EU JTPF Considers the Arbitration Convention and EU Transfer Pricing Documentation

The EU Joint Transfer Pricing Forum (JTPF) met on 12 March 2015. Following the consideration of information from the European Commission on current ongoing issues the Forum considered a revised draft of the final report on improving the functioning of the Arbitration Convention (AC) and improvements to the EU Transfer Pricing Documentation (EU TPD).

Improving the functioning of Arbitration Convention

The JTPF considered a discussion paper on improving the functioning of the EU Arbitration Convention (AC). The proposed amendments include the following:

An amendment to the preamble to emphasize that due respect is given to the confidentiality of government to government communication;
Clarification that the AC may be used even if the transfer pricing adjustment will not result in a cash payment, for example where the amount of the adjustment is covered by losses carried forward or by group relief;
Clarification that the AC may still be used even if the entities subject to the adjustment have changed their status due to mergers, restructurings, liquidation etc; and
In some cases the use of the AC may depend on the outcome of a mutual agreement procedure under a tax treaty, for example regarding whether a PE exists in a member state, and in this case the two-year period for application of the AC will not begin until after the issue addressed under the tax treaty is resolved.

Where a member state denies access to the AC because it considers the case is not covered by the scope of the AC, the JTPF is to include a recommendation that member states consider providing domestic legal remedies to determine if the denial of access by their administrative bodies is justified.

The JTPF also wishes to recommend to tax administrations that when they make a transfer pricing adjustment they inform a taxpayer of its rights under the AC and any time limits for initiating a mutual agreement procedure.

Multilateral MAPs

The OECD is currently working on procedures for a multilateral mutual agreement procedure (MAP); building on the work of the EU JTPF on triangular cases, but no additional guidance from the OECD is expected in the short term. The JTPF notes the increasing importance of multilateral MAPs and of MAPs between two or more EU states and between EU and non-EU states. The JTPF therefore intends to take up further work on this matter in the future.

Position papers

Guidance on position papers will be included to clarify that the competent authority of the country in which a tax assessment has been made will send a position paper to the competent authority of the other country when a taxpayer requests the mutual agreement procedure. The guidance includes a summary of the detailed information that the position paper may set out.

Serious penalties

A member state may refuse a taxpayer access to the AC where a serious penalty has been imposed. The JTPF intends to clarify that this only applies to exceptional cases such as serious penalties for fraud and similar situations. It is not the penalty in itself that is the reason for denying access to the AC but the underlying behavior of the taxpayer.

Improving the functioning of the EU TPD

The JTPF is discussing ways to improve the functioning of the EU Transfer Pricing Documentation, taking into account the latest guidance from the OECD. The main issues being discussed are:

The possibility of providing incentives for taxpayers opting for the EU TPD or of making it compulsory;
Standardized use of pan-European comparables or guidance on benchmarking analysis and comparable selection;
Acceptance of English as the language for transfer pricing documentation;
EU-wide harmonization of local file requirements, simplifying the content of the master file, guidance on having more than one master file and exempting group members from EU TPD;
A common definition of small and medium enterprises (SMEs) for the purpose of EU TPD and guidance on the use of EU TPD by SMEs;
Guidance on deadlines for submission of documentation; and
Guidance on the relevance of documentation for subsequent periods.

The JTPF will also consider the application of risk-based approaches in the context of transfer pricing documentation, considering quantitative and qualitative aspects and timing. The JTPF will consider simplification for certain transactions in line with OECD work on safe harbors.

Work program of EU JTPF

The new mandate for the JTPF began on 1 April 2015 and the future work program was discussed at the March meeting. Suggestions include work on CCAs in respect of IP intangibles; financial transactions; safe harbors and further guidance on APAs; alternative dispute resolution; a common email system for MAPs under the Arbitration Convention; and other issues arising from the OECD/G20 action plan on base erosion and profit shifting (BEPS) or elsewhere. A draft work program will be tabled for consideration at the next meeting of the JTPF in June 2015.