The end of 2017 brought several interesting transfer pricing developments. Below an overview of recent developments as well as a forecast for 2018/19.
1. Transfer Pricing Documentation: Update by the Austrian Ministry of Finance (MoF)
At the beginning of December 2017 the Austrian Ministry of Finance published an information letter to clarify interpretation issues regarding the application of the Transfer Pricing Documentation Law (Verrechnungspreisdokumentationsgesetz) as well as its Transfer Pricing Directive.
In addition to detailed questions regarding Country-by-Country Reporting, the information letter includes a series of clarifications relating to Master File and Local File:
- The MoF clarifies that the revenue threshold of EUR 50 Mio for the reporting obligation refers to Austrian local GAAP.
- Documentation has to be prepared also in cases where the revenue threshold is exceeded but no crossborder transactions exist. However, the documentation effort should be little in such cases.
- Only material transactions have to be documented. There is no quantitative determination about what qualifies as “material”. The question of materiality has to be assessed for each individual case by referring to the principle of a prudent business man.
- Domestic intra-group transactions do not have to be documented.
- It is essential that in the event of a request for the submission of documentation by the tax authority, all copies of agreements are submitted as well.
Link to the information letter: Please click here
2. Forecast 2019: Improvements for the Resolution of international Transfer Pricing Conflicts are planned
The EU recognised inefficiencies regarding the resolution of transfer pricing conflicts and cases of double taxation. In autumn 2017 a directive was adopted which should bring improvements for taxpayers for transfer pricing corrections.
New features include the possibility of arbitration proceedings which ends with a mandatory dispute resolution in the form of “baseball arbitration” and the solution of the transfer pricing conflict.
The directive has to be implemented into national law by member states until 30 June 2019 at the latest. It remains to be seen whether the implementation of the directive actually brings improvements for taxpayers. As the number of pending proceedings increases year after year, improvements will only be possible if the tax authorities build up additional resources to deal with the cases. Even in the case of proper execution of the new proceedings taxpayers should expect a duration of 2 years (extendable by one year at the request of the court of arbitration).
We will keep you updated regarding the implementation in Austria!
3. ECJ Rulings regarding Transfer Pricing
There have been a number of ECJ rulings in December which are relevant for transfer pricing:
Hornbach Case: Arm‘s length Principle does not violate EU Law
The “Hornbach” Case refers to a case in which the parent company did not charge fees for the granting of letter of comforts to its subsidiaries in the Netherlands.
According to the opinion of the German fiscal authorities fees pursuant to the arm´s length principle should have been charged.
The parent company chose not to charge fees in order not to increase the costs at the level of Dutch subsidiaries. Among other things the parent company argued that letters of comfort are transactions which are principally not concluded in similar ways between independent parties.
In the course of proceedings the fundamental question was raised whether the demand for “fictitious” fees from a tax perspective contradicts EU law.
The attorney general issued his opinion in December 2017 in which he does not see a violation of EU law. The final decision by the ECJ remains to be seen.
Hamamatsu Case: “Year-end Adjustments” are not recognised by Customs Law
Hamamatsu Photonics Deutschland GmbH bought goods from its Japanese parent company. For these transactions the company concluded an advance pricing agreement with the German fiscal authorities according to which the profit of the local company was set pursuant to a range of arm´s length net margins and the allocation of residual profit. A pivotal element of the transfer pricing system approved by the German fiscal authorities were year-end adjustments to transfer prices for goods, if the actual profit of the German company was outside the range.
During the contested years, transfer prices were adjusted downwards. Therefore, the company requested an ex-post adjustment of the customs value for the received goods.
The German customs authorities as well as the ECJ (ECJ C-529/16 from 20 December 2017) rejected an ex-post adjustment of customs value:
- The original calculated and declared customs value remains valid, regardless of an ex-post adjustment of transfer prices.
- This is because adjustments are only admissible in specific, in the EU customs code defined cases.
- The EU customs code in its current version does not include the possibility to request adjustments of the original declared transaction value.
In practice, this means the transaction value-method cannot be applied to transactions which are based on a transfer price consisting of an original value and an ex-post adjustment.
We recommend therefore to review the consequences arising from year-end adjustments from a customs law perspective carefully.