Proposal for a code of conduct on transfer pricing documentation for associated enterprises in the EU
Date: 2005-11-07
Institutions: European Commission
Subjects: EU Member State, approximation of laws, code of conduct, document, exchange of information, fiscal policy, restrictive trade practice, transfer pricing

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 07.11.2005 
COM(2005) 543 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 on transfer pricing documentation 
for associated enterprises in the EU 

Proposal for a 

CODE OF CONDUCT 

on transfer pricing documentation for associated enterprises in the EU 

(presented by the Commission) 

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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 on transfer pricing documentation 
for associated enterprises in the EU 

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INTRODUCTION 

The  aim  of  this  communication  is  to  report  on  the  work  done  by  the  EU  Joint 
Transfer Pricing Forum (JTPF) from January 2004 to May 2005 on transfer pricing 
documentation  for  associated  enterprises  in  the  EU  and  to  present  the  conclusions 
which the Commission draws from this work.  

BACKGROUND 

To follow up its study on "Company Taxation in the Internal Market"1, in its 2001 
communication  "Towards  an  internal  market  without  obstacles  -  A  strategy  for 
providing  companies  with  a  consolidated  corporate  tax  base  for  their  EU-wide 
activities2"  the  Commission  proposed  the  establishment  of  an  "EU  Joint  Transfer 
Pricing Forum". On 11 March 2002 the Council adopted conclusions welcoming this 
move.  

The Forum was formally established by the Commission in June 2002 and consists of 
one expert from the tax administrations of each Member State plus 10 experts from 
business. Representatives from applicant countries and the OECD Secretariat attend 
as observers. The summary records of the proceedings of the JTPF are available on 
the Commission's website3. 

As also reflected in the Council conclusions, the JTPF should work on the basis of 
consensus  and  should  produce  pragmatic,  non-legislative  solutions  within  the 
framework of the OECD Transfer Pricing Guidelines to the practical problems posed 
by transfer pricing practices in the EU.  

The  JTPF  met  for  the  first  time  in  October  2002  and  established  a  two-year  work 
programme.  

The main achievements of the JTPF in its first term of activity were its conclusions 
and  recommendations  on  issues  related  to  the  Arbitration  Convention  (Convention 
90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with 

"Company  Taxation  in  the  Internal  Market",  Commission  staff  working  paper,  SEC(2001)  1681, 
23.10.2001. 
Communication from the Commission to the Council, the European Parliament and the Economic and 
Social Committee: "Towards an internal market without obstacles - A strategy for providing companies 
with a consolidated corporate tax base for their EU-wide activities" COM(2001) 582 final, 23.10.2001. 
http://europa.eu.int/comm/taxation_customs/taxation/company_tax/transfer_pricing/index_en.htm 

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the  adjustment  of  profits  of  associated  enterprises)  and  on  certain  related  issues 
concerning mutual agreement procedures under double tax treaties between Member 
States. 

The  JTPF's  conclusions  and  recommendations  were  taken  as  the  basis  for  a 
Commission  communication4  on  the  activities  of  the  JTPF  from  October  2002  to 
December  2003,  including  a  proposal  for  a  Code  of  Conduct  for  the  effective 
implementation  of  the  Arbitration  Convention  and  certain  related  issues  of  the 
mutual  agreement  procedure  under  double  tax  treaties  between  Member  States, 
which was published on 23 April 2004. The proposed Code of Conduct was adopted 
by the Council on 7 December 2004. 

Considering the constructive results and the important outstanding issues remaining 
on  the  JTPF's  work  programme,  in  December  2004  the  Commission  extended  the 
JTPF’s mandate for another two years (from January 2005 to December 2006).  

ACTIVITIES OF THE EU JOINT TRANSFER PRICING FORUM FROM JANUARY 2004 TO 
MAY 2005 

A  report  on  the  activities  of  the  JTPF,  adopted  by  consensus  in  May  2005  and 
covering  the  work  on  transfer  pricing  documentation  requirements  is  included  in  a 
Staff  Working  Document5.  The  activity  report  summarises  the  deliberations  of  the 
JTPF.  It  concludes  that  standardized  and  partially  centralized  transfer  pricing 
documentation for associated enterprises in the EU could benefit the development of 
the single market. 

Examination  of  transfer  pricing  documentation  for  associated  enterprises  in  the  EU 
was  the  main  activity  of  the  JTPF  from  January  2004  to  May  2005.  It  has  been 
noticed  that  documentation  requirements  in  the  EU  have  increased  and  there  are 
significant differences in documentation requirements between Member States.  

The existence of different sets of documentation requirements in the internal market 
places  a  burden  on  a  company  in  one  Member  State  that  wants  to  set  up  and/or 
conduct  business  with  an  affiliated  company  in  another  Member  State.  The 
preparation  of  separate  and  unique  documentation  packages  in  different  Member 
States is uneconomic. Small and medium-sized enterprises especially can be affected 
by these problems. 

In  order  to  remedy  this  situation,  the  Forum  identified  different  approaches  to 
documentation requirements and, in the light of their pros and cons, in particular in 
terms of legal certainty and flexibility, decided to pursue the concept of standardized 
"EU Transfer Pricing Documentation" (EU TPD). The main features of the EU TPD 
are  standardization  of  the  documentation  requirements  necessary  for  a  tax 
administration as a risk assessment tool and to obtain sufficient information for the 
assessment  of  a  group's  transfer  prices;  the  possibility  of  centralization  of  the  core 

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COM(2004) 297 final, 23.4.2004: "Communication on the work of the EU JTPF 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)." 
SEC(2005) Report on transfer pricing documentation prepared by the EU Joint Transfer Pricing Forum. 

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part of the documentation (the "masterfile") at group level; and the availability to all 
EU Member States concerned of common standardized transfer pricing information 
relevant for all EU affiliates of a multinational enterprise. 

12. 

