Global Daily Tax News, EU Parliament Seeks Rethink Of EC's Transfer Pricing Initiative, (Nov 21, 2023)

The European Parliament is expected to request that the European Commission fundamentally revise its initiative on the harmonization of member states' transfer pricing policies.

The initiative was announced alongside Business in Europe: Framework for Income Taxation, or BEFIT, presented on September 12. The Commission said harmonizing transfer pricing rules within the EU and ensuring a common approach to transfer pricing would increase tax certainty and mitigate the risk of litigation and double taxation. The Directive would also further reduce the opportunities for companies to use transfer pricing for aggressive tax planning purposes, it said.

The BEFIT package is proposed to come into force from July 1, 2028, subject to approval in the Council. The transfer pricing proposal would be effective from January 1, 2026, however.

A draft European Parliament legislative resolution has been released containing amendments proposed to the proposed Council directive on transfer pricing.

Rapporteur Kira Marie Peter-Hansen said the changes to the directive proposed would "simplify the directive and align as closely as possible to the latest OECD Transfer Pricing Guidelines, both to provide certainty to tax payers and Member States."

While welcoming "a stronger future role for the European Commission in seeking a more harmonized approach in the EU on applying the OECD Transfer Pricing Guidelines," she equally called for "coordination amongst Member States ahead of OECD negotiations on the future guidelines and towards third countries."

Noting that member states have already introduced the arm's length principle in their domestic legislation, the draft legislative resolution proposes to bring forward implementation to 2025.

The resolution further raises concerns about "the significant limitations of the arm's length principle and the OECD Transfer Pricing Guidelines."

The explanatory memorandum to the resolution states: "The rapporteur supports the idea of phasing out the application of the arm's length principle and instead introduce group-wide consolidation and formulary apportionment as a means of fairly allocating profits in-between countries and recognizing the operational reality of a multinational company. The rapporteur welcomes the important developments in this direction through the OECD Pillar 1 proposal, also known as the Multilateral Convention, and the European Commission's proposed BEFIT directive. Although the rapporteur recognizes that in the meantime there is a need for a proper and consistent application of the arm's length principle in the EU."

"To this end, the rapporteur has included a sunset clause in this directive. The directive should first cease to apply for those companies in scope of the BEFIT directive, known as the BEFIT groups, as of 2035. Going further, the directive should cease to exist for all multinational groups operating in the EU as of 2040, except for their transactions with third countries."