The coexistence of 25 different direct taxation regimes is seen by some policy makers as an obstacle to an efficient and competitive single European market. Therefore, efforts are being made to reduce income tax compliance burdens and to alleviate double taxation within Europe.
As part of this broader effort, the European Union (EU) Joint Transfer Pricing Forum (JTPF) has already adopted codes of conduct calling for (1) better adherence to the EU arbitration convention in order to assist taxpayers in avoiding double taxation on their intra-group trade within the EU and (2) the standardisation of EU transfer pricing documentation requirements across member states.
However, despite the growing efforts being made by the JTPF towards standardisation, member states still adopt widely differing approaches to transfer pricing documentation and enforcement. Most countries in Western Europe have enacted transfer pricing regulations and implemented requirements for documentation. However, the extent of legislation and level of enforcement varies significantly from country to country.
Fourteen of the 16 countries in this article have chosen to enact some form of transfer pricing legislation. The only two countries that have not yet done so are Ireland and Switzerland. Of those countries that have enacted transfer pricing legislation, only Belgium and Norway have not yet implemented documentation requirements.
In Belgium, taxpayers are urged to compile documentation based on an administrative circular. Norway is expected to introduce documentation requirements as of 2008.
Diversity is evident in the level of local enforcement. Tax authorities in Belgium, Denmark, France, Germany, Greece, Italy, the Netherlands, Norway, Sweden and the UK tend to be most active in enforcing transfer pricing rules, with the level of enforcement generally increasing in the remaining countries.
While most countries do not require explicit disclosure of inter-company transactions on the corporate tax return, this is explicitly required in seven of the countries surveyed. Transfer pricing penalties vary widely across the 16 countries, from no specific penalties (eight countries) to up to 200% of the underpayment in Italy.
Local comparables are generally preferred when conducting benchmarking studies but in practice Pan-European comparables are widely accepted in line with the EU Joint Transfer Pricing Forum code of conduct on documentation with certain exceptions. The tax authorities in Italy and Portugal only accept Pan-European comparables under exceptional circumstances while in Norway and Spain such practice will only be accepted if local comparables are not readily available.
Consistent with efforts to avoid double taxation, APAs have become accepted in many jurisdictions. However Denmark, Finland, Greece, Ireland, Norway, Portugal and Sweden have not yet formalised APA procedures. The German tax authorities will only accept bilateral APAs.
To explore the diversity within the transfer pricing environment in Europe, seven countries have been selected for a more detailed analysis: Ireland, Finland, Spain, Belgium, France, the UK and Germany. These countries illustrate the various points on the continuum of European transfer pricing regulatory enforcement, from Ireland - which has limited transfer pricing legislation - to Germany, a country in the process of enacting aggressive transfer pricing legislation.
To read the detailed analysis of the seven member states, see below.
Ireland
Unlike the majority of Organisation for Economic Co-Operation and Development (OECD) member countries, Ireland has yet to introduce broad-based transfer pricing legislation. Ireland’s position in this regard is somewhat understandable in the context of favorable tax opportunities available to multinationals doing business in Ireland.
http://www.tpweek.com/Article/1684980/Ireland---still-holding-out.html
Finland
New legislation on transfer pricing documentation rules became effective on January 1 2007. Documentation rules will apply to accounting periods starting on or after January 1 2007. The Finnish documentation rules conform to the principles established in the Transfer Pricing Guidelines for Multinational Enterprises (MNEs) and Tax Administrations (OECD Guidelines) as well as the Code of Conduct for Transfer Pricing Documentation in the EU.
http://www.tpweek.com/Article/1684981/Finland-enlists.html
Spain
In late 2006, Spain enacted the Law for Prevention of Tax Fraud. This law, which introduced significant changes to transfer pricing in Spain, applies to all fiscal years beginning on or after 1 January 2007.
http://www.tpweek.com/Article/1684983/Spain-raises-the-bar.html
UK
Her Majesty's Revenue and Customs (HMRC) is active in transfer pricing audits, particularly in cases of business restructuring, dealing with related issues such as exit charges and permanent establishment (PE) issues. HMRC takes an active role in the OECD’s work on taxation of multinationals and is at the forefront of the OECD work on business restructuring and on comparability and profits methods.
