The European Commission has adopted a ‘communication’ endorsing reports submitted by the EU Joint Transfer Pricing Forum, which includes guidelines on three aspects of the treatment of transfer pricing transactions: risk management in dealing with transfer pricing; the application of secondary adjustments; and the use of compensating adjustments.
On transfer pricing risk management, the communication suggests that, in addition to the legal and practical tools available, tax administrations and taxpayers can make use of special tools including exchange of information (the EU Directive on Administrative Cooperation), common working procedures for audits, a common documentation standard and the dispute resolution mechanism under the Arbitration Convention.
The communication states that transfer pricing legislation sometimes requires ‘secondary transactions’ in order to make the actual allocation of profits consistent with the original transfer pricing adjustment. The secondary transaction may have tax consequences and result in a ‘secondary adjustment’. The communication recommends characterising secondary adjustments as constructive dividends or constructive capital distributions under the Parent Subsidiary Directive.
These are transfer pricing adjustments ‘in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer’s opinion, an arm’s length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises’. The communication suggests that such adjustments should be accepted by member states, provided that certain conditions are fulfilled.
The European Commission has adopted a ‘communication’ endorsing reports submitted by the EU Joint Transfer Pricing Forum, which includes guidelines on three aspects of the treatment of transfer pricing transactions: risk management in dealing with transfer pricing; the application of secondary adjustments; and the use of compensating adjustments.
On transfer pricing risk management, the communication suggests that, in addition to the legal and practical tools available, tax administrations and taxpayers can make use of special tools including exchange of information (the EU Directive on Administrative Cooperation), common working procedures for audits, a common documentation standard and the dispute resolution mechanism under the Arbitration Convention.
The communication states that transfer pricing legislation sometimes requires ‘secondary transactions’ in order to make the actual allocation of profits consistent with the original transfer pricing adjustment. The secondary transaction may have tax consequences and result in a ‘secondary adjustment’. The communication recommends characterising secondary adjustments as constructive dividends or constructive capital distributions under the Parent Subsidiary Directive.
These are transfer pricing adjustments ‘in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer’s opinion, an arm’s length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises’. The communication suggests that such adjustments should be accepted by member states, provided that certain conditions are fulfilled.
