back to updates & publications

[EU TAX] THE EUROPEAN TRANSFER PRICING DIRECTIVE

– –

The European Union has recently proposed the introduction of a council directive on Transfer Pricing.  The proposed directive would incorporate the arm’s length principle and key transfer pricing rules into the EU legal framework. It is intended to clarify the role and status of the OECD Transfer Pricing Guidelines across the European Union and would create the possibility of establishing common binding transfer pricing rules on specific aspects of transfer pricing. The Directive on transfer pricing is part of the Business in Europe: Framework for Income Taxation (BEFIT) package.

Scope

Article 4 of the proposed directive lays down the general rule on the application of the arm’s length principle by obliging all EU Member States to ensure that, where an enterprise engages in one or more commercial or financial cross-border transactions with an associated enterprise, such enterprise determines the amount of its taxable profits in a manner that is consistent with the arm’s length principle.

Associated Enterprises The directive aims to introduce a common definition of “Associated Enterprise”.

An enterprise will be classified as an associated enterprise if it satisfies one of the following conditions:

  • A person participates in the management of another person by being in a position to exercise a significant influence over the other person.
  • A person participates in the control of another person through a holding that exceeds 25 % of the voting rights.
  • A person participates in the capital of another person through a right of ownership that, directly or indirectly, exceeds 25% of the capital.
  • A person is entitled to 25% or more of the profits of another person.

Transfer pricing methods

Article 9 of the Directive proposes the use of one of the following transfer pricing methods to determine the arm’s length price:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost plus method
  • Transactional net margin method
  • Profit split method.

Other valuation methods

Member States shall still be allowed to use other techniques to arrive at the arm’s length price where:

  • None of the methods mentioned is appropriate or workable in the circumstances of the case; and
  • the selected valuation method or technique is consistent with the arm’s length principle and provides a more reliable estimate of the arm’s length result.

The proposed Directive is expected to regulate the following issues arising in the context of transfer pricing:

  • The most appropriate method rule
  • Identification of commercial or financial transactions
  • Compensation and corresponding adjustments
  • Comparability analysis
  • Transfer pricing documentation
  • Determination of the arm’s length range

FF International provides a vast range of advisory, tax, VAT and compliance services.

For further information, please contact:

Franco Falzon C.P.A. LL.M (Managing Director)

E: franco@ffinternational.com.mt

T: +356 2010 7771 (office)

M: +356 9989 5679 (mobile)

Disclaimer
While FF International Limited (hereinafter referred to as “FFI”) endeavours to ensure that any information published in articles / publications / memos / updates (including any information published on our website) is accurate as at the time of publication, FFI nor any of their respective directors, partners, officers, employees, or agents make any representation or warranty (express or implied) or accept or will accept any responsibility or liability in relation to the accuracy or completeness of the information contained published in our articles / publications / memos / updates (including any information published on our website) or any other written or oral information made available or published on our articles / publications / memos and updates. Any responsibility or liability in respect of any such information or any inaccuracy or omission arising from any article / publication / memo is expressly disclaimed. In particular, but without prejudice to the generality of the foregoing, no representation or warranty is given as to the achievement or reasonableness of any future projections, estimates, prospects or returns published on our articles / publications / memos / updates (including any information published on our website) . The content of the above article / publication / memo / update and any information published on our website is intended to serve solely as general information only and its purpose is not to provide any specific professional advice whether of a financial, legal, tax or other nature. Since it is recommended that business decisions be based only on qualified professional advice, neither FFI nor any related company belonging to FFI nor any of the respective directors, partners, officers, employees, or agents of FFI will be held liable for any damages which might result as a consequence of relying on the information contained within. FFI including any directors, partners, officers, employees, or agents of FFI and / or any entity related to FFI accept no liability whatsoever for the content of this article / publication / memo / update for the consequences of any actions taken on the basis of the information provided. If you have any questions relating to the accuracy and correctness of the above article / publication / memo / updates or any information published on our website you are kindly requested inform us by sending us an email on info@ffinternational.com.mt