The Forum further discussed the use of database searches for comparables, the issue 
of  risk  assessment  and  proposals  for  more  general  recommendations  related  to  the 
timing and preparation of documentation, aggregation of transactions, simplification 
of  documentation  requirements  for  SMEs,  language  requirements,  documentation-
related penalties, the application of documentation rules to permanent establishments 
and  the  effect  of  the  re-entry  into  force  of  the  Arbitration  Convention  on 
1 November 2004. 

3.1. 

Use of database searches for comparables 

13. 

To support the arm's length nature of intra-group transactions, both the taxpayer and 
the tax administration have various possibilities for obtaining evidence. These range 
from  the  preferred  source  of  information  readily  available  within  the  company  or 
group  (internal  comparables)  to  external  comparables  that  can  be  obtained  from  a 
variety  of  sources,  including  searches  of  databases  when  the  latter  satisfy  the 
comparability  requirements  and  the  rules  on  the  aggregation  of  transactions.  The 
Forum  agreed  that  tax  administrations  should  evaluate  domestic  or  non-domestic 
comparables  with  respect  to  the  specific  facts  and  circumstances  of  the  case.  For 
example,  comparables  found  in  pan-European  databases  should  not  be  rejected 
automatically. The use of non-domestic comparables by itself should not subject the 
taxpayer to penalties for non-compliance.  

3.2. 

Risk assessment 

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tax  administrations  need 

Globalization  complicates  taxation  issues  and  the  ability  of  tax  administrations  to 
track down trade and income flows. By increasing significantly the amount and type 
of income earned abroad, globalization also reduces the ability of tax administrations 
to verify the accuracy of taxpayers’ transfer pricing. In the light of limited resources 
available, 
to  maximize  administrative  efficiency. 
Enterprises,  on  the  other  hand,  are  confronted  with  varying  and  often  extensive 
documentation  requirements  and  are  also  more  and  more  exposed  to  penalties  for 
non-compliance with such documentation requirements or the arm's length principle. 
The Forum therefore briefly discussed the issue of risk assessment in the context of 
documentation  requirements  from  the  point  of  view  of  both  the  tax  administration 
and business and identified specific and common objectives. 

For  tax  administrations,  risk  assessment  is  regarded  as  the  most  important  case 
selection tool and as a tool for specific inquiries and tax audits. For business on the 
other hand risk assessment may help taxpayers to concentrate pro-actively on "risk" 
transactions  which  may  require  more  detailed  explanations  and  documentation  and 
can also help to improve the transfer pricing system applied. 

The  common  objective  of  risk  management  is  to  enable  a  business  or  a  tax 
administration  to  establish  what  amount  of  effort  and  cost  is  appropriate  in 
establishing,  in  particular  circumstances,  what  the  “arm’s  length”  result  of  a 
transaction  between  associated  enterprises  should  be  and  how  evidence  should  be 
kept  to  demonstrate  that  result.  In  other  words,  risk  assessment  enables  both  tax 

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administrations and business to allocate and use their scarce resources as efficiently 
and effectively as possible.  

The  Forum  concluded  that  the  more  common  understanding  there  was  between 
businesses  and  tax  administrations  about  the  basis  of  risk  assessment,  the  greater 
would  be  the  benefits  for  all  concerned.  It  considered  that  an  agreed  procedure  for 
reviewing  tax  risks  with  a  company  would  be  particularly  helpful  in  questions 
concerning transfer pricing.  

The Forum examined the risk assessment process, reviewed risk indicators and ratios 
and considered the scope for an EU-wide risk assessment procedure and the possible 
merits  of  a  standardized  risk  assessment  form.  However,  it  was  not  possible  to 
complete  the  work  on  risk  assessment  because,  due  to  time  constraints,  the  Forum 
decided  to  pursue  the  more  important  work  on  transfer  pricing  documentation  for 
associated enterprises in the EU.  

3.3. 

The EU transfer pricing documentation: description of the approach 

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A  common  EU-wide  approach  on  documentation  requirements  was  considered 
beneficial  both  for  taxpayers,  in  terms  of  reducing  compliance  costs  and  exposure 
to documentation-related  penalties,  and  for  tax  administrations  due  to  enhanced 
transparency  and  consistency.  The  Forum  therefore  examined  the  potential  and 
merits  of  several  possible  common  approaches  to  documentation  requirements,  i.e. 
"best  practice",  "standardized  documentation"  and  "centralized  (integrated  global) 
documentation". The JTPF discussed this issue in the light of the experience of the 
Pacific Association of Tax Administrators (PATA) and the OECD Transfer Pricing 
Guidelines  for  Multinational  Enterprises  and  Tax  Administrations,  aiming  at 
maintaining  a  balance  between  the  tax  administrations’  right  to  obtain  from  a 
taxpayer the information necessary to assess whether the taxpayer's transfer pricing is 
at arm's length and the compliance cost for the taxpayer. 

In the light of the pros and cons of the standardized and the centralized approaches, 
the  JTPF  developed  a  new  approach  called  "EU  Transfer  Pricing  Documentation" 
(EU  TPD)  which  combines  aspects  of  the  standardized  approach  and  of  the 
centralized (integrated global) documentation approach. It consists of two main parts: 
one set of documentation containing common standardized information relevant for 
all  EU  group  members  (the  "masterfile")  and  several  sets  of  standardized 
documentation  each  containing  country-specific  information  ("country-specific 
documentation"). The EU TPD approach means, therefore, that a multinational group 
of  companies  has  a  standardized  and  consistent  set  of  documentation  (the 
"masterfile" supplemented by "country-specific documentation") at company level. 

The “masterfile” should follow the economic reality of the enterprise and provide a 
“blueprint” of the company and its transfer pricing system that would be relevant for 
all  EU  Member  States  concerned.  Together,  the  "masterfile"  and  the  "country-
specific  documentation"  constitute  the  documentation  file  for  the  relevant  EU 
Member State. 

The EU TPD should cover all group entities resident in the EU including controlled 
transactions  between  enterprises  outside  the  EU  and  group  entities  resident  in  the 
EU. 

