COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE on the work of the EU Joint Transfer Pricing Forum in the period July 2012 to January 2014
Date: 2014-06-04
Institutions: European Commission
Subjects: double taxation, multinational enterprise, nationality of legal persons, parent company, tax system, transfer pricing













EUR-Lex - 52014DC0315 - EN











|



52014DC0315

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE on the work of the EU Joint Transfer Pricing Forum in the period July 2012 to January 2014 /* COM/2014/0315 final */










1.                
Introduction

The
global economic interdependence and the interaction of national tax rules can
lead to double taxation or double non-taxation of multi-national enterprises.
The Action Plan on Base Erosion and Profit Shifting ("BEPS Action
Plan") presented by the Organisation for Economic Cooperation and
Development (OECD) in July 2013 seeks to  improve international tax rules and
has received wide international support at the highest level. The Action Plan
identifies several deficiencies in the existing international tax rules and
standards, which can be exploited to erode the tax base in other jurisdictions
and to shift elements of the tax base to reduce the overall tax bill. 
              From a European Union (EU) perspective,
the existing gaps in international tax rules and standards hinder the smooth
functioning of the Internal Market which encompasses 28 different tax regimes.
The Commission considers it important to explore synergies between the current
international debate on BEPS and discussions within the EU with view to
establishing workable solutions within the EU, taking into account EU Treaty
obligations, as well as to promote EU interests in the setting of international
standards. The Commission also recognises that measures taken at EU level can
contribute to achieving the objectives laid down in the BEPS Action Plan. 
              In the area of transfer pricing,
multi-national enterprises (MNEs) and tax administrations (TA) are confronted
with practical problems in pricing cross-border transactions between associated
enterprises for tax purposes. The approach adopted by EU Member States to
correctly evaluate the price of such transactions is that of the arm's length
principle (ALP)[1].
The ALP is based on a comparison between the conditions applied by associated
enterprises and the conditions that would have applied between independent
enterprises.
              However, the interpretation and
application of the ALP varies – from one tax administration to another and
between tax administrations and business. This can result in uncertainty,
increased costs and potential double taxation or double non-taxation. These
aspects impact negatively on the smooth functioning of the Internal Market.
              The Commission set up in October 2002[2]
the EU Joint Transfer Pricing Forum (JTPF), an expert group, to find pragmatic
solutions to problems arising from the application of the ALP within the EU. The
JTPF operates on the basis of four-year mandates, established through
Commission Decisions. The present mandate of the JTPF runs until 31 March 2015.
              The JTPF has been an important
resource for the Commission’s work on improving the practices of transfer
pricing administration and functioning in the EU. It can also serve as a useful
source of input to the G20 sponsored OECD BEPS project.
              This Communication reports on the work
of the JTPF in the period July 2012 to January 2014.

2.                
Summary of Activities of the JTPF from July 2012 to
January 2014

              In the period July 2012 to January
2014, the JTPF continued to implement its 2011‑2015 work programme and
met four times. Detailed reports were completed on three subjects – secondary
adjustments, transfer pricing risk management and compensating adjustments. In
parallel, the JTPF carried out several monitoring exercises. Ongoing projects
of the JTPF include the monitoring of the practical functioning of Convention
90/436/EEC on the elimination of double taxation in connection with the
adjustment of profits of associated enterprises[3] (Arbitration
Convention) and the revised Code of Conduct for the effective implementation of
the Arbitration Convention[4],
as well as the monitoring of the Code of Conduct on transfer pricing
documentation for associated enterprises in the EU (EU TPD)[5].

              The work of the JTPF as a whole has
been consistent with the actions envisaged in the Action Plan on Base Erosion
and Profit Shifting (BEPS Action Plan). The newly adopted reports could inform
possible revision of relevant provisions in the commentary to the OECD MTC and
the Transfer Pricing Guidelines, while current work done by the JTPF on
improving the practical functioning of the Arbitration Convention is relevant
for the BEPS discussion on making dispute resolution mechanisms more effective
(Action 14 of the BEPS Action Plan). BEPS work on transfer pricing
documentation (Action 13 of the BEPS Action Plan) will also benefit from the
findings of the JTPF in its ongoing review of the EU TPD.

2.1.    JTPF Report on Secondary
Adjustments (Annex I)

              Transfer pricing legislation in some
Member States allows or requires “secondary transactions” in order to make the
actual allocation of profits consistent with the original transfer pricing
adjustment (“primary adjustment”). Double taxation may arise due to the fact
that the secondary transaction itself may have tax consequences and result in
an adjustment ("secondary adjustment"). 
              A JTPF questionnaire took stock of the
situation across Member States as at 1 July 2011 and revealed that there are
different legal provisions and practices with respect to secondary adjustments
which may lead to double taxation within the EU.
              The report presents the general
aspects of secondary adjustments and gives recommendations on how to deal with
possible double taxation in this context. Member States in which secondary
adjustments are not compulsory are advised to refrain from making them in order
to avoid double taxation. Member States in which secondary adjustments are
compulsory are advised to provide ways and means to avoid double taxation. The
recommendations, however, assume that the taxpayer is acting in good faith. 
              Drawing on the EU Parent Subsidiary
Directive (PSD)[6]
the report recommends characterising secondary adjustments within the EU as
constructive dividends or constructive capital contributions.  Accordingly, the
PSD ensures that no withholding tax is imposed on the distribution from a
subsidiary to its parent within the EU. 
              For cases not covered by the PSD, the
report describes and recommends the procedure of repatriation in the context of
a Mutual Agreement Procedure (MAP) available under the respective applicable Double
Taxation Agreement (DTA) or even at an earlier stage. Further it is recommended
that Member States should refrain from imposing a penalty with respect to the
secondary adjustment. 
              The recommendations in the report
address most cases of double taxation arising from the different practices in
MS with respect to secondary adjustments.

