COMMISSION OF THE EUROPEAN COMMUNITIES

 

 

 

Brussels, 26.2.2007

 

COM(2007) 71 final

 

 

 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE

 

EUROPEAN PARLIAMENT AND THE EUROPEAN ECONOMIC AND SOCIAL

 

COMMITTEE

 

 

 

on the work of the EU Joint Transfer Pricing Forum in the field of dispute avoidance

 

and resolution procedures and on Guidelines for Advance Pricing Agreements

 

within the EU

 

 

 

{SEC(2007) 246}


TABLE OF CONTENTS

 

 

 

1.      Aim and context                                                                                                                3

 

2.      Activities of the EU Joint Transfer Pricing Forum from March 2005 to

 

         September 2006                                                                                                                 4

 

2.1.   Simultaneous tax examinations                                                                                 4

 

2.2.   Expert opinion or mediation                                                                                     4

 

2.3.   Prior notification, prior consultation or prior agreement                                           4

 

2.4.   Advance Pricing Agreements                                                                                   5

 

2.5.   What are the salient points of the EU APA guidelines?                                          5

 

3.      The Arbitration Convention and related issues                                                                 6

 

4.      Future work programme of the JTPF                                                                                 7

 

5.      Commission conclusions                                                                                                    7

 

 

 

ANNEX                                                                                                                                      9

 

 

 

1.      Legal framework                                                                                                                9

 

2.      Organisation of APA procedures in Member States                                                         9

 

3.      Entry to the APA programme                                                                                          10

 

4.      Fees                                                                                                                                  10

 

5.      Complexity thresholds                                                                                                     10

 

6.      Documentation                                                                                                                11

 

7.      Conduct of the APA process                                                                                           11

 

7.1.   Pre-filing/Informal application stage.                                                                     11

 

7.2.   Formal application for APA                                                                                   12

 

7.3.   Evaluation and negotiation of the APA                                                                 13

 

7.4.   Formal agreement of APA                                                                                      14

 

8.      APAs: Specific areas                                                                                                       15

 

8.1.   Transactions and Participants in the APA                                                              15

 

8.2.   Critical Assumptions                                                                                               15

 

8.3.   Rollback                                                                                                                  16

 

8.4.   Publication of statistics                                                                                           16

 

8.5.   Unilateral APAs                                                                                                      16

 

8.6.   Facilitating APAs for SMEs                                                                                   17


1. AIM AND CONTEXT

 

 

 

1.   The existence within the EU of different sets of national transfer pricing rules laying

 

down that transactions between taxpayers under common shareholder control should

 

be taxed as if they had taken place between independent taxpayers undermines the

 

proper functioning of the internal market and represents a large administrative

 

burden on taxpayers .

 

 

 

2.   In order to find pragmatic solutions to this problem, the EU Joint Transfer Pricing

 

Forum (JTPF) was set-up by the Commission in October 2002. The Commission has

 

reported twice on the work of the JTPF through two Communications. The first

 

Communication[1] presented a Code of Conduct[2] on the Convention for the

 

elimination of double taxation (the “Arbitration Convention[3]”) to ensure that it would

 

operate more efficiently. The second communication[4] presented a Code of Conduct[5]

 

on documentation requirements for transfer pricing within the EU- the EU Transfer

 

Pricing documentation (EUTPD.) The Code of Conduct on EUTPD sets out rules for

 

the amount and type of documentation that Member States will request and accept

 

for the purposes of their own transfer pricing rules.

 

 

 

3.   Transfer pricing related disputes between a taxpayer and a tax administration

 

frequently lead to double taxation and hence to disputes between tax administrations

 

to relieve this double tax. While the Code of Conduct on the effective

 

implementation of the Arbitration Convention adopted by Member States in

 

December 2004 should in principle help to eliminate transfer pricing double taxation

 

in the EU within a time frame of not more than three years, it would be highly

 

desirable to avoid such disputes between tax administrations in the first place.

 

 

 

4.   This third Communication therefore has as its main objective to prevent transfer

 

pricing disputes and associated double taxation from arising in the first place by

 

introducing Guidelines for Advance Pricing Agreements (hereafter: "APAs") within

 

the EU. APAs are agreements between the tax administrations of EU Member States

 

concerned defining how future transactions between related taxpayers established in

 

two or more Member States will be taxed. The Guidelines are based on the best

 

practice identified by the JTPF.

 

 

 

5.   The Commission considers that APAs Guidelines are an efficient tool for dispute

 

avoidance with valuable advantages for tax administrations and taxpayers. APAs will

 

provide in advance certainty concerning the transfer pricing methodology and

 

therefore simplify or prevent costly and time-consuming tax examinations into the

 

transactions included in the APA; this should lead to savings for all parties involved

 

in an APA.

 

 

 

6.   These APAs Guidelines explain how Member States should conduct the APA

 

process and provide guidance for taxpayers involved in the process. Following the guidelines will result in a quick and efficient resolution of the APA process and in

 

turn should encourage the use of APAs in the EU, leading to more dispute avoidance

 

and less double taxation.

 

 

 

2. ACTIVITIES OF THE EU JOINT TRANSFER PRICING FORUM FROM MARCH 2005 TO SEPTEMBER 2006

 

 

 

7.   The full report compiled by the JTPF is contained in a staff working document[6].    

 

Within the overall scope of dispute resolution and avoidance, the JTPF considered

 

several possible procedures which might lessen transfer pricing burdens on taxpayers

 

within the EU. These were simultaneous tax examinations, expert opinion or

 

mediation, a system of prior notification, consultation or agreement and the

 

possibilities for APA procedures.

 

 

 

2.1. Simultaneous tax examinations.

 

 

 

8.   These are generally considered as methods by which two or more countries combine

 

efforts to audit taxpayers together. While the JTPF acknowledged that this might

 

have attractions for Member States from a compliance perspective, the opportunities

 

for resolving disputes this way were considered to be fewer than the opportunities for

 

creating them.

 

 

 

2.2. Expert opinion or mediation.

 

 

 

9.   The JTPF reflected upon the statement in the commentary to article 25 of the OECD

 

Model Tax Convention that countries might seek an advisory opinion from an expert

 

to help resolve double taxation cases. Experts from the tax administrations did not

 

consider the idea of intervention by a third party expert as a useful tool to prevent

 

double taxation in the light of the Arbitration Convention which already compels the

 

resolution of cases through the medium of an independent arbitration panel.

 

 

 

2.3. Prior notification, prior consultation or prior agreement.

 

 

 

10. The JTPF examined the possibilities for a framework for prior agreement or at least

 

consultation before tax administrations make transfer pricing adjustments. The interaction could be limited to the mere notification of a transfer pricing adjustment

 

(which could speed up dispute resolution), be extended to prior consultation between

 

tax administrations before a transfer pricing adjustment was made final (which could

 

again speed up subsequent dispute resolution or avoid any subsequent resolution ever

 

becoming necessary) or use of a system of prior agreement (whereby a tax

 

administration would have to agree to provide a corresponding adjustment to

 

eliminate any double tax before the first adjustment was made final) to prevent a

 

dispute from coming into existence in the first place.

 

 

 

11. The JTPF found that, while it might be possible to do all of the above under existing

 

mechanisms, to develop effective mechanisms would be time consuming and might

 

well require fundamental changes in domestic laws. The JTPF felt that this might be outside its remit and that its time and resources should be concentrated on developing

 

APA procedures.

 

 

 

12. The Commission considers that a system of prior agreement would eliminate all

 

double taxation within the EU and therefore is of the opinion that this issue could

 

usefully be deepened in the future.

 

 

 

2.4. Advance Pricing Agreements.

 

 

 

13. An APA is an agreement between tax administrations over the way in which certain

 

transfer pricing transactions between taxpayers will be taxed in the future. Hence an

 

APA often prevents the need for a dispute between tax administrations over the

 

transactions included in the APA. APAs are an exemplary method of dispute

 

avoidance.

 

 

 

14. The JTPF examined the pros and cons of APAs in depth and concluded that there

 

were significant advantages for taxpayers and tax administrations that can arise from

 

APAs. First amongst these are the certainty over the taxation treatment of the

 

transactions in the APA – a certainty enjoyed by both the tax administrations (which

 

no longer have to conduct an audit to establish the correct transfer pricing; it is only

 

the correct application of the APA that has to be checked) and the taxpayers (who

 

know how to establish the correct transfer pricing since this has been agreed between

 

the tax administrations involved.)

 

 

 

15. Given the significant advantages of APAs, the JTPF felt that it was appropriate to

 

identify best practices for the conduct of APA procedures in the EU. These are

 

contained in the Guidelines in the Annex to this Communication.

 

 

 

2.5. What are the salient points of the EU APA guidelines?

 

 

 

16. The guidelines lay down procedures for an efficient APA process and detail the

 

stages usually found in an APA and what should ideally happen at each stage.

 

 

 

17. These guidelines focus on bi and multilateral APAs because they are considered as

 

the most efficient tool to prevent double taxation. However the Guidelines also

 

include a section on Unilateral APAs.

 

 

 

18. The guidelines envisage a four stage process and describe what should happen at

 

each stage.

 

 

 

19. APAs start with the taxpayers' decision to request an APA. The guidelines suggest an

 

informal approach be made to all the tax administrations potentially involved and

 

recommend what should be done in this informal stage to ensure an efficient

 

resolution of the APA application. Details of the type of information that should be

 

included in the formal application are provided on the grounds that, although each

 

APA will be different, the type of basic information likely to be necessary is often

 

similar from case to case.

 

 

 

20. Once the formal application is received, the guidelines describe what should happen

 

for the efficient conduct of the process. APAs will require that each tax

 

administration involved checks the application to decide whether the proposed

 

transfer pricing treatment in the application is acceptable. The precise details of the transfer pricing treatment will also need to be negotiated and agreed between the tax

 

administrations involved. Details of how these processes should be done are laid

 

down in the guidelines.

 

 

 

21. APAs will require formal agreement between the tax administrations involved, so

 

that they and the taxpayers involved are guaranteed certainty over the tax treatment

 

of the transactions. The guidelines provide details over what should be in this formal

 

agreement so that this certainty is given.

 

 

 

22. A typical timeline is provided in appendix of the guidelines to illustrate the conduct

 

of the APA process.

 

 

 

23. The guidelines also discuss some often problematic areas which frequently arise

 

during, or even before, APA procedures and detail ways in which these areas can be

 

rendered less likely to impede an efficient resolution of the APA process itself. The

 

JTPF concentrated on areas where experience has shown that the most problems

 

arise: retrospective application of the tax treatment in the APA, fees and complexity

 

thresholds (which could constitute an undesired barrier to the APA process) and the

 

types and amount of transactions that should be covered by the APA.

 

 

 

3. THE ARBITRATION CONVENTION AND RELATED ISSUES.

 

 

 

24. The follow-up of its work on the Arbitration Convention is an on-going process for

 

the JTPF. It is vital that Member States respect the terms of the Arbitration

 

Convention and of the related Code of Conduct adopted in December 2004.

 

 

 

25. With regard to the state of play of the ratification process of the Accession

 

Convention to the Arbitration Convention[7], at the end of September 2006, twelve

 

Member States had ratified it and the other Member States had indicated that the

 

Convention should be ratified in the coming months.

 

 

 

26. The JTPF has also monitored the implementation of the recommendation included in

 

its first Code of Conduct related to the suspension of tax collection. At the end of

 

September 2006, sixteen Member States have confirmed that they allow suspension

 

of tax collection during the dispute resolution procedure and the other Member States

 

have replied that they were preparing revised texts granting this possibility. This

 

issue will need further monitoring in the future.

 

 

 

27. Finally an update of the 2005 questionnaire on pending mutual agreement procedure

 

(MAPs) under the EU Arbitration Convention that was filled in by Member States

 

tax administrations revealed that none of the 24 cases for which the taxpayer had

 

made the request prior to 1 January 2000 was sent to an Arbitration Commission.

 

 

 

28. The Commission considers that the number of long outstanding transfer pricing

 

double tax cases means that, for reasons that need to be further explored, the

 

Arbitration Convention is not eliminating transfer pricing related double taxation in

 

the EU as well as it is supposed to. The proper functioning of the single market is

 

therefore impaired. The Commission intends to consider how this failing can be addressed. It might well be that an instrument that ensures a more timely and

 

effective elimination of double taxation, is necessary from the perspective of the

 

single market. The Commission also notes that the AC deals only with transfer

 

pricing related double taxation and that the new material in Article 25 of the OECD

 

Model Treaty and attached commentary goes further by offering treaty partners a

 

binding, compulsory arbitration procedure for eliminating all double taxation.

 

 

 

4. FUTURE WORK PROGRAMME OF THE JTPF

 

 

 

29. Considering these recent achievements in transfer pricing within the EU and the need

 

to ensure a monitoring of the implementation of the new tools but also to continue

 

the examination of several issues, the Commission has decided to renew the JTPF for

 

a new mandate of two years.

 

 

 

30. The JTPF has begun examining the potential new work programme for 2007-2008.

 

 

 

31. Under the current work programme of the JTPF, in particular penalties and interest

 

related to transfer pricing adjustments still need to be examined.

 

 

 

32. In the future, no doubt dispute avoidance and resolution will continue to feature as

 

they are of major importance to taxpayers and tax administrations.

 

 

 

33. The Forum should also assist the Commission in monitoring the implementation by

 

Member States of the Codes of Conduct and the Guidelines issued on the basis of the

 

JTPF conclusions. Indeed Member States will have to report on the implementation

 

of the different instruments and on practical problems ensued from their

 

implementation. This will allow the effectiveness of these instruments in the

 

elimination of double taxation in connection with the adjustment of profits of

 

associated enterprises to be assessed.

 

 

 

34. As regards the Arbitration Convention, the Commission having received additional

 

feedback since the adoption of the Code of Conduct, points out the following issues

 

where clarifications should be given to ensure a better functioning of the Convention:

 

the deadline for the setting-up of the arbitration commission, a common

 

understanding of the definition of a serious penalty, the possible extension of the

 

scope to more than two Member States, the deadline to implement the final decision,

 

the role of the taxpayer, what is precisely covered by a transfer pricing adjustment

 

(for example is thin capitalization to be considered). The Commission has finally

 

received comments arguing for the setting-up of a permanent and independent

 

Secretariat.

 

 

 

5. COMMISSION CONCLUSIONS

 

 

 

35. The Commission congratulates the JTPF for its work and its contribution to a better

 

environment within the EU for lessening the burden of transfer pricing rules in

 

general and dispute avoidance and resolution procedures in particular. The JTPF

 

achievements since October 2002 have lead to a number of improvements that have

 

facilitated cross-border trade and therefore have improved the functioning of the

 

Single Market.

 

 

 

36. With regard to the work achieved by the JTPF in the field of dispute avoidance and

 

resolution procedures, the Commission fully supports the conclusions and

 

suggestions of the JTPF on APAs. On the basis of this work the Commission has

 

drawn up the attached Guidelines for APAs in the EU.

 

 

 

37. These guidelines constitute a worthwhile blueprint for APA processes across the EU.

 

By following the guidelines, Member States will encourage the use of APAs which

 

will lead to better dispute avoidance, fewer disputes and less double taxation. This

 

will help achieve a removal of tax obstacles and the primary aims of the single

 

market: a better investment and more competitive business environment, growth and

 

jobs.

