Transfer Pricing Europe – a walk-through the basics [2022]
article published on 10 January 2022
With boundless attention from global tax authorities and subject-matter media, transfer pricing has become one of the most discussed areas of taxation, mostly due to the high financial and reputational impact usually triggered by a transfer pricing dispute.
With giants such as Facebook and Amazon historically brought into the spotlight for transfer pricing matters, Europe’s tax authorities are on high alert to prevent, identify and correct similar erroneous behavior arising from the pricing mechanisms of intra-group transactions.
Therefore, if you want to expand your business in Europe, or your company is already part of a multinational enterprise and transactions with related (“sister”) companies are inevitable, you should be aware of the fundamental principles, legislation environment and documentation obligations of transfer pricing Europe.
If you are responsible for a company the transfer pricing or even an external tax consultant / lawyer seeking a more comprehensive guidance on the most common transfer pricing issues that you may encounter when dealing with transfer pricing, check out our free guide / eBook below:
Please note that if transfer pricing is a new topic for you, we recommend reading our beginner’s manual first for a comprehensive introduction on the transfer pricing topic.
1. Firstly, how does transfer pricing impact your business?
1.1 The obligation to prepare a transfer pricing documentation file
Related parties have to prepare and present transfer pricing documentation either contemporaneous (especially in case of large taxpayers or large groups) or upon the request of the tax authorities from the resident country.
Even though in some countries there is no specific law providing that taxpayers should prepare transfer pricing documentation (e.g. Bulgaria, United Kingdom), in practice, the tax authorities may request transfer pricing documentation in most of these countries too.
1.2 Potential consequences in case of non-compliance
In the current context of globalization, companies are more willing than ever to expand their business in other territories, but at the same time, keeping in mind that obeying each of the operating jurisdictions’ transfer pricing legislation and regulations is a must – which is no easy task.
Usually, the tax authorities address the non-compliance of a taxpayer by pressing fines, as well as adjusting the transfer prices applied as to match what they believe to be at arm’s length level. These transfer pricing adjustments most often translate to lengthy disputes and difficult resolutions, additional corporate income tax to be paid, as well as penalties and fees.
The penalties for non-compliance with documentation and reporting requirements can be categorized as follows:
a. additional corporate income tax payable;
b. fines for inexistence or incomplete documentation;
c. fines for negligence or gross negligence (generally applied as percentage applied to additional tax base or to the transfer pricing adjustments);
d. late payment interest;
e. late payment penalties;
f. double taxation resulting from not being able to perform corresponding adjustments.
In every case, the penalties can be avoided if proper documentation is prepared and the transfer prices are at arm’s length.
1.3 Overall benefits of transfer pricing
On the other hand, transfer pricing is creating a favorable context for the companies to benefit from group synergies, higher independence from external suppliers and easier access to global markets.
Therefore, it is now easier to understand why transfer pricing Europe has become such a topic of interest for the tax authorities and multinational companies alike – authorities remain vigilant to prevent misapplication of the law, while companies try to successfully navigate through the complex requirements stemming from it.
2. Transfer pricing regulations across Europe
2.1 The OECD Transfer Pricing Guidelines
All transfer pricing Europe regulations stem from and reflect in part or in entirety the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as set forth by the Organization for Economic Co-operation and Development (hereinafter referred as “OECD”).
The purpose of these Guidelines is to establish and explain transfer pricing principles as the OECD member states understand them but are not to be viewed as being of legislation nature, except where directly stated otherwise. One example for such a case in Europe would be Austria.
Even if the fundamental principles of transfer pricing are unified within these Guidelines, the complexity of the business world gave rise to a multitude of transfer pricing regulations and obligations to be applied in each jurisdiction, at the liberty of the statutory authorities, as described in the following.
Entities that are part of the same group of companies are often described in legislation as related parties and transfer pricing principles will apply only to companies abiding to this definition.
The nature of related parties is usually established by the domestic law by reference to a direct or indirect percent of ownership or participation of a company in another company. In Europe, this share of ownership is sitting around a minimum 5.00% (e.g. Bulgaria) to 50% (e.g. Denmark, Sweden).
In addition, some jurisdictions – like Germany, Netherlands or Sweden – added in their domestic legislation mentions about the case of control in / management of another entity, emphasizing that the decision power and stake in the profits can also be taken into account to the definition of related parties.
The various definitions of related parties in EU Member States can be categorized as follows:
a. Effective control de jure or de facto in all the EU countries – in line with the article 9 of the OECD Model Convention with respect to taxes on income and on capital – control is also deemed through individuals in most of the EU Member States;
b. minimum 50% ownership in certain countries (Denmark, Finland, Hungary, Sweden);
c. minimum 25% ownership in certain countries (Austria, Czech Republic, Lithuania, Poland, Germany, Slovakia, Slovenia, Spain);
d. other minimum percentage of ownership (Portugal – 20%, Romania – 24.99%, Greece – 33%, Bulgaria – 5%, Estonia – 10%).
