EU Gateway: Transfer Pricing Directive and our observations

22/02/24

This EU Gateway publication with the title “The Transfer Pricing Directive: The Fundamental Changes and Impact on Groups Operating in the EU” provides an overview of the key elements of the proposed Directive on Transfer Pricing and discusses their implications for companies operating in EU Member States, including our observations.

Take a look here at our EU Gateway publication.

What does it mean for you?

The Directive on Transfer Pricing, commonly referred to as the “TP Directive”, has been put forth by the European Commission on 12 September 2023. If adopted, this Directive would incorporate the arm’s length principle into both EU law and the domestic legislation of EU Member States. It aims to standardize important transfer pricing regulations and provide the opportunity to establish common binding rules within the EU on specific transfer pricing matters.

For the TP Directive to be adopted, a consensus is required among all EU Member States. The process ahead is anticipated to be difficult, as early responses to the TP Directive have been varied. Sweden has expressed a negative reaction, while Finland has shown support for the directive.

PwC the Netherlands as your EU Gateway

PwC Netherlands, supported by the robust Knowledge Centre and the ITS/EUDTG network of EU colleagues, endeavors to offer coordinated assistance to non-EU clients in navigating the intricate EU tax and legal landscape. Furthermore, PwC Netherlands assumes a proactive role in apprising clients of significant EU tax law and EU27 domestic developments through the monthly EU Gateway newsletter, thereby establishing itself as the primary point of contact for non-EU clients and colleagues within the EU.

The publication

We have identified five aspects of the TP Directive that, if implemented, will signify a departure from the current state and the international standard set by the OECD TP Guidelines. These changes are expected to have a significant impact on multinational groups operating within EU Member States.

1. Definition of associated enterprises

The TP Directive is designed to ensure that taxable profits from cross-border transactions between associated enterprises are consistent with the arm's length principle. An enterprise is considered associated if it holds at least a 25% share in voting rights, capital, or profits of another company, or if it has a significant influence over the management, control, or profits of that entity. Permanent establishments are also treated as associated enterprises of their parent company.

2. Arm’s length range

The Directive defines the arm's length range as the interquartile range of results from uncontrolled comparables. If a controlled transaction falls outside this range, an adjustment is made to the median unless a different point in the range is justified.

3. Corresponding adjustments

For corresponding adjustments, the Directive formalizes the process for EU Member States to make downward adjustments, with a fast-track procedure to prevent double taxation that aims to resolve taxpayer requests within 180 days.

4. Compensation adjustments

Compensating adjustments are addressed to avoid double taxation and litigation. The TP Directive sets conditions for recognizing these adjustments within the EU.

5. Version of OECD TP guidelines applicable

Finally, the TP Directive aims to align with the latest OECD TP guidelines and allows for the European Commission to propose amendments to maintain consistency with any changes to these guidelines.