The European Commission has proposed a new legislative framework for the harmonization of transfer pricing rules within the European Union, which would be implemented by all member states by the end of 2025 and effectively applied from 1 January 2026. This draft directive comes as response to the current challenges posed by the lack of a common system at EU level, which leads to problems such as profit shifting and tax avoidance, litigation and double taxation, as well as high compliance costs for companies.

Transfer pricing, essential in transactions between companies belonging to the same group, is currently regulated differently in Member States, leading to divergent interpretations and uneven practices. Although, in principle, the approach at the level of the member states is a common one, especially regarding the respect of the principle of full competition, there are several elements, rules or definitions that differ substantially. These differences generate consequences related to profit shifting and tax avoidance, litigation and double taxation, but also high compliance costs for companies operating in multiple tax jurisdictions, as they must make consistent efforts to comply with the specifics, criteria and rules local taxes.

According to a press release issued by the European Commission, aspects such as the definitions of “affiliated persons” and the notion of “control” differ fundamentally between member states, or these are essential conditions for the application of transfer pricing legislation.

The proposal of the European Commission (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2023%3A0529%3AFIN) aims precisely at the harmonization of transfer pricing rules in the EU, incorporating the principle of market and key transfer pricing rules in Community law to ensure a common approach to concepts across Member States. The purpose of the new regulation is to increase tax certainty and reduce the risk of litigation or double taxation, while also limiting the opportunities for aggressive tax planning by companies.

The new regulatory framework, which would include both general rules and the principle organization of the field of transfer pricing, as well as specific application rules, valid at the European level, will also contribute to simplifying tax compliance procedures for companies.

Thus, the main two objectives proposed by the future directive aim, on the one hand, to establish a framework of mandatory common rules regarding certain aspects related to transfer pricing within the European Union (by standardizing aspects such as: the definition of affiliated persons, adjustments in mirror that can be made by the member states under certain conditions, year-end compensatory adjustments and the conditions in which they can be made, transfer pricing methods, as well as the rule of the most suitable analysis method and comparability analyses), and on the other, clarifying the role and status of the OECD Transfer Pricing Guidelines.

A key aspect of the proposal is the introduction of a standardized mechanism for pricing transactions between related entities of a multinational group. This will facilitate the application of the arm’s length principle, which requires that transactions between related entities of a multinational group be valued in the same way as transactions between third parties in comparable circumstances.

This draft directive aims to harmonize and simplify the tax rules for companies operating cross-border within the bloc, being complementary to other recent initiatives of the European Commission, such as the proposal on the taxation of large groups of companies in the EU with the minimum tax of 15%.

The BEFIT Directive (https://taxation-customs.ec.europa.eu/taxation-1/corporate-taxation/business-europe-framework-income-taxation-befit_en), also in the works in Brussels, proposes a unique set of rules for determining the tax base of groups of companies. Through this new framework proposed by the European Commission, all member companies of a group would calculate their tax base according to a common set of tax adjustments applied to their accounting financial statements. The tax bases of all group members will be aggregated into a single tax base, allowing for cross-border offsetting of losses and providing increased tax certainty in transfer pricing compliance. The rules will be binding on groups that operate in the EU and have combined annual revenues of at least €750 million. They will also apply to companies based outside the EU, provided their EU members generate combined annual revenues of at least €50 million. Smaller groups will be able to opt out of these rules if they wish, which is particularly useful for SMEs operating across borders. The new system will also include a rule for the transitional allocation of the aggregate tax base, which assumes that each member of the group will have a percentage of the aggregate tax base calculated on the basis of the average taxable results of the last three fiscal years, a rule that will pave the way for a permanent allocation method.

Article published in Business-Mark