2.2.    JTPF Report on Transfer
Pricing Risk Management (Annex II)

Enforcement
and compliance with transfer pricing rules can be resource-intensive for tax
administrations and taxpayers respectively. The JTPF recognises that available
resources for transfer pricing are limited and should therefore be deployed
effectively. For this purpose, it is important to assess risks, address them
effectively and have mechanisms in place to resolve disputes in an efficient
and timely manner. 
The
report highlights that in addition to the legal and practical tools available,
tax administrations and taxpayers in the EU can make use of special tools to
manage transfer pricing. Such tools include exchange of information, common
working procedures for audits in general, coordinated approaches on TP audits,
a common documentation standard[7]
and the dispute resolution mechanism under the Arbitration Convention. 
The
report builds on prior work on risk management done by the Commission[8]
and other bodies such as the OECD[9]
and puts it in the context of the special challenges of transfer pricing
as well as the legal and administrative tools available within the EU. 
The
report contains guidance on managing transfer pricing risks based on the
general principles of cooperation between taxpayer and tax administration(s),
identification of high and low risk areas as well as well-targeted, timely and
appropriate actions. For the phase prior to an audit the report recommends
communication between taxpayer and the tax administration(s) at an early point
in time and finding the balance between the need of tax administration(s) for
information and the burden imposed on the taxpayer by requests for information.
The report also recommends that Member States consider, in appropriate
circumstances, exchanging information based on the EU Directive on
Administrative Cooperation[10].
According to the Directive each competent authority of a Member State may request relevant information from the competent authority of any other Member State. Competent authorities may also, at their own initiative, spontaneously share
information they consider relevant for other competent authorities with those
other competent authorities. Furthermore, tax administrations should have
appropriate tools available to address high risk cases. 
For
the audit phase the report recommends to taxpayers and the tax administrations
to achieve a mutual understanding of the facts and circumstances underlying the
transactions under review at an early stage. It also recommends that MS
consider, in appropriate circumstances, cooperative approaches within the EU on
audits. 
In
the phase of dispute resolution, the report recommends efficient and timely
resolution in the framework of MAPs and the Arbitration Convention.  

2.3     JTPF
Report on Compensating Adjustments (Annex III)

Compensating
adjustments are transfer pricing adjustments “in which the taxpayer reports a
transfer price for tax purposes that is, in the taxpayer's opinion, an arm's
length price for a controlled transaction, even though this price differs from
the amount actually charged between the associated enterprises”[11].

A
JTPF questionnaire took stock of the situation in EU MS as at 1 July 2011 and
revealed that MS have different practices with respect to compensating
adjustments.  The conditions, the procedures and the time to make such
adjustments vary across MS and double taxation as well as double non-taxation
may arise as a result. 
The
report aims to provide practical guidance on avoiding double taxation and
double non-taxation that may result from different practices in Member States in
the application of compensating adjustments. The guidance in the report is
applicable to compensating adjustments which are made in the taxpayer’s
accounts and explained in the taxpayer’s transfer pricing documentation.
The
report recommends that Member States should accept a compensating adjustment
initiated by the taxpayer (upward as well as downward adjustment), if the
taxpayer has fulfilled certain conditions: the profits of the concerned related
enterprises are calculated symmetrically, i.e. enterprises participating in a
transaction report the same price for the respective transaction in each of the
Member States involved; the taxpayer has made reasonable efforts to achieve an
arm's length outcome; the approach applied by the taxpayer is consistent over
time; the adjustment has been made before the tax return is filed; in case a
taxpayer’s forecast differs from the result achieved, the taxpayer is able to
explain why this occurred, should it be required by at least one of the Member
States involved.  

2.4     Monitoring
activity

An ongoing task
of the JTPF is to monitor and manage the effective implementation of its
achievements. This is done both by producing annual statistical reports and by
preparing specific reports. The reports are then examined by the Commission and
the JTPF to identify where further work by the JTPF could be carried out. 
Statistical
reports with respect to pending Mutual Agreement Procedures (MAPs) under the Arbitration
Convention (AC) and on Advanced Pricing Agreements (APAs) are prepared and
evaluated annually. The format of the statistics on pending MAPs under the AC
has been recently improved and now allows better evaluation. 
The
comprehensive monitoring exercise which is currently being carried out on the
practical functioning of the Arbitration Convention and its Code of Conduct has
already resulted in concrete proposals for its improvement which are being
discussed by the JTPF. The functioning of the EU TPD was monitored in 2013: MS
and non-government stakeholders completed questionnaires on the impact of the
EU TPD. The results will be discussed by the JTPF in 2014. Further to the
Report on Small and Medium Enterprises (SMEs) and Transfer Pricing, information
on transfer pricing relevant for SMEs was published in 2013 on the JTPF webpage
for each MS. 

3.       Commission
Conclusions

The
Commission continues to regard the JTPF expert group as a valuable resource in
addressing transfer pricing issues and providing pragmatic solutions to a
variety of such issues. The work of the JTPF is consistent with the actions
envisaged in the BEPS Action Plan. The reports on secondary adjustments,
transfer pricing risk management and compensating adjustments address key tasks
identified by the Commission when setting up the JTPF and identified in the
BEPS Action Plan.  
The
Commission fully supports the conclusions and suggestions of the Reports on
Secondary Adjustments, Transfer Pricing Risk Management and Compensating
Adjustments. The Commission invites the Council to endorse the Report on
Secondary Adjustments and invites Member States to implement the
recommendations in their national legislation or administrative rules. The
Commission invites the Council to endorse the Report on Transfer Pricing Risk
Management and invites Member States to implement practices that are in line
with the approaches and procedural considerations contained in the report. The
Commission invites the Council to endorse the Report on Compensating
Adjustments and invites Member States to implement the practical solution
recommended in the report.
The
Commission believes that a future periodical monitoring exercise on the
implementation of the reports' conclusions and recommendations will provide
useful feedback to inform any necessary updating exercise. 
The
Commission encourages the JTPF to continue its monitoring activity and looks
forward to the outcome of its current work on improving the practical
functioning of the AC and the discussion on the Code of Conduct on transfer
pricing documentation for associated enterprises in the EU. In the context of
BEPS, once concrete solutions in the area of transfer pricing are agreed, the
JTPF will consider ways to contribute to their consistent implementation within
the EU. 
[1] The arm's length
principle is set forth in Article 9 of the Model Tax Convention developed by
the Organisation for Economic Co-operation and Development (OECD MTC). The OECD
has also developed Transfer Pricing Guidelines for Multinational Enterprises
and Tax Administrations.
[2] 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, p. 21.
[3] OJ L 225,
20.8.1990, p.10.
[4] OJ C 322, 30.12.2009,
p.1.
[5] OJ C 176, 26.07.2006,
p.1.
[6] Council
Directive 2011/96/EU of 30 November 2011 on the common system of taxation
applicable in the case of parent companies and subsidiaries of different Member
States.
[7] Code of Conduct
on transfer pricing documentation for associated enterprises in the European
Union (EUTPD), OJ C 176, 28.7.2006.
[8] European
Commission: Risk Management Guide for Tax Administrations (2006) and Compliance
Risk Management Guide for Tax Administrations (2010). 
[9] OECD FTA Study
"Dealing Effectively with the Challenges of Transfer Pricing" and
OECD Draft Handbook on Transfer Pricing Risk Assessment.
[10] Council Directive 2011/16/EU of
15 February 2011 on administrative cooperation in the field of taxation  and
repealing Directive 77/799/EEC, OJ L 64, 11.3.2011.
[11] OECD Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations, Glossary
(2010).
ANNEX I
REPORT ON SECONDARY ADJUSTMENTS 

1. Background

1.      The
EU Joint Transfer Pricing Forum (JTPF), as part of its work programme
for 2011-2015 considered so-called secondary adjustments in transfer
pricing, as these adjustments may result in double taxation.  A questionnaire
launched in June 2011 took stock of the situation prevailing in each EU Member
State at 1 July 2011 and served to prepare an overview on the legal and
administrative/practical aspects in the different Member States. All 27 Member
States' responses were included in document JTPF/018/REV1/2011. A draft
discussion paper on secondary adjustments (doc. JTPF/010/2012/EN) was prepared
and discussed at the JTPF meeting in June 2012. The present report was
discussed and agreed at the JTPF meeting in October 2012. 