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The EU TPD would serve both as a basic set of information for the assessment of a 
multinational enterprise (MNE) group’s transfer prices and as a risk assessment tool 
for taxpayers to identify transactions that may require more detailed explanations and 
documentation  and  for  tax  administrations  for  case  selection  purposes  and  as  a 
starting point for examination of the company's transfer pricing. The EU TPD would 
have  the  potential  to  improve  the  quality  of  the  documentation  and  enhance 
taxpayers'  compliance  with  transfer  pricing  documentation  requirements  in  EU 
Member  States.  It  would  thus  reduce  the  risk  of  double  taxation  and  exposure  to 
documentation-related penalties. For tax administrations, the main advantage of the 
EU TPD approach is that all tax administrations involved would have access to the 
same common documentation and information in the masterfile element. 

The EU TPD leaves some flexibility to taxpayers and to tax administrations as use of 
the EU TPD is optional for taxpayers while Member States may decide not to require 
transfer pricing documentation at all or to have transfer pricing documentation rules 
which require less information and documents than the EU TPD. 

MNEs opting for the EU TPD should generally apply this approach collectively to all 
associated  enterprises  to  which  transfer  pricing  rules  apply.  However,  some  MNE 
groups have a decentralized organisational, legal or operational structure, or consist 
of several large divisions with completely different product lines and transfer pricing 
policies.  In  other  cases  the  divisions  of  a  MNE  group  have  no  inter-company 
transactions.  Also,  implementing  a  MNE's  EU  TPD  in  the  group  or  in  a  recently 
acquired  company  may  take  some  time.  In  all  those  cases,  one  single  masterfile 
covering  all  EU  group  members  might  be  inappropriate.  In  well  justified  cases,  a 
MNE group should, therefore, be allowed to produce more than one masterfile or to 
exempt specific group members from the EU TPD. 

A MNE group should not arbitrarily opt in and out of the EU TPD approach for its 
documentation  purposes  but  should  retain  consistency  and  continuity  in  its 
documentation policy. Therefore, a MNE group that adopts the EU TPD should do so 
in a way that is consistent throughout the EU and from year to year. 

Member  States  have  to  decide  how  to  implement  the  EU  TPD  at  national  level, 
e.g. through  domestic  legislation,  guidance,  administrative  practices,  etc.  so  as  to 
allow  acceptance  of  the  EU  TPD  at  national  level.  The  EU  TPD  should  be 
implemented  flexibly  and  should  recognise  the  particular  circumstances  of  the 
business  concerned.  In  particular,  smaller  and  less  complex  businesses  (including 
SMEs)  should  not  be  expected  to  produce  the  amount  or  complexity  of 
documentation that might be expected from larger and more complex businesses. 

The masterfile should be provided and accepted in a commonly understood language 
for  the  Member  States  concerned.  Translations  of  the  masterfile  should  be  made 
available only upon request. The country-specific documentation should be prepared 
in  a  language  prescribed  by  the  specific  Member  State  concerned,  even  if  the 
taxpayer has opted to keep the country-specific documentation in the masterfile. 

The taxpayer should have to submit its EU TPD to the tax administration only at the 
beginning  of  a  tax  audit  or  upon  specific  request.  However,  each  Member  State 
retains the right to require, in its domestic law, a taxpayer to provide, upon specific 

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request  or  during  a  tax  audit,  more  information  and  documents  than  would  be 
contained in the EU TPD. 

Member States should not impose a documentation-related penalty where taxpayers 
comply in good faith, in a reasonable manner and within a reasonable time with the 
EU TPD or with a Member State's domestic documentation requirements and apply 
their documentation properly to determine their arm's length transfer prices.  

Taxpayers  avoid  cooperation-related  penalties  where  they  have  agreed  to  adopt  the 
EU  TPD  approach  and  provide,  upon  specific  request  or  during  a  tax  audit,  in  a 
reasonable manner and within reasonable time additional information and documents 
going beyond the EU TPD.  

3.4. 

Re-entry into force of the Arbitration Convention 

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33. 

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35. 

After ratification by all Member States, the Protocol to the Arbitration Convention, 
from 
re-entered 
1 January 2000) inter alia extending its validity by periods of five years. 

force  on  1 November 2004 

retroactive  effect 

(with 

into 

Considering  the  diverging  positions  taken  by  Member  States  during  the  interim 
period when not all Member States had ratified the Protocol (see Annex 1 to the first 
report6  of  the  JTPF)  the  Forum  was  of  the  opinion  that  discussing  the  different 
problems related to the re-entry into force of this instrument, in particular with regard 
to the tax treatment of pending cases, could be useful for finding common solutions 
and ensuring taxpayers' legal certainty. 

revealed 

The  replies  to  a  questionnaire  on  pending  mutual  agreement  procedures  (MAPs) 
under  the  EU  Arbitration  Convention  that  was  sent  to  Member  States'  tax 
administrations 
total  of  109  cases  were  pending  on 
31 December 2004.  In  64  of  these  cases  the  time  already  spent  on  the  mutual 
agreement procedures exceeded two years and in 24 cases the taxpayer had made the 
request prior to 1 January 2000, which means that these cases had been pending for 
more than five years (unless the two-year time limit has been extended in accordance 
with Article 7(4) of the Arbitration Convention). 

that  a 

The results of the questionnaire clearly show the importance of the JTPF's work on 
the Code of Conduct for the effective implementation of the Arbitration Convention7. 
Member States are, therefore, urged to expedite reaching mutual agreements on their 
pending  MAPs  under  the  Arbitration  Convention,  especially  as  regards  those  cases 
on  which  more  than  two  years  have  already  been  spent.  Those  Member  States 
concerned  with  the  24  cases  where  the  taxpayer  made  the  request  prior  to 
1 January 2000 are urged to set up advisory commissions, without further delay, and 
to submit the cases for arbitration, in order urgently to eliminate the double taxation. 

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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) (COM(2004) 
297 final of 23 April 2004). 
Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the 
adjustment of profits of associated enterprises OJ L 255, 20.8.1990, p. 10-24. 

