Explanatory Memorandum to COM(2005)543-1 - Work of the EU Joint Transfer Pricing Forum on transfer pricing documentation for associated enterprises in the EU - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2005)543-1 - Work of the EU Joint Transfer Pricing Forum on transfer pricing documentation for associated enterprises in the EU. |
|---|---|
| source | COM(2005)543  |
| date | 07-11-2005 |
A first Commission Communication i was issued in April 2004 and adopted by the Council in December 2004 on the activities of the JTPF from October 2002 to December 2003. This included a proposal for a Code of Conduct for the effective implementation of the Arbitration Convention i and certain related issues of the mutual agreement procedure under double tax treaties between Member States.
Considering the constructive results and the remaining important issues of the JTPF's work programme, the Commission decided in 2004 to extend until the end of 2006 the initial period of two years foreseen for the activities of the JTPF.
Transfer pricing documentation for associated enterprises in the EU was the second issue of the work programme discussed by the JTPF. An EU-wide common approach on documentation requirements was considered beneficial both for taxpayers, in particular in terms of reducing compliance costs and the exposure to documentation related penalties and for tax administrations due to enhanced transparency and consistency.
The JTPF discussed the purpose and content of good and effective documentation including the benefit of risk assessment and the issue of burden of proof, preparation, submission and storage of documentation, the question in which language transfer pricing documentation should be presented, the use of database searches for comparables and the application of transfer pricing documentation to permanent establishments.
In light of the pros and cons of the traditional approaches (a code of best practice, EU-wide standardized documentation rules and centralized (integrated global) documentation in particular in terms of legal certainty and flexibility, the JTPF eventually considered a new approach, the most appropriate, i.e. a standardized 'EU Transfer Pricing Documentation' (EU TPD). The EU TPD consists of two main parts: (i) one set of standardized and consistent documentation relevant for all EU group members of a multinational enterprise ("MNE") group (the 'masterfile'), and (ii) several sets of standardized documentation containing country specific information that fit together with the “masterfile”.
The main features of the EU TPD are: (i) standardisation of the documentation requirements necessary for a tax administration as a risk assessment tool and to obtain sufficient information for the assessment of the MNE group's transfer prices, (ii) the possibility for centralisation of the core part of the documentation (the 'masterfile') at group level, and (iii) the availability to all EU Member States concerned of common standardised transfer pricing information relevant for all EU affiliates of a multinational enterprise.
The JTPF adopted its report and conclusions by consensus in May 2005. The work on transfer pricing documentation achieved by the JTPF is reported in a Commission Staff Working Document i.
The deliberations of the Forum and its report on documentation have clearly highlighted the need to provide all parties (Member States and the business community) with an instrument providing some recommendations in the field of transfer pricing related documentation.
The Commission supports the conclusions and the recommendations contained in the second report of the JTPF. Indeed, the new EU TPD approach reduces compliance costs and provides more simplicity, consistency and transparency in the area of transfer pricing.
Since the objective of the proposed action, namely setting up of a standardized and partially centralized (integrated global) documentation as regards transfer pricing for associated enterprises in the EU, should respect the principles of subsidiarity and proportionality as set out in Article 5 of the Treaty establishing the European Community and should remain optional for companies, a Commission proposal for a Code of Conduct to be adopted by the Council is considered the most appropriate legal tool.
Contents
- Proposal for a
- b) not request documentation that has no bearing on transactions under review; and
- ANNEX TO THE CODE OF CONDUCT
- 4. The masterfile
- h) a list of cost contribution agreements, APAs and rulings covering transfer pricing aspects as far as group members in the EU are affected; and
- 5. Country-specific documentation
- a) a detailed description of the business and business strategy, including changes in the business strategy compared to the previous tax year; and
- e) relevant information on internal and/or external comparables if available; and
- Section 2
- Section 3
- Section 4
- SECTION 5
- Standardized documentation
- Centralized (integrated global) documentation
- EU Transfer Pricing Documentation (EU TPD)
- Documentation-related penalty
- Cooperation-related penalty
- Adjustment-related penalty
CODE OF CONDUCT
on transfer pricing documentation for associated enterprises in the EU
THE COUNCIL OF THE EUROPEAN UNION AND THE REPRESENTATIVES OF THE GOVERNMENTS OF THE MEMBER STATES, MEETING WITHIN THE COUNCIL,
HAVING REGARD TO the European Commission's study on 'Company Taxation in the Internal Market' i, the proposal made by the Commission, in its 2001 communication "Towards an internal market without obstacles - A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities i", for the establishment of a 'EU Joint Transfer Pricing Forum' (hereinafter referred to as “JTPF”), the Council conclusions of 11 March 2002 welcoming this move and the establishment of the JTPF in June 2002,
WHEREAS:
1. The internal market comprises an area without frontiers in which the free movement of goods, persons, services and capital is guaranteed.