 

 

 

38. The Commission invites the Council to endorse the proposed Guidelines on APAs in

 

the EU and invites Member States to implement quickly the recommendations

 

included in the Guidelines in their national legislation or administrative rules.

 

 

 

39. Member States are invited to report annually to the Commission on any measures

 

they have taken further to these Guidelines and their practical functioning. On the

 

basis of these reports, the Commission will periodically review these Guidelines.

 

 

 

 

 

 

 

 

 

 

 

 


ANNEX

 

 

 

GUIDELINES FOR ADVANCE PRICING AGREEMENTS (APAS)

 

IN THE EUROPEAN UNION

 

 

 

1. LEGAL FRAMEWORK

 

 

 

1.   Article 25 (3) of the OECD Model Tax Convention permits countries to enter into

 

Adavance Pricing Agreements (Hereafter APAs).

 

 

 

2.   An APA is an arrangement that determines, in advance of controlled transactions, an

 

appropriate set of criteria (e.g. method, comparables and appropriate adjustments

 

thereto, critical assumptions as to future events) for the determination of the transfer

 

pricing for those transactions over a fixed period of time.

 

 

 

3.   The APA should not agree precisely the actual profit which should be taxed in the

 

future.

 

 

 

The APA should fix according to the arm's length principle arrangements for the

 

determining the transfer pricing for the future transactions in the APA.

 

 

 

4.   APAs must provide certainty for taxpayers and tax administrations. The precise way

 

this can be done can vary depending on the law of the Member State in which the

 

taxpayer pays tax.

 

 

 

5.   At all times, the taxpayer is subject to the usual rules of the tax administration.

 

Where there is an APA, a tax administration still has the right to conduct an audit.

 

However, under normal circumstances, the audit is carried out only to check and

 

monitor the APA by reviewing the terms and critical assumptions underlying the

 

APA.

 

 

 

6.   Bilateral and multilateral APAs will require agreements between tax administrations

 

and understandings between each tax administration and the taxpayer concerned.

 

Unilateral APAs will only require understandings between a tax administration and

 

the taxpayer concerned

 

 

 

2. ORGANISATION OF APA PROCEDURES IN MEMBER STATES

 

 

 

7.   Tax administrations should be able to draw upon all of their skill and adequate

 

resources to conduct an APA.

 

 

 

APA programmes should be centrally co-ordinated.

 

 

 

Tax administrations should carry out two broad roles to deal with an APA

 

application: firstly, evaluating the application and secondly negotiating an agreement

 

with the other tax administration.

 

 

 

8.   The negotiations between tax administrations should be conducted by the Competent

 

Authorities (Hereafter CAs). It is the CA's responsibility to ensure that the roles of

 

checking and evaluating the APA and negotiating with other countries are carried

 

out. This applies even if the CA calls upon other parts of the tax administration to

 

provide specialist knowledge.

 

 

 

3. ENTRY TO THE APA PROGRAMME

 

 

 

9.   It is up to the taxpayer to initially decide which transactions should be included in an

 

APA application.

 

 

 

The tax administration can review the application and modify or reject it.

 

 

 

The tax administration should accept the application where all requirements have

 

been met.

 

 

 

In practice, taxpayer and tax administration should work together to establish

 

mutually acceptable terms and conditions for an APA.

 

 

 

A withdrawal of an APA application should not automatically trigger an audit

 

 

 

10. Domestic considerations will legitimately affect how a tax administration runs its

 

APA programme.

 

 

 

11. Rules on fees and complexity thresholds can be used by tax administrations to ensure

 

APAs are only made available where they are considered appropriate by those tax

 

administrations.

 

 

 

4. FEES

 

 

 

12. It is for Member States to decide if a fee system is appropriate.

 

 

 

A fee should not be a precondition for an efficient service which should be provided

 

as a matter of course.

 

 

 

13. If they are used, fees should be charged by reference to a lump sum amount as a pure

 

entry fee and/or linked to the extra costs incurred by the tax administration as a result

 

of the APA.

 

 

 

14. Fees are particularly appropriate where without a fee a tax administration would be

 

unable to have an APA programme. But they should not be set so high so as to be a

 

disincentive to apply for an APA.

 

 

 

5. COMPLEXITY THRESHOLDS

 

 

 

15. If complexity thresholds are to be used, they should be used as a guide to whether an

 

APA is appropriate and they should be dependent on the facts and circumstances of

 

the case so not to be too prescriptive.

 

 

 

Complexity thresholds should be operated consistently for all taxpayers.

 

 

 

16. The likely attitude of other tax administrations directly involved in any APA should

 

also be a factor in the operation of any complexity threshold: a threshold could be

 

lowered where other tax administrations are willing to accept an APA application.

 

 

 

Whether a complexity threshold will operate to deny a taxpayer entry into an APA

 

programme should be discussed at any pre-filing meeting.

 

 

 

17. The number or size of transactions should not constitute an infallible guide to

 

uncertainty or transfer pricing risk. Complexity thresholds should take into account

 

the relative size and transfer pricing risk (to the taxpayer) of the transactions.

 

 

 

6. DOCUMENTATION

 

 

 

18. Where a Multinational Enterprise uses the EU Transfer Pricing Documentation

 

(EUTPD), this will serve as a useful basis for any APA application.

 

 

 

Useful additions can be any transfer pricing policy documentation on which the

 

application is based and any reports received on which the application relies.

 

Documentation requirements should not be unduly onerous for taxpayers but the tax

 

administration must be given the opportunity to fully evaluate the transactions

 

included in the APA.

 

 

 

Appendices A and B provide a list of documentation that is likely to be of use for any

 

APA application. What is actually required in the formal application should be

 

agreed at the pre-filing stage.

 

 

 

19. The specific information necessary to monitor the application of the APA should

 

always be agreed upon as part of the APA negotiation. The taxpayer must maintain

 

documentation throughout the APA so that the tax administration can monitor the

 

way the APA is applied.

 

 

 

7. CONDUCT OF THE APA PROCESS

 

 

 

20. Tax administrations and taxpayers should work together in as cooperative a manner

 

as possible to ensure that the APA is conducted as efficiently as possible.

 

 

 

An APA application should typically have four distinct stages:

 

(a) Pre-filing stage/Informal application

 

(b) Formal application

 

(c) Evaluation and negotiation of the APA

 

(d) Formal agreement

 

 

 

7.1. Pre-filing/Informal application stage.

 

 

 

21. The pre-filing meeting should allow all parties to assess the likely success of the

 

APA. The tax administration should be provided with sufficient information to permit this assessment. This information should at least describe the activity and

 

transactions to be covered, the taxpayers concerned, the preferred methodology,

 

desired length of the APA, any rollback and the countries to be involved.

 

 

 

The pre-filing stage must allow the tax administration to make a reasoned judgement

 

on whether the application will be acceptable.

 

 

 

Taxpayers should approach the tax administrations as early as possible once they are

 

clear about their intended actions when considering an APA.

 

 

 

22. Tax administrations might consider anonymous approaches from taxpayers but

 

nothing binding can be agreed on an anonymous basis. At any rate, the taxpayer's

 

intentions should be relatively fixed for the anonymous meeting and as such an

 

anonymous approach should not be a protracted process.

 

 

 

23. The tax administration should give a clear indication as soon as possible whether a

 

taxpayer's subsequent formal application is likely to be accepted and also indicate,

 

where possible, which aspects might be more controversial.

 

 

 

24. The taxpayer should approach all of the Member States directly involved in the

 

envisaged APA. Where more than one tax administration is consulted, the same

 

information should be provided to each (this should apply throughout the APA

 

process).

 

 

 

25. As part of the pre-filing stage, CAs should consult with one another where necessary.

 

Where such a consultation is deemed necessary, it should take place as quickly as

 

possible.

 

 

 

In the pre-filing stage, the taxpayer and tax administration should discuss what

 

documentation should be included with the formal application. Any complexity

 

threshold should also be discussed. The tax administration should also use the prefiling

 

stage to influence the content of the application where this will aid an efficient

 

outcome of the application.

 

 

 

7.2. Formal application for APA

 

 

 

26. Formal application for an APA should be made as early as possible in relation to the

 

years to be covered by the APA and in particular soon after any informal approach.

 

The taxpayer should make the formal application to the tax administration where it

 

pays tax and at the same time to all other countries concerned. Where Member States

 

have different administrative or legal procedures concerning APAs, it is the

 

taxpayer's responsibility to ensure that all applications are made in time. The tax

 

administration should endeavour to tell the taxpayer as soon as possible whether the

 

application for an APA has been formally accepted for processing and to request as

 

soon as possible any further documentation necessary to evaluate the APA and to

 

formulate a position.

 

 

 

Content of the formal application

 

 

 

27. In the initial formal application, the taxpayer should try to enclose all relevant

 

information necessary for the tax administration to evaluate the application and to

 

come to a view about the methodology that will be used later to calculate the arm's length price. Appendices A and B contain details of the type of information that

 

might often be necessary in all instances but is not necessarily a minimum and is not

 

the maximum. The precise information necessary for the formal application should

 

be tailored to the specific case.

 

 

 

28. A tax administration has the right to ask for supplementary information to evaluate

 

the APA application.

 

 

 

7.3. Evaluation and negotiation of the APA

 

 

 

29. The aims of the evaluation and negotiation are distinct even if it might sometimes be

 

appropriate to carry out these tasks partly together. A balanced approach should be

 

adopted to ensure that the evaluation takes place as quickly as possible and the

 

negotiation begins as soon as possible.

 

 

 

In the evaluation, the tax administration should formulate its preferred terms and

 

conditions for the APA. The negotiation with the other tax administrations concerned

 

should resolve any differences which arise between tax administrations so that one

 

set of terms and conditions can be provided to all the taxpayers involved.

 

 

 

30. As soon as possible after a formal application is received, the CAs of the tax

 

administrations concerned should contact one another and establish a timetable for

 

the APA. The taxpayer should be involved in the creation of the timetable and a

 

model timetable is contained in Appendix C. In multilateral APAs, the CAs could

 

agree that one CA takes the lead in organising the procedure.

 

 

 

31. The taxpayer should help the tax administration to evaluate the application through

 

the provision of information. The evaluation should be completed as soon as possible

 

to allow negotiation to be started.

 

 

 

32. Tax administrations should make every effort to keep the burden of the evaluation to

 

a minimum by requiring only pertinent information; taxpayers must in turn provide

 

any information requested as quickly as possible. It should be possible to agree what

 

information is relevant.

 

 

 

33. All information provided to one tax administration should also be provided to the

 

other tax administrations involved. Details of what information has been requested

 

should also be exchanged. A convention should be established for each APA to say

 

whether the taxpayer or, exceptionally, the tax administration through exchange of

 

information will do this.

 

 

 

34. Where a tax administration forms an evaluation different from the taxpayer's

 

application, then its evaluation should be discussed with the taxpayer.

 

 

 

35. As part of the evaluation process, the tax administration should try to obtain the tax

 

payer's agreement with the position of the tax administration. It is advantageous for

 

tax administration and taxpayer to work together to keep the proceedings on track to

 

a mutually acceptable conclusion.

 

 

 

36. Tax administrations and taxpayers should work together in an APA to minimise any

 

delay, in particular by making timely requests for necessary information and

 

supplying information in a timely manner. Tax administrations should always consider making joint/common requests for information when this will further

 

minimise delays.

 

 

 

37. As soon as its evaluation is complete, a tax administration should endeavour to begin

 

negotiations and, if necessary, the other tax administration involved should

 

endeavour to complete its own evaluation so that negotiations can begin.

 

 

 

38. The evaluation stage should involve CA inter-action where this will aid reaching an

 

APA. Provisional agreement should be reached where possible. However, it is

 

preferable that a tax administration has in mind at least a preliminary evaluation

 

before actual CA negotiations begin.

 

 

 

39. If it would aid the APA procedure, preliminary negotiations should begin before the

 

evaluation is finalised but this should not permit tax administrations to

 

inappropriately postpone finalizing the evaluation.

 

 

 

40. For most APAs, each CA should produce a position paper containing the tax

 

administration's evaluation. The formal exchange of positions should take place with

 

an exchange of CA position papers. This should be done as soon as possible after the

 

application is received.

 

 

 

41. Where appropriate, CAs do not need to exchange position papers if this makes the

 

APA process more efficient and faster. But in most cases having all CAs prepare

 

position papers before full negotiations begin will help to identify and thus resolve

 

any disputes quickly and efficiently. Where one CA has prepared a position paper,

 

any other CA involved in the negotiation should at least set out what disagreement

 

exists.

 

 

 

Contents of CA position papers

 

 

 

42. The contents of a position paper should set out the view of the tax administration

 

involved in the APA. Appendix D lists some of the details that are likely to be

 

necessary in a CA position paper.

 

 

 

43. Negotiations should be started by the sending of CA papers. A timetable should be

 

agreed for the negotiations. Taxpayers should be kept informed of all significant

 

developments.

 

If the CAs agree, taxpayers should be allowed to attend CA meetings to address

 

factual matters by making a presentation.

 

 

 

44. If beneficial, CAs should arrange regular meetings to keep the whole APA

 

programme up-to-date but this should not impede arranging and conducting meetings

 

on individual cases.

 

 

 

7.4. Formal agreement of APA

 

 

 

45. The formal APA should be given effect by formal agreements between the tax

 

administrations involved (in a multi-lateral APA there could be one agreement

 

between all tax administrations or a series of bilateral agreements between each tax

 

administration).

 

All agreements should detail the terms and conditions of the APA.

 

 

 

46. These agreements should give certainty to those involved in the APA and provided

 

the relevant terms of the APA are met, then the transfer pricing for the transactions

 

will be as determined in the APA and that the transactions will not be subject to a

 

different interpretation by the tax administration. Tax administrations should ensure

 

that they are able to provide this certainty.

 

 

 

47. Appendix E contains information which is likely to be necessary for all APA formal

 

agreements.

 

 

 

8. APAS: SPECIFIC AREAS.

 

 

 

8.1. Transactions and Participants in the APA.

 

 

 

48. It is up to the taxpayer to initially decide which transactions and which group entities

 

he wants to have included in the APA. But it is the decision of the tax administration

 

whether it accepts the taxpayer's application.

 

 

 

49. It is important that tax administrations are as flexible as possible in allowing the

 

taxpayer to include what he wishes in the APA. It is recommended that the taxpayer's

 

logic for excluding as well as including companies and transactions is explained in

 

the application.

 

 

 

50. A tax administration should exchange information (EOI) spontaneously (subject to

 

any domestic law limitations) with another tax administration which the first tax

 

administration feels should be included in the APA. The taxpayer would need to be

 

consulted about which tax administrations to involve in the APA since the taxpayer's

 

agreement to the terms and conditions of the APA needs to be obtained.

 

 

 

8.2. Critical Assumptions

 

 

 

51. The taxpayer should describe in the application the assumptions on which the ability

 

of the methodology to accurately reflect the arm's length pricing of future

 

transactions are based.

 

 

 

52. Critical assumptions are by their nature vital to the APA and should be drafted

 

carefully to ensure the capability of the APA to reflect arm's length pricing.

 

 

 

53. Taxpayers and tax administrations should attempt to identify critical assumptions

 

that are based where possible on observable, reliable and independent data.

 

 

 

54. Critical assumptions should be tailored to the individual circumstances of the

 

taxpayer, the particular commercial environment, the methodology and the type of

 

transactions covered.

