Transfer pricing - EU law

Transfer pricing is in certain cases important for determining the customs value of goods. The European Commission has proposed new transfer pricing legislation in September 2023. But what is transfer pricing? Why is new EU legislation needed? The experts responsible for drafting the new legislation provide the answers: Read the full interview. 

What is transfer pricing?

Transfer pricing is a rule that was designed in international taxation to establish which part of the income within a multinational enterprise needs to be allocated between two companies in the same group if they have a transaction between them. The rule, in general, is that they need to act as if they were third parties in order to establish the third-party price. That is not always very easy, and therefore the OECD has developed a whole set of guidelines on how to establish this price.

Why is new EU legislation needed?

Because transfer pricing it is not an exact science, it is sometimes exploited for tax avoidance. Some multinationals manipulate the transfer price in order to allocate profit where it is more convenient. At the same time, transfer pricing is also a source of double taxation and litigation. It's a problem also from this perspective, because even if you want to be compliant with the transfer pricing rules, sometimes you don't know how to be. So, businesses and Member States spend a lot of time and resources in solving double taxation issues.

What are the building blocks of the new proposal?

The proposal is based on four main building blocks:

• The first one being the introduction of the arm’s length principle, which is the cornerstone principle of transfer pricing. This is basically saying that one needs to price the transactions as if the companies were independent from each other.
• The second building block is a set of common rules which are the core rules that one needs to apply every time a company performs a transfer pricing analysis, which are, for example, how to identify the commercial or financial relations as well as which transfer pricing method to apply.
• Then the third big building block is consistency with the OECD transfer pricing guidelines, where we want to ensure that we are using the OECD transfer pricing guidelines as an interpretive tool to apply our core rules across the EU.
• And then our fourth building block revolves around the further simplification - through delegated acts that further standardise transfer pricing documentation in the Union and through Council implementing acts, which will provide further rules on specific transactions or dealings in certain topics of transfer pricing.