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In the case of requests made by taxpayers before 1 November 2004, in line with the 
provisions of the Prolongation Protocol, the arbitration procedure (the second phase 
of the Convention) should be initiated as follows (unless the two-year time limit has 
been extended in accordance with Article 7(4) of the Convention): 

– 

– 

for cases where the mutual agreement procedure was initiated more than 
two years before 1 November 2004: as soon as possible after the Protocol 
entered into force, i.e. soon after 1 November 2004; and 

for  cases  where  the  mutual  agreement  procedure  was  initiated  less  than 
two years before 1 November 2004: two years after the commencement 
of the mutual agreement procedure. 

3.5. 

Future work programme of the JTPF 

36. 

At  its  meeting  on  14  December  2004  the  Forum  agreed  to  discuss  the  following 
issues in 2005 and 2006: 

•  Alternative  dispute  avoidance  and  resolution  procedures  (including  APAs  and 

prior consultation); 

•  Interest and penalties relating to transfer pricing adjustments; 

•  Certain  aspects  of  the  interaction  of  the  mutual  agreement  and  arbitration 

procedure with administrative and judicial appeals; and 

•  The  influence  of  accounting  systems  on  transfer  pricing  (consequences  and 
possibilities  of  more  harmonized  and  integrated  accounting  systems  on  transfer 
pricing). 

3.6.  Monitoring 

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The Forum also agreed to assist the Commission in monitoring the implementation 
by  Member  States  of  the  Code  of  Conduct  on  the  effective  implementation  of  the 
Arbitration Convention and the ratification process regarding the Convention on the 
accession  of  the  ten  new  Member  States  to  the  Arbitration  Convention8.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.  

COMMISSION CONCLUSIONS 

Considering the aforementioned report on the activities of the JTPF, once again the 
Commission can only express its satisfaction with the work done by the JTPF. The 
experts  from  the  Member  States  and  from  business  have  examined  the  different 
issues  in  an  open  and  constructive  manner  that  has  led  to  pragmatic  proposals  and 
recommendations for solutions.  

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Not yet published in the OJ. 

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The  Commission  believes  that  the  work  achieved  by  the  JTPF  on  transfer  pricing 
documentation  is  a  pragmatic  solution  to  the  problems  posed  by  the  significant 
differences  in  documentation  requirements  between  Member  States  as  indicated  in 
the  Commission  study  on  "Company  Taxation  in  the  Internal  Market".  A  common 
approach on transfer pricing documentation should lead to a reduction of compliance 
costs  and  provide  more  consistency  in  transfer  pricing  documentation  requirements 
in the EU. 

The  Commission  considers  the  EU  TPD  to  be  the  most  appropriate  and  efficient 
approach to transfer pricing documentation on the growing intra-group cross-border 
trade transactions in the EU. This new approach will reduce tax obstacles to cross-
border economic activities on the internal market. 

The  Commission  fully  supports  the  conclusions  and  suggestions  contained  in  the 
JTPF's  second  report.  On  the  basis  of  this  work,  the  Commission  has  drawn  up  a 
proposal  for  a  Code  of  Conduct  on  transfer  pricing  documentation  for  associated 
enterprises in the EU. 

The  Commission  invites  the  Council  to  adopt  the  proposed  Code  of  Conduct  on 
transfer  pricing  documentation  for  associated  enterprises  in  the  EU  and  invites 
Member States to implement quickly the recommendations included in the Code of 
Conduct in their national legislation or administrative rules. 

The Commission also fully supports the new work programme agreed by the JTPF at 
its  meeting  in  December  2004  and  expects  substantive  progress  in  the  field  of 
avoidance and resolution of tax disputes. The Commission will report on this issue as 
soon as the JTPF completes its work. 

Member  States  are  invited  to  report  annually  to  the  Commission  on  any  measures 
they have taken further to this Code of Conduct and its practical functioning. On the 
basis  of  these  reports,  the  Commission  will  periodically  review  this  Code  of 
Conduct. 

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EXPLANATORY MEMORANDUM 

Taking  into  consideration  the  European  Commission's  Study  "Company  Taxation  in  the 
Internal  Market"9,  the  Commission  proposed  in  its  2001  Communication  "Towards  an 
Internal  Market  without  obstacles  -  a  strategy  for  providing  companies  with  a  consolidated 
corporate  tax  base  for  their  EU-wide  activities10"  the  establishment  of  a  "EU  Joint  Transfer 
Pricing  Forum"  (hereafter:  JTPF).  On  11  March  2002,  the  Council  adopted  conclusions 
welcoming this initiative. The Commission formally established the JTPF in June 2002. 

A first Commission Communication11 was issued in April 2004 and adopted by the Council in 
December  2004  on  the  activities  of  the  JTPF  from  October  2002  to  December  2003.  This 
included a proposal for a Code of Conduct for the effective implementation of the Arbitration 
Convention12 and certain related issues of the mutual agreement procedure under double tax 
treaties between Member States. 

Considering  the  constructive  results  and  the  remaining  important  issues  of  the  JTPF's  work 
programme, the Commission decided in 2004 to extend until the end of 2006 the initial period 
of two years foreseen for the activities of the JTPF. 

Transfer pricing documentation for associated enterprises in the EU was the second issue of 
the  work  programme  discussed  by  the  JTPF.  An  EU-wide  common  approach  on 
documentation  requirements  was  considered  beneficial  both  for  taxpayers,  in  particular  in 
terms of reducing compliance costs and the exposure to documentation related penalties and 
for tax administrations due to enhanced transparency and consistency. 

The JTPF discussed the purpose and content of good and effective documentation including 
the benefit of risk assessment and the issue of burden of proof, preparation, submission and 
storage  of  documentation,  the  question  in  which  language  transfer  pricing  documentation 
should  be  presented,  the  use  of  database  searches  for  comparables  and  the  application  of 
transfer pricing documentation to permanent establishments. 

In light of the pros and cons of the traditional approaches (a code of best practice, EU-wide 
standardized  documentation  rules  and  centralized  (integrated  global)  documentation  in 
particular  in  terms  of  legal  certainty  and  flexibility,  the  JTPF  eventually  considered  a  new 
approach, the most appropriate, i.e. a standardized "EU Transfer Pricing Documentation" (EU 
TPD).  The  EU  TPD  consists  of  two  main  parts:  (i)  one  set  of  standardized  and  consistent 
documentation  relevant  for  all  EU  group  members  of  a  multinational  enterprise  ("MNE") 
group  (the  "masterfile"),  and  (ii)  several  sets  of  standardized  documentation  containing 
country specific information that fit together with the “masterfile”.  