 

 

 

55. Critical assumptions should not be drawn so tightly that certainty provided by the

 

APA is jeopardised but should encompass as wide a variation of the underlying facts

 

as those involved in the APA feel comfortable with.

 

     The APA agreement should include parameters for an acceptable level of divergence

 

for some assumptions in advance and only if these parameters are exceeded should a

 

renegotiation become necessary.

 

 

 

57. Taxpayers should inform their tax administrations if critical assumptions are not met.

 

All those involved in the APA should consult with each other to examine the reasons

 

why a critical assumption has not been met and to see if the APA methodology is

 

still appropriate.

 

 

 

An attempt should be made renegotiate the APA if at all possible.

 

 

 

8.3. Rollback

 

 

 

58. Rollback – when provided for in domestic legislation –can be considered where it

 

will resolve disputes or remove the possibility of disputes in earlier periods.

 

 

 

59. Rollback should only be a secondary result of the APA and should only be carried

 

out where it is appropriate to the facts of the case. Similar facts and circumstances to

 

those in the APA should have existed for previous periods in order for rollback to be

 

appropriate.

 

 

 

60. Rollback of the APA should only be applied with the taxpayer's consent.

 

 

 

61. A tax administration has recourse to the usual domestic measures if, as part of the

 

APA process, it discovers information which would affect the taxation of earlier

 

periods. But tax administrations should advise the taxpayer of any such intended

 

action to give the taxpayer the opportunity of explaining any apparent inconsistency

 

before making a tax re-assessment concerning previous periods.

 

 

 

8.4. Publication of statistics

 

 

 

62. The publication of some statistical information on APAs by each tax administration

 

would be useful

 

 

 

8.5. Unilateral APAs

 

 

 

63. Although there may be circumstances where the taxpayer has good reasons to believe

 

that a unilateral APA is more appropriate than a bilateral, bilateral APAs are

 

preferred over unilateral APAs. Where a unilateral APA may reduce the risk of

 

double taxation to some degree, care must be taken that unilateral APAs are

 

consistent with the arm's length principle in the same way as bilateral or multilateral

 

APAs.

 

 

 

64. In the first instance the taxpayer has the right to decide whether a unilateral or

 

bilateral APA is required.

 

 

 

65. The option of including another MS in the APA could be considered by the MS

 

preparing for a unilateral APA. Taxpayers however should not be forced into a

 

bilateral APA.

 

 

 

66. Tax administrations are entitled to turn down requests for unilateral APAs where the

 

tax administration feels that a bilateral or multi-lateral APA is more appropriate, or

 

feels that no APA at all is appropriate.

 

 

 

67. The rights of other tax administrations and taxpayers should not be affected by the

 

existence of a unilateral APA. When a unilateral APA is concluded, a MAP should

 

not be excluded afterwards

 

 

 

68. With the "Code of Conduct" (Business Taxation), Member States have committed

 

themselves to spontaneously exchange details of concluded unilateral APAs. The

 

Exchange of Information (EOI) should be made to any other tax administration

 

directly concerned by the unilateral APA and should be done as swiftly as possible

 

after the conclusion of the APA.

 

 

 

8.6. Facilitating APAs for SMEs

 

 

 

69. Tax administrations should use their experience of the problems faced by SMEs to

 

facilitate access to APAs for SMEs where APAs are useful for dispute avoidance or

 

resolution

 

 

 

 

 

 

 

 

 

 


Appendix A – A list of the type of information that is likely to be

 

necessary with the formal application for a bilateral or

 

multilateral APA.

 

 

 

The actual information will vary depending on the facts of the case and would need to be

 

discussed between the taxpayers and tax administrations, ideally at the pre-filing meeting.

 

 

 

This information can be considered as two broad types: information about the past –historical

 

information – which might already exist in some format but will need to be compiled for the

 

APA and information that may need to be created specifically for the APA.

 

 

 

When considering historical information, MS should keep in mind that APAs concern the

 

future and that historical information may have less relevance for future periods. That said,

 

historical information will be necessary to place the APA in perspective and to allow better

 

judgements about the future to be made.

 

 

 

The pre-filing stage is a useful time for tax administration and taxpayer to decide what

 

information should accompany the formal application. The aim should be to strike a balance

 

between the tax administration having enough information to consider the application

 

properly and the taxpayer not being required to produce unnecessarily onerous amounts of

 

information.

 

 

 

In all cases the tax administration has the right to require further information and the taxpayer

 

has the right to submit further information.

 

 

 

1.   Names and addresses of all associated enterprises (including all permanent

 

establishments) in the APA.

 

 

 

2.   A group structure showing all entities involved in the trade of the enterprises in the

 

APA.

 

 

 

3.   An analysis of industry and market trends which are expected to affect the business.

 

Any marketing or financial studies for the business which lead to this expectation

 

should also be provided where relevant. An outline should be provided of the

 

business strategy expected to be used for the period of the APA and, where different,

 

of the strategy employed for previous periods. This might include projections used in

 

the plan for the future, management budgets, information on expected business

 

trends and competition, future marketing, production or R&D strategy. Details of

 

who has the power and responsibility of developing and dictating business strategy

 

could be provided.

 

 

 

4.   The period for which the taxpayer desires that the APA should apply, including any

 

request for rollback.

 

 

 

5.   A functional analysis (see Appendix B) of the parties and transactions to be covered

 

by the APA

 

 

 

6.   The reason why the taxpayer feels an APA is appropriate for these particular

 

transactions.

 

 

 

7.   The critical assumptions integral to the APA.

 

 

 

 

 

8.   Details of the proposed methodology for the covered transactions and evidence for

 

the view that this produces results consistent with the arm's length principle.

 

Depending on the methodology and how it is to be applied, this evidence could

 

include:

 

 

 

(a) A review of the five OECD comparability factors including comparables and

 

any adjustments made to achieve comparability.

 

(b) Reasons why the method in the APA application was selected

 

(c) A demonstration by reference to financial information of how the proposed

 

methodology is to be implemented.

 

 

 

9.   A list of any APAs already entered into by any of the associated enterprises involved

 

in the APA which relate to the same or similar transactions if not already available to

 

the tax authorities.

 

 

 

10. Details of financial information of the entities in the APA for the three years prior to

 

the APA. This could embody:

 

 

 

(a) the three years statutory accounts.

 

(b) an analysis of product/service lines showing gross and net margins with

 

associated costs for the products/services to be included in the APA, if

 

available and useful.

 

 

 

11. A list of any legal agreements between any associated enterprises which affect the

 

transactions in the APA. For example, licence agreements, purchase agreements,

 

distribution agreements, R&D service agreements.

 

 

 

12. For any years where a rollback is requested – where possible in domestic law -

 

details of the tax position of each entity involved for these years, e.g. tax return

 

agreed, submitted but not agreed, submitted and under audit etc., together with

 

details of any MAP process still open and an analysis of the time limits laws in place

 

in each relevant jurisdiction to show whether years of assessment are capable of

 

being adjusted.

 

 

 

 

 

 


Appendix B: Functional Analysis

 

 

 

The functional analysis is the key tool for any transfer pricing work. The contents should be

 

tailored to the specific taxpayer and the transactions in the APA. Dependant on the situation,

 

the APA application should also show to a certain extent which entity carries out what

 

functions in the overall business of the MNE. Tax administrations however should keep in

 

mind that they are not evaluating transactions which are not in the APA. This information will

 

have to be sufficient for them to understand both ends of the transactions under review.

 

 

 

Activities and Functions

 

 

 

All the activities relating to the transactions covered by the APA should be described

 

(Research and development, manufacturing, distribution, marketing, the type of service

 

activity carried out, etc.) The economic and entrepreneurial worth of these activities should be

 

made clear along with details of how these activities inter-act with those carried out by other

 

group entities. The market and the level in the market place of the entity should be described,

 

along with the type of customer, what product is sold, how it is developed or acquired, who it

 

is acquired from and sold to.

 

 

 

Risks

 

 

 

The risks assumed by the entity with regard to the transactions in the APA should be

 

described and assessed. Typical risks might include product, technological, obsolescence,

 

market, credit, foreign exchange and legal.

 

 

 

Assets employed

 

 

 

The amount and type of working capital, tangible and intangible assets utilised in the APA

 

should be described. Again the relative importance of these in the trade should be analysed if

 

possible.

 

 

 

There will be further details necessary if intellectual property right (IPR) is used in the

 

transactions in the APA. Information should be provided on how the IPR was created within

 

the group or acquired by the group. It should be made clear which entity now owns the IPR

 

and how it came to do so, how it is utilised and what value it adds to the business.

 

 

 

 


Appendix C: Tentative time frame for concluding an APA

 

 

 

Every APA is different; therefore, there are inherent dangers in stipulating a common

 

timetable for every APA. Best practice is for all parties to formulate a timetable as early as

 

possible once the APA application has been received. Tax administrations can help keep the

 

time to negotiate an APA as short as possible by examining information quickly and

 

efficiently; taxpayers can help to keep the time to negotiate an APA as short as possible by

 

providing complete information quickly. The timetable below is illustrative, but contains all

 

the stages typically found in APAs.

 

 

 

Pre-filing stage – informal application – month 0

 

 

 

An informal approach is made by a taxpayer to two tax administrations, requesting an APA.

 

The tax administrations listen to the statements made and indicate whether the particular case

 

merits an APA. The tax administrations consult with one another to ensure both will agree.

 

Each has brief discussions with the taxpayer over what information should be provided in the

 

first instance and explores what methodology will be appropriate.

 

 

 

Months 1-3

 

 

 

The formal application is received by each tax administration. The CAs establish in month 1 a

 

timetable to evaluate and negotiate the APA. Both tax administrations conduct an initial

 

review independently and issue information requests if necessary.

 

 

 

Months 4-12

 

 

 

Tax administrations continue to evaluate independently with the full cooperation of the

 

taxpayers. A first full face to face meeting could take place with a presentation to all involved

 

parties by the taxpayer. The CAs consult as appropriate. The taxpayer is involved in this

 

evaluation and is consulted. By the end of this period each tax administration has formulated

 

its position. The CAs are able to exchange position papers. They agree to meet to discuss

 

these in Month 14.

 

 

 

Month 13

 

 

 

Each CA evaluates the other CA's position paper and obtains further information where

 

necessary. (Alternatively, in month 12 one CA issues a position paper and in month 13 the

 

other CA issues a position paper rebutting the position and suggesting alternatives.)

 

 

 

Months 14-16

 

 

 

Discussions occur between CAs. Further clarifications are obtained from the taxpayer who is

 

kept informed of the CA negotiations.

 

 

 

Month 17

 

 

 

The CAs reach agreement. The taxpayers are consulted and indicate their agreement.

 

 

 

 


Month 18

 

 

 

The APA is formally agreed between the CAs. Formal documents are exchanged. The

 

taxpayers receive assurances that the APA is acceptable.

 

 

 

More complex cases may take longer, but, with the cooperation and planning of all parties,

 

the time taken to conclude an APA should be kept to a minimum.

 

 

 

 

 

 

 

 


Appendix D: Contents of the CA position paper

 

 

 

Since each case will be different position papers will vary. But below is general guidance

 

which should be applicable for the contents of all position papers. The key to concluding an

 

APA procedure without unnecessary delay will always be to commence CA negotiations most

 

often through a position paper as soon as possible after the application is received.

 

 

 

It will often be appropriate for a position paper to contain:

 

 

 

1.   The conclusion of the CA together with a rationale. This should include details of the

 

preferred methodology and the reasoning for this.

 

 

 

2.   Reasons for any rejection or modification of the taxpayer's initially preferred method.

 

 

 

3.   Details of the facts considered as most relevant in forming the above conclusion. If

 

relevant, special consideration should be given to any facts which came to light

 

during the APA process as opposed to in the original application.

 

 

 

4.   Details of the critical assumptions that the APA will be dependent on.

 

 

 

5.   A position on any retrospective element and on the future length of the APA.

 

 

 

6.   Suggestions on how the APA should be monitored.

 

 

 

7.   A description of the Treaty law and domestic law that will govern the APA and

 

provide certainty for the taxpayer.

 

 

 

 


Appendix E: Details likely to be necessary in an APA agreement

 

 

 

1.   The duration of the APA and day of entry into force.

 

 

 

2.   Details of the methodology acceptable for determining transfer pricing and the

 

critical assumptions (see appendix F) that must be followed for the APA to apply.

 

 

 

3.   An agreement that the APA will be binding on the tax administrations involved

 

 

 

4.   An agreement of how the APA is to be monitored

 

 

 

5.   An agreement of what documentation is to be maintained throughout the APA to

 

allow monitoring to take place, for example an annual report.

 

 

 

6.   Any agreement on any retrospective treatment.

 

 

 

7.   Any circumstances which will require the APA to be revised.

 

 

 

8.   Any circumstances which will result in the APA being rescinded prospectively or

 

even retrospectively (for instance if false information has been provided.)

 

 

 

 


APPENDIX F – Critical assumptions

 

 

 

Critical assumptions will vary depending on the APA itself but it is possible that assumptions

 

will need to be made about some of the following areas:

 

 

 

1.   the relevant domestic tax law and treaty provisions;

 

 

 

2.   the tariffs, duties, import restrictions and government regulations;

 

 

 

3.   the economic conditions, market share, market conditions, end-selling price, and

 

sales volume;

 

 

 

4.   the nature of the functions and risks of the enterprises involved in the transactions;

 

 

 

5.   the exchange rates, interest rates, credit rating and capital structure;

 

 

 

6.   the management or financial accounting and classification of income and expenses;

 

 

 

7.   the enterprises that will operate in each jurisdiction and the form in which they will

 

do so.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



[1]       OJ C/2004/122 of 30/04/2004 p.4

[2]       OJ C/2006/176 of 28/07/2006 p.8

[3]       OJ L/1990/225 of 20/08/1990 – Convention 90/436/EEC

[4]       OJ C/2006/49 of 28/02/2006 p.23

[5]       OJ C/2006/176 of 28/07/2006 p.1

[6]       Not yet published

[7]       OJ C/2005/160 of 30/06/2005 p.1-22

 

 

COMMISSION OF THE EUROPEAN COMMUNITIES

 

 

 

Brussels, 23.04.2004

 

 

 

COM(2004) 297 final

 

 

 

COMMUNICATION FROM THE COMMISSION

 

TO THE COUNCIL, THE EUROPEAN PARLIAMENT AND

 

THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE

 

 

 

on the work of the EU Joint Transfer Pricing Forum in the field of business taxation

 

from October 2002 to December 2003 and on a proposal for a Code of Conduct for the

 

effective implementation of the Arbitration Convention (90/436/EEC of 23 July 1990)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

INTRODUCTION

 

 

 

1.      Background

 

 

 

2.      Activities of the EU Joint Transfer Pricing Forum from October 2002 to December

 

2003

 

 

 

3.      Commission conclusions

 

 

 

ANNEX I:      ESTABLISHMENT OF THE JTPF

 

 

 

ANNEX II:    DRAFT CODE OF CONDUCT

 

 

 

ANNEX III:   REPORT ON THE ACTIVITIES OF THE EU JOINT TRANSFER PRICING

 

FORUM IN THE FIELD OF BUSINESS TAXATION OCTOBER 2002 –

 

DECEMBER 2003

 

 

 

1.      Summary of the proceedings of the meetings of the EU Joint Transfer Pricing Forum

 

 

 

2.      Conclusions and recommendations on issues related to the Arbitration Convention

 

and on certain related issues of mutual agreement procedures under double tax

 

treaties between Member States

 

 

 

3.      Other issues examined by the JTPF in relation to double taxation resulting from

 

transfer pricing adjustments

 

 

 

4.      Conclusions

 

 

 

ANNEX I::     MEMBER STATES' POSITION DURING THE INTERIM PERIOD

 

 

 

ANNEX II:    DRAFT CODE OF CONDUCT

 

 

 

Annex to the draft Code of Conduct

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTRODUCTION

 

 

 

1.      BACKGROUND

 

 

 

1.      The European Commission's Study “Company Taxation in the Internal Market"[1]

 

examined whether the current application of company taxation in the Internal Market

 

creates inefficiencies and prevents operators from exploiting its full benefits. It did so

 

in response to the mandate given to the Commission by the Council of Ministers in

 

July 1999 to investigate the impact of differentials in the effective level of corporate

 

taxation in Member States on the location of economic activity and investment and

 

the impact of tax provisions that constitute obstacles to cross-border economic

 

activities in the Internal Market and remedies thereto.