2. In an internal market having the characteristics of a domestic market, transactions between associated enterprises from different Member States should not be subject to less favourable conditions than those applicable to the same transactions carried out between associated enterprises from the same Member State.
3. In the interest of the proper functioning of the internal market, it is of major importance to reduce the compliance costs as regards transfer pricing documentation for associated enterprises.
4. This Code of Conduct provides Member States and taxpayers with a valuable instrument for the implementation of standardized and partially centralized transfer pricing documentation in the EU, with the aim of simplifying transfer pricing requirements for cross-border activities.
5. Standardized and partially centralized transfer pricing documentation required in Member States to support transfer pricing on an arm’s length basis could help businesses to benefit more from the internal market.
6. Transfer pricing documentation in the EU must be viewed in the framework of the OECD Transfer Pricing Guidelines.
7. Standardized and partially centralized documentation should be implemented flexibly and should recognize the particular circumstances of the business concerned.
8. A Member State may decide not to have transfer pricing documentation rules at all or to require less transfer pricing documentation than that referred to in this Code of Conduct,
ACKNOWLEDGING that a common EU-wide approach on documentation requirements is beneficial both for taxpayers, in particular in terms of reducing compliance costs and exposure to documentation-related penalties, and for tax administrations due to enhanced transparency and consistency,
WELCOMING the 2005 Commission communication on the work of the EU Joint Transfer Pricing Forum in the field of business taxation and on a proposal for a Code of Conduct on transfer pricing documentation for associated enterprises in the EU,
EMPHASISING that the Code of Conduct is a political commitment and does not affect the Member States' rights and obligations or the respective spheres of competence of the Member States and the Community resulting from the Treaty,
ACKNOWLEDGING that the implementation of this Code of Conduct should not hamper solutions at a more global level,
HEREBY ADOPT THE FOLLOWING CODE OF CONDUCT:
Without prejudice to the respective spheres of competence of the Member States and the Community, this Code of Conduct concerns the implementation of standardized and partially centralized transfer pricing documentation for associated enterprises in the EU.
1. Member States will accept standardized and partially centralized transfer pricing documentation for associated enterprises in the EU, i.e. the “EU TPD” referred to in the Annex, and consider it as a basic set of information for the assessment of a multinational enterprise (MNE) group's transfer prices.
2. The use of the EU TPD will be optional for a MNE group.
3. Member States will apply similar considerations to documentation requirements for the attribution of profits to a permanent establishment as apply to transfer pricing documentation.
4. Member States will, wherever necessary, take duly into account and be guided by the general principles and requirements referred to in the annex.
5. Member States undertake not to require smaller and less complex enterprises (including SMEs) to produce the amount or complexity of documentation that might be expected from larger and more complex enterprises.
6. Member States should:
a) not impose unreasonable compliance costs or administrative burden on enterprises in requesting documentation to be created or obtained;
c) ensure that there is no public disclosure of confidential information contained in documentation.
7. Member States should not impose a documentation-related penalty where taxpayers comply in good faith, in a reasonable manner and within a reasonable time with standardized and consistent documentation as described in the Annex or with a Member State's domestic documentation requirements and apply their documentation properly to determine their arm's length transfer prices.
8. This Code of Conduct is addressed to Member States but it is also intended to encourage MNEs to apply the EU TPD approach.
9. In order to ensure the even and effective application of this Code, Member States are invited to report annually to the Commission on any measures they have taken further to this Code and its practical functioning. On the basis of these reports, the Commission intends to report to the Council and may propose a review of the provisions of this Code.