2. Definition and Scope

2.      It is
possible that a transfer pricing adjustment is accompanied by a so-called
"secondary adjustment". The OECD defines secondary adjustments in the
Glossary of the OECD Transfer Pricing Guidelines (TPG) as "an
adjustment that arises from imposing tax on a secondary transaction in transfer
pricing cases", and a secondary transaction as a constructive
transaction that some States assert under their domestic transfer pricing
legislation after having proposed a primary adjustment in order to make the
actual allocation of profits consistent with the primary adjustment. Secondary
transactions may take the form of constructive dividends (that is items treated
as though they are dividends, even though they would not normally be regarded
as such), constructive equity contributions, or constructive loans".

 Transfer
     pricing legislation in some States allows or requires "secondary
     transactions" in order to make the actual allocation of profits
     consistent with the primary adjustment. Double taxation may arise due to
     the fact that the secondary transaction itself may have tax consequences
     and results in an adjustment. For example, the amount of the income
     adjustment to a subsidiary on a transaction with a non-resident parent may
     be treated by the subsidiary’s jurisdiction as a deemed dividend paid to
     the parent and a withholding tax may be applicable. 
 Secondary
     adjustments are reversed if the primary adjustment is reversed. Secondary
     adjustments taking the form of constructive dividends may create double
     taxation if the other State does not provide a corresponding tax credit or
     relief under Article 23 of the OECD Model Tax Convention (MTC) for the
     withholding tax arising from the secondary adjustment. Although the
     Commentary on Article 10 of the OECD MTC already states in paragraph 28
     that constructive dividends are covered by Article 10 and by the rules for
     eliminating double taxation, the other State may simply not recognise such
     a deemed transaction, which gives rise to withholding tax (see par. 4.69
     OECD TPG). 
 The
     OECD MTC does not prevent secondary adjustments from being made where they
     are permitted under domestic law[1].
     Tax administrations are however "encouraged to structure such
     adjustments in a way so as to minimise the possibility of double taxation
     as a consequence thereof except where the taxpayer's behaviour suggests an
     intent to disguise a dividend for the purposes of avoiding withholding
     tax." (par. 4.71 OECD TPG). 

6.      Out
of the 27 EU Member States, 9 have legislation on secondary adjustments. The
responses to the questionnaire indicate that secondary adjustments in some of
those 9 Member States are discretionary. 
R 1: 
The application of secondary adjustments
may lead to double taxation. Therefore, if secondary adjustments are not
compulsory, it is recommended that MS refrain from making secondary adjustments
when they lead to double taxation. Where secondary adjustments are compulsory
under the legislation of a Member State, it is recommended that Member States
provide for ways and means to avoid double taxation (e.g. by endeavouring to
solve it through a MAP, or by allowing the repatriation of funds at an early
stage, where possible). These recommendations assume that the taxpayer's
behaviour does not suggest an intent to disguise a dividend for the purpose of
avoiding withholding tax[2].  
7.      In
most Member States where secondary adjustments are possible/compulsory, these
adjustments are treated as hidden profit distribution and therefore considered
as constructive dividends which are potentially subject to withholding tax. 
8.      Secondary
adjustments may also take other forms e.g. a constructive loan. The OECD TPG
(par. 4.70) highlight that these constructive transactions carry their own
complications e.g. issues related to imputed interest on those loans. In their
replies to the questionnaire most Member States did not refer to these types of
constructive transactions. The reason may be that Member States want to avoid
the related complications and generally make secondary adjustments in the form
of constructive dividends/contributions. Constructive contributions and
constructive dividends between an EU subsidiary and an EU parent company
minimise the risk of double taxation, as they do not entail withholding tax
consequences (see section 3).
R 2: 
Given the additional complications they
raise, it is recommended that within the EU Member States characterise
secondary adjustments as constructive dividends or constructive capital
contributions rather than as constructive loans, as long as there is no
repatriation.
9.      A
more problematic situation arises if the primary adjustment is made between
parties that are indirectly related. Some MS may deal with this situation by
way of hypothesising a distribution to the parent company and a contribution of
the parent to the other subsidiary (par. 4.70 OECD TPG).
10.  This report
concentrates on secondary transactions between EU resident/established entities
and in the form of constructive dividends and addresses – based on the legal
framework existing in the EU – ways to minimise double taxation and other
administrative and financial burden (e.g. penalties) resulting from secondary
adjustments[3].

11.  The following
sections address the application of the  EU Parent Subsidiary Directive (PSD)
(see section 3)),  situations where MS may consider giving relief if the
taxpayer repatriates funds (in a Mutual Agreement Procedure (section 4.2) or at
an earlier stage (section 4.3)) and also discuss penalties and
procedural/administrative aspects (sections 5 and 6).  

3. Parent Subsidiary Directive (PSD)

12.  When secondary
adjustments are treated as hidden profit distribution/contribution and
therefore considered as constructive dividends, the application of the PSD
(Articles 4 and 5) results in no withholding tax being imposed on a
distribution from a subsidiary to its parent within the EU.
13.  Nine EU Member
States currently apply secondary adjustments - Austria, Bulgaria, Denmark, Germany, France, Luxembourg, the Netherlands, Slovenia and Spain. In a situation whereby a subsidiary in a MS is subject to a secondary adjustment
based on a primary transfer pricing adjustment relating to a transaction with
its parent company situated in another MS, seven[4]
of those nine MS would not impose any withholding tax on the basis of the
provisions of the PSD. Two MS[5]
would consider that the PSD is not applicable to constructive dividends.