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"CompanyTaxation  in  the  Internal  Market"  Commission  staff  working  paper,  SEC(2001)  1681 
23.10.2001. 
Communication from the Commission to the Council, the European Parliament and the Economic and 
Social  Committee:  "  Towards  an  Internal  Market  without  obstacles  -  a  strategy  for  providing 
companies with a consolidated corporate tax base for their EU-wide activities" COM(2001) 582 final, 
23.10.2001. 
"Communication on the work of the EU JTPF 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 
23 July 1990)" Com(2004) 297 final, 23.04.2004. 
Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the 
adjustment of profits of associated enterprises, OJ L 255, 20.8.1990, p. 10-24. 

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The main features of the EU TPD are: (i) standardisation of the documentation requirements 
necessary  for  a  tax  administration  as  a  risk  assessment  tool  and  to  obtain  sufficient 
information  for  the  assessment  of  the  MNE  group's  transfer  prices,  (ii)  the  possibility  for 
centralisation of the core part of the documentation (the "masterfile") at group level, and (iii) 
the availability to all EU Member States concerned of common standardised transfer pricing 
information relevant for all EU affiliates of a multinational enterprise. 

The JTPF adopted its report and conclusions by consensus in May 2005. The work on transfer 
pricing  documentation  achieved  by  the  JTPF  is  reported  in  a  Commission  Staff  Working 
Document13. 

The deliberations of the Forum and its report on documentation have clearly highlighted the 
need to provide all parties (Member States and the business community) with an instrument 
providing some recommendations in the field of transfer pricing related documentation.  

The Commission supports the conclusions and the recommendations contained in the second 
report of the JTPF. Indeed, the new EU TPD approach reduces compliance costs and provides 
more simplicity, consistency and transparency in the area of transfer pricing. 

Since the objective of the proposed action, namely setting up of a standardized and partially 
centralized  (integrated  global)  documentation  as  regards  transfer  pricing  for  associated 
enterprises in the EU, should respect the principles of subsidiarity and proportionality as set 
out  in  Article  5  of  the  Treaty  establishing  the  European  Community  and  should  remain 
optional for companies, a Commission proposal for a Code of Conduct to be adopted by the 
Council is considered the most appropriate legal tool. 

13 

SEC(2005) Report on transfer pricing documentation prepared by the EU Joint Transfer Pricing Forum. 

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Proposal for a 

CODE OF CONDUCT 

on transfer pricing documentation for associated enterprises in the EU 

THE COUNCIL OF THE EUROPEAN UNION AND THE REPRESENTATIVES OF THE 
GOVERNMENTS OF THE MEMBER STATES, MEETING WITHIN THE COUNCIL,  

HAVING  REGARD  TO  the  European  Commission's  study  on  "Company  Taxation  in  the 
Internal  Market"14,  the  proposal  made  by  the  Commission,  in  its  2001  communication 
"Towards  an  internal  market  without  obstacles  -  A  strategy  for  providing  companies  with  a 
consolidated corporate tax base for their EU-wide activities15", for the establishment of a "EU 
Joint Transfer Pricing Forum" (hereinafter referred to as “JTPF”), the Council conclusions of 
11 March 2002 welcoming this move and the establishment of the JTPF in June 2002, 

WHEREAS: 

1. 

2. 

3. 

4. 

5. 

6. 

14 

15 

The internal market comprises an area without frontiers in which the free movement 
of goods, persons, services and capital is guaranteed. 

In  an  internal  market  having  the  characteristics  of  a  domestic  market,  transactions 
between associated enterprises from different Member States should not be subject to 
less favourable conditions than those applicable to the same transactions carried out 
between associated enterprises from the same Member State. 

In  the  interest  of  the  proper  functioning  of  the  internal  market,  it  is  of  major 
importance to reduce the compliance costs as regards transfer pricing documentation 
for associated enterprises. 

This  Code  of  Conduct  provides  Member  States  and  taxpayers  with  a  valuable 
instrument  for  the  implementation  of  standardized  and  partially  centralized  transfer 
pricing  documentation  in  the  EU,  with  the  aim  of  simplifying  transfer  pricing 
requirements for cross-border activities. 

Standardized  and  partially  centralized  transfer  pricing  documentation  required  in 
Member  States  to  support  transfer  pricing  on  an  arm’s  length  basis  could  help 
businesses to benefit more from the internal market. 

Transfer pricing documentation in the EU must be viewed in the framework of the 
OECD Transfer Pricing Guidelines. 

"Company  Taxation  in  the  Internal  Market"  Commission  staff  working  paper,  SEC(2001)  1681, 
23.10.2001. 
Communication from the Commission to the Council, the European Parliament and the Economic and 
Social Committee: "Towards an internal market without obstacles - A strategy for providing companies 
with a consolidated corporate tax base for their EU-wide activities" COM(2001) 582 final, 23.10.2001. 

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7. 

8. 

Standardized  and  partially  centralized  documentation  should  be  implemented 
flexibly and should recognize the particular circumstances of the business concerned. 

A Member State may decide not to have transfer pricing documentation rules at all or 
to  require  less  transfer  pricing  documentation  than  that  referred  to  in  this  Code  of 
Conduct, 

ACKNOWLEDGING  that  a  common  EU-wide  approach  on  documentation  requirements  is 
beneficial  both  for  taxpayers,  in  particular  in  terms  of  reducing  compliance  costs  and 
exposure  to documentation-related  penalties,  and  for  tax  administrations  due  to  enhanced 
transparency and consistency, 

WELCOMING the 2005 Commission communication on the work of the EU Joint Transfer 
Pricing Forum in the field of business taxation and on a proposal for a Code of Conduct on 
transfer pricing documentation for associated enterprises in the EU,  

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 a 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  standardized  and 
partially  centralized  transfer  pricing  documentation  for  associated  enterprises  in  the 
EU. 

