arising from the obligation for companies to determine which prices could be considered at Arm’s Length, perform studies, compile, maintain, and update the related documentation.
The proposal will increase tax certainty and mitigate the risk of litigation and double taxation. In addition, it will reduce opportunities for companies to use Transfer Pricing for aggressive tax planning purposes.
Member states should implement the Transfer Pricing rules no later than January 1, 2026.
Source: European Commission