EU May Allow Pan-European Transfer Pricing Comparability

by Ulrika Lomas, Tax-News.com, Brussels

13 June 2006

The EU Transfer Pricing Forum has accepted as an official submission a Deloitte Touche Tohmatsu (DTT) economic analysis which concluded that pan-European transfer pricing documentation was more reliable in many cases than a country-by-country approach.

The analysis responds to a growing debate over the selection of comparables in using the transactional net margin method. Many practitioners now believe that a pan-European set of comparable companies provides a more reliable measure of an arm’s length result than the use of comparables from only the country where the tested party resides.

Says DTT: 'Deloitte Touche Tohmatsu (DTT) member firms have been working to provide taxpayers with greater certainty in their transfer pricing by helping shape relevant European policy. To this end, DTT member firms presented, and the EU Joint Transfer Pricing Forum (EUJTPF) accepted as an official submission, a detailed economic analysis that studied the reliability of the pan-European approach to transfer pricing documentation and comparables for the most commonly employed transfer pricing method.

'In this study DTT member firms concluded that pan-European documentation based on pan-European comparable companies for this transfer pricing method was more reliable than a country-by-country approach for many fact patterns. A pan-European documentation and comparables approach was recommended when supported by the facts and circumstances.'

The EU Transfer Pricing Forum (JTPF) was formally established by the Commission in June 2002 and consists of one expert from the tax administrations of each Member State plus 10 experts from business. Representatives from applicant countries and the OECD Secretariat attend as observers.

As also reflected in the Council conclusions, the JTPF works on the basis of consensus and is mandated to produce pragmatic, non-legislative solutions within the framework of the OECD Transfer Pricing Guidelines to the practical problems posed by transfer pricing practices in the EU.

The JTPF met for the first time in October 2002 and established a two-year work programme. In December 2004 the Commission extended the JTPF's mandate for another two years (from January 2005 to December 2006).

Based on work by the JTPF, the European Commission on 10 November 2005 adopted a proposal for a Code of Conduct that would standardise the documentation that multinationals must provide to tax authorities on their pricing of cross-border intra-group transactions ('transfer pricing' documentation).

The proposal would reduce significantly the tax complications that companies face when trading with associated enterprises in other Member States. Companies frequently complain about the onerous and divergent documentation obligations with which they have to comply in such cases in the different Member States involved.

The Code would be a political commitment and would not affect Member States' rights and obligations or the respective spheres of competence of the Member States and the EU.

The issues which remain under discussion at the JTPF are "alternative dispute avoidance and resolution procedures" (including Advance Pricing Agreements -APAs- and prior consultation) and interest and penalties relating to transfer pricing adjustments.

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