4. Repatriation of funds
4.1 General
  In
     essence, repatriation means effectively reversing the funds so that the
     accounts of the parties involved are in line with the economic intent of
     the primary adjustment. The OECD TPG (par. 4.73) describe some of the
     possible ways in which repatriation might be made. The OECD Manual on
     effective mutual agreement procedures (MEMAP)[6]
     also contains guidance on repatriation. The OECD TPG (par. 4.76)
     recommends discussing repatriation in a MAP where it has been initiated
     for the related primary adjustment.
 The
     terms in a mutually agreed MAP settlement between the competent
     authorities in respect of a transfer pricing adjustment are specific to
     the particular settlement between the two CAs. Once the CAs have reached
     an agreement on the characterisation of the deemed transaction, a MAP also
     involves examining the following two issues:

·      
whether
the TA which made the secondary adjustment would abstain from withholding tax
or the other TA would eliminate the resulting double taxation, and,
·      
when
repatriation is considered, how it will be made and how it is ensured that it
does not result in a further taxable burden that may itself cause double
taxation.

 The
     MEMAP indicates that a repatriation agreement may also be reached at an
     earlier stage, e.g. during an audit (see 4.3). 
4.2 Repatriation in the course of a MAP 

17.  If repatriation
is part of a settlement, the terms may vary, but often allow for the
repatriation of funds to be effected either by a direct reimbursement or
through an offset of inter-company accounts. Typically, the agreed terms also
allow a taxpayer to repatriate within a mutually agreed reasonable time period,
free from withholding taxes by the State out of which the repatriation is made
and from any additional taxable treatment in the State to which the
repatriation is made. Repatriation may be subject to audit verification. 
R 3:
Where competent authorities agree in a
MAP on the need to effectively put the accounts in line with the economic
intent of the primary adjustment, Member States consider repatriation by a
direct reimbursement or through an offset of inter-company accounts as an
appropriate tool for achieving this result.
R 4:
Tax administrations should be aware that
taxpayers would need up to 90 days from the date of the notification of the
agreement to actually implement the repatriation. 
R 5:
When repatriation is agreed in a MAP
settlement, it is recommended that the MAP agreement states that no withholding
tax will be applied by the Member State out of which the repatriation is made
and no additional taxable burden will be imposed in the Member State to which the repatriation is made. 
18.  As a
repatriation is made after the initial transaction, the Member State to which the repatriation payment will be made may consider that the payment should
include an interest component to compensate its resident taxpayer for the
foreign associated enterprise’s use of that taxpayer’s funds between the time
of the initial transaction and the repatriation. Such an approach would,
however, result in further complicating the repatriation and may also have its
own tax consequences. 
R 6:
Where the MAP is between Member States
it is, on grounds of simplification, recommended that MS allow, as far as
possible, the repatriation without an interest component and state this in the
MAP agreement.

4.3 Repatriation at an early stage, e.g. an audit

19.  Some States have
developed approaches to avoid potential double taxation by refraining from
secondary transactions and secondary adjustments if a repatriation is already
made at the stage of an audit. Repatriation at an earlier stage, e.g. at the
stage of an audit, would from a taxpayer's perspective require an arrangement
on how to conform the accounts to the primary adjustments and from a TA's
perspective the agreement to this arrangement (some MS may only be able to
agree on refraining from secondary transaction/adjustment in the context of a MAP).
Further a corresponding treatment by the other TA involved is needed. Ensuring
the latter may require informing the other MS based on the exchange of
information rules or initiating a MAP as already the primary adjustment might
not be acceptable for this TA. It should be noted that under Article 25 of the
OECD MTC it would be possible for a taxpayer to initiate a MAP already when he
considers that actions of one country are likely to result in double taxation[7].

R 7: 
If a Member State considers repatriation
at an early stage, e.g. at the stage of an audit, it is recommended to ensure
that the other Member State is informed concurrently based on an exchange of
information procedure, or by the taxpayer (if the taxpayer agrees). 
R 8:
A repatriation agreement reached at the
audit stage should not preclude a request by the taxpayer for a MAP, nor should
it indicate agreement or disagreement with an audit statement.

5. Penalties

20.  Secondary
adjustments may in some Member States be subject to specific penalties or
result in penalties under the general penalty regime. The EU JTPF's summary
report on penalties[8]
already elaborates on different penalty regimes within the EU and reveals in
section 5 that in most Member States a possibility to abstain from imposing penalties
(as long as they are not considered by a Member State as a serious penalty)
exists. Further it contains the message that penalties should be in line with
the final, agreed transfer pricing. This conclusion may also be read in a way
that penalties should only relate to the transfer pricing adjustment itself,
i.e. the primary adjustment and not to the secondary adjustment. 
R 9:
When a secondary adjustment is required,
Member States should refrain from imposing a penalty with respect to the
secondary adjustment. 

 In case penalties on secondary
     adjustments are nonetheless applied, it is worth to consider addressing
     those penalties in a MAP to ensure the removal of double taxation
     resulting from secondary adjustments.  

R 10:
When the tax consequences of a secondary
adjustment are eliminated or reduced in a MAP, it is recommended to eliminate
or commensurately reduce the related penalty, respectively.   

6. Procedure for removing double taxation

22.  In their
responses to the questionnaire on secondary adjustments (JTPF/018/REV1/2011),
most Member States which apply secondary adjustments stated that they do not
consider double taxation issues resulting from secondary adjustments as being
covered by the Arbitration Convention (AC), only a few consider them covered by
the AC Convention, and some other MS indicated that the applicability of the AC
to secondary adjustments remains an open question for them. However, most MS
applying secondary adjustments would be willing to address them in the course
of a MAP. Therefore, in cases where it is not possible to avoid double taxation
at the outset, e.g. by way of applying the PSD, a taxpayer would – in a case of
(potential) double taxation resulting from a secondary adjustment – have to
file two requests, i.e. a request under the Arbitration Convention and a
request for a MAP. The latter would require in each case a treaty being
concluded between Member States that includes a MAP provision comparable to
Article 25 of the OECD MTC (preferably including an arbitration clause as per
Article 25 (5) OECD MTC).
R 11: 
As taxpayers may not be aware of the
fact that in certain situations a separate request needs to be made for
avoiding double taxation resulting from secondary adjustments, Member States
which do not consider that secondary adjustments can be treated under the AC
are encouraged to highlight in their public guidance the fact that a separate
request under Art 25 OECD MTC may be needed to remove double taxation. For
reasons of efficiency, it is recommended that taxpayers submit both requests in
the same letter.
ANNEX
II
REPORT ON TRANSFER PRICING RISK
MANAGEMENT