1. 

2. 

3. 

4. 

5. 

Member  States  will  accept  standardized  and  partially  centralized  transfer  pricing 
documentation for associated enterprises in the EU, i.e. the “EU TPD” referred to in 
the  Annex,  and  consider  it  as  a  basic  set  of  information  for  the  assessment  of  a 
multinational enterprise (MNE) group's transfer prices. 

The use of the EU TPD will be optional for a MNE group. 

Member States will apply similar considerations to documentation requirements for 
the  attribution  of  profits  to  a  permanent  establishment  as  apply  to  transfer  pricing 
documentation. 

Member States will, wherever necessary, take duly into account and be guided by the 
general principles and requirements referred to in the annex. 

Member  States  undertake  not  to  require  smaller  and  less  complex  enterprises 
(including SMEs) to produce the amount or complexity of documentation that might 
be expected from larger and more complex enterprises. 

6. 

Member States should: 

a) 

not  impose  unreasonable  compliance  costs  or  administrative  burden  on 
enterprises in requesting documentation to be created or obtained;  

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b) 

c) 

not  request  documentation  that  has  no  bearing  on  transactions  under  review; 
and  

ensure that there is no public disclosure of confidential information contained 
in documentation. 

Member States should not impose a documentation-related penalty where taxpayers 
comply  in  good  faith,  in  a  reasonable  manner  and  within  a  reasonable  time  with 
standardized  and  consistent  documentation  as  described  in  the  Annex  or  with  a 
Member State's domestic documentation requirements and apply their documentation 
properly to determine their arm's length transfer prices. 

This  Code  of  Conduct  is  addressed  to  Member  States  but  it  is  also  intended  to 
encourage MNEs to apply the EU TPD approach. 

In order to ensure the even and effective application of this Code, Member States are 
invited  to  report  annually  to  the  Commission  on  any  measures  they  have  taken 
further  to  this  Code  and  its  practical  functioning.  On  the  basis  of  these  reports,  the 
Commission  intends  to  report  to  the  Council  and  may  propose  a  review  of  the 
provisions of this Code.  

7. 

8. 

9. 

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ANNEX TO THE CODE OF CONDUCT 

EUROPEAN UNION TRANSFER PRICING DOCUMENTATION (EU TPD) 

SECTION 1 

CONTENT OF THE EU TPD 

each 

containing 

1. A multinational enterprise (MNE) group's standardized and consistent EU TPD consists of 
two  main  parts:  (i)  one  set  of  documentation  containing  common  standardized  information 
relevant  for  all  EU  group  members  (the  "masterfile");  and  (ii)  several  sets  of  standardized 
documentation 
("country-specific 
documentation"). The EU TPD should contain enough details to allow the tax administration 
to make a risk assessment for case selection purposes or at the beginning of a tax audit, ask 
relevant  and  precise  questions  regarding  the  MNE's  transfer  pricing  and  assess  the  transfer 
prices  of  the  inter-company  transactions.  Subject  to  paragraph  31,  the  company  would 
produce one single file for each Member State concerned, i.e. one common masterfile to be 
used in all Member States concerned and a different set of country-specific documentation for 
each Member State. 

country-specific 

information 

2. Each of the items of the EU TPD listed below should be completed, taking into account the 
complexity  of  the  enterprise  and  the  transactions.  As  far  as  possible,  information  should  be 
used that is already in existence within the group (e.g. for management purposes). However, a 
MNE might be required to produce documentation for this purpose that otherwise would not 
have been in existence. 

3. The EU TPD covers all group entities resident in the EU including controlled transactions 
between enterprises resident outside the EU and group entities resident in the EU. 

4. The masterfile 

4.1  The  “masterfile”  should  follow  the  economic  reality  of  the  business  and  provide  a 
“blueprint”  of  the  MNE  group  and  its  transfer  pricing  system  that  would  be  relevant  and 
available to all EU Member States concerned.  

4.2 The masterfile should contain the following items:  

a) 

b) 

c) 

d) 

a general description of the business and business strategy, including changes 
in the business strategy compared to the previous tax year;  

a general description of the MNE group’s organizational, legal and operational 
structure  (including  an  organization  chart,  a  list  of  group  members  and  a 
description of the participation of the parent company in the subsidiaries);  

the  general  identification  of  the  associated  enterprises  engaged  in  controlled 
transactions involving enterprises in the EU;  

a  general  description  of  the  controlled  transactions  involving  associated 
enterprises in the EU, i.e. a general description of: 

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(i) 

flows of transactions (tangible and intangible assets, services, financial); 

(ii) 

invoice flows; and 

(iii)  amounts of transaction flows; 

e) 

f) 

g) 

h) 

i) 

a general description of functions performed, risks assumed and a description 
of  changes  in  functions  and  risks  compared  to  the  previous  tax  year, 
e.g. change from a fully fledged distributor to a commissionaire; 

the  ownership  of  intangibles  (patents,  trademarks,  brand  names,  know-how, 
etc.) and royalties paid or received; 

the MNE group's inter-company transfer pricing policy or a description of the 
group's  transfer  pricing  system  that  explains  the  arm's  length  nature  of  the 
company's transfer prices; 

a  list  of  cost  contribution  agreements,  APAs  and  rulings  covering  transfer 
pricing aspects as far as group members in the EU are affected; and  

to  provide  supplementary 
an  undertaking  by  each  domestic 
information  upon  request  and  within  a  reasonable  time  frame  in  accordance 
with national rules. 

taxpayer 

5. Country-specific documentation  

5.1 The content of the country-specific  documentation  supplements the masterfile. Together 
the  two  constitute  the  documentation  file  for  the  relevant  EU  Member  State.  The  country-
specific  documentation  would  be  available  to  those  tax  administrations  with  a  legitimate 
interest in the appropriate tax treatment of the transactions covered by the documentation. 