 

 

 

2.      This Study highlighted in detail (part III, chapter 5) the increasing importance of

 

transfer pricing tax problems as an Internal Market issue. The obstacles and problems

 

identified are varied in nature but all have become increasingly important in recent

 

years and call for action. The deepening of the Internal Market and the growing

 

number of new technologies and business structures at national and international

 

level has aggravated these problems over the last few years. There is convincing

 

evidence that applying transfer prices for tax purposes is complicated and often

 

problematic in practice. A common feature of many of the specific individual

 

problems is that closer co-operation between tax administrations and business could

 

lead to solutions. The Study considers the improvement of co-ordination between

 

Member States of major importance in the short term in order to reduce compliance

 

costs and lessen the uncertainty relating to transfer pricing.

 

 

 

3.      One of the possible methods of tackling the specific EU transfer pricing problems

 

mentioned in the Study, and proposed by the Commission in its Communication

 

“Towards an Internal Market without tax obstacles – A strategy for providing

 

companies with a consolidated corporate tax base for their EU-wide activities ”[2], was

 

the establishment of a “EU Joint Transfer Pricing Forum” (Hereafter: JTPF).

 

 

 

4.      Following the Council Conclusions of 11 March 2002 welcoming this initiative, the

 

Commission established the JTPF. Its members consist of an expert of each Member

 

State and 10 experts from business. Representatives from applicant countries and the

 

OECD-Secretariat attend as observers. Details on the procedure followed for the

 

selection of the Chairman and the JTPF Members are contained in Annex I of this

 

Communication. The proceedings of the JTPF are available on the Commission's

 

website.[3]

 

 


2.      ACTIVITIES OF THE EU JOINT TRANSFER PRICING FORUM FROM OCTOBER 2002 TO DECEMBER 2003

 

 

 

5.      The JTPF met for the first time on 3 October 2002 and established a two-year work

 

programme. An activity report of the JTPF, adopted by consensus and covering the

 

first element of the work programme, is annexed to the present Communication

 

(Annex III). The JTPF has so far mainly discussed the problems related to the

 

application of the Arbitration Convention[4]. It has examined problems that have

 

occurred in the last few years as a result of the fact that not all contracting states have

 

ratified the Accession Convention of the Republic of Austria, the Republic of

 

Finland and the Kingdom of Sweden (Accession Convention) and the Protocol

 

amending the original Convention (Prolongation Protocol). Furthermore, the JTPF

 

has looked for clear definitions of the starting point of the three year (notification)

 

and two-year (mutual agreement) periods enshrined in the first phase of the

 

arbitration procedure established under the Arbitration Convention. It has also

 

examined ways to improve the mutual agreement and arbitration phases and

 

addressed issues such as the interaction of the mutual agreement and arbitration

 

procedure with administrative and judicial appeals, the possibility of suspending tax

 

collection during cross border dispute resolution procedures, the accession of EU

 

Acceding States to the Arbitration Convention and the effect of interest charges and

 

penalties. The activity report summarises the deliberations of the JTPF. It concludes

 

by inviting the Commission to propose a Code of Conduct setting out detailed rules

 

to ensure the effective implementation of the Arbitration Convention (Convention

 

90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with

 

the adjustment of profits of associated enterprises) and dealing with certain related

 

issues of the mutual agreement procedures under double tax treaties between

 

Member States. The report proposes that this Code could be adopted by the Council

 

in the format of a Resolution.

 

 

 

3.      COMMISSION CONCLUSIONS

 

 

 

6.      Considering the aforementioned activity report of the JTPF, the Commission can

 

only express its satisfaction with the work of the JTPF which has proved to be a

 

constructive tool to tackle the challenges posed by transfer pricing policies in the EU.

 

 

 

7.      The experts from the Member States and those from business have examined the

 

different issues at stake in an open and constructive manner that has lead to

 

pragmatic non-legislative proposals and recommendations for solutions.

 

 

 

8.      However, the Commission regrets that the JTPF had to spend much of its meeting

 

time on issues linked to the fact that the Prolongation Protocol to the Arbitration

 

Convention as well as the Accession Convention, signed in 1999 and 1995

 

respectively, have not yet been ratified by all Member States. Clearly this situation

 

would not have arisen had the Council followed the original Commission proposal of

 

adopting an instrument under Community law rather than a multilateral Convention.

 

 

 

 

 

9.         The specific problem of the accession of the EU Member States to the Arbitration

 

Convention (3.1 of the JTPF report) is of particular concern to the Commission. As

 

demonstrated by the previous enlargement of the EU, the time that the future 25 EU

 

Member States could take to ratify this instrument might seriously jeopardise its

 

added value for the new EU Member States and for corporate business as a whole in

 

that geographic area. Moreover the network of bilateral double tax treaties between

 

the new EU Member States themselves and between those States and the current

 

Member States is not complete, despite the efforts made to complete it. This

 

sometimes makes it impossible for business to request a mutual agreement procedure

 

so as to obtain relief from double taxation. The Commission therefore endorses fully

 

the recommendation of the JTPF that the Member States should commit to

 

ratification of an Accession Convention for the new EU Member States before the

 

end of the first half of 2006. Moreover, this Accession Convention should contain a

 

provision permitting immediate bilateral application between ratifying Member

 

States. The Commission is also in favour of including in the Arbitration Convention

 

itself a legal provision that would avoid a repeat of the time consuming ratification

 

process after each EU enlargement e.g by providing for automatic accession or

 

accession by unilateral declaration.

 

 

 

10.    The Commission looks forward to the Forum's work on the remainder of the work

 

programme adopted in 2002. In this context, the Commission would like to dispel

 

misunderstandings that may have arisen concerning the Forum's mandate to "identify

 

possible non-legislative improvements to … practical problems". The objective of

 

this element of the mandate was to avoid any prejudice to the respective

 

competencies of the EU institutions and the Member States and thus it concerns

 

Community legislation. This element of the mandate should not in any way be

 

considered to preclude the JTPF from identifying practical improvements that could

 

imply legislative changes in certain Member States. Since the JTPF is a purely

 

consultative expert group, the decision on any potential legislative changes would in

 

any event remain solely with the Member States concerned.

 

 

 

11.    Taking into account the remaining and important outstanding issues of the JTPF's

 

working programme adopted in 2002, the Commission intends to extend from June

 

2004 until the end of 2004 the initial period of two years foreseen for the activities of

 

the JTPF. Taking into account the overall results and further issues for discussion

 

identified and proposed by the JTPF, the Commission might decide on a further

 

extension of the JTPF mandate for another period of two years.

 

 

 

12.    Deliberations in the JTPF have highlighted the difficulties encountered in the

 

implementation of the Arbitration Convention. The conclusions and

 

recommendations proposed by the JTPF would resolve many of its shortcomings and

 

the Commission is of the opinion that their practical implementation could lead to

 

important progress in achieving a proper tool to remedy double taxation related to

 

transfer pricing in the E.U. In view of these considerations and in function of the

 

follow-up given to the present Commission proposal by the Council, the Commission

 

will assess the need for proposing an instrument of Community law at a later stage.

 

 

 

13.    As an intermediate solution however, the Commission fully supports the conclusions

 

and recommendations contained in the first activity report of the JTPF, and it

 

therefore invites the Council to adopt as soon as possible the proposal for a Code of

 

Conduct on the effective implementation of Convention 90/436/EEC of

 

23 July 1990, on the elimination of double taxation in connection with the

 

adjustment of profits of associated enterprises, as laid down in annex II of this

 

Communication.


ANNEX I: ESTABLISHMENT OF THE JTPF

 

 

 

Selection of Chair

 

 

 

The Council conclusions of 11 March 2002 stated that the Chair of the JTPF should

 

be an independent personality with long standing experience in the field of transfer

 

pricing who should be appointed by the Commission in agreement with a Selection

 

Board composed of high level representatives of the Council Presidency, the

 

Commission and the UNICE Tax Committee.

 

 

 

This Selection Board was composed of Mr. José Maria VALLEJO CHAMORRO,

 

Deputy Director General for International Tax Affairs, representing the Spanish

 

Presidency, Mr. Jan van der BIJL, Chairman of the UNICE Fiscal Affairs

 

Committee, and Mr. Michel AUJEAN, Director of the Directorate for Tax Policy of

 

the Commission's Directorate-General for Taxation and the Customs Union. The

 

selection board unanimously agreed on Mr. Bruno GIBERT, partner of CMS Bureau

 

Francis Lefebvre, as Chairman of the JTPF

 

 

 

Selection of business experts

 

 

 

Following the publication of the call for applications of interest for the establishment

 

of the JTPF in the OJ C 90 of 16 April 2002, the above selection board, referred to in

 

paragraph 1.2.1 §6, met on 28 June 2002 to consider the list of selected applications

 

for participation as business representatives. These members would act in their own

 

capacity and for a renewable period of two years.

 

 

 

The Commission received 60 applications of which six were received after the

 

deadline fixed in the call for applications.

 

 

 

Taking into account the criteria laid down in the call, (proven abilities and

 

experience in the field of transfer pricing, proven knowledge and experience with EU

 

Community legislation and internal market and taxation issues in particular) and the

 

need for a balanced composition in terms of geographical origin, size of business and

 

type of activity, the selection board decided to select the following applicants (in

 

alphabetical order:

 

 

 

Mr. Philip GILLET

 

Mr. Eduardo GRACIA

 

Mr. Guy KERSCH

 

Dr. Klaus KROPPEN

 

Prof. Gugliemo MAISTO

 

Dr. Ulrich MOEBUS

 

Mrs. Sylvie PUECH

 

Mr. Chris ROLFE

 

Mr. Theo SCHMIT

 

Prof. Dirk VAN STAPPEN

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appointment of experts from Member States’ tax administrations

 

 

 

A letter inviting Member States to appoint an expert to participate in the JTPF was

 

sent out on 10 June 2002. All addressees replied positively and appointed an expert.

 

 

 

Appointment of observers from EU Candidate Member States’ tax

 

administrations and OECD

 

 

 

A letter inviting EU candidate countries and OECD to appoint an observer to the

 

JTPF was sent out on 10 June 2002. Except for Romania all addressees replied

 

positively and appointed an observer.

 

 


ANNEX II: DRAFT CODE OF CONDUCT

 

 

 

THE COUNCIL OF THE EUROPEAN UNION AND THE REPRESENTATIVES

 

OF THE GOVERNMENTS OF THE MEMBER STATES, MEETING WITHIN

 

THE COUNCIL,

 

 

 

HAVING REGARD TO Convention 90/436/EEC of 23 July 1990, on the

 

elimination of double taxation in connection with the adjustment of profits of

 

associated enterprises,

 

 

 

ACKNOWLEDGING the need both for Member States and taxpayers to have more

 

detailed rules to implement efficiently the aforementioned Convention,

 

NOTING the Commission communication on the report on the activities of the EU

 

Joint Transfer Pricing Forum in the field of business taxation of ……………2004,

 

 

 

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 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

 

Convention 90/436/EEC of 23 July 1990, on the elimination of double taxation

 

in connection with the adjustment of profits of associated enterprises and

 

certain related issues of the mutual agreement procedure under double tax

 

treaties between Member States.

 

 

 

1.      The starting point of the three-year period (deadline for submitting the

 

request according to Article 6 (1) of the Arbitration Convention

 

 

 

The date of the “first tax assessment notice or equivalent which results or is likely to

 

result in double taxation within the meaning of Article 1, e.g. due to a transfer

 

pricing adjustment” is considered as the starting point for the three-year period.

 

 

 

As far as transfer pricing cases are concerned, Member States are recommended to

 

apply this definition also to the determination of the three-year period as provided for

 

in Article 25 (1) of the OECD Model Tax Convention on Income and on Capital and

 

implemented in the double tax treaties between EU Member States.

 

 

 

 

 

2.      The starting point of the two-year period (Article 7 (1) of the Arbitration

 

Convention)

 

 

 

(i)      For the purpose of Article 7 (1) of the Convention, a case will be regarded as

 

having been submitted according to Article 6 (1) when the taxpayer provides

 

he following :

 

 

 

a)      identification (such as name, address, tax identification number) of the

 

enterprise of the Contracting State that presents its request and of the

 

other parties to the relevant transactions;

 

b)      details of the relevant facts and circumstances of the case (including

 

details of the relations between the enterprise and the other parties to the

 

relevant transactions);

 

c)      identification of the tax periods concerned;

 

d)      copies of the tax assessment notices, tax audit report or equivalent

 

leading to the alleged double taxation;

 

e)      details of any appeals and litigation procedures initiated by the enterprise

 

or the other parties to the relevant transactions and any court decisions

 

concerning the case;

 

f)      an explanation by the enterprise of why it thinks that the principles set

 

out in Article 4 of the Arbitration Convention have not been observed;

 

g)      an undertaking that the enterprise shall respond as completely and

 

quickly as possible to all reasonable and appropriate requests made by a

 

competent authority and have documentation at the disposal of the

 

competent authorities; and

 

h)      any specific additional information requested by the competent authority

 

within two months upon receipt of the taxpayer’s request.

 

 

 

(ii)     The two-year period starts on the latest of the following dates:

 

 

 

a)      the date of the tax assessment notice, i.e. a final decision of the tax

 

administration on the additional income, or equivalent;

 

b)      the date on which the competent authority receives the request and the

 

minimum information as stated under point 2 (i).

 

 

 

3.      Mutual agreement procedures under the Arbitration Convention

 

 

 

3.1    General provisions

 

 

 

a)      The arm’s length principle will be applied, as advocated by the OECD, without

 

regard to the immediate tax consequences for any particular Contracting State.

 

b)      Cases will be resolved as quickly as possible having regard to the complexity

 

of the issues in the particular case in question.

 

c)      Any appropriate means for reaching a mutual agreement as expeditiously as

 

possible, including face-to-face meetings, will be considered; where

 

appropriate, the enterprise will be invited to make a presentation to its

 

competent authority.

 

d)      Taking into account the provisions of this Code, a mutual agreement should be

 

reached within two years of the date on which the case was first submitted to

 

one of the competent authorities in accordance with point 2 (ii) of this Code.

 

e)      The mutual agreement procedure should not impose any inappropriate or

 

excessive compliance costs on the person requesting it, or on any other person

 

involved in the case.