EUROPEAN UNION TRANSFER PRICING DOCUMENTATION (EU TPD)
SECTION 1
CONTENT OF THE EU TPD
1. A MULTINATIONAL ENTERPRISE (MNE) GROUP'S STANDARDIZED AND CONSISTENT EU TPD CONSISTS OF TWO MAIN PARTS: (I) ONE SET OF DOCUMENTATION CONTAINING COMMON STANDARDIZED INFORMATION RELEVANT FOR ALL EU GROUP MEMBERS (THE 'MASTERFILE'); AND (II) SEVERAL SETS OF STANDARDIZED DOCUMENTATION EACH CONTAINING COUNTRY-SPECIFIC INFORMATION ("COUNTRY-SPECIFIC DOCUMENTATION"). THE EU TPD SHOULD CONTAIN ENOUGH DETAILS TO ALLOW THE TAX ADMINISTRATION TO MAKE A RISK ASSESSMENT FOR CASE SELECTION PURPOSES OR AT THE BEGINNING OF A TAX AUDIT, ASK RELEVANT AND PRECISE QUESTIONS REGARDING THE MNE'S TRANSFER PRICING AND ASSESS THE TRANSFER PRICES OF THE INTER-COMPANY TRANSACTIONS. SUBJECT TO paragraph 31, the company would produce one single file for each Member State concerned, i.e. one common masterfile to be used in all Member States concerned and a different set of country-specific documentation for each Member State.
2. Each of the items of the EU TPD listed below should be completed, taking into account the complexity of the enterprise and the transactions. As far as possible, information should be used that is already in existence within the group (e.g. for management purposes). However, a MNE might be required to produce documentation for this purpose that otherwise would not have been in existence.
3. The EU TPD covers all group entities resident in the EU including controlled transactions between enterprises resident outside the EU and group entities resident in the EU.
4.1 The “masterfile” should follow the economic reality of the business and provide a “blueprint” of the MNE group and its transfer pricing system that would be relevant and available to all EU Member States concerned.
4.2 The masterfile should contain the following items:
a) a general description of the business and business strategy, including changes in the business strategy compared to the previous tax year;
b) a general description of the MNE group’s organizational, legal and operational structure (including an organization chart, a list of group members and a description of the participation of the parent company in the subsidiaries);
c) the general identification of the associated enterprises engaged in controlled transactions involving enterprises in the EU;
d) a general description of the controlled transactions involving associated enterprises in the EU, i.e. a general description of:
(i) flows of transactions (tangible and intangible assets, services, financial);
(ii) invoice flows; and
(iii) amounts of transaction flows;
e) a general description of functions performed, risks assumed and a description of changes in functions and risks compared to the previous tax year, e.g. change from a fully fledged distributor to a commissionaire;
f) the ownership of intangibles (patents, trademarks, brand names, know-how, etc.) and royalties paid or received;
g) the MNE group's inter-company transfer pricing policy or a description of the group's transfer pricing system that explains the arm's length nature of the company's transfer prices;
h) a list of cost contribution agreements, APAs and rulings covering transfer pricing aspects as far as group members in the EU are affected; and
i) an undertaking by each domestic taxpayer to provide supplementary information upon request and within a reasonable time frame in accordance with national rules.
5.1 The content of the country-specific documentation supplements the masterfile. Together the two constitute the documentation file for the relevant EU Member State. The country-specific documentation would be available to those tax administrations with a legitimate interest in the appropriate tax treatment of the transactions covered by the documentation.
5.2 Country-specific documentation should contain, in addition to the content of the masterfile, the following items:
a) a detailed description of the business and business strategy, including changes in the business strategy compared to the previous tax year; and
b) information, i.e. description and explanation, on country-specific controlled transactions. including:
(i) flows of transactions (tangible and intangible assets, services, financial);
(ii) invoice flows; and
(iii) amounts of transaction flows;
c) a comparability analysis, i.e.:
(i) characteristics of property and services;
(ii) functional analysis (functions performed, assets used, risks assumed);
(iii) contractual terms;
(iv) economic circumstances; and
(v) specific business strategies;
d) an explanation about the selection and application of the transfer pricing method[s], i.e. why a specific transfer pricing method was selected and how it was applied;
f) a description of the implementation and application of the group's inter-company transfer pricing policy.
6. A MNE should have the possibility of including items in the masterfile instead of the country-specific documentation, keeping, however, the same level of detail as in the country-specific documentation. The country-specific documentation should be prepared in a language prescribed by the specific Member State concerned, even if the MNE has opted to keep the country-specific documentation in the masterfile.
