Taking into consideration the European Commission's Study "Company Taxation in the Internal Market"[9], the Commission proposed 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 [10] " the establishment of a "EU Joint Transfer Pricing Forum" (hereafter: JTPF). On 11 March 2002, the Council adopted conclusions welcoming this initiative. The Commission formally established the JTPF in June 2002.
A first Commission Communication[11] 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[12] 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[13].
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.
Proposal for a
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"[14], 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[15]", 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;
b) not request documentation that has no bearing on transactions under review; and
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.