 

 

 

3.2    Practical functioning and transparency

 

 

 

a)      In order to minimise costs and delays caused by translation, the mutual

 

agreement procedure, in particular the exchange of position papers, should be

 

conducted in a common working language, or in a manner having the same

 

effect, if the competent authorities can reach agreement on a bilateral basis.

 

b)      The enterprise requesting the mutual agreement procedure will be kept

 

informed by the competent authority to which it made the request of all

 

significant developments that affect it during the course of the procedure.

 

c)      The confidentiality of information relating to any person that is protected under

 

a bilateral tax convention or under the law of a Contracting State will be

 

ensured.

 

d)      The competent authority will acknowledge receipt of a taxpayer’s request to

 

initiate a mutual agreement procedure within one month from the receipt of the

 

request and at the same time inform the competent authorities of the other

 

Contracting States involved in the case attaching a copy of the taxpayer’s

 

request.

 

e)      If the competent authority believes that the enterprise has not submitted the

 

minimum information necessary for the initiation of a mutual agreement

 

procedure as stated under point 2 (i), it will invite the enterprise within two

 

months upon receipt of the request, to provide it with the specific additional

 

information it needs.

 

f)      Contracting States undertake that the competent authority will respond to the

 

enterprise making the request in one of the following forms:

 

 

 

(i)      if the competent authority does not believe that profits of the enterprise

 

are included, or are likely to be included, in the profits of an enterprise of

 

another Contracting State, it will inform the enterprise of its doubts and

 

invite it to make any further comments;

 

(ii)     if the request appears to the competent authority to be well-founded and

 

it can itself arrive at a satisfactory solution, it will inform the enterprise

 

accordingly and make as quickly as possible such adjustments or allow

 

such reliefs as are justified;

 

(iii)    if the request appears to the competent authority to be well-founded but it

 

is not itself able to arrive at a satisfactory solution, it will inform the

 

enterprise that it will endeavour to resolve the case by mutual agreement

 

with the competent authority of any other Contracting State concerned.

 

 

 

g)      If a competent authority considers a case to be well founded, it should initiate a

 

mutual agreement procedure by informing the competent authority of the other

 

Contracting State of its decision and attach a copy of the information as

 

specified under point 2 (i) of this Code. At the same time it will inform the

 

person invoking the Arbitration Convention that it has initiated the mutual

 

agreement procedure. The competent authority initiating the mutual agreement

 

procedure will also inform - on the basis of information available to it - the

 

competent authority of the other Contracting State and the person making the

 

request whether the case was presented within the time limits provided for in

 

Article 6 (1) of the Arbitration Convention and of the starting point for the twoyear

 

period of Article 7 (1) of the Arbitration Convention.

 

 

 

3.3    Exchange of position papers

 

 

 

a)      Contracting States undertake that when a mutual agreement procedure has been

 

initiated, the competent authority of the country in which a tax assessment, i.e.

 

a final decision of the tax administration on the income, or equivalent has been

 

made, or is intended to be made, which contains an adjustment that results, or

 

is likely to result, in double taxation within the meaning of Article 1 of the

 

Arbitration Convention, will send a position paper to the competent authorities

 

of the other Contracting States involved in the case setting out:

 

 

 

(i)      the case made by the person making the request;

 

(ii)     its view of the merits of the case, e.g. why it believes that double taxation

 

has occurred or is likely to occur;

 

(iii)    how the case might be resolved with a view to the elimination of double

 

taxation together with a full explanation of the proposal.

 

 

 

b)      The position paper will contain a full justification of the assessment or

 

adjustment and will be accompanied by basic documentation supporting the

 

competent authority’s position and a list of all other documents used for the

 

adjustment.

 

c)      The position paper will be sent to the competent authorities of the other

 

Contracting States involved in the case as quickly as possible taking account of

 

the complexity of the particular case and no later than four months from the

 

latest of the following dates:

 

 

 

i)       the date of the tax assessment notice, i.e. final decision of the tax

 

administration on the additional income, or equivalent;

 

ii)      the date on which the competent authority receives the request and the

 

minimum information as stated under point 2 (i).

 

 

 

d)      Contracting States undertake that, where a competent authority of a country in

 

which no tax assessment or equivalent has been made, or is not intended to be

 

made, which results, or is likely to result, in double taxation within the

 

meaning of Article 1 of the Arbitration Convention, e.g. due to a transfer

 

pricing adjustment, receives a position paper from another competent authority

 

it will respond as quickly as possible taking account of the complexity of the

 

particular case and no later than six months after receipt of the position paper.

 

e)      The response should take one of the following two forms:

 

 

 

(i)      if the competent authority believes that double taxation has occurred, or

 

is likely to occur, and agrees with the remedy proposed in the position

 

paper, it will inform the other competent authority accordingly and make

 

such adjustments or allow such relief as quickly as possible;

 

(ii)     if the competent authority does not believe that double taxation has

 

occurred, or is likely to occur, or does not agree with the remedy

 

proposed in the position paper, it will send a responding position paper to

 

the other competent authority setting out its reasons and proposing an

 

indicative time scale for dealing with the case taking into account its

 

complexity. The proposal will include, whenever appropriate, a date for a

 

face-to-face meeting, which should take place no later than 18 months

 

from the latest of the following dates:

 

 

 

aa)    the date of the tax assessment notice, i.e. final decision of the tax

 

administration on the additional income, or equivalent;

 

bb)    the date on which the competent authority receives the request and

 

the minimum information as stated under point 2 (i).

 

 

 

f)      Contracting States will further undertake any appropriate steps to speed up all

 

procedures wherever possible. In this respect, Contracting States should

 

envisage to organise regularly, and at least once a year, face-to-face-meetings

 

between their competent authorities to discuss pending mutual agreement

 

procedures (provided that the number of cases justifies such regular meetings).

 

 

 

3.4    Double tax treaties between Member States

 

 

 

As far as transfer pricing cases are concerned, Member States are recommended to

 

apply the provisions of points 1 to 3 also to mutual agreement procedures initiated in

 

accordance with Article 25 (1) of the OECD Model Convention on Income and on

 

Capital, implemented in the Double tax treaties between Member States.

 

 

 

4.      Proceedings during the second phase of the Arbitration Convention

 

 

 

4.1    List of independent persons

 

 

 

a)      Contracting States commit themselves to inform without any further delay the

 

Secretary General of the Council of the European Union of the names of the

 

five independent persons of standing, eligible to become a Member of the

 

advisory commission as referred to in Article 7 (1) of the Arbitration

 

Convention and inform, under the same conditions, of any alteration of the list.

 

b)      When transmitting the names of their independent persons of standing to the

 

Secretary General of the Council of the European Union, Contracting States

 

will join a curriculum vitae of those persons, which should, among other

 

things, describe their legal, tax and especially transfer pricing experience.

 

c)      Contracting States may also indicate on their list those independent persons of

 

standing who fulfil the requirements to be elected as Chairman.

 

d)      The Secretary General of the Council will address every year a request to

 

Contracting States to confirm the names of their independent persons of

 

standing and/or give the names of their replacements.

 

e)      The aggregate list of all independent persons of standing will be published on

 

the Council’s web-site.

 

 

 

4.2    Establishment of the advisory commission

 

 

 

a)      Unless otherwise agreed between the Contracting States concerned, the

 

Contracting State that issued the first tax assessment notice, i.e. final decision

 

of the tax administration on the additional income, or equivalent which results,

 

or is likely to result, in double taxation within the meaning of Article 1 of the

 

Arbitration Convention, takes the initiative for the establishment of the advisory

 

commission and arranges for its meetings, in agreement with the other

 

Contracting State.

 

b)      The advisory commission will normally consist of two independent persons of

 

standing in addition to its Chairman and the representatives of the competent

 

authorities.

 

c)      The advisory commission will be assisted by a Secretariat for which the

 

facilities will be provided by the Contracting State that initiated the

 

establishment of the advisory commission unless otherwise agreed by the

 

Contracting States concerned. For reasons of independence, this Secretariat

 

will function under the supervision of the Chairman of the advisory

 

commission. Members of the Secretariat will be bound by the secrecy

 

provisions as stated in Article 9 (6) of the Arbitration Convention.

 

d)      The place where the advisory commission meets and the place where its opinion

 

is to be delivered may be determined in advance by the competent authorities of

 

the Contracting States concerned.

 

e)      Contracting States will provide the advisory commission before its first

 

meeting, with all relevant documentation and information and in particular all

 

documents, reports, correspondence and conclusions used during the mutual

 

agreement procedure.

 

 

 

4.3    Functioning of the advisory commission

 

 

 

a)      A case is considered to be referred to the advisory commission on the date

 

when the Chairman confirms that its members have received all relevant

 

documentation and information as specified under point 4.2 e).

 

b)      The proceedings of the advisory commission will be conducted in the official

 

language or languages of the Contracting States involved, unless the competent

 

authorities decide otherwise by mutual agreement, taking into account the wishes

 

of the advisory commission.

 

c)      The advisory commission may request from the party from which a statement or

 

document emanates to arrange for a translation into the language or languages in

 

which the proceedings are conducted.

 

d)      Whilst respecting the provisions of Article 10 of the Arbitration Convention, the

 

advisory commission may request the Contracting States and in particular the

 

Contracting State that issued the first tax assessment notice, i.e. final decision of

 

the tax administration on the additional income, or equivalent which resulted or

 

may result in double taxation within the meaning of Article 1, to appear before

 

the advisory commission.

 

e)      The costs of the advisory commission procedure, which will be shared equally

 

by the Contracting States concerned, will be the administrative costs of the

 

advisory commission and the fees and expenses of the independent persons of

 

standing.

 

f)      Unless the competent authorities of the Contracting States concerned agree

 

otherwise:

 

 

 

i)       the reimbursement of the expenses of the independent persons of

 

standing will be limited to the reimbursement usual for high ranking civil

 

servants of the Contracting State which has taken the initiative to

 

establish the advisory commission;

 

ii)      the fees of the independent persons of standing will be fixed at Euro 1000

 

per person per meeting day of the advisory commission, and the

 

Chairman will receive a 10% higher fee than the other independent

 

persons of standing.

 

 

 

g)      Actual payment of the costs of the advisory commission procedure will be

 

made by the Contracting State which has taken the initiative to establish the

 

advisory commission, unless the competent authorities of the Contracting

 

States concerned decide otherwise.

 

 

 

4.4    Opinion of the advisory commission

 

 

 

Contracting States would expect the opinion to contain:

 

 

 

a)      the names of the members of the advisory commission;

 

b)      the request; the request contains:

 

 

 

      the names and addresses of the enterprises involved;

 

      the competent authorities involved;

 

       a description of the facts and circumstances of the dispute;

 

      a clear statement of what is claimed;

 

 

 

c)      a short summary of the proceedings;

 

d)      the arguments and methods on which the decision in the opinion is based;

 

e)      the opinion;

 

f)      the place where the opinion is delivered;

 

g)      the date on which the opinion is delivered;

 

h)      the signatures of the members of the advisory commission.

 

 

 

The decision of the competent authorities and the opinion of the advisory commission

 

will be communicated as follows:

 

 

 

i)       Once the decision has been taken, the competent authority to whom the case

 

was presented will send a copy of the decision of the competent authorities and

 

the opinion of the advisory commission to each of the enterprises involved.

 

ii)      The competent authorities of the Contracting States can agree that the decision

 

and the opinion may be published in full, they can also agree to publish the

 

decision and the opinion without mentioning the names of the enterprises

 

involved and with deletion of any further details that might disclose the identity

 

of the enterprises involved. In both cases, the enterprises' consent is required

 

and prior to any publication the enterprises involved must have communicated

 

in writing to the competent authority to whom the case was presented that they

 

do not have objections to publication of the decision and the opinion.

 

iii)     The opinion of the advisory commission will be drafted in three original

 

copies, two to be sent to the competent authorities of the Contracting States and

 

one to be transmitted to the Secretariat General of the Council for archiving. If

 

there is agreement on the publication of the opinion, the Secretariat General of

 

the Council will request publication in the Official Journal of the European

 

Union.

 

 

 

5.      Suspension of tax collection during cross border dispute resolution

 

procedures

 

 

 

Member States are recommended to take all necessary measures to ensure that the

 

suspension of tax collection during cross-border dispute resolution procedures under

 

the Arbitration Convention can be obtained by enterprises engaged in such

 

procedures, under the same conditions as those engaged in a domestic

 

appeals/litigation procedure although these measures may imply legislative changes

 

in some Member States. It would be appropriate for Member States to extend these

 

measures to the cross-border dispute resolution procedures under double tax treaties

 

between Member States.

 

 

 

6.      Accession of new EU Member States to the Arbitration Convention

 

 

 

Member States will endeavour to sign and ratify the Accession Convention of new

 

EU Member States to the Arbitration Convention, as soon as possible and in any

 

event no later than two years after their accession to the EU.

 

 

 

7.      Final provisions

 

 

 

In order to ensure the even and effective application of the Code, Member States are

 

invited to report to the Commission on its practical functioning every two years. On

 

the basis of these reports, the Commission intends to report to the Council and may

 

propose a review of the provisions of the Code.


ANNEX III: REPORT ON THE ACTIVITIES OF THE EU JOINT TRANSFER

 

PRICING FORUM IN THE FIELD OF BUSINESS TAXATION

 

OCTOBER 2002 – DECEMBER 2003

 

 

 

1.      SUMMARY OF THE PROCEEDINGS OF THE MEETINGS OF THE EU JOINT TRANSFER

 

PRICING FORUM

 

 

 

1.1.   Inaugural meeting

 

 

 

The inaugural meeting of the EU Joint Transfer Pricing Forum (hereafter: JTPF)

 

under the Chairmanship of Mr. Bruno Gibert, was held on 3 October 2002 and was

 

mainly devoted to the discussion and adoption of internal rules of procedure, the

 

election of Vice-Chairpersons for the Member States and business representatives

 

and the discussion of an issues paper in order to establish a two–year working

 

programme as suggested by the Council conclusions of 11 March 2002.

 

 

 

The internal rules of procedure were adopted by consensus. Business experts elected

 

Mr. Guy Kersch, Director European Taxes of Pharmacia S.A., Luxemburg, and tax

 

administration experts elected Mrs. Montserrat Trape Viladomat, Deputy Head of

 

the International Taxation Unit from Spain as Vice-Chairpersons.

 

 

 

The draft two-year working program was discussed and with some minor

 

amendments subsequently approved in the second meeting. The discussion showed

 

that most Members were of the opinion that, in line with the Council conclusions of

 

11 March 2001, the highest priority should be attributed to practical solutions for a

 

more uniform application of the Arbitration Convention in order to achieve more

 

certainty as regards the procedural issues of the Arbitration Convention.[5] That

 

included both the first phase of the Arbitration Convention, i.e. the mutual agreement

 

procedure, and the second phase, i.e. the arbitration itself.

 

 

 

The prevailing view of the Members of the JTPF was that the issue of documentation

 

requirements for transfer prices should also be addressed by the JTPF.

 

 

 

It was also concluded that despite the demand for Advance Pricing Agreements

 

(APA) from businesses, APAs faced quite some scepticism and criticism because of

 

the shortcomings linked to them. The JTPF should therefore in the first place study

 

other procedural means to enable taxpayers to achieve greater certainty and in

 

particular the possibility of prior consultation between tax administrations before

 

making adjustments. Both issues should be examined together but were attributed

 

lower priority.