7. Any country-specific information and documents that relate to a controlled transaction involving one or more Member States must be contained either in the country-specific documentation of all the Member States concerned or in the common masterfile.
8. MNEs should be allowed to prepare the country-specific documentation in one set of documentation (containing information about all businesses in that country) or in separate files for each business or group of activities in that country.
9. The country-specific documentation should be prepared in a language prescribed by the specific Member State concerned.
GENERAL APPLICATION RULES AND REQUIREMENTS FOR MNES
10. USE OF THE EU TPD IS OPTIONAL FOR MNE GROUPS. HOWEVER, A MNE GROUP SHOULD NOT ARBITRARILY OPT IN AND OUT OF THE EU TRANSFER PRICING DOCUMENTATION APPROACH FOR ITS DOCUMENTATION PURPOSES BUT SHOULD APPLY THE EU TPD IN A WAY THAT IS CONSISTENT THROUGHOUT THE EU AND FROM YEAR TO YEAR.
11. A MNE group that opts for the EU TPD should generally apply this approach collectively to all associated enterprises engaged in controlled transactions involving enterprises in the EU to which transfer pricing rules apply. Subject to paragraph 31, a MNE group opting for the EU TPD would, therefore, need to keep the documentation specified in section 1 in respect of all its enterprises in the Member State concerned, including permanent establishments.
12. Where a MNE group has opted for the EU TPD for a given fiscal year, each member of the MNE group should inform its tax administration accordingly.
13. MNEs should undertake to prepare the masterfile in time to comply with any legitimate request originating from one of the tax administrations involved.
14. The taxpayer in a given Member State should make its EU TPD available, upon request by a tax administration, within a reasonable time depending on the complexity of the transactions.
15. The taxpayer responsible for making documentation available to the tax administration is the taxpayer that would be required to make the tax return and that would be liable to a penalty if adequate documentation were not made available. This is the case even if the documentation is prepared and stored by one enterprise within a group on behalf of another. The decision of a MNE group to apply the EU TPD implies a commitment towards all associated enterprises in the EU to make the masterfile and the respective country-specific documentation available to its national tax administration.
16. Where, in its tax return, a taxpayer makes an adjustment to its accounts profit resulting from the application of the arm's length principle, documentation demonstrating how the adjustment was calculated should be available.
17. The aggregation of transactions must be applied consistently, be transparent to the tax administration and be in accordance with paragraph 1.42 of the OECD Transfer Pricing Guidelines (which allow aggregation of transactions that are so closely linked or continuous that they cannot be evaluated adequately on a separate basis). These rules should be applied in a reasonable manner, taking into account in particular the number and complexity of the transactions.
GENERAL APPLICATION RULES AND REQUIREMENTS FOR MEMBER STATES
18. Since the EU TPD is a basic set of information for the assessment of the MNE group's transfer prices a Member State would be entitled in its domestic law to require more and different information and documents, by specific request or during a tax audit, than would be contained in the EU TPD.
19. The period for providing additional information and documents upon specific request (cf. paragraph 18) should be determined on a case-by-case basis taking into account the amount and detail of the information and documents requested. Depending on specific local regulations, the timing should give the taxpayer a reasonable time (which can vary depending on the complexity of the transaction) to prepare the additional information.
20. Taxpayers avoid cooperation-related penalties where they have agreed to adopt the EU TPD approach and provide, upon specific request or during a tax audit, in a reasonable manner and within a reasonable time additional information and documents going beyond the EU TPD (cf. paragraph 18).
21. Taxpayers should have to submit their EU TPD, i.e. the masterfile and the country-specific documentation, to the tax administration only at the beginning of a tax audit or upon specific request.
22. Where a Member State requires a taxpayer to submit information about transfer pricing with its tax return, that information should be no more than a short questionnaire or an appropriate risk assessment form.
23. It may not always be necessary for documents to be translated into a local language. In order to minimize costs and delays caused by translation, Member States should accept documents in a foreign language as far as possible. As far as the EU Transfer Pricing Documentation is concerned, tax administrations should be prepared to accept the masterfile in a commonly understood language for the Member States concerned. Translations of the masterfile should be made available only if strictly necessary and upon specific request.