5.2  Country-specific  documentation  should  contain,  in  addition  to  the  content  of  the 
masterfile, the following items:  

a) 

b) 

a detailed description of the business and business strategy, including changes 
in the business strategy compared to the previous tax year; and 

information,  i.e.  description  and  explanation,  on  country-specific  controlled 
transactions. including: 

(i) 

flows of transactions (tangible and intangible assets, services, financial); 

(ii) 

invoice flows; and 

(iii)  amounts of transaction flows;  

c) 

a comparability analysis, i.e.: 

(i) 

characteristics of property and services; 

(ii) 

functional analysis (functions performed, assets used, risks assumed); 

(iii)  contractual terms; 

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(iv)  economic circumstances; and 

(v) 

specific business strategies; 

d) 

e) 

f) 

an  explanation  about  the  selection  and  application  of  the  transfer  pricing 
method[s], i.e. why a specific transfer pricing method was selected and how it 
was applied;  

relevant information on internal and/or external comparables if available; and 

a  description  of  the  implementation  and  application  of  the  group's  inter-
company transfer pricing policy. 

6.  A  MNE  should  have  the  possibility  of  including  items  in  the  masterfile  instead  of  the 
country-specific documentation, keeping, however, the same level of detail as in the country-
specific documentation. The country-specific documentation should be prepared in a language 
prescribed by the specific Member State concerned, even if the MNE has opted to keep the 
country-specific documentation in the masterfile. 

7.  Any  country-specific  information  and  documents  that  relate  to  a  controlled  transaction 
involving  one  or  more  Member  States  must  be  contained  either  in  the  country-specific 
documentation of all the Member States concerned or in the common masterfile.  

8.  MNEs  should  be  allowed  to  prepare  the  country-specific  documentation  in  one  set  of 
documentation  (containing  information  about  all  businesses  in  that  country)  or  in  separate 
files for each business or group of activities in that country.  

9.  The  country-specific  documentation  should  be  prepared  in  a  language  prescribed  by  the 
specific Member State concerned. 

SECTION 2 

GENERAL APPLICATION RULES AND REQUIREMENTS FOR MNES 

10.  Use  of  the  EU  TPD  is  optional  for  MNE  groups.  However,  a  MNE  group  should  not 
arbitrarily  opt  in  and  out  of  the  EU  Transfer  Pricing  Documentation  approach  for  its 
documentation purposes but should apply the EU TPD in a way that is consistent throughout 
the EU and from year to year. 

11. A MNE group that opts for the EU TPD should generally apply this approach collectively 
to all associated enterprises engaged in controlled transactions involving enterprises in the EU 
to  which  transfer  pricing  rules  apply.  Subject  to  paragraph  31,  a  MNE  group  opting  for  the 
EU TPD would, therefore, need to keep the documentation specified in section 1 in respect of 
all its enterprises in the Member State concerned, including permanent establishments. 

12. Where a MNE group has opted for the EU TPD for a given fiscal year, each member of 
the MNE group should inform its tax administration accordingly. 

13. MNEs should undertake to prepare the masterfile in time to comply with any legitimate 
request originating from one of the tax administrations involved.  

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14. The taxpayer in a given Member State should make its EU TPD available, upon request 
by  a  tax  administration,  within  a  reasonable  time  depending  on  the  complexity  of  the 
transactions.  

15. The taxpayer responsible for making documentation available to the tax administration is 
the  taxpayer  that  would  be  required  to  make  the  tax  return  and  that  would  be  liable  to  a 
penalty  if  adequate  documentation  were  not  made  available.  This  is  the  case  even  if  the 
documentation is prepared and stored by one enterprise within a group on behalf of another. 
The  decision  of  a  MNE  group  to  apply  the  EU  TPD  implies  a  commitment  towards  all 
associated  enterprises  in  the  EU  to  make  the  masterfile  and  the  respective  country-specific 
documentation available to its national tax administration. 

16.  Where,  in  its  tax  return,  a  taxpayer  makes  an  adjustment  to  its  accounts  profit  resulting 
from  the  application  of  the  arm's  length  principle,  documentation  demonstrating  how  the 
adjustment was calculated should be available. 

17.  The  aggregation  of  transactions  must  be  applied  consistently,  be  transparent  to  the  tax 
administration  and  be  in  accordance  with  paragraph  1.42  of  the  OECD  Transfer  Pricing 
Guidelines (which allow aggregation of transactions that are so closely linked or continuous 
that they cannot be evaluated adequately on a separate basis). These rules should be applied in 
a  reasonable  manner,  taking  into  account  in  particular  the  number  and  complexity  of  the 
transactions. 

SECTION 3 

GENERAL APPLICATION RULES AND REQUIREMENTS FOR MEMBER STATES  

18.  Since  the  EU  TPD  is  a  basic  set  of  information  for  the  assessment  of  the  MNE  group's 
transfer  prices  a  Member  State  would  be  entitled  in  its  domestic  law  to  require  more  and 
different information and documents, by specific request or during a tax audit, than would be 
contained in the EU TPD. 

19.  The  period  for  providing  additional  information  and  documents  upon  specific  request 
(cf. paragraph  18)  should  be  determined  on  a  case-by-case  basis  taking  into  account  the 
amount and detail of the information and documents requested. Depending on specific local 
regulations, the timing should give the taxpayer a reasonable time (which can vary depending 
on the complexity of the transaction) to prepare the additional information.  

20.  Taxpayers  avoid  cooperation-related  penalties  where  they  have  agreed  to  adopt  the  EU 
TPD  approach  and  provide,  upon  specific  request  or  during  a  tax  audit,  in  a  reasonable 
manner and within a reasonable time additional information and documents going beyond the 
EU TPD (cf. paragraph 18). 

21.  Taxpayers  should  have  to  submit  their  EU  TPD,  i.e.  the  masterfile  and  the  country-
specific documentation, to the tax administration only at the beginning of a tax audit or upon 
specific request.  

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22.  Where  a  Member  State  requires  a  taxpayer  to  submit  information  about  transfer  pricing 
with  its  tax  return,  that  information  should  be  no  more  than  a  short  questionnaire  or  an 
appropriate risk assessment form.  