 

 

 

1.2.   Subsequent meetings

 

 

 

Following its agreed two–year working program, the JTPF examined during its

 

meetings on 4 December 2002, 2 April 2003, 19 June 2003, 11 September 2003 and

 

11 December 2003 procedural issues related to the improvement of the practical

 

functioning of the Arbitration Convention and certain related aspects of mutual

 

agreement procedures (MAP) under double tax treaties between Member States.

 

Discussions included the procedures to be followed during the interim period when

 

not all Member States have ratified the 1999 Protocol extending the Convention (of

 

which the application ended on 31 December 1999), the starting point of the threeyear

 

period, which is the deadline to present a case to a competent authority

 

(Art. 6.1), the starting point of the two-year period foreseen for the mutual agreement

 

procedure, i.e. the first phase provided for in the Arbitration Convention, (Art. 7.1),

 

proceedings during this mutual agreement procedure (expediting the procedure,

 

suspension of tax collection, interest charges and refunds, transparency and taxpayer

 

participation), proceedings of the arbitration i.e. after the MAP the second phase of

 

the Arbitration Convention (Art. 7 to 11) and the interaction of the mutual agreement

 

procedure and arbitration with administrative and judicial appeals.(Art. 7.3)

 

 

 

In accordance with its two-year working program, the JTPF began to discuss in

 

December 2003, the issue of transfer pricing documentation requirements.

 

 

 

1.3.   Conclusions

 

 

 

The JTPF made substantial progress on the procedural issues related to the

 

improvement of the practical functioning of the Arbitration Convention and related

 

issues of the mutual agreement procedures under double tax treaties between

 

Member States. Taking into account the potential benefit both for businesses and

 

national tax administrations of a rapid implementation of its conclusions and

 

recommendations, the JTPF decided to submit to the Commission an interim report

 

on its activities so far.

 

 

 

Having regard to what follows, the JTPF was of the opinion that the best way to deal

 

with its various conclusions and recommendations, was to propose a Code of

 

Conduct for the implementation of Convention 90/436/EEC of 23 July 1990 on the

 

elimination of double taxation in connection with the adjustment of profits of

 

associated enterprises and on certain aspects of the mutual agreement procedures

 

under Double Tax Treaties between Member States, as presented in Annex II to this

 

report. The Commission could propose to the Council to adopt this Code of Conduct.

 

 

 

2.      CONCLUSIONS AND RECOMMENDATIONS ON ISSUES RELATED TO THE ARBITRATION CONVENTION AND ON CERTAIN RELATED ISSUES OF MUTUAL AGREEMENT PROCEDURES UNDER DOUBLE TAX TREATIES BETWEEN MEMBER STATES

 

 

 

2.1.   Proceedings during the interim period when not all contracting states have

 

ratified the Accession Convention of the Republic of Austria, the Republic of

 

Finland and the Kingdom of Sweden (Accession Convention) and the Protocol

 

amending the original Convention (Prolongation Protocol)

 

 

 

In spite of the signature of the relevant instruments on 25 May 1999 and

 

21 December 1995 respectively, so far, Italy and Portugal still have not ratified the

 

Prolongation Protocol and Greece has not ratified the Accession Convention.

 

 

 

The Arbitration Convention has therefore not been in force since 1 January 2000.

 

Associated companies are thus unable to rely on this instrument to avoid or remedy

 

double taxation.

 

 

 

The JTPF examined the different practical situations and problems which can occur

 

during this interim period and the possible consequences on the implementation of

 

the Arbitration Convention when it re-enters into force.

 

 

 

2.1.1.   Procedure in cases where a request has been made by a taxpayer before

 

1 January 2000

 

 

 

All Member States except Denmark will complete cases, which have been initiated

 

under the Arbitration Convention prior to 1 January 2000, according to the rules of

 

the Arbitration Convention. Denmark, however, continues MAP procedures under

 

the pertinent double tax treaty. Two other Member States also consider that the

 

procedures under the Arbitration Convention are suspended while the Convention is

 

not in force but have no cases that were submitted before 1 January 2000.

 

 

 

2.1.2.   Procedure in cases where a request is made by a taxpayer after 1 January 2000

 

 

 

There is consensus that a taxpayer’s request to invoke the Arbitration Convention is

 

in principle valid under the Prolongation Protocol. This means that an enterprise may

 

present a case to a competent authority but that in practice there is no time limit for

 

the MAP nor for initiating the arbitration phase.

 

 

 

The multitude of possible positions as regards the implementation of the Arbitration

 

Convention during the interim period, including both the MAP and arbitration phase,

 

reflected in Annex I to this report, highlights the legal uncertainty for companies to

 

make use of the Arbitration Convention and in particular to see the arbitration phase

 

applied.

 

 

 

All Member States, however, initiate a MAP either under the rules of the Arbitration

 

Convention (if the other Member State agrees, see Annex I) or under the double tax

 

treaty with the other Member State.

 

 

 

The majority of Members supports the idea that time spent on a MAP under a double

 

tax treaty should be subtracted from the 2-year period foreseen in Article 7 (1) of the

 

Arbitration Convention once the competent authorities initiate or continue the MAP

 

under the Arbitration Convention.

 

A detailed overview of Member States positions can be found in Annex I to this

 

report.

 

 

 

2.1.3. Conclusions

 

 

 

Although the JTPF found it useful to clarify the approaches of the different national

 

tax authorities during the interim period, Members concluded, considering the

 

transitional nature and the limited impact of the interim period, not to issue any

 

proposals or recommendations having regard to this period.

 

 


2.2.   The starting point of the three- and two-year periods enshrined in the first

 

phase of the Arbitration Convention

 

 

 

2.2.1. The starting point of the three-year period (deadline for submitting the request

 

according to Article 6 (1) of the Arbitration Convention and Article 25 (1) of the

 

OECD Model Tax Convention)

 

 

 

Article 6 (1) of the Arbitration Convention provides that “…The case must be

 

presented within three years of the first notification of the action which results or is

 

likely to result in double taxation within the meaning of Article 1.”

 

 

 

All Member States favour: ”the date of the first tax assessment notice or equivalent

 

which results, or is likely to result, in double taxation within the meaning of Article

 

1, e.g. due to a transfer pricing adjustment”[6] as the definition for the relevant action

 

that triggers the starting point for the three-year period.

 

 

 

Member States’ definitions of this relevant event in the national language and in

 

English are set out in the Annex to the draft Code of Conduct as presented in

 

Annex II to this report.

 

 

 

The OECD Model Tax Convention on Income and Capital, which is the basis of all

 

double tax treaties between EU Member States, contains in its Article 25 (1) a similar

 

wording as the Arbitration Convention in its Article 6 (1) as regards the time limits to

 

present a case of double taxation to the competent authorities.

 

 

 

As a matter of coherence and as far as transfer pricing cases are concerned, the JTPF

 

therefore recommends Member States to apply the definition of the start of the threeyear

 

period, as specified in the Annex to the draft Code of Conduct, also to double

 

tax treaties between Member States.

 

 

 

2.2.2. The starting point of the two-year period (Article 7 (1) of the Arbitration Convention)

 

 

 

The Arbitration Convention does not provide in its Articles 6 (1) nor 7 (1) for any

 

specific requirement, except the “presentation or submission of a case”, to start the

 

two-year mutual agreement period. During this period, the relevant competent

 

authorities should seek, under a MAP, an agreement to eliminate the double taxation

 

without the need to initiate the arbitration phase of the Arbitration Convention.

 

 

 

 

 

The JTPF has recognised that for “a case” to be considered as being “presented” or

 

“submitted” and in order to provide a sufficient base to permit the competent

 

authority to assess whether a complaint is “well-founded” (which is, as defined under

 

Article 6.2 of the Arbitration Convention, a prior condition to initiate a mutual

 

agreement procedure), a minimum of information, as defined in chapter 2 of the

 

Code of Conduct, from the taxpayer is necessary. Besides this minimum information,

 

the competent authority should be entitled, within two months from the receipt of the

 

taxpayer's request, to ask for specific additional information before the two-year

 

period starts. In case the competent authority does not issue such a request, the twoyear

 

period starts on the date as indicated in the Code of Conduct.

 

 

 

Without questioning the reliability and good faith of the information provided by a

 

large majority of enterprises, the JTPF would also like to stress the need for taxpayers’

 

full co-operation to maximise the possibilities of reaching a mutual

 

agreement as quickly as possible. This co-operation should not only be limited to the

 

initiation of the procedure but should be ensured throughout the whole mutual

 

agreement procedure. The JTPF is also of the opinion that this co-operation should

 

not only be ensured by the enterprise that has presented the case, but also by the

 

other parties to the relevant transactions, and that failure to do so could result in the

 

procedure taking longer than would otherwise have been the case.

 

 

 

2.3.   Proceedings during the first phase of the Arbitration Convention

 

 

 

Once the competent authorities have received all necessary information to enable a

 

decision to be made as to whether the case appears to be well founded (see 2.2.2), the

 

two-year period during which a mutual agreement between the competent authorities

 

on the elimination of double taxation should be reached starts.

 

 

 

The JTPF is of the opinion that the proposal of a tentative time scale for MAPs,

 

including the moment of exchange of position papers, could be useful to improve

 

timing of the different actions, co-ordination and speeding-up of proceedings.

 

 

 

Furthermore it is agreed as a general principle, that all appropriate means for

 

reaching a mutual agreement as expeditiously as possible should be considered and

 

that standards of best practice as regards the use of language and information of the

 

taxpayer should be set.

 

 

 

There is consensus that taxpayers should not be granted the right to be present at

 

competent authority discussions. Most Members agree that on the request of a

 

taxpayer, a presentation to its competent authority should be granted.

 

 

 

As far as transfer pricing cases are concerned, and without prejudice to arrangements

 

on a more global level, the JTPF recommends Member States to apply the provisions

 

of the Code of Conduct related to MAPs under the Arbitration Convention also to

 

double tax treaties between Member States.

 

 

 

2.4.   Proceedings during the second phase of the Arbitration Convention:

 

establishment and functioning of the advisory commission

 

 

 

The JTPF concluded that Articles 7, 9, 10, 11 and 12 of the Arbitration Convention,

 

which relate to the functioning of the arbitration procedure (the second phase of the

 

Convention), are not sufficiently detailed to guarantee a smooth functioning of this

 

procedure.

 

 

 

According to information provided by the Council’s Secretariat General, the JTPF

 

established that in September 2003, five Contracting States (Greece, Finland, Ireland,

 

Portugal and Sweden) have so far not nominated their independent persons of

 

standing, eligible to become a Member of the advisory commission as referred to in

 

Article 7 (1) of the Convention. Other Contracting States’ nomination lists date from

 

shortly after the adoption of the Convention in 1990 which puts into question their

 

current value.

 

 

 

There are no detailed rules on the practical organisation of the arbitration phase, e.g.

 

which competent authority takes the initiative to establish the advisory commission,

 

where does the advisory commission meet, who provides the facilities for a

 

secretariat, when is a case considered as being referred to the advisory commission,

 

what is the level of fees of the Members and Chairman, what will be the content of

 

the opinion and what are the conditions for its publication, etc.

 

 

 

Based on the work already undertaken by the Council working group on financial

 

questions in 1996/1997 and the recent experience of certain Contracting States, the

 

JTPF agreed by consensus on a modus operandi for the arbitration phase, as reflected

 

in chapter 4 of the draft Code of Conduct presented in Annex II to this report.

 

 

 

2.5.   Interaction of the mutual agreement and arbitration procedure with

 

administrative and judicial appeals

 

 

 

The JTPF also examined the links between both types of procedures as reflected in

 

the Article 7 of the Arbitration Convention.

 

 

 

A first point of concern was the provision of Article 7 (1) second subparagraph

 

which provides that “Enterprises may have recourse to the remedies available to

 

them under the domestic law of the Contracting States concerned; however, where

 

the case has so been submitted to a court or tribunal, the term of two years referred

 

to in the first subparagraph shall be computed from the date on which the judgement

 

of the final court of appeal was given”.

 

 

 

Business experts were of the view that the independence of the two remedies is very

 

limited insofar as – in the event that the domestic judicial remedy is activated – the

 

most important phase of the Arbitration Convention (the setting up of the advisory

 

commission) may be pursued only after the domestic judicial remedy has been

 

exhausted and the two-year mutual agreement period has elapsed. Moreover, some

 

national tax authorities do not seem to make a distinction between administrative and

 

judicial appeal, only the latter being determined in the aforementioned Article 7 (1)

 

as being a reason to defer the start of the two-year period. This might create a

 

significant drawback to the operation and effectiveness of the Arbitration Convention

 

since it can make the total duration of the Arbitration Convention proceedings equal

 

to: (i) the duration of the domestic administrative/judicial proceedings ending with a

 

final judicial judgement; (ii) plus two years; (iii) plus the six months available to the

 

advisory commission to deliver its opinion.

 

 

 

A similar concern was expressed by business as regards the application of Article

 

7 (3) of the Arbitration Convention which stipulates that ”Where the domestic law of

 

a Contracting State does not permit the competent authorities of that State to

 

derogate from the decisions of their judicial bodies, paragraph 1 shall not apply

 

unless the associated enterprise of that State has allowed the time provided for

 

appeal to expire, or has withdrawn any such appeal before a decision has been

 

delivered”. Although France and the United Kingdom are the only Contracting

 

States that made a formal declaration that this provision applies in their countries, a

 

survey demonstrated that a large majority of the Contracting States (and EU

 

Acceding Countries) apply/would apply the same rules in practice. In this respect it

 

needs to be noted that Art 7 (3) of the Arbitration Convention is self-executing and

 

does not specifically require a formal declaration to be applicable.

 

 

 

Business members claimed that the aforementioned provision in many cases lead

 

taxpayers to withdraw their domestic judicial remedies. Considering the potential of

 

the Arbitration Convention to eliminate double taxation, this should not necessarily

 

create disadvantages to the taxpayer. However, the choice of the enterprises to opt

 

for cross-border dispute resolution procedures instead of domestic judicial remedies

 

can have an important financial impact as discussed under 2.6 hereafter.

 

 

 

Considering the complexity of the issue, the JTPF decided to limit its

 

recommendations to the suspension of tax collection during cross-border dispute

 

resolution procedures discussed hereafter.

 

 

 

2.6.   Suspension of tax collection during cross-border dispute resolution procedures

 

 

 

The JTPF examined the existing rules in Member States and Acceding Countries in

 

relation to the suspension of tax collection during administrative and judicial

 

appeals/litigation. In almost all countries, the suspension of tax collection is

 

regulated at legal level in so far as domestic procedures are concerned. These rules

 

differ however widely as regards prior conditions, application, duration, amount of

 

suspension etc.

 

 

 

When it comes to rules in relation to cross-border dispute resolution procedures,

 

specific legal or administrative provisions exist only in few countries. However, a

 

significant number of tax administrations can suspend the collection of taxes on a

 

discretionary basis in order to avoid double payment even if specific provisions for

 

suspension during mutual agreement or arbitration procedures do not exist.