2.3 Transfer pricing Europe documentation file structure
The transfer pricing documentation structure requirements in Europe are comprised of three separate documents:
(i) Master File – providing a macro perspective, with a focus on the group as a whole, comprising information on the categories of intra-group transactions and transfer pricing policies applied;
(ii) Local file – usually focusing on one single entity of the group, providing detailed information about its activity, including proof that all intra-group transactions the entity is a counterparty are at arm’s length;
(iii) Country by Country Report – the aggregated report that includes a breaking down the financial results of the group by jurisdiction, like revenue, taxes paid, capital or employment is known as Country by Country Reporting.
This list of documents to be prepared by the companies is usually referred to as “three-tiered” documentation.
Most of European Union Member States’ tax authorities require annual preparation or even submission of all documents listed, with references to the OECD Guidelines, the European Union’s Directives on the topic and the Code of Conduct on Transfer Pricing Documentation Associated Enterprises in the European Union (EUTPD), published in the Official Journal of the European Union No. C176/1 of 28th of July 2006.
2.4 Transfer pricing filing obligations
A taxpayer can be requested by domestic law:
(i) to prepare the transfer pricing documentation file on an annual basis, usually having as deadline the filing of the corporate income tax return;
(ii) to submit the transfer pricing documentation upon the specific request of the tax authorities, usually within a short time frame;
(iii) to file the transfer pricing documentation with the local tax authorities on a yearly basis (e.g. Denmark, Hungary).
Some transfer pricing Europe tax authorities have also linked the obligation to prepare or submit the transfer pricing documentation based on thresholds on the intra-group transactions amounts or group’s revenues.
Nevertheless, even if a company does not fulfill the thresholds and therefore is not obliged to annually prepare the necessary documentation, it will be found that the generally allotted time to respond to a tax audit team’s request to submit the documentation, 30 days, is insufficient and advance preparation is advised.
2.5 Language of documentation
All European tax authorities will accept the transfer pricing documentation prepared in the local language. There are some jurisdictions that also allow for submission documents prepared in English language, such as Austria, Belgium, Denmark, Finland, France, Hungary, Luxembourg, Netherlands, Spain, Sweden and Norway.
3. Are you prepared for a transfer pricing audit?
As mentioned above, in the case of a transfer pricing audit, the local tax audit teams from each EU Member State may request the transfer pricing documentation as to check whether the pricing applied in the intra-group transactions carried out by the company is considered at arm’s length.
In case the tax audit team does not agree with the company / group approaches from the transfer pricing documentation, the tax authorities may perform transfer pricing adjustments, as well as compute additional corporate income tax, penalties or fines – all which can sum up to substantial amounts, in some cases even paired with reputational effects.
Therefore, it is essential for a company to be aware of, to prevent or to correct, if the case, the main risk factors that can make it vulnerable in dealing with the local tax authorities.
3.1 Transfer pricing exposure to adjustments may be diminished by Advance Pricing Agreements
To avoid any transfer pricing disputes over a transaction of high importance for the company, an Advance Pricing Agreement, in-short APA, can be issued with the tax authority/ties involved.
The process involves providing the tax authorities with all requested documentation on parties involved, the subject transaction, as well as proof of the alignment of the transfer pricing methodology chosen to the arm’s length principle.
Only after the authorities agree with the terms included, the APA is issued and will only have effects over the transaction between the parties as included in the documentation.
The advantages of this instrument are the elimination of potential transfer pricing Europe audits in regards to the respective transaction, thus including the associated transfer pricing adjustments, penalties or fees. Moreover, the taxpayer also incurs cost savings with documenting the transactions covered by the APA, as well as any other proceedings that would stem from potential double taxation disputes.
4. In conclusion
Not preparing for a transfer pricing Europe investigation that may be performed by the tax authorities is a poor strategy that may result in significant tax liabilities for the local subsidiary operating on the European territory.
Preparation in advance can bring a strategic advantage and it would allow for the identification and mitigation of the main risk areas – before the transfer pricing Europe tax authorities show up at the doorstep.
In case you need to start right now to prepare yourself, contact us to show you how we can use our innovative TRUE Master File concept in helping you achieve not only compliance across all the countries in Europe but also simplification of the entire transfer pricing documentation process.
Now that you’re here
ATIPIC Solutions is a transfer pricing specialized company with a culture highly centered around using of the automation in transfer pricing, innovation and efficiency. We work with companies having as ERP of choice SAP, Oracle, Microsoft Dynamics or Scala and we are recognized providers in the World TP rankings.
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