Loyens & Loeff New York regularly posts 'Snippets' on a range of EU tax and legal topics. The topic of this Snippet is the proposed EU Transfer Pricing Directive (TPD). If adopted, the TPD may impact U.S. multinationals with operations in Europe.
In September 2023, the European Commission published a proposal
for the TPD. The TPD seeks to harmonise TP principles and
documentation requirements. As such, it would provide for a uniform
application of the arm's length principle (ALP) within the EU.
To ensure a common EU-wide application of the ALP, the 2022 version
of the OECD TP Guidelines (TPG) would become binding within the
EU.
The draft TPD contains an independent definition of
"associated enterprises" (generally, (i) 25% of vote,
capital or profit interest or (ii) being able to exercise
significant influence). Also, permanent establishments are treated
as an associated enterprise under the draft TPD. As this definition
is broader than the one currently applied by various EU Member
States (MS), the number of transactions that may have to comply
with the TPG increases.
Further, the draft TPD introduces a mechanism that facilitates a
corresponding adjustment in the other MS involved if the tax
authorities in an MS makes a correction based on the ALP. This
mechanism includes a "fast-track" procedure which should
resolve double taxation through a corresponding adjustment that
must be concluded within 180 days. The draft TPD also requires
taxpayers to have sufficient TP documentation, which we expect to
be comparable to current OECD local file requirements. Since not
all MS currently impose OECD-based TP documentation requirements in
the same manner, this could lead to an additional burden for
taxpayers.
Under the draft TPD, the EU Council would be allowed to propose
common binding rules for specific transactions (e.g., transfers of
intangibles or financing transactions) and on the application of
future amendments to the TPG. Though not further specified in the
TPD, the EU Council may decide on such further rules by a qualified
majority vote. This diverges from the unanimous vote required to
adopt EU Directives, see our previous article. The TPD could thus limit the
rights of MS in tax matters, including the interpretation of the
ALP.
Adoption of the draft TPD requires a unanimous vote by MS. There
does not seem sufficient support from MS for the current proposal,
which seems due to, amongst others, the potential limitations of
the rights of MS concerning further rules under the TPD. Therefore,
the envisaged entry into effect by January 2026 seems ambitious and
the current proposal may change. We are closely monitoring the
developments in this regard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