Background
 The
     Joint Transfer Pricing Forum (JTPF) considered risk assessment as an
     important aspect of transfer pricing and included it in the work programme
     of the JTPF for 2011-2015[9].
     Work on this topic started with presentations by three Member States[10]
     (MS) and by Non-government Members (NGM)[11]
     about their approaches to risk management. A subgroup was then created to
     prepare the discussion. From the start, it was felt that limiting the
     scope of the project to the assessment of risk would not be optimal.
     Therefore the scope was broadened to "risk management in transfer
     pricing" in general, to cover the whole process of ensuring that
     transfer prices are finally set in accordance with the arm's length
     principle. The JTPF was informed on the progress of the work of the
     subgroup at the meetings in October 2012 and February 2013. 
 Given
     the comprehensive material on risk management that is already publicly
     available (e.g. from the OECD[12])
     and to avoid duplication of work, the report will refer to appropriate
     conclusions in this material and put a stronger emphasis on the specific
     situation in the EU. 
 Given
     the different economic situations, the variety of transactions within a
     multi-national enterprise, the different legal and administrative
     environment as well as the differences in resources available in MS, it is
     not possible to develop a universal approach on how to concretely manage
     transfer pricing risk effectively. Therefore, this report is intended to
     provide best practices on effective risk management in transfer pricing
     with a focus on aspects specific for MS and business in the EU. Member States and taxpayers are encouraged to use this guidance within their abilities and
     laws to deal with transfer pricing risks effectively.
1. Preamble

4.      Enforcement
of and compliance with transfer pricing rules as embodying the arm's length
principle under Article 9 of the OECD Model Tax Convention (OECD MTC) can be
resource-intensive for tax administrations and taxpayers respectively. The JTPF
recognises that available resources for transfer pricing are limited and should
therefore be deployed effectively. Accordingly, the term 'transfer pricing
risk' as used in this report not only covers the risk that transfer prices
are not set in accordance with the arm's length principle[13],
but also the risk that resources are not allocated efficiently towards ensuring
that transfer prices are set in accordance with the arm’s length principle. 
5.      The
JTPF seeks to find practical solutions for the proper functioning of the arm’s
length principle in the EU. In line with this task, the role of the JTPF in the
context of transfer pricing risk management is seen as assisting MS and
taxpayers in coordinating actions, ensuring transparency and working on the
basis of aligned approaches. 
R 1: 
It is recommended to respect the
following general principles when managing transfer pricing risk:
·     
It
is preferable to take a cooperative approach based on dialogue and
trust. A cooperative approach is inter alia characterised by communication
between tax administration and taxpayer at an early stage, i.e. already when
considering an audit, preparing an audit or actually beginning an audit. Early
communication can prevent misunderstandings and inefficient allocation of
resources by helping to focus on the most critical aspects which contribute to
effective risk management. A cooperative approach implies the disclosure and
understanding of facts and circumstances of the case under consideration by the
taxpayer. 
·     
It
is worthwhile to put efforts in identifying aspects which involve a higher
transfer pricing risk than others and to take the specific belongings of
SMEs into account[14]. 
·     
Effective
risk management also implies allocating resources to areas with a high
transfer pricing risk. 
·     
Legal
tools should be available to effectively address situations with high transfer
pricing risk. 
·     
To
avoid unnecessary deployment of resources it is important to ensure that all
actions envisaged are well-targeted and appropriate to the circumstances
of the case, taking into account the resources available and the burden these
actions create.
6.      It
should, however, be stressed that the cooperative approach is only valid when
dealing with a cooperative taxpayer. Whether a taxpayer can be regarded
as cooperative may be indicated, for example by experience with past
administrative procedures (e.g. audits)[15],
transparency or the fact that documentation consistent with the Code of Conduct
on Transfer Pricing Documentation for Associated Enterprises (EU TPD)[16]
is maintained and can be made available to the tax administration.

2. The different phases in transfer pricing

7.      This
part is structured according to the three phases a transfer pricing file
normally follows: 
·        
Initial
phase – period prior to an audit of the transfer pricing issue;
·        
Audit
phase – period from start to end of an audit;
·        
Resolution
phase – period during which the tax authority and the tax-payer seek to resolve
any disagreements.

2.1 The initial phase
 It
     is recognised that MS have different practices on how they organise their
     administrative procedures and especially their audits. In some MS
     taxpayers are selected for an audit based on general criteria like size,
     location, or industry sector. The concrete focus of the audit, e.g.
     transfer pricing, is then determined at a later stage. Other MS have a
     procedure where taxpayers are specifically selected for a transfer pricing
     audit. It is not the purpose of this report to strictly and universally distinguish
     between the different steps. Therefore the term 'initial phase’ in the
     context of this report should be understood as covering the time before a
     serious commitment of a tax administration's resources is made to
     concretely investigate whether transfer prices are set in accordance with
     the arm's length principle, regardless of whether this is already
     considered as audit or pre-audit in the administrative practice of the MS.
 The
     objective of the initial phase is to enable the tax administration to make
     a well-founded judgement on whether it is, in the light of the risk
     identified and the resources available, appropriate to pursue with a
     further investigation (the audit phase) and if so, where to put the focus.
     Accordingly, a tax administration should also be prepared not to
     start/continue addressing transfer pricing issues in an audit if the
     initial phase reveals no or a low transfer pricing risk. 
 The
     following aspects should generally be taken into account for effectively
     structuring the initial phase: 

·        
A
certain amount of information is needed to assess whether there is a
transfer pricing risk that requires further action. This information may be
available to the tax administration from various sources such as public
sources, findings in past audits, information requested automatically (e.g. in
the context of the tax return) or specifically (e.g. by issuing specific
questionnaires on transfer pricing)[17].

R 2: 
Requests for additional information
should be balanced between the needs of the tax administrations, taking into
account their different approaches, on one side and the burden imposed on the
taxpayer on the other side. The following aspects should be taken into account
in particular: 
·        
what
information is actually needed for the initial phase, 
·        
what
is the most appropriate point in time to request this information, 
·        
what
is the appropriate form for requesting the information, and 
·        
what
burden is imposed on the taxpayer by the request. 
More generally, understanding the facts
and circumstances is often regarded as more helpful than pure numbers.  
·        
The
information obtained needs to be evaluated with respect to the question whether
it reveals transfer pricing risks to which it is worth allocating more
resources. It is therefore necessary to know what factors create transfer
pricing risk, which are the typical scenarios triggering risk and how to
evaluate the information available with respect to these risk factors[18].
For this purpose it would be helpful to have an organisational framework
that enables a decision on whether (in light of the risk and the resources
available) it is worth taking further steps[19]. Some MS
have, for example made good experience with setting up a group of TP experts
(TP board) who decide how to proceed with specific TP issues and cases.  
R 3a: 
When considering the application of
risk-based approaches it is recommended to develop specific criteria that
indicate transfer pricing risk. 
R 3b: 
It is recommended to establish an
appropriate administrative organisation that enables a tax administration to
make a well-founded decision on whether further resources should be deployed to
a certain case/audit field.
·        
Some
MS have good experience with establishing a so-called cooperative compliance
arrangement[20]
with taxpayers, i.e. maintaining communication on transfer pricing issues
between the taxpayer and tax administrations before the tax return is made or
even the transaction takes place. From their experience taxpayers also welcome
such an approach.  
R 4: 
While it is recognised that an approach
of cooperative compliance arrangement may - due to their respective
administrative framework and practice - not be considered appropriate in all
MS, it is recommended to at least implement measures that allow communication
between taxpayers and tax administrations at an early point in time. This would
be especially useful when the taxpayer identifies transfer pricing aspects
where problems in substance or administration are foreseeable. 
11.  There are also
situations where it would make sense that a transfer pricing risk which was
identified by one tax administration is communicated to the other tax
administration(s) involved. The EU Directive on Administrative Cooperation[21]
provides a practicable framework for exchanging such information from risk
assessment in an effective manner and at an early point in time. In this
initial phase, the detail of information submitted should, however, be rather
limited as the aim of the exchange would be to prevent problems resulting from
early and late audits or to envisage a simultaneous or joint audit. 
R 5: 
It is recommended that MS exchange
information on transfer pricing risks based on the EU Directive on
Administrative Cooperation (2011/16/EU) when problems in substance or
administration are foreseeable between the MS involved or joint action of Tax
Administrations could be considered as an appropriate reaction.

