The new TP Directive: a double-edged sword?
On 12 September 2023 the EU Commission presented a draft directive on transfer pricing with the aim to establish a uniform set of transfer pricing regulations designed to standardize the application of the arm’s length principle throughout the EU.
What is the impact on Luxembourg?
The directive and Luxembourg tax law follow the OECD’s concept of the arms’ length principle so that the impact of the directive should remain limited. Certain differences subsist which may result in uncertainties: the directive only applies to cross-border EU-transactions, while the Luxembourg rules also cover domestic and non-EU transactions. The directive’s definition of “associated enterprises” seems to be stricter than the Luxembourg concept, which includes “interested persons”. Luxembourg tax law also requires a larger application of compensating adjustments. Regarding corresponding adjustments, the directive does unfortunately not go much further than the OECD’s guidance or Luxembourg domestic rules (a simplified fast-track procedure without the necessity to trigger a MAP is nevertheless foreseen). Finally, the directive restricts the arm’s length value to the interquartile range, while Luxembourg law accepts the entire range.
When should the directive come into force?
The directive should be implemented by 31 December 2025 and apply as of 1 January 2026, provided that it is approved by all the EU Member States. Sweden has already made some reservations, e.g. that a global solution including non-EU States would be preferable.
Is it a good initiative?
After the failed attempts by the EC to impose a stand-alone European concept of the arm’s length principle in the Fiat case, one may welcome the adoption of the OECD’s arm’s length principle. Trying to harmonise the transfer pricing rules within the EU, with a view to reduce compliance cost and standardise administrative practice, seems as well a legitimate initiative. However, to the extent most EU Member States are also OECD Member States and already apply the OECD standards it remains questionable whether the directive is necessary. In addition, the EC reserves itself the possibility to add new rules in the future, which may be seen as yet another attempt by the EC to interfere in the Member States’s tax rules.
Alain Goebel and Francesco Procopio