 

 

 

The absence of specific or general rules enabling the suspension of tax collection

 

during cross-border dispute resolution, at least under the same conditions as those

 

applicable for domestic appeal/litigation, creates an additional financial burden for

 

companies facing double taxation at Community level. In combination with the

 

provisions of Article 7 of the Arbitration Convention on the interaction between

 

administrative/judicial appeal and cross-border dispute resolution procedures as

 

discussed under 2.5, this is regarded by the business Members of the JTPF and most

 

tax authority Members as an impediment for taxpayers to request the application of

 

the Arbitration Convention or mutual agreement procedures under double tax treaties

 

between Member States.

 

 

 

2.7.   The accession of EU Acceding States to the Arbitration Convention

 

 

 

With the accession to the EU of Austria, Finland and Sweden, a new Convention

 

allowing these new Member States to accede to the Arbitration Convention, was

 

signed on 21 December 1995. However since one Member States still has not ratified

 

this Accession Convention (see 2.1), the Arbitration Convention has not fully entered

 

into force with the Member States which joined the EU in 1995

 

In order to avoid another lengthy process during which the Arbitration Convention

 

would not be applicable throughout the whole (enlarged) EU, the JTPF examined

 

ways to speed up the entry into force of the Arbitration Convention in the new EU

 

Member States following the forthcoming enlargement of the EU in May 2004. In

 

this respect, the possibilities of “provisional application” (application of Article 25 of

 

the UN Vienna Convention on the Law of Treaties) or “entry into force upon

 

signature” (Article 24 (1) of the aforementioned Vienna Convention) were

 

envisaged. However since both possible solutions would require, in a majority of

 

both current and future Member States, ratification by national parliament they

 

would not really speed up the process.

 

 

 

Regrettably there seems to be no legal means to speed up the entry into force of the

 

Arbitration Convention by the Acceding States. The JTPF has agreed therefore by

 

consensus to recommend Member States to commit to ratify the accession treaties to

 

the Arbitration Convention not later than two years[7] after the accession of new EU

 

Member States. This recommendation is also contained in the proposed Code of

 

Conduct.

 

 

 

2.8.   Conclusions

 

 

 

In view of paragraphs 2.1 to 2.7 of this chapter, the JTPF agreed by consensus to

 

invite the Commission to propose to the Council the adoption of a Code of Conduct

 

for the implementation of Convention 90/436/EEC of 23 July 1990, on the

 

elimination of double taxation in connection with the adjustment of profits of

 

associated enterprises, and on certain related issues of the mutual agreement

 

procedures under double tax treaties between Member States, as presented in Annex

 

II to this report.

 

 

 

3.      OTHER ISSUES EXAMINED BY THE JTPF IN RELATION TO DOUBLE TAXATION RESULTING FROM TRANSFER PRICING ADJUSTMENTS

 

 

 

3.1.   Interest charges for back taxes and interest on tax refunds

 

 

 

Most Member States and Acceding States have specific provisions concerning

 

interest charges in relation to additional back taxes for previous years and interest on

 

tax refunds. The interest rates are contained in civil/commercial law or specific tax

 

law and are, with some exceptions, regularly being revised based on different

 

criteria. Most countries apply flat interest rates.

 

 

 

Starting points for the calculation of the interest (both on additional back taxes and

 

tax refunds) vary widely between countries but seem coherent at national level. Tax

 

authorities which allow the deduction of interest payments on additional back taxes

 

as business expenses also consider interest received on tax refunds as taxable

 

income. For a majority of national tax administrations, however, interest is treated as

 

being tax neutral (no deduction/no taxation).

 

 

 

A more important finding in an EU context concerns corresponding adjustments

 

resulting from cross-border dispute resolution procedures (MAP or arbitration). None

 

of the countries, except for the Netherlands, provides for the possibility to agree in a

 

MAP for corresponding interest to be paid to the company on its overpaid taxes,

 

having regard to the interest charges on additional back taxes in the other Contracting

 

State (and vice versa) so as to balance the interest paid and received by the company

 

concerned.

 

 

 

Whereas the Arbitration Convention and double tax treaties between Member states

 

aim to eliminate double taxation, they do not provide for a balance of interest paid on

 

back taxes and interest received on tax refunds.

 

 

 

JTPF business members made a proposal on the suspension of the accrual of interest

 

for late payment in mutual agreement and arbitration procedures under the

 

Arbitration Convention.

 

 

 

Considering, however, the complexity of the issue, the JTPF decided to defer more

 

in-depth discussions on this to a later stage.

 

 

 

3.2.   Penalties

 

 

 

A specific penalty regime in relation to transfer pricing adjustments exists in only a

 

few countries. In all other countries, the general penalty regime applies. The criminal

 

nature of those penalties depends in most cases on the circumstances, except in one

 

country, where transfer pricing penalties are always considered to be of a criminal

 

nature. So-called “monetary no-fault” penalties do not seem to be common practice

 

in Member States nor Acceding States. The rules for interpretation and specification

 

of the amount of penalties are somewhat mixed; some countries regulate these issues

 

in detail whereas other countries leave the application of general penalty principles to

 

the discretion of the tax authorities. However, most countries provide for appeal

 

procedures. None of the tax authorities allow the deduction of penalty payments as

 

business expenses.

 

 

 

Again, considering the complexity of the issue and the potential impact on domestic

 

legislation, the JTPF decided to defer more in-depth discussions on this to a later

 

stage.

 

 

 

4.      CONCLUSIONS

 

 

 

The JTPF will continue its activities in 2004 on the basis of its agreed two-year

 

working programme.

 

 

 

In accordance with the Council conclusions of 11 March 2002, the JTPF invites the

 

Commission to transmit this activity report to the Council with a view to appropriate

 

follow-up action.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANNEX I: MEMBER STATES’ POSITION DURING THE INTERIM PERIOD

 

 

 

 

 

 

 

 

 

ANNEX I

 

Member States' positions during the interim period

(request filed after 1 January 2000)

 

 

Arbitration Convention

Mutual Agreement Procedure

(first phase)

 

 

 

 

 

 

Arbitration Procedure

(second phase)

Accept

request

and continue

under AC

if other

MS agrees

Accept

request

but continue

under DTA

AC suspended

so only

taken up when

it re-enters

into force

Continue

procedure

if other

MS agrees **

 Austria

 

X*

 

X

 

 Belgium

 

X

 

X

 

 Denmark

 

X*

 

X

 

 Finland

 

X

 

X

 

 France

 

X

 

X

 

 Germany

X

 

 

 

X

 Greece

X

 

 

 

X

 Ireland

X

 

 

 

X

 Italy

 

X*

 

X

 

 Luxembourg

X

 

 

 

X

 Netherlands

X

 

 

 

X

 Portugal

 

X

 

X

 

 Spain

X

 

 

 

X

 Sweden

 

X

 

X

 

 UK

X

 

 

 

X

 

 *   Only if specifically requested by the taxpayer

 **  If the other Member State does not agree, those Member States will - with the taxpayer’s consent - continue the MAP under the double taxation agreement with the other Member State

 

 

 

 


ANNEX II: DRAFT CODE OF CONDUCT

 

 

 

THE COUNCIL OF THE EUROPEAN UNION AND THE REPRESENTATIVES

 

OF THE GOVERNMENTS OF THE MEMBER STATES, MEETING WITHIN

 

THE COUNCIL,

 

 

 

HAVING REGARD TO Convention 90/436/EEC of 23 July 1990, on the

 

elimination of double taxation in connection with the adjustment of profits of

 

associated enterprises,

 

 

 

ACKNOWLEDGING the need both for Member States and taxpayers to have more

 

detailed rules to implement efficiently the aforementioned Convention,

 

 

 

NOTING the Commission communication on the report on the activities of the EU

 

Joint Transfer Pricing Forum in the field of business taxation of ……2004,

 

 

 

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 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

 

Convention 90/436/EEC of 23 July 1990, on the elimination of double taxation

 

in connection with the adjustment of profits of associated enterprises and

 

certain related issues of the mutual agreement procedure under double tax

 

treaties between Member States.

 

 

 

1.      The starting point of the three-year period (deadline for submitting the

 

request according to Article 6 (1) of the Arbitration Convention

 

 

 

The date of the “first tax assessment notice or equivalent which results or is likely to

 

result in double taxation within the meaning of Article 1, e.g. due to a transfer

 

pricing adjustment”[8] is considered as the starting point for the three-year period.

 

 

 

Member States’ definitions of the relevant event in the national language and in

 

English are set out in the Annex to this Code

 

 

 

As far as transfer pricing cases are concerned, Member States are recommended to

 

apply these definitions also to the determination of the three-year period as provided

 

for in Article 25 (1) of the OECD Model Tax Convention on Income and on Capital

 

and implemented in the double tax treaties between EU Member States.

 

 

 

2.      The starting point of the two-year period (Article 7 (1) of the Arbitration

 

Convention)

 

 

 

(i)      For the purpose of Article 7 (1) of the Convention, a case will be regarded as

 

having been submitted according to Article 6 (1) when the taxpayer provides

 

the following :

 

 

 

a)      identification (such as name, address, tax identification number) of the

 

enterprise of the Contracting State that presents its request and of the

 

other parties to the relevant transactions;

 

b)      details of the relevant facts and circumstances of the case (including

 

details of the relations between the enterprise and the other parties to the

 

relevant transactions);

 

c)      identification of the tax periods concerned;

 

d)      copies of the tax assessment notices, tax audit report or equivalent

 

leading to the alleged double taxation;

 

e)      details of any appeals and litigation procedures initiated by the enterprise

 

or the other parties to the relevant transactions and any court decisions

 

concerning the case;

 

f)      an explanation by the enterprise of why it thinks that the principles set

 

out in Article 4 of the Arbitration Convention have not been observed;

 

g)      an undertaking that the enterprise shall respond as completely and

 

quickly as possible to all reasonable and appropriate requests made by a

 

competent authority and have documentation at the disposal of the

 

competent authorities; and

 

h)      any specific additional information requested by the competent authority

 

within two months upon receipt of the taxpayer’s request.

 

 

 

(ii)     The two-year period starts on the latest of the following dates:

 

 

 

a)      the date of the tax assessment notice, i.e. a final decision of the tax

 

administration on the additional income, or equivalent;

 

b)      the date on which the competent authority receives the request and the

 

minimum information as stated under point 2 (i).

 

 

 

3.      Mutual agreement procedures under the Arbitration Convention

 

 

 

3.1    General provisions

 

 

 

a)      The arm’s length principle will be applied, as promulgated by the OECD,

 

without regard to the immediate tax consequences for any particular

 

Contracting State.

 

b)      Cases will be resolved as quickly as possible having regard to the complexity

 

of the issues in the particular case in question.

 

c)      Any appropriate means for reaching a mutual agreement as expeditiously as

 

possible, including face-to-face meetings, will be considered; where

 

appropriate, the enterprise will be invited to make a presentation to its

 

competent authority.

 

d)      Taking into account the provisions of this Code, a mutual agreement should be

 

reached within two years of the date on which the case was first submitted to

 

one of the competent authorities in accordance with point 2 (ii) of this Code.

 

e)      The mutual agreement procedure should not impose any inappropriate or

 

excessive compliance costs on the person requesting it, or on any other person

 

involved in the case.

 

 

 

3.2 Practical functioning and transparency

 

 

 

a)      In order to minimise costs and delays caused by translation, the mutual

 

agreement procedure, in particular the exchange of position papers, should be

 

conducted in a common working language, or in a manner having the same

 

effect, if the competent authorities can reach agreement on a bilateral basis.

 

b)      The enterprise requesting the mutual agreement procedure will be kept

 

informed by the competent authority to which it made the request of all

 

significant developments that affect it during the course of the procedure.

 

c)      The confidentiality of information relating to any person that is protected under

 

a bilateral tax convention or under the law of a Contracting State will be

 

ensured.

 

d)      The competent authority will acknowledge receipt of a taxpayer’s request to

 

initiate a mutual agreement procedure within one month from the receipt of the

 

request and at the same time inform the competent authorities of the other

 

Contracting States involved in the case attaching a copy of the taxpayer’s

 

request.

 

e)      If the competent authority believes that the enterprise has not submitted the

 

minimum information necessary for the initiation of a mutual agreement

 

procedure as stated under point 2 (i), it will invite the enterprise within two

 

months upon receipt of the request, to provide it with the specific additional

 

information it needs.

 

f)      Contracting States undertake that the competent authority will respond to the

 

enterprise making the request in one of the following forms:

 

 

 

(i)      if the competent authority does not believe that profits of the enterprise

 

are included, or are likely to be included, in the profits of an enterprise of

 

another Contracting State, it will inform the enterprise of its doubts and

 

invite it to make any further comments;

 

(ii)     if the request appears to the competent authority to be well-founded and

 

it can itself arrive at a satisfactory solution, it will inform the enterprise

 

accordingly and make as quickly as possible such adjustments or allow

 

such reliefs as are justified;

 

(iii)    if the request appears to the competent authority to be well-founded but it

 

is not itself able to arrive at a satisfactory solution, it will inform the

 

enterprise that it will endeavour to resolve the case by mutual agreement

 

with the competent authority of any other Contracting State concerned.

 

 

 

g)      If a competent authority considers a case to be well founded, it should initiate a

 

mutual agreement procedure by informing the competent authority of the other

 

Contracting State of its decision and attach a copy of the information as

 

specified under point 2 (i) of this Code. At the same time it will inform the

 

person invoking the Arbitration Convention that it has initiated the mutual

 

agreement procedure. The competent authority initiating the mutual agreement

 

procedure will also inform - on the basis of information available to it - the

 

competent authority of the other Contracting State and the person making the

 

request whether the case was presented within the time limits provided for in

 

Article 6 (1) of the Arbitration Convention and of the starting point for the twoyear

 

period of Article 7 (1) of the Arbitration Convention.

 

 

 

3.3    Exchange of position papers

 

 

 

a)      Contracting States undertake that when a mutual agreement procedure has been

 

initiated, the competent authority of the country in which a tax assessment, i.e.

 

a final decision of the tax administration on the income, or equivalent has been

 

made, or is intended to be made, which contains an adjustment that results, or

 

Is likely to result, in double taxation within the meaning of Article 1 of the

 

Arbitration Convention, will send a position paper to the competent authorities

 

of the other Contracting States involved in the case setting out:

 

 

 

(i)      the case made by the person making the request;

 

(ii)     its view of the merits of the case, e.g. why it believes that double taxation

 

has occurred or is likely to occur;

 

(iii)    how the case might be resolved with a view to the elimination of double

 

taxation together with a full explanation of the proposal.

 

 

 

b)      The position paper will contain a full justification of the assessment or

 

adjustment and will be accompanied by basic documentation supporting the

 

competent authority’s position and a list of all other documents used for the

 

adjustment.

 

c)      The position paper will be sent to the competent authorities of the other

 

Contracting States involved in the case as quickly as possible taking account of

 

the complexity of the particular case and no later than four months from the

 

latest of the following dates:

 

 

 

i)       the date of the tax assessment notice, i.e. final decision of the tax

 

administration on the additional income, or equivalent;

 

ii)      the date on which the competent authority receives the request and the

 

minimum information as stated under point 2 (i).

 

 

 

d)      Contracting States undertake that, where a competent authority of a country in

 

which no tax assessment or equivalent has been made, or is not intended to be

 

made, which results, or is likely to result, in double taxation within the

 

meaning of Article 1 of the Arbitration Convention, e.g. due to a transfer

 

pricing adjustment, receives a position paper from another competent authority

 

it will respond as quickly as possible taking account of the complexity of the

 

particular case and no later than six months after receipt of the position paper.