2.2 The audit phase:

12.  For the purposes
of this report the ‘audit phase’ starts with the decision to make a serious
commitment of a tax administration's resources to concretely investigate
whether transfer prices were set in accordance with the arm's length principle.
During the audit phase it is important that the procedure is structured as
effectively as possible and the available resources are deployed to complete
the audit as quickly as possible. 
13.  The foundation
for an effective audit process is a well-founded result of the initial phase,
i.e. the identification of areas involving a transfer pricing risk that is
worth being investigated further. In addition, it is important to establish a work
plan which includes the steps that will probably be taken and the timelines
envisaged on both sides - the tax administration and the taxpayer. Setting up
such a work plan can help ensure an effective process which is characterised by
mutual understanding. 
R 6: 
It is recommended to set up a work plan
for the audit. The work plan should cover both the perspective and actions on
the side of the tax administration and those on the side of the taxpayer. 
The appendix to this report contains one example for
such a work plan. 
R 7: 
It is recommended to take the following
aspects into account during the audit phase[22]:
·        
The
importance of first establishing mutual understanding of the facts and
circumstances underlying the transactions that were chosen for further review
in the context of the business and the industry in which the taxpayer is
operating before applying transfer pricing rules. For this purpose the
involvement of sector or industry experts may be useful. 
·        
A
high degree of cooperation between taxpayer and tax administration, e.g.  by
establishing an early and ongoing dialogue is regarded as beneficial for the
whole process. Further, well-prepared face to face meetings are helpful.
Generally, keeping the time difference between the transaction and audit as
short as possible or even envisage discussing on a real time basis is regarded
as beneficial.
·        
As
already mentioned in the preamble, all actions and requests should be well
targeted and a reasonable balance should be kept between the usefulness of the
information requested for the issue under consideration and the burden the
request creates for both the taxpayers and the tax administration.

 Safe
     harbours and other simplification measures may in certain circumstances contribute
     to effective management of transfer pricing risks[23]. 
 Another
     aspect that should be highlighted is that a taxpayer should be able to
     demonstrate to the tax administration with appropriate documentation that
     his transfer prices are set in accordance with the arm’s length principle.
     Although the extent to which MS implemented specific documentation
     requirements varies, it can be concluded that - given the bi-/or
     multilateral nature of transfer pricing - establishing common key features
     of documentation is beneficial. While on the side of the taxpayer such key
     features could help to reduce the compliance burden, the benefit for the
     tax administration lies in the fact that availability of standardised
     information would assist in international cooperation and the development
     of common rules. In the EU, the EU TPD which was developed in 2006 already
     provides such an agreed framework for transfer pricing documentation.
     Keeping documentation consistent with the EU TPD and making it available
     can also be regarded as an indication for a cooperative taxpayer. The EU
     TPD consists of a masterfile, containing general information about the
     enterprise and its transfer pricing system that would be relevant and
     available to all MS concerned and, as a supplement to the masterfile,
     country specific documentation which would be available to those tax
     administrations with a legitimate interest in the appropriate tax
     treatment of the transactions covered by this documentation. With respect
     to the country specific documentation a balance needs to be kept between
     the need for information and the administrative burden the requirements
     create. Therefore it is important that also documentation should focus on
     those areas with higher risks and be less intensive in areas with lower
     risk. 

R 8: 
When considering risk-based approaches
in the context of documentation it is recommended to take the following aspects
into account:
·     
Quantitative
aspects, e.g. 
lower documentation requirements for low amount transactions,
·     
Qualitative
aspects, e.g.
lower documentation requirements for certain low risk transactions,
·     
Time
aspects, e.g.
not imposing annual documentation requirements for continuous transactions
where the facts and circumstances stay the same and
·     
Simplification
for
certain transactions and in accordance with the conclusions of the OECD on safe
harbours in revised paragraphs 4.93 – 4.131 of the OECD TPG. In this context it
is also useful to refer to the JTPF guidance on low value adding intra-group
services[24] and
CCAs on service not creating intangible property[25].  

 A
     further and important aspect of transfer pricing is its bi- or even
     multilateral nature. A well-founded primary adjustment by one State
     results in the need for a corresponding adjustment in the other State to
     avoid economic double taxation. If one State decided to invest resources
     in auditing a particular taxpayer/a particular audit field and this
     results in a primary adjustment, the result is that also the other State
     or States involved need to invest resources to determine whether this
     adjustment is justified in principle and as regards the amount. The other
     State or States involved will also need to decide whether a corresponding
     adjustment should be made or eventual economic double taxation will have
     to be removed under a Mutual Agreement Procedure (MAP). Managing transfer
     pricing risk is therefore not only relevant for the State considering the
     primary adjustment, but also for the other States affected by this primary
     adjustment. There is a risk that more resources than necessary are
     invested by States, e.g. because of timing mismatches or different levels
     of information. The problem is multiplied in multilateral situations,
     where the adjustments concern more than one State. A coordinated action at
     an early point in time between the MS involved may help to address these
     issues. The EU Directive on Administrative Cooperation (2011/16/EU)
     provides for simultaneous audits[26].
     Simultaneous audits or even joint audits[27]
     may – given the bi- and multilateral nature of transfer pricing – be
     especially useful in the context of transfer pricing. It may also be
     helpful if there is a possibility for taxpayers to propose such
     simultaneous audits in situations where issues are foreseeable. Such a
     possibility may be regarded as closing the gap between Advance Pricing
     Agreements (APAs), which generally only apply before the assessment and
     the MAPs, which are in practice in most cases applied after an assessment,
     even though simultaneous audits are an instrument for exchange of
     information and the auditors may not have the authority to negotiate
     agreements. A common documentation package consistent with the EU TPD is
     especially useful for simultaneous or joint audits. 
 The
     benefit of simultaneous controls is not limited to the audit phase but may
     also influence the resolution phase. For example, if a simultaneous audit
     is performed, information can be requested in the context of the
     simultaneous audit, so that both tax administrations have an early
     opportunity to point to the information they may need as minimum
     information for a later MAP request. Consequently, delays regarding the
     start of the 2-year period under Article 7 of the Arbitration Convention
     (AC) can be avoided.
 It
     is acknowledged that at the beginning the actual performance of simultaneous
     and joint audits provides legal and practical challenges. Therefore
     developing or improving existing legal frameworks and practical guidance
     on bi- or multilateral TP controls would be useful. It is suggested that
     the JTPF considers taking up this work in the future.

