EU TP Directive proposal

On 12 September 2023, the European Commission published a proposal of a Directive on transfer pricing rules in the EU (the TP Directive). If unanimously agreed by Member States, the TP Directive would apply from 1 January 2026.

Below, we summarise the key changes proposed by the TP Directive. 

The TP Directive proposal seeks to harmonise the most important transfer pricing rules and establish common binding rules on specific transfer pricing matters under the framework of the OECD Transfer Pricing Guidelines. 

The most notable changes proposed by the TP Directive are:

• Introduction of a common definition of related parties, based on a 25% threshold to align the rules of countries which currently apply different rules (usually 50%) with the rules applied by the majority of Member States, including Slovakia.

• Determination of the arm’s length range by using the interquartile range instead of allowing other percentile or statistical methods. This harmonisation step would disallow and limit the use of other statistical methods which are currently recognised by the OECD Transfer Pricing Guidelines. 

• If the results of a controlled transaction fall outside the arm’s length range, an adjustment is made to the median, unless it can be documented that another point of the range better determines the arm’s length price, which would represent alignment with the Slovak approach applied as of 2023. 

• Acceptance of the most recent version of the OECD TP Guidelines as an official interpretation of the TP rules which could lead to the resolution of transfer pricing disputes at the European Court of Justice and bring additional binding interpretations as regards transfer pricing.

• Introduction of a fast-track procedure (up to 180 days) for the approval of the corresponding TP adjustments without the need to initiate a Mutual Agreement Procedure (MAP). Nevertheless, a key condition to allow the corresponding adjustment would still be that the Member State which should allow the downward corresponding adjustment agrees that the primary adjustment was consistent with the arm’s length principle, which is usually a bottleneck for all corresponding adjustments. 

• Introduction of conditions under which a compensating (year-end) adjustment can be recognised by taxpayers, i.e. adjustments initiated by the taxpayer if transfer prices need to be adjusted to arrive at an arm’s length result. The conditions are as follows:
  • reasonable efforts were made to achieve an arm’s length price prior to booking the transactions; 
    
  • the year-end adjustment is made symmetrically in the accounts of all parties involved i.e. recognised in the accounts; 
    
  • the same approach is applied consistently over time; 
    
  • the year-end adjustment is made prior to filing the income tax return; 
    
  • an explanation is provided as to why the forecasts do not match the actual results.

• Introduction of the option to perform a downward adjustment, even when a primary adjustment (e.g. additional tax assessment) is not made, given the below conditions are met:
  • the downward adjustment is consistent with the arm’s length principle (in principle and amount);
    
  • an amount equal to the downward adjustment leads to double taxation in the Member State and the other jurisdiction;
    
  • the Member State requested to perform the downward adjustment has communicated to the other jurisdiction its intention to perform a downward adjustment, and provided documentation to evaluate the downward adjustment under the arm’s length principle.

The TP Directive also states that the Commission is empowered to develop and adopt a common TP documentation template, define which taxpayers should comply with these templates, and which periods should be covered to decrease the administration burden in EU.

The Directive also provides for the future possibility of establishing safe harbours to provide taxpayers with a clear view of what tax authorities in the EU will consider to be acceptable in specific transactions such as (a) transfers of intangible assets; (b) the provision of services between associated enterprises; (c) cost contribution arrangements; (d) business restructurings; (e) financial transactions; (f) dealings between the head office and its permanent establishments. Although the above initiative could increase certainty in specific related party transactions within EU, it may also create differences in non-EU related party transactions which will not be harmonised with EU principles.  

The above proposals on harmonising documentation rules and creating EU safe harbours are more forward looking and set out the vision for future changes rather than laying down rules or clarifying details in the current TP Directive.   

We will keep you updated about further developments and changes to the TP Directive, which are to be expected given the requirement for unanimity of Member States.

If you would like to discuss how the proposed changes could affect your business, please contact one of our TP advisors below and we will be happy to provide more details.