 

e)      The response should take one of the following two forms:

 

 

 

(i)      if the competent authority believes that double taxation has occurred, or

 

is likely to occur, and agrees with the remedy proposed in the position

 

paper, it will inform the other competent authority accordingly and make

 

such adjustments or allow such relief as quickly as possible;

 

(ii)     if the competent authority does not believe that double taxation has

 

occurred, or is likely to occur, or does not agree with the remedy

 

proposed in the position paper, it will send a responding position paper to

 

the other competent authority setting out its reasons and proposing an

 

indicative time scale for dealing with the case taking into account its

 

complexity. The proposal will include, whenever appropriate, a date for a

 

face-to-face meeting, which should take place no later than 18 months

 

from the latest of the following dates:

 

 

 

aa)    the date of the tax assessment notice, i.e. final decision of the tax

 

administration on the additional income, or equivalent;

 

bb)    the date on which the competent authority receives the request and

 

the minimum information as stated under point 2 (i).

 

 

 

f)      Contracting States will further undertake any appropriate steps to speed up all

 

procedures wherever possible. In this respect, Contracting States should

 

envisage to organise regularly, and at least once a year, face-to-face-meetings

 

between their competent authorities to discuss pending mutual agreement

 

procedures (provided that the number of cases justifies such regular meetings).

 

 

 

3.4    Double tax treaties between Member States

 

 

 

As far as transfer pricing cases are concerned, Member States are recommended to

 

apply the provisions of points 1 to 3 also to mutual agreement procedures initiated in

 

accordance with Article 25 (1) of the OECD Model Convention on Income and on

 

Capital, implemented in the Double tax treaties between Member States.

 

 

 

4.      Proceedings during the second phase of the Arbitration Convention

 

 

 

4.1    List of independent persons

 

 

 

a)      Contracting States commit themselves to inform without any further delay the

 

Secretary General of the Council of the European Union of the names of the

 

five independent persons of standing, eligible to become a Member of the

 

advisory commission as referred to in Article 7 (1) of the Arbitration

 

Convention and inform, under the same conditions, of any alteration of the list.

 

b)      When transmitting the names of their independent persons of standing to the

 

Secretary General of the Council of the European Union, Contracting States

 

will join a curriculum vitae of those persons, which should, among other

 

things, describe their legal, tax and especially transfer pricing experience.

 

c)      Contracting States may also indicate on their list those independent persons of

 

standing who fulfil the requirements to be elected as Chairman.

 

d)      The Secretary General of the Council will address every year a request to

 

Contracting States to confirm the names of their independent persons of

 

standing and/or give the names of their replacements.

 

e)      The aggregate list of all independent persons of standing will be published on

 

the Council’s web-site.

 

 


4.2    Establishment of the advisory commission

 

 

 

a)      Unless otherwise agreed between the Contracting States concerned, the

 

Contracting State that issued the first tax assessment notice, i.e. final decision

 

of the tax administration on the additional income, or equivalent which results,

 

or is likely to result, in double taxation within the meaning of Article 1 of the

 

Arbitration Convention, takes the initiative for the establishment of the advisory

 

commission and arranges for its meetings, in agreement with the other

 

Contracting State.

 

b)      The advisory commission will normally consist of two independent persons of

 

standing in addition to its Chairman and the representatives of the competent

 

authorities.

 

c)      The advisory commission will be assisted by a Secretariat for which the

 

facilities will be provided by the Contracting State that initiated the

 

establishment of the advisory commission unless otherwise agreed by the

 

Contracting States concerned. For reasons of independence, this Secretariat

 

will function under the supervision of the Chairman of the advisory

 

commission. Members of the Secretariat will be bound by the secrecy

 

provisions as stated in Article 9 (6) of the Arbitration Convention.

 

d)      The place where the advisory commission meets and the place where its opinion

 

is to be delivered may be determined in advance by the competent authorities of

 

the Contracting States concerned.

 

e)      Contracting States will provide the advisory commission before its first

 

meeting, with all relevant documentation and information and in particular all

 

documents, reports, correspondence and conclusions used during the mutual

 

agreement procedure.

 

 

 

4.3    Functioning of the advisory commission

 

 

 

a)      A case is considered to be referred to the advisory commission on the date

 

when the Chairman confirms that its members have received all relevant

 

documentation and information as specified under point 4.2 e).

 

b)      The proceedings of the advisory commission will be conducted in the official

 

language or languages of the Contracting States involved, unless the competent

 

authorities decide otherwise by mutual agreement, taking into account the wishes

 

of the advisory commission.

 

c)      The advisory commission may request from the party from which a statement or

 

document emanates to arrange for a translation into the language or languages in

 

which the proceedings are conducted.

 

d)      Whilst respecting the provisions of Article 10 of the Arbitration Convention, the

 

advisory commission may request the Contracting States and in particular the

 

Contracting State that issued the first tax assessment notice, i.e. final decision of

 

the tax administration on the additional income, or equivalent which resulted or

 

may result in double taxation within the meaning of Article 1, to appear before

 

the advisory commission.

 

e)      The costs of the advisory commission procedure, which will be shared equally

 

by the Contracting States concerned, will be the administrative costs of the

 

advisory commission and the fees and expenses of the independent persons of

 

standing.

 

f)      Unless the competent authorities of the Contracting States concerned agree

 

otherwise:

 

 

 

i)       the reimbursement of the expenses of the independent persons of

 

standing will be limited to the reimbursement usual for high ranking civil

 

servants of the Contracting State which has taken the initiative to

 

establish the advisory commission;

 

ii)      the fees of the independent persons of standing will be fixed at Euro 1000

 

per person per meeting day of the advisory commission, and the

 

Chairman will receive a 10% higher fee than the other independent

 

persons of standing.

 

 

 

g)      Actual payment of the costs of the advisory commission procedure will be

 

made by the Contracting State which has taken the initiative to establish the

 

advisory commission, unless the competent authorities of the Contracting

 

States concerned decide otherwise.

 

 

 

4.4    Opinion of the advisory commission

 

 

 

Contracting States would expect the opinion to contain:

 

 

 

a)      the names of the members of the advisory commission;

 

b)      the request; the request contains:

 

 

 

      the names and addresses of the enterprises involved;

 

      the competent authorities involved;

 

             a description of the facts and circumstances of the dispute;

 

      a clear statement of what is claimed;

 

 

 

c)      a short summary of the proceedings;

 

d)      the arguments and methods on which the decision in the opinion is based;

 

e)      the opinion;

 

f)      the place where the opinion is delivered;

 

g)      the date on which the opinion is delivered;

 

h)      the signatures of the members of the advisory commission.

 

 

 

The decision of the competent authorities and the opinion of the advisory commission

 

will be communicated as follows:

 

 

 

i)       Once the decision has been taken, the competent authority to whom the case

 

was presented will send a copy of the decision of the competent authorities and

 

the opinion of the advisory commission to each of the enterprises involved.

 

ii)      If the competent authorities of the Contracting States concerned agree that the

 

decision and the opinion may be published, they will only do so if both of the

 

enterprises involved communicate in writing to the competent authority to

 

whom the case was presented that they do not have objections to publication of

 

the decision and the opinion. With the consent of the enterprises involved, the

 

competent authorities of the Contracting States concerned can also agree to

 

publish the decision and the opinion without mentioning the names of the

 

enterprises involved and with deletion of any further details that might disclose

 

the identity of the enterprises involved.

 

iii)     The opinion of the advisory commission will be drafted in three original

 

copies, two to be sent to the competent authorities of the Contracting States and

 

one to be transmitted to the Secretariat General of the Council for archiving. If

 

there is agreement on the publication of the opinion, the Secretariat General of

 

the Council will request publication in the Official Journal of the European

 

Union.

 

 

 

5.      Suspension of tax collection during cross border dispute resolution

 

procedures

 

 

 

Member States are recommended to take all necessary measures to ensure that the

 

suspension of tax collection during cross-border dispute resolution procedures under

 

the Arbitration Convention can be obtained by enterprises engaged in such

 

procedures, under the same conditions as those engaged in a domestic

 

appeals/litigation procedure although these measures may imply legislative changes

 

in some Member States. It would be appropriate for Member States to extend these

 

measures to the cross-border dispute resolution procedures under double tax treaties

 

between Member States.

 

 

 

6.      Accession of new EU Member States to the Arbitration Convention

 

 

 

Member States will endeavour to sign and ratify the Accession Convention of new

 

EU Member States to the Arbitration Convention, as soon as possible and in any

 

event no later than two years after their accession to the EU.[9]

 

 

 

7.      Final provisions

 

 

 

In order to ensure the even and effective application of the Code, Member States are

 

invited to report to the Commission on its practical functioning every two years. On

 

the basis of these reports, the Commission will report to the Council and may

 

propose a review of the provisions of the Code.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANNEX TO THE DRAFT CODE OF CONDUCT

 

 

 

The starting point of the three-year period (deadline for submitting the request

 

according to Article 6 (1) of the Arbitration Convention or Article 25 (1) of the

 

OECD Model Tax Convention on Income and Capital)

 

 

 

Member

State

Implementation of the definition

in national legislation

Member States' translation in EN

of their implementation of the

definition in national legislation

Austria

Die Zustellung des

Steuerbescheides [der zu einer

Doppelbesteuerung, z.B. aufgrund

einer Verrechnungspreiskorrektur,

führt]

The date on which the taxpayer

receives the tax assessment notice or

equivalent [that results in double

taxation, e.g. due to a transfer

pricing adjustment]

Belgium

La date d’envoi de l’avertissementextrait

de rôle comportant

l’imposition ou le supplément

d’imposition /en Nl. : de

verzendingsdatum van het

aanslagbiljet dat de aanslag of de

aanvullende aanslag omvat

The date on which the notice of

assessment is sent containing the

assessment or the supplementary

assessment

Denmark

Såfremt skattemyndighederne agter

at foretage en skatteansættelse på et

andet grundlag end det, der er

selvangivet, skal den skattepligtige

underrettes skriftlig herom. Det

skal samtidig underrettes om, at

skatteyder har en frist på mindst

15 dage regnet fra skrivelsens

datering, til at fremkomme med en

udtalelse imod den forelåede

ændring af skatteansættelsen, jf.

Skattestyrelseslovens §§ 3, stk. 4

og 12A.Har den skattepligtige

udtalt sig inden fristens udløb, skal

skattemyndighederne give skriftlig

underretning om skatteansættelsen

(kendelse).

 

I Danmark vil den første endelige

underretning fra

skattemyndighederne om

armslængde reguleringen blive

givet ved modtagelsen af

kendelsen, hvorfor treårsfristen i

henhold til Voldgiftskonventionens

art. 6.1 begynder at løbe fra dette

tidspunkt.

The date on which the taxpayer

receives the final assessment from the

tax authorities

 

[If the tax authorities intend to make

an assessment not in accordance with

a tax return, a notice specifying the

amendment and the reason for it must

be sent to the taxpayer. The taxpayer

must be given a period of at least 15

days from the date of the notice to

submit its comments on the

amendment. Hereafter the tax

authorities send the final assessment

to the taxpayer.]

 

 


 

 

Member

State

Implementation of the definition

in national legislation

Member States' translation in EN

of their implementation of the

definition in national legislation

Finland

Se päivä, jona verovelvollinen on

saanut tiedon verotuspäätöksestä tai

vastaavasta toimenpiteestä, jolla

siirtohinnoittelua on oikaistu.

(Suomessa kysymyksessä voi olla

säännönmukainen verotus,

oikaisuvaatimuksen johdosta

annettu päätös tai

jälkiverotuspäätös.)

 

på svenska:

 

Dagen då den skattskyldige fått

kännedom om skattebeslutet eller

motsvarande åtgärd, genom vilken

den interna prissättningen har

korrigerats. (I Finland: ordinarie

beskattning, beslut om

skatterättelse eller beslut om

efterbeskattning)

The date on which the taxpayer

receives the tax assessment notice or

equivalent [that reflects the transfer

pricing adjustment]

 

(In Finland: tax decision, notice of

tax adjustment or notice of reassessment)

France

• La date de réception de la

  notification de redressements en

  cas de procédure contradictoire,

 

• La date de réception de la

  notification des bases ou

  éléments d’imposition en cas de

  procédure d’office

The date of receipt of the notification

of adjustments or the notification of

basis of elements of assessments in

case of estimated assessment

Germany

Die Bekanntgabe des ersten

Bescheides, der zu einer

Doppelbesteuerung führt

The date on which the taxpayer

receives the first tax assessment

notice or equivalent that results in

double taxation

Greece

από την ημερομηνία επίδοσης του

φύλλου ελέγχου

From the date of service (receipt) of

the tax assessment notice

Ireland

The date of the issue to the

taxpayer of a notice of an

assessment, or of an amended

assessment [reflecting the

determination by an inspector of

taxes of a transfer pricing issue]

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

Member

State

Implementation of the definition

in national legislation

Member States' translation in EN

of their implementation of the

definition in national legislation

Italy[10]

"Avviso di accertamento"

 

Per avviso di accertamento si

intende l’atto scritto con il quale

l’Amministrazione fiscale

comunica al contribuente di aver

accertato un reddito imponibile

maggiore del reddito dichiarato

oppure un reddito imponibile non

dichiarato.

The date on which the taxpayer

receives the notice of assessment that

reflects the transfer pricing

adjustment

 

Avviso d’accertamento» means a

formal written act through which the

tax administration notifies the

taxpayer to have assessed taxable

income that resulted to be higher

than the declared income or that was

not declared at all.]

Luxembourg

« Bulletin », effet: le troisième jour

ouvrable qui suit la remise de

l'envoi à la poste

 

Das Datum des dritten Arbeitstages

nach Absendung des Bescheids

 

[Les différents bulletins (bulletin d’impôt, bulletin de fixation, bulletin d’établissement séparé, bulletin provisoire, définitif, rectificatif…..) émis par l’administration des contributions

du Luxembourg peuvent être désignés dans le contexte de la convention d’arbitrage par le mot « bulletin », en anglais « assessment », en allemand

« Bescheid ».]

The date of the third working day

following the sending of the

assessment

Netherlands

Navorderingsaanslag, of primaire

aanslag indien de

verrekenprijscorrectie hierin is

begrepen"

The date of the tax re-assessment

notice, or original assessment [if it

includes the transfer pricing

adjustment]

Portugal

Data da notificação legal do acto de

liquidação efectuado pela

Administração Fiscal ou data da

liquidação efectuada pelo

contribuinte, quando incluir o

ajustamento do lucro tributável que

origine ou seja susceptível de

originar uma dupla tributação.

Constitui notificação o recebimento

pelo contribuinte de cópia do

assento do acto da liquidação

Date of legal notification of the

assessment or re-assessment act made by the tax administration or the date of the self-assessment, if it includes the taxable profit adjustment which results or is likely to result in double taxation

 

Notification means the receipt by the

taxpayer of the tax assessment or reassessment

notice

 

 

 

Member

State

Implementation of the definition

in national legislation

Member States' translation in EN

of their implementation of the

definition in national legislation

Spain

La fecha de la recepcion de la

notificacion del acto de liquidación

The date on which the taxpayer

receives the tax assessment notice or

equivalent [that reflects the transfer

pricing adjustment]

Sweden

“Grundläggande beslut om årlig

  taxering”

 

“Omprövningsbeslut”

 

“Eftertaxering”

The date of sendi