R 9a:  
Given the bi- or multilateral nature of
transfer pricing, it is recommended to take in appropriate cases simultaneous
audits on the basis of the Directive on Administrative Cooperation (2011/16/EU)
or joint audits into consideration but to take into account that especially at
the beginning of this practice the capacity and experience of one or both of
the tax administrations involved may be limited. 
R 9b: 
In cases where the taxpayer already
foresees significant transfer pricing issues between MS and/or serious timing
mismatches, it is recommended to apply for an APA or to have the possibility to
inform the tax administrations involved and propose simultaneous or joint
audits. 

 It
     is beneficial for the tax administration to know whether it is dealing
     with a taxpayer that can be regarded as cooperative. An indicator of a
     cooperative taxpayer may be the experience made in past audits. That
     experience may not only benefit the tax administrations with respect to
     future proceedings, but also the taxpayer who would be aware of a feedback
     and may have an incentive to improve the situation if necessary. 

R 10: 
As already highlighted in the Preamble,
it is beneficial for the tax payer and tax administration to communicate
effectively. It is therefore helpful if both parties during the various phases
of the audit not only discuss content but also the audit process. This is
especially true at the beginning and the end of the audit. 

2.3 The resolution phase
 Even
     if all parties involved act in the best manner, there will be cases in
     which it will not be possible to come to an agreement. The disagreement
     may be between the taxpayer and the tax administration or, e.g. in case of
     simultaneous or joint audits, the tax administrations involved may come to
     different conclusions. In these situations it is important to decide
     whether the issue can be resolved within the audit phase or whether the so
     called resolution phase should be started.[28]
     In this report 'resolution phase' means further proceedings (litigation or
     MAP) if the taxpayer claims for these proceedings.. The decision to enter
     the resolution phase should not be postponed unnecessarily. 
 While
     MAP and litigation start following a taxpayer's request, dispute
     resolution requires an explicit decision in case unilateral relief cannot
     be provided. Some MS have positive experiences with having a third
     person review the case and the areas of conflict to evaluate whether
     the case is worth to go to litigation/MAP. Such a process may be
     established purely internally or may involve external persons[29].
 If
     it is not possible to resolve the case by a common agreement, it is
     important to have an efficient mechanism for the resolution of disputes in
     place. In the EU the Arbitration Convention (AC) and the Code of Conduct
     for the effective implementation of the AC provide for such a mechanism.
     Although this mechanism already works well, the JTPF has identified
     various areas where further improvements could be made[30].

R 11: 
It is recommended to establish an administrative
framework which ensures that the decision to enter the resolution phase is made
in a timely and efficient manner. MS and taxpayers should ensure the proper
functioning of the AC by following the guidance in the Code of Conduct. Given
the high workload on MAP, MS may also consider the implementation of
Alternative Dispute Resolution Mechanisms. 

3. Evaluation

23.  The challenges
with respect to risk management in transfer pricing vary and change over time.
Taxpayers and tax administrations may be confronted with new issues and
structures. The JTPF therefore agrees to evaluate after a certain period of
time the experience from applying risk-based approaches. The experiences will
then be exchanged at the level of the JTPF. 

4. Conclusion

24.  The application
of the arm’s length principle involves the risk that transfer prices are not
set in accordance with it and that resources are not deployed efficiently to
ensure compliance. One component for addressing this is the availability of
clear guidance appropriate for today’s economy and the complexity of
multinationals' global operations. Risk-based approaches are aimed at targeting
the higher risk cases including uncooperative taxpayers. For this purpose it is
important to assess risks, address them effectively by audits and have
mechanisms in place which solve disputes in an effective and timely manner.
This report highlights that in addition to the tools generally available, the
situation for tax administrations and taxpayers in the EU is improved by
providing special tools for effectively exchanging information, common working
procedures for audits in general as well as for coordinated approaches, a
common documentation standard and an effective dispute resolution mechanism.
The combination and actual application of these tools contributes to
effectively dealing with the risks arising from transfer pricing. 
Appendix:
TP audit work plan
Explanatory
note to the TP audit work plan
This
TP audit work plan is an example of the various steps that are typically
performed during a TP audit (not a comprehensive audit) on the side of the
taxpayer and on the side of the tax administration, respectively. It should be
understood as an informative guide rather than as prescriptive rules. It is
recognised that the structure suggested may not fit into all MSs' and
taxpayers’ legal framework and administrative practice. An underlying
assumption of the work plan is that properly prepared documentation - as
requested by local tax authorities - is available and well-trained staff act on
both sides.
The
summary of steps on the first slide presents an overview of the various steps
that are typically performed and their sequence. The following slides elaborate
on these steps in more detail.
In
particular, the first steps on notification and preparation of the audit may be
different in some MS or in situations where transfer pricing is only part of
the audit rather than the purpose of the audit. As far as possible the
preparation should already be part of the initial phase. Furthermore, not every
step which is suggested in the work plan needs to be performed in each and
every case and certain steps, such as, e.g. information request, may, if
necessary, be repeated. It may make sense to have further interim meetings also
held regularly during the audit. 
The
timing of the various steps will have to be tailored to the facts and
circumstances of the case and the various steps should be agreed in advance as
far as possible. Also, the respective people in charge of the different steps
may vary in accordance with the organisational structure of the taxpayer and
the tax administration. 
Generally,
the TP audit of a cooperative taxpayer should be characterised by mutual
understanding, transparency, timeliness and targeted action on both sides.
ANNEX III
REPORT ON COMPENSATING
ADJUSTMENTS

1. Background 
 In
     line with the work programme of the Joint Transfer Pricing Forum (JTPF)
     for 2011-2015 (doc. JTPF/016/2011/EN), Member States (MS) agreed during
     the JTPF meeting of 9 June 2011 that in relation to compensating
     adjustments it would be useful to take stock of the situation prevailing
     in each MS by 1 July 2011, establish an overview and evaluate whether
     further work might be done on this issue (doc. JTPF/015/2011/EN). 
 The
     Secretariat prepared a questionnaire for MS' tax administrations and
     circulated it for input on 30 June 2011. MS' responses to the JTPF questionnaire
     on compensating adjustments (doc. JTPF/019/REV1/2011/EN) and further
     contributions by non-government members of the JTPF (doc.
     JTPF/006/2013/EN) and MS informed a JTPF discussion on compensating
     adjustments which led to the preparation of a draft report
     (JTPF/009/2013/EN) for the JTPF meeting in June 2013. 