24. Member States should not oblige taxpayers to retain documentation beyond a reasonable period consistent with the requirements of the domestic laws which apply to each enterprise in the group.
25. Member States should evaluate domestic or non-domestic comparables with respect to the specific facts and circumstances of the case. For example, comparables found in pan-European databases should not be rejected automatically. The use of non-domestic comparables by itself should not subject the taxpayer to penalties for non-compliance.
GENERAL APPLICATION RULES AND REQUIREMENTS APPLICABLE TO MNES AND MEMBER STATES
26. WHERE DOCUMENTATION PRODUCED FOR ONE PERIOD REMAINS RELEVANT FOR SUBSEQUENT PERIODS AND CONTINUES TO PROVIDE EVIDENCE OF ARM’S LENGTH PRICING, IT MAY BE APPROPRIATE FOR THE DOCUMENTATION FOR SUBSEQUENT PERIODS TO REFER TO EARLIER DOCUMENTATION RATHER THAN TO REPEAT IT.
27. Documentation does not need to replicate the documentation that might be found in negotiations between enterprises acting at arm’s length (for example, in agreeing to a borrowing facility or a large contract) as long as it includes adequate information to assess whether arm’s length pricing has been applied.
28. The sort of documentation that needs to be produced by an enterprise that is a subsidiary enterprise in a group may be different from that needed to be produced by a parent company, i.e. a subsidiary company would not need to produce information about all of the cross-border relationships and transactions between associated enterprises within the MNE group but only about relationships and transactions relevant to the subsidiary in question.
29. It should be irrelevant for tax administrations where a taxpayer prepares and stores its documentation as long as the documentation is sufficient and made available in a timely manner to the tax administrations involved upon request. Taxpayers should, therefore, be free to keep their documentation, including their EU TPD, either in a centralized or in a decentralized manner.
30. The way that documentation is stored - whether on paper, in electronic form or in any other system - should be at the discretion of the taxpayer, provided that it can be made available to the tax administration in a reasonable way.
31. In well justified cases, e.g. where a MNE group has a decentralized organizational, legal or operational structure or consists of several large divisions with completely different product lines and transfer pricing policies or no inter-company transactions, and in the case of a recently acquired enterprise, a MNE group should be allowed to produce more than one masterfile or to exempt specific group members from the EU TPD .
GLOSSARY
MULTINATIONAL ENTERPRISE (MNE) AND MNE GROUP
According to the OECD Transfer Pricing Guidelines:
- A MNE is a company that is part of a MNE group.
- A MNE group is a group of associated companies with business establishments in two or more countries.
A uniform, EU-wide set of rules for documentation requirements according to which all enterprises in Member States prepare separate and unique documentation packages. This more prescriptive approach aims at arriving at a decentralised but standardized set of documentation, i.e. each entity in a multinational group prepares its own documentation, but according to the same rules.
A single documentation package (core documentation) on a global or regional basis that is prepared by the parent company or headquarters of a group of companies in a EU-wide standardized and consistent form. This documentation package can serve as the basis for preparing local country documentation from both local and central sources.
The EU Transfer Pricing Documentation (EU TPD) approach combines aspects of the standardized and of the centralized (integrated global) documentation approach. A multinational group would prepare one set of standardized and consistent transfer pricing documentation that would consist of two main parts: (i) one uniform set of documentation containing common standardized information relevant for all EU group members (the 'masterfile') and (ii) several sets of standardized documentation each containing country-specific information ("country-specific documentation"). The documentation set for a given country would consist of the common masterfile supplemented by the standardized country-specific documentation for that country.
An administrative (or civil) penalty imposed for failure to comply with the EU TPD or the domestic documentation requirements of a Member State (depending on which requirements the MNE has chosen to comply with) at the time the EU TPD or the domestic documentation required by a Member State was due to be submitted to the tax administration.
An administrative (or civil) penalty imposed for failure to comply in a timely manner with a specific request of a tax administration to submit additional information or documents going beyond the EU TPD or the domestic documentation requirements of a Member State (depending on which requirements the MNE has chosen to comply with).
A penalty imposed for failure to comply with the arm's length principle usually levied in the form of a surcharge at a fixed amount or a certain percentage of the transfer pricing adjustment or the tax understatement.