Harmonizing TP Rules

The EU has been working towards harmonizing TP rules across member states to ensure a level playing field. In September 2023, the European Commission proposed a directive to incorporate the arm’s length principle and key TP rules into the EU legal framework. This proposal aims to increase tax certainty for multinational enterprise groups within the EU, mitigate the risk of litigation related to TP arrangements, and reduce the risks of double taxation.

Dispute Resolution and TP Controversies in the EU

Disputes related to TP are common and often arise between tax authorities and businesses. These disputes typically involve tax authorities checking the ‘arm’s length’ nature of the TP applied between different entities of a multinational business. The EU Arbitration Convention establishes a procedure to resolve disputes where double taxation occurs between enterprises of different Member States. New rules on tax dispute resolution have been in place since 1 July 2019, ensuring that businesses and citizens can resolve disputes related to the interpretation and application of tax treaties more swiftly and effectively.

5 Important TP Cases for the EU in the Last 2 Years

Over the last two years, the European Union has seen several significant transfer pricing (TP) cases that have had a considerable impact on the understanding and application of transfer pricing rules within the EU. These cases are crucial for tax professionals, multinational corporations, and policymakers, as they provide insights into the EU’s approach to transfer pricing, a critical aspect of international taxation. Here are five important transfer pricing cases from this period:

• Apple Inc. and Ireland vs. European Commission: 

  This high-profile case involved the European Commission’s decision that Ireland had granted illegal tax benefits to Apple, amounting to €13 billion. The General Court of the European Union annulled this decision, stating that the Commission did not succeed in demonstrating the requisite legal standard that there was an advantage. This case has profound implications for how EU state aid rules are applied to transfer pricing arrangements.

• Fiat Chrysler Finance Europe vs. European Commission:

  Similar to the Apple case, the European Commission found that Luxembourg had granted illegal tax benefits to Fiat Chrysler, which amounted to around €30 million. The General Court upheld the Commission’s decision, contrasting the outcome of the Apple case. This decision emphasizes the need for robust arm’s length principle compliance in intra-group financing.

• Starbucks vs. European Commission:

  The European Commission initially found that the Netherlands had allowed Starbucks to reduce its tax burden illegally through transfer pricing arrangements. However, the General Court annulled this decision, indicating that the Commission did not prove that the agreed-upon transfer pricing arrangements were at odds with the arm’s length principle. This case adds another layer of complexity to how EU member states and multinational companies should approach transfer pricing.

• Amazon EU Sàrl vs. European Commission:

  In this case, the European Commission alleged that Luxembourg had granted undue tax benefits to Amazon worth approximately €250 million. However, the General Court annulled this decision, finding that the Commission did not prove that there was an undue reduction of the tax burden of a European subsidiary of the Amazon group. This case is particularly influential in understanding the application of transfer pricing rules to complex corporate structures.

• Engie Global vs. European Commission:

  The European Commission found that Luxembourg had granted illegal tax benefits to Engie Global, amounting to about €120 million. The General Court’s decision on this case is particularly important for understanding how hybrid financing arrangements are treated under EU state aid rules and transfer pricing laws.

These cases highlight the complexities and evolving nature of transfer pricing within the EU. They underscore the importance of compliance with the arm’s length principle and the intricate interplay between national tax laws and EU regulations. The outcomes of these cases continue to shape the landscape of transfer pricing in the EU and have significant implications for multinational enterprises operating across Europe.

Latest TP Developments in the EU

In September 2023, the European Commission proposed a directive on TP as part of its Business in Europe: Framework for Income Taxation (BEFIT) package. This proposal aims to harmonize TP rules within the EU, requiring member states to apply the same standards. The directive ensures that the arm’s-length principle and its interpretation in the OECD Transfer Pricing Guidelines (2022) become part of the legislation of all EU Member States.

Arms Length Principle

The arm’s length principle is a key aspect of TP rules. It requires that transactions between associated enterprises should be priced in the same way as comparable transactions with unrelated parties. The European Commission’s proposed directive aims to clarify the role and status of the OECD TP guidelines across the EU and establish common binding rules on specific aspects of TP.

Permanent Establishments

The proposed directive would apply to all companies resident in an EU member state, and to permanent establishments located within the EU.

Compliance

Compliance with TP rules and maintaining proper documentation is crucial to avoid disputes and double taxation. The European Commission’s proposed directive aims to increase tax certainty for multinational enterprise groups within the EU and mitigate the risk of litigation related to TP arrangements.

Base Erosion and Profit Shifting (BEPS) 

The resolution of international tax disputes, including those related to BEPS, is an important element of the OECD/G20 BEPS Project. The EU Arbitration Convention has been an important instrument in resolving these disputes.

TP Policy Development

The European Commission’s proposed directive aims to harmonize TP rules within the EU, requiring member states to apply the same standards. This is a significant development in TP policy within the EU.

Transfer Pricing Education and Training

Dr Erasmus, as the head of academics at the I/I/T/F Academy of Tax Law, emphasizes the importance of education and training in TP. He is the lead lecturer on the 3 postgraduate programmes (PG-Certificate, PG-Diploma and Masters – MSc) in Transfer Pricing offered by the I/I/T/F Academy of Tax Law, as validated by Middlesex University, London.  Click here to view the programmes.

Why should you engage with Prof Dr Erasmus and his team?

The EU Transfer Pricing Guide is meant to give you a quick overview of TP issues in the EU.  If you require an in-depth analysis for your organisation Prof Dr Daniel N Erasmus and his team at Tax Risk Management (TRM™) have a proven track record of over 30 years in international cross-border tax matters, including TP disputes. Their expertise spans complex domestic and international issues, with a particular emphasis on TP issues. They have successfully represented multinational corporations in various tax disputes in court, including those related to TP, in countries around the world.

Conducting a TP Trial

Dr Erasmus’s new book, “Conducting a TP Trial,” is a valuable resource for anyone involved in TP. Drawing from his experiences in preparing for and arguing at numerous TP trials, Dr Erasmus provides a practical guide to navigating the complex world of TP trials. The book is a testament to his expertise and commitment to sharing his knowledge with others in the field.

In the ever-evolving landscape of TP, organisations must stay ahead of the curve. Engaging with Prof Dr Daniel N Erasmus and his team can help organisations effectively manage their TP policies, mitigate TP disputes, and navigate the complexities of TP trials. Their expertise, coupled with their successful track record, makes them the ideal choice for organisations seeking to ensure compliance with TP regulations and avoid costly disputes.