The meeting of the EU Joint Transfer Pricing Forum (EU JTPF) on 18 February 2016 considered some of the relevant issues concerning transfer pricing including joint audits in the EU and the use of pan-European comparables.

Joint audits in the EU

A presentation was given by the tax administrations of the Netherlands and Germany on joint audits. The legal authority for joint audits in the EU is contained in Directive 2011/16 Article 11 (Presence in administrative offices and participation in administrative enquiries) and Article 12 (Simultaneous controls).

A working group was set up to decide if there was a sufficient legal framework; to determine the criteria for selection of cases; and to establish if joint audit is an efficient approach for tax administrations and for companies. Following the selection of cases bilateral audit teams were set up. The teams sent questionnaires to the taxpayers; requested and audited records and documentation; conducted necessary interviews and discussed the conclusions with the taxpayer.

The audits were conducted within twelve months and resulted in a joint report. Agreement was reached with the taxpayer, selected transfer pricing issues were resolved and double taxation avoided. In the Netherlands the audit results were used to establish unilateral APAs for future periods.

A joint evaluation team was formed and after sending questionnaires to the audit teams and interviewing the taxpayers a joint evaluation report was sent to the Ministries in the Netherlands and Germany. The joint audits avoided the need for a mutual agreement procedure, resolved issues more quickly and provided agreements for the future. The procedures need more alignment however and joint audits must go beyond simultaneous examinations. The procedure did however provide more certainty and transparency for the taxpayer.

Problems may arise from different objectives of different jurisdictions. Selection of cases for audit could be difficult and problems could arise from uncooperative taxpayers. There are still legal barriers to joint audit teams as defined by the OECD.

Comparables in the EU

The subject was discussed by the EU JTPF and a discussion paper has been published on the EU website. After discussion of delineation of transactions the paper looks at guidance on comparability. This notes that there is difficulty in setting a minimum standard on comparability. Focus should be placed on understanding and working with the information available. It is important to develop guidance on common comparability adjustments and how to deal with arm’s length ranges.

The paper also considers the use of pan-European comparables. The OECD describes the use of foreign source or non-domestic comparables in the comparability search as a pragmatic solution, for situations where there is insufficient domestic data or where compliance costs may be kept down. The OECD guidelines state that non-domestic comparables should not be automatically rejected just because they are not domestic.

The reliability test used by the OECD for non-domestic comparables refers to the five comparability factors and to a relevant market or reasonably homogeneous market test. The relevant market is determined by reference to the available substitute goods or services.

The OECD guidelines consider the search for comparables in other geographical markets, whether comparable or not, as a pragmatic solution to broaden the search for comparables at the scale of a “comparable geographical market” or “other geographical market”. The OECD emphasizes that the taxpayer must find the most reliable data recognizing that the data will not always be perfect.

The Code of Conduct on EU TP Documentation stated that comparables from pan-European databases should not be automatically rejected. Taxpayers should evaluate domestic or non-domestic comparables in relation to the specific facts and circumstances of the case. The tax administrations in EU countries rarely refer to this however. There are a wide range of practices in EU member states and the reasons for this need to be assessed given that there is general recognition of the EU TPD in member states.

The EU JTPF needs to review the guidance on pan-European comparables in the EU TPD and consider the impact of the recently revised guidelines on location savings and local market features in the OECD Guidelines. Consideration should also be given to how the pragmatic approach on accepting non-local comparables even if they are not always perfect could be implemented in the EU.

BEPS Action 13

The Forum also discussed the state of play in the EU on follow up to Action 13 of the OECD’s action plan on base erosion and profit shifting (BEPS). This concerns the recommendations made by the OECD in relation to transfer pricing documentation.