http://www.tpweek.com/Article/1684995/UK-seeks-a-more-streamlined-approach.html
Germany
As early as 1983, Germany issued its first detailed transfer pricing regulations (so-called administrative principles), which established general principles of transfer pricing (including the adoption of the arm’s length standard) as well as the authorities’ position on the application of transfer pricing methods and on various categories of inter-company transactions.
http://www.tpweek.com/Article/1685004/Germany-develops-a-new-concept-in-transfer-pricing.html
Belgium
Belgium is becoming more aggressive and more skilled in the field of transfer pricing as it becomes increasingly aware of the active interest in this area (typically) in surrounding countries and the risk of the erosion of Belgium’s taxable bases.
http://www.tpweek.com/Article/1684985/Belgium-becomes-more-aggressive.html
France
In France, transfer pricing rules comply with the arm’s length principle, and OECD guidelines are consulted by the French tax authorities (FTA). No contemporaneous documentation is required in France. However, during a tax audit very short deadlines are imposed to answer the FTAs often very detailed transfer pricing questions.
www.tpweek.com/Article/1684988/France-imposes-higher-levels-of-enforcement.html
Legislation |
Documentation requirements |
Enforcement Activity |
Penalties |
Disclosure requirements |
Local Comparables |
Pan-European Comparables |
APAs |
|
Austria |
Yes |
Yes |
Developing |
No specific TP penalties |
No |
Preferred |
Accepted |
No |
Belgium |
Yes |
No |
Aggressive |
No specific TP penalties |
No |
If available the BTA will tend to rely on local comparables as a sanity check |
Accepted |
Yes |
Denmark |
Yes |
Yes |
Aggressive |
Twice the amount saved + 10% penalty |
Annual tax return |
Preferred |
Accepted |
Limited activity but no formal regulations |
Finland |
Yes |
Yes |
Developing |
Up to 25.000 euro added tax |
Annual tax return |
Preferred |
Accepted |
No |
France |
Yes |
Yes |
Aggressive |
No specific TP penalties |
No |
Preferred |
Accepted |
Yes |
Germany |
Yes |
Yes |
Aggressive |
5-10% |
Upon request |
Preferred |
In practice often used |
Yes (but only bilateral) |
Greece |
Yes |
Yes (approval by a special committee required for Management fees/royalties) |
Fairly Aggressive |
10% fine on difference plus penalties for inaccurate tax filing |
No |
Preferred |
Possibly |
No |
Ireland |
No |
No |
Developing |
No specific TP penalties |
No |
No |
Accepted |
No |
Italy |
Yes |
Yes |
Aggressive |
Up to 200% |
Annual tax return |
Strongly preferred |
In exceptions |
Yes |
Netherlands |
Yes |
Yes |
Aggressive |
No specific TP penalties |
Annual tax return |
Preferred |
Accepted |
Yes |
Norway |
Yes |
Yes from 2008 |
Aggressive |
No specific TP penalties: up to 60% additional tax from 2008 lack of documentation may result in loss of right to appeal assessments) |
Annual tax return |
Preferred |
If local comparables not available |
No |
Portugal |
Yes |
Yes |
Developing |
No specific TP penalties |
Annual tax return |
Strongly preferred |
In exceptions |
No |
Spain |
Yes |
Yes |
Developing |
15% of adjustment (with minimum) & certain specific documentation penalties |
Annual tax return |
Strongly preferred |
If local comparables not available |
Yes |
Sweden |
Yes |
Yes |
Aggressive |
General tax penalties apply (20% of 40%) |
Upon request |
Preferred |
Accepted |
Developing |
Switzerland |
No |
No |
Developing |
No specific TP penalties |
No |
No |
Accepted |
Yes |
United Kingdom |
Yes |
Yes |
Aggressive |
Max 100% of the underpaid tax |
No |
Preferred |
Accepted |
Yes |
