All you need to know about the Transfer Pricing Guidelines 2021
On Thursday 7 October, the final version of the revised Austrian Transfer Pricing Guidelines (TPG 2021) was published by the Austrian Ministry of Finance. These guidelines replace the previous Austrian Transfer Pricing Guidelines (VPR 2010) after more than 10 years. An update was necessary in order to incorporate the OECD developments, particularly the OECD/G20 work in the context of the Base Erosion and Profit Shifting (BEPS) project.
Here is a brief overview of the content of the TPG 2021 and the most material changes and updates.
Content and structure of the Austrian TPG 2021
The structure of the Austrian guidelines was maintained and the main chapters – as in the 2010 version – are:
- Multinational group structures
- Multinational permanent establishment structures
- Documentation and reporting requirements
- Transfer pricing audits
- Appendix with reference documents (OECD and EU)
Relevance of the OECD Transfer Pricing Guidelines 2017 and EU Joint Transfer Pricing Forum
The Austrian TPG 2021 are meant to constitute an interpretative aid to the arm’s length principle and are intended to ensure its uniform application. In this context, it is clarified that the TPG 2021 are to be used for the interpretation of the respective applicable double tax treaty provisions – in the sense of a dynamic interpretation – in their latest valid version. Only if a more recent version of the OECD Transfer Pricing Guidelines (TPG) contains an explicit departure from statements made in earlier OECD TPG, and not merely clarifying or supplementary statements, should the respective transaction be based on the version of the OECD TPG in force at that time.
The TPG 2021 also state that the OECD TPG and tax recommendations are legally relevant at the level of local law, namely to the extent that they fill gaps in interpretation.
The reports of the EU Joint Transfer Pricing Forum can be used as an interpretative aid for the arm’s length principle, but are not legally binding.
More focus on economic substance and written contracts
In line with the OECD, the Austrian TPG 2021 place significantly more focus on the actual (economic) circumstances as well as the economic substance. In a first step the actual economic substance of a transaction must be delineated, taking into account an economic approach (based on Section 21 Austrian Federal Tax Act) as well as general principles of income allocation. A profit can only be attributed to an (intermediary) company if the company bears economically significant risks or performs an economic function along the value chain. If this is not the case, transactions may be reclassified or not recognised if they lack economic rationality.
In addition, the Austrian TPG 2021 stress the legal concept of a prudent and conscientious business manager which is to be applied in order to check the adequacy of the related party transaction. The respective case law of the Austrian Supreme Administrative Court on transactions between related parties must be considered. This case law mainly focuses on the existence of written contracts in order for a transaction to be accepted for tax purposes. Such contracts should be in writing and have an unambiguous and clear content that excludes any doubt and are concluded between third parties under the same conditions.
Application of transfer pricing methods
Generally, Austria refers to all the OECD transfer pricing methods. In individual cases, other methods may also be used, provided they satisfy the arm’s length principle and prove to be more suitable than the methods recognised by the OECD.
The 2021 update envisages some finetuning regarding the application of the transaction net margin method: It is stated that when determining transfer prices on the basis of a cost-oriented net margin, only operating expenses are generally to be taken into account, while taxes, interest expenses and extraordinary expenses are to be excluded from the cost basis. Furthermore, it is clarified that no profit mark-up should be applied on so-called “transitory items” if third parties would calculate in the same way in comparable situations. Since this information is hardly available, this clarification is highly critical for the practical application of the transactional net margin method.
The application of the profit split method is now regulated in more detail in the guidelines based on the OECD Revised Guidance on the Application of the Transactional Profit Split Method.
Correction in case of interquartile ranges
An improvement in the Austrian TPG 2021 is that the correction to the median – which was heavily criticised already in the previous version of 2010 – is now changed. If the taxpayer reports a margin outside the interquartile range, the tax auditor may still correct to the median value. However, the taxpayer has the possibility to prove that another value within the interquartile range is more reliable, this other value shall be applied.
Price adjustments are only possible under specific conditions
A year-end adjustment is only considered to be at arm’s length if the price-determining factors are agreed in advance, the ex-ante pricing is subject to significant uncertainties (e.g. with regard to sales figures and operating expenses or in the case of fluctuations in capacity in production) and reasonable efforts have been made by the taxpayer during the year to achieve an arm’s length transfer price (intra-year monitoring).
For routine services mark-ups based on the report of the EU Joint Transfer Pricing Forum between 3% and 10% (often 5%) may be applied.
The previously mentioned range of profit mark-ups between 5% and 15% may only be referred to for business years before 1 January 2022.