23. It may not always be necessary for documents to be translated into a  local language. In 
order  to  minimize  costs  and  delays  caused  by  translation,  Member  States  should  accept 
documents  in  a  foreign  language  as  far  as  possible.  As  far  as  the  EU  Transfer  Pricing 
Documentation is concerned, tax administrations should be prepared to accept the masterfile 
in  a  commonly  understood  language  for  the  Member  States  concerned.  Translations  of  the 
masterfile should be made available only if strictly necessary and upon specific request.  

24. Member States should not oblige taxpayers to retain documentation beyond a reasonable 
period consistent with the requirements of the domestic laws which apply to each enterprise in 
the group. 

25. Member States should evaluate domestic or non-domestic comparables with respect to the 
specific  facts  and  circumstances  of  the  case.  For  example,  comparables  found  in  pan-
European  databases  should  not  be  rejected  automatically.  The  use  of  non-domestic 
comparables by itself should not subject the taxpayer to penalties for non-compliance. 

SECTION 4 

GENERAL APPLICATION RULES AND REQUIREMENTS APPLICABLE TO MNES 
AND MEMBER STATES 

26.  Where  documentation  produced  for  one  period  remains  relevant  for  subsequent  periods 
and  continues  to  provide  evidence  of  arm’s  length  pricing,  it  may  be  appropriate  for  the 
documentation for subsequent periods to refer to earlier documentation rather than to repeat it.  

27.  Documentation  does  not  need  to  replicate  the  documentation  that  might  be  found  in 
negotiations  between  enterprises  acting  at  arm’s  length  (for  example,  in  agreeing  to  a 
borrowing  facility  or  a  large  contract)  as  long  as  it  includes  adequate  information  to  assess 
whether arm’s length pricing has been applied.  

28. The sort of documentation that needs to be produced by an enterprise that is a subsidiary 
enterprise in a group may be different from that needed to be produced by a parent company, 
i.e. a subsidiary company would not need to produce information about all of the cross-border 
relationships and transactions between associated enterprises within the MNE group but only 
about relationships and transactions relevant to the subsidiary in question.  

29.  It  should  be  irrelevant  for  tax  administrations  where  a  taxpayer  prepares  and  stores  its 
documentation  as  long  as  the  documentation  is  sufficient  and  made  available  in  a  timely 
manner to the tax administrations involved upon request. Taxpayers should, therefore, be free 
to  keep  their  documentation,  including  their  EU  TPD,  either  in  a  centralized  or  in  a 
decentralized manner. 

30.  The  way  that  documentation  is  stored  -  whether  on  paper,  in  electronic  form  or  in  any 
other  system  -  should  be  at  the  discretion  of  the  taxpayer,  provided  that  it  can  be  made 
available to the tax administration in a reasonable way. 

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31. In well justified cases, e.g. where a MNE group has a decentralized organizational, legal 
or  operational  structure  or  consists  of  several  large  divisions  with  completely  different 
product lines and transfer pricing policies or no inter-company transactions, and in the case of 
a  recently  acquired  enterprise,  a  MNE  group  should  be  allowed  to  produce  more  than  one 
masterfile or to exempt specific group members from the EU TPD. 

SECTION 5 

GLOSSARY 

MULTINATIONAL ENTERPRISE (MNE) AND MNE GROUP 

According to the OECD Transfer Pricing Guidelines: 

– 

– 

A MNE is a company that is part of a MNE group.  

A  MNE  group  is  a  group  of  associated  companies  with  business 
establishments in two or more countries. 

STANDARDIZED DOCUMENTATION 

A  uniform,  EU-wide  set  of  rules  for  documentation  requirements  according  to  which  all 
enterprises in Member States prepare separate and unique documentation packages. This more 
prescriptive  approach  aims  at  arriving  at  a  decentralised  but  standardized  set  of 
documentation, i.e. each entity in a multinational group prepares its own documentation, but 
according to the same rules. 

CENTRALIZED (INTEGRATED GLOBAL) DOCUMENTATION 

A  single  documentation  package  (core  documentation)  on  a  global  or  regional  basis  that  is 
prepared  by  the  parent  company  or  headquarters  of  a  group  of  companies  in  a  EU-wide 
standardized  and  consistent  form.  This  documentation  package  can  serve  as  the  basis  for 
preparing local country documentation from both local and central sources. 

EU TRANSFER PRICING DOCUMENTATION (EU TPD) 

The  EU  Transfer  Pricing  Documentation  (EU  TPD)  approach  combines  aspects  of  the 
standardized  and  of  the  centralized  (integrated  global)  documentation  approach.  A 
multinational  group  would  prepare  one  set  of  standardized  and  consistent  transfer  pricing 
documentation  that  would  consist  of  two  main  parts:  (i)  one  uniform  set  of  documentation 
containing  common  standardized  information  relevant  for  all  EU  group  members  (the 
"masterfile")  and  (ii)  several  sets  of  standardized  documentation  each  containing  country-
specific  information  ("country-specific  documentation").  The  documentation  set  for  a  given 
country would consist of the common masterfile supplemented by the standardized country-
specific documentation for that country. 

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DOCUMENTATION-RELATED PENALTY 

An  administrative  (or  civil)  penalty  imposed  for  failure  to  comply  with  the  EU  TPD  or  the 
domestic documentation requirements of a Member State (depending on which requirements 
the MNE has chosen to comply with) at the time the EU TPD or the domestic documentation 
required by a Member State was due to be submitted to the tax administration. 

COOPERATION-RELATED PENALTY 

An administrative (or civil) penalty imposed for failure to comply in a timely manner with a 
specific request of a tax administration to submit additional information or documents going 
beyond  the  EU  TPD  or  the  domestic  documentation  requirements  of  a  Member  State 
(depending on which requirements the MNE has chosen to comply with). 

ADJUSTMENT-RELATED PENALTY 

A penalty imposed for failure to comply with the arm's length principle usually levied in the 
form  of  a  surcharge  at  a  fixed  amount  or  a  certain  percentage  of  the  transfer  pricing 
adjustment or the tax understatement. 

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