Brussels, 26/02/2007 (Agence Europe) - On Monday 26 February, the Commission adopted a communication containing guidelines on concluding Advance Pricing Agreements (APAs) in the EU. These agreements, usually signed between the tax administrations of EU member states, at the request of a company with cross-border operations, define how and where future transactions between related taxpayers established in two or more Member States will be taxed over a given period (around five years). European Finance Ministers are called on to endorse these guidelines. The Common Consolidated Corporate Tax Base (CCCTB) will mean that any problems of double taxation resulting from transfer pricing will be resolved, says the Commission, which will present an interim report prior to a legislative initiative in 2008.
Transfer pricing is the pricing on the cross-border trade in goods, services or intangible assets (e.g. revenue from intellectual property) between companies belonging to the same group, but located in different member states. This could be, for example, the price that company X based in Belgium sells an asset to sister company Y in Spain. In such a case, the Belgian and Spanish tax authorities have to check that the price does not conceal the transfer of a profit or loss from Company X to Company Y, or vice versa. It is possible for the price charged between companies owned by the same shareholders can be different from the market price which would apply under normal circumstances if the companies were independent one of the other. The issue is delicate and difficult to assess, the Commission says, because it deals with sensitive information linked to the group's development strategy. Nonetheless, the Commission wants to act - through a “soft law”- because the difficulty of setting transfer pricing and the way it would be calculated for taw purposes can lead to double taxation.
Unlike under the first two transfer pricing codes of conduct which serve to improve the settlement of tax disputes (see EUROPE 9221, 8844), these new guidelines on Advance Pricing Agreements act upstream to prevent cases of double taxation. A group can conclude one or more agreements for its cross-border activities. One APA can, for example, concentrate on financial services, another on delivery of goods, a third on use of patents. Potentially, several APAs could deal with identical activities but in various member states. While aimed at all kinds of companies, APAs will be used mainly by large firms. The APAs on transfer pricing within the Airbus consortium in four different member states is a unique example of public agreement when these agreements are confidential.
According to the Commission, among the advantages of advance pricing agreements are the “guarantees” that they bring for the tax treatment of transactions. These guarantees are valid both for all the tax administrations concerned, because they no longer have to carry out an audit to check transfer pricing, but only have to check the proper use of the APA, and for taxpayers, who now know how to go about setting (advance) transfer pricing correctly between tax administrations. A guarantee of stability for those companies which have taken APAs.
The guidelines establish the procedures to ensure the proper working of the four stages which lead to the conclusion of an APA: the decision by a group to request an APA from the competent authorities; the verification by each tax administration concerned of the APA; negotiations between these administrations to agree on the exact details of arrangements for setting transfer pricing, the formal agreement between administrations and the group. Indicating that the procedure could last 18 months, a model timetable illustrating how the APA procedure unfolds is also attached to the guidelines. Difficulties linked to signing an APA are not avoided. These concern mainly the retrospective application of the tax treatment provided for in the APA, costs involved, types of transaction and the sums from the transactions that should be covered.
Finally, the Commission communication speaks of the current and future work of the EU Joint Transfer Pricing Forum, whose mandate was extended for two years (see EUROPE 8260) (mb)