EU Transfer Pricing Directive: a game changer or more of the same?
Rafał Graczyk
by Rafał Graczyk
Background
On 12 September 2023, the European Commission proposed a new transfer pricing directive as part of a package known as Business in Europe: Framework for Income Taxation, or BEFIT. BEFIT is aimed at: (1) developing a fair distribution of taxing rights between member states, (2) reducing administrative burdens, (3) simplifying the system, and (4) reducing the possibility of tax avoidance.
Objectives
Current transfer pricing regulations vary across EU member states. These differences lead to inconsistencies in interpretation, resulting in disputes between taxpayers and tax authorities, including at the judicial level. The European Commission believes this situation creates uncertainty in tax law, leads to excessive formalities within multinational groups, and increases costs for taxpayers and administrative authorities.
The proposed directive aims to address these issues by:
Incorporating the arm’s length principle into EU law;
Harmonising key transfer pricing rules;
Clarifying the role and status of OECD guidelines; and
Creating the possibility of establishing common binding rules on specific aspects of transfer pricing.
While these objectives seem reasonable enough, some of the proposed solutions may raise a few eyebrows.
Proposal
The European Commission initially proposed to harmonise transfer pricing regulations by:
Introducing:
A common definition of “associated enterprise” within the EU;
Regulations on identifying commercial and financial relations;
A catalogue of transfer pricing methods along with rules for their application;
The obligation to establish the arm’s length range; and
Templates for transfer pricing documentation;
Standardising the rules on corresponding adjustments and introducing a “fast-track” procedure; and
Reinforcing the obligation to scrutinise controlled transactions.
Amendments
In April 2024, the European Parliament suggested amending the proposal to allow for tax adjustments where the initial adjustment was made in another member state or a third country, implementing joint audits and other forms of international cooperation, and improving the arbitration system to promote alternative dispute resolution.
Additionally, the European Parliament proposed reinstating the Joint Transfer Pricing Forum to support the European Commission in any future changes or implementations of transfer pricing regulations at the EU level.
Implementation
The initial plan was for the new regulations to take effect in January 2026, which was later moved up to January 2025, giving EU member states a relatively short amount of time to implement the directive. However, since most member states already had some transfer pricing regulations in place, the deadline seemed feasible. Although the current proposal may not offer groundbreaking solutions, the sheer number of minor changes suggests we will have our work cut out to prepare for its implementation.
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New to the firm, Rafał specialises in tax issues in real estate, energy, and manufacturing.Contact Rafał.