The OECD simplification regarding low value-adding intra-group services is now also adopted. The simplification means that it is not necessary to prove for each individual service provision that the recipient obtains a benefit but rather an abstract benefit test is sufficient. The mark-up on direct and indirect costs is fixed at 5% for services being charged under the concept.
The previous chapter on financing was completely updated and incorporates the main statements in Chapter X of the OECD Transfer Pricing Guidelines:
Regarding loan transactions, the Austrian TPG 2021 state that the arm´s length test for loan transactions also includes the debt-equity ratio. For the analysis typically ratings are necessary. Standalone ratings may need to be corrected to reflect the implicit group support. The group rating may only be used as a rating for the individual company if it proves to be the most reliable indicator. The analysis of a loan transaction must be two-sided and refer both to lender and borrower perspective. Typically, the applied methods are the comparable uncontrolled price method or the cost of funds approach in limited cases (e.g. in the case of passed-through group loans).
Cash pooling, guarantees and hedging transactions are also updated in line with the OECD.
The chapter in the Austrian guidelines regarding intangible assets is completely revised in accordance with the amendments to Chapter VI of the OECD Transfer Pricing Guidelines. Accordingly, the Austrian TPG 2021 now also include explanations of the DEMPE concept, which is decisive for the allocation of income from the transfer or use of intangible assets. If a group company outsources all DEMPE functions and does not exercise any control over the outsourced functions, it shall not be entitled to any remuneration from the exploitation of the outsourced functions but only a routine remuneration for any services rendered. If in such a case all DEMPE functions are carried out by a company other than the legal owner, this other company must also be regarded as the beneficial owner within the meaning of the Austrian Federal Tax Act.
In the case of intra-group sales and marketing activities, the question often arises as to whether the marketing company is merely providing (routine) services to the legal owner of the brand (routine) services to the legal owner of the trademark or whether it has increased the value of the trademark trademark or the other intangible marketing assets as a result of its activities. The Austrian TPG 2021 clarify that only in the latter case the sales or marketing company is entitled to an additional to additional compensation that also reflects the functions and risks associated with the further and risks associated with the further development of the brand (e.g. in the form of higher distribution profits, a lower licence fee or a profit share in the increased brand value).
The Austrian TPG 2021 also state that in general, a distribution company acting as a reseller of branded products will additionally pay royalties for the usage of the brand. This is because the reseller regularly does not obtain the right to use the trademark, but the right of ownership to the goods supplied.
Also the mere use of a group name is not in itself eligible for remuneration. The distribution company may, however, pay additional royalties if the brand or trade mark is not included in the purchase price for the goods or if the company itself manufactures the goods using a brand name owned by another group company.
Hard-to-value intangibles (HTVI)
Austria follows the HTVI approach recommended by the OECD. Accordingly, in the case of intangible assets that are difficult to value, the tax authorities may also use ex-post results to assess the appropriateness of the pricing. However, transfer price adjustments are only possible in accordance with national procedural rules.
Location savings and group synergies
The OECD statements on locational advantages and group synergies were also incorporated into the Austrian guidelines. Accordingly, locational advantages are to be allocated between the participating companies in accordance with the principles of Chapter I of the OECD Transfer Pricing Guidelines.
For Austria it is stressed that the Austrian research and development premium (a 14% premium on local qualified research and development costs) may be considered such a location saving. The premium may only reduce the transfer price to a foreign group company if there is evidence that also third parties pass the premium on to their principals.
Group synergies are generally to be shared between the companies contributing to the creation of the advantage; however, incidental advantages would generally not be compensated.
The Austrian TPG 2021 now include the main topics arising from different types of business restructuring measures in line with the Chapter IX of the OECD Transfer Pricing Guidelines. The revisions generally are only of a clarifying nature and are meant to provide more guidance on specific topics.
Documentation and reporting
The previous separate guideline on transfer pricing documentation was included in the Austrian TPG 2021. This guideline provided guidance for those companies which fall under the legal obligation to prepare transfer pricing documentation in Austria. This is mainly the case if the local entity realises a turnover of more than EUR 50m in two consecutive years.
Additionally, the Austrian TPG 2021 now also clarify the documentation requirements for all those companies which do not fall under the legal obligation.
The reporting obligation under DAC6 regarding the transfer pricing hallmarks is also briefly referred to in the guidelines.
The changes in the Austrian TPG 2021 mainly refer to OECD updates which already were published a couple of years ago. In this regard the Austrian TPG 2021 certainly are no revolution for taxpayers with business in Austria. Some of the clarifications, however, may trigger additional and more intense discussions in tax audits and should therefore be considered in the transfer pricing set-up and planning.