3.      The
present report reflects the discussion on compensating adjustments that the
JTPF had in June and November 2013. It proposes guidance for a practical
solution to issues arising from the application of different approaches to
compensating adjustments by MS. Price adjustments and theoretical issues remain
outside the scope of this report. 

2. Definition

4.      In
the Glossary of the OECD Transfer Pricing Guidelines (TPG) the term “compensating
adjustment” is defined as “an adjustment in which the taxpayer reports a
transfer price for tax purposes that is, in the taxpayer's opinion, an arm's
length price for a controlled transaction, even though this price differs from
the amount actually charged between the associated enterprises. This adjustment
would be made before the tax return is filed.” 

3. Scope of this report

5.      MS'
responses to the JTPF questionnaire on compensating adjustments
(doc. JTPF/019/REV1/2011/EN) indicate that MS apply different approaches
with respect to compensating adjustments. It is recognised that these
differences are often grounded in a different understanding of more fundamental
principles in transfer pricing, e.g. timing issues and the use of information
relating to contemporaneous uncontrolled transactions[31],
the availability of comparable data and the quality of benchmark studies
created on the basis of commercial databases[32] and what
constitutes the inappropriate use of hindsight in transfer pricing[33].
6.      The
guidance in this report should not be understood as indicating the JTPF's view
on these more fundamental principles. Rather, the purpose of this report is to
provide a practical solution for the issues described in section 4.1 below
which arise from different approaches applied by MS. Moreover, the acceptance
of compensating adjustments should not be understood as limiting a tax
administration’s ability to make an adjustment at a later stage.
7.      The
recommendations in this report are applicable to compensating adjustments which
are made in the accounts and explained in the taxpayer’s transfer pricing
documentation. 

4. Compensating adjustments  
4.1 General

8.      In
general, the adjustment, at a later point of time, of  transfer prices set at
the time of a transaction touches upon the important theoretical issue in
transfer pricing on whether
·        
taxpayers
should be required to establish transfer pricing documentation that
demonstrates that they have made reasonable efforts to comply with the arm's
length principle at the time their intra-group transactions were undertaken
based on information that was reasonably available to them at that moment (ex-ante
or arm's length price setting approach)[34], or whether 
·        
taxpayers
can or should test the actual outcome of their controlled transactions to
demonstrate that the conditions of these transactions were consistent with the
arm's length principle (ex-post or arm's length outcome testing approach)[35].
9.      MS
which follow the reasoning of an ex-ante approach would generally require the
taxpayer to make reasonable efforts to establish the transfer prices at the
time of transaction. If prices were set in a way third parties would have done
and with the information reasonably available to third parties at the time of
transaction, these prices and the economic result would be binding. 
10.  MS which follow
the reasoning of an ex-post approach would generally allow or even require
taxpayers to test and, if necessary, to adjust their transfer prices at the end
of the year, before closing the books or when filing the tax return[36].
Following an ex-post approach may also imply that at the time of an audit the
best data available (e.g. data relating to the time when the transaction was
undertaken) may have to be used. 
11.  When both MS
apply an ex-post approach and require compensating adjustments, problems and
even a risk of double taxation or double non-taxation may arise with respect to
the following: 
·        
The
point in time when such an adjustment should/can be made (year-end, closure of
books, filing of the tax return), 
·        
The 
data which should be used for determining the need for an adjustment and the
adjustment itself, 
·        
Whether
an adjustment can be made in both directions (upwards and downwards) and
·        
To
which price the adjustment should be made (in case of ranges e.g. closest
quartile, median etc.). 
12.  If the
transactions under review are between two related parties which are situated in
two MS one of which follows an ex-ante while the other follows an ex-post
approach with an obligation to reflect the adjustments in the books, a conflict
arises on whether such an adjustment can be made at all. 
13.  The guidance in
the OECD TPG on those issues is currently rather limited. Both the arm's length
price setting approach and the arm's length outcome-testing approach are
recognised as being applied by MS and in case of dispute, the OECD refers to
the Mutual Agreement Procedure (MAP)[37].

14.  However, a MAP
may not yet be available or may not yet provide a solution for the conflict at
an early stage, e.g. at the time when the taxpayer is obliged to file his tax
return. 
15.  To address these
or related practical issues, MS agree on conditions under which
taxpayer-initiated compensating adjustments should be accepted for the tax
return. The decision whether to oblige the taxpayer to make such an adjustment
is left to the discretion of the MS. 

4.2 Practical solution to compensating adjustments in the
EU

16.  To address the
practical issues arising from the situation described in section
4.1 above, MS agree that: (i) the profits of the related enterprises with
respect to the commercial or financial relations between them need to be
calculated symmetrically, i.e. enterprises participating in a transaction
should use the same price for the respective transactions, and that (ii) a
compensating adjustment initiated by the taxpayer should be accepted if the
conditions listed below are fulfilled. This means that if the MS involved have
less prescriptive rules on compensating adjustments, these less prescriptive
rules apply; furthermore, this report does not encourage MS to introduce more
conditions for compensating adjustments than currently apply. The conditions
are:
·        
Before
the relevant transaction or series of transactions, the taxpayer made
reasonable efforts to achieve an arm's length outcome. This would normally be
described in the transfer pricing documentation of the taxpayer.
·        
The
taxpayer makes the adjustment symmetrically in the accounts in both MS
involved.
·        
The
taxpayer applies the same approach consistently over time. 
·        
The
taxpayer makes the adjustment before filing the tax return.  
·        
The
taxpayer is able to explain for what reasons his forecast did not match the
result achieved, when it is required by internal legislation in at least one of
the MS involved.
17.  In case the
actual result is outside the range of arm's length results targeted when
setting the price at the time of the transaction, the adjustment should be made
to the most appropriate point in an arm's length range. In this context the
guidance in paragraphs 3.55 ff. of the TPG may be helpful. Upward as well as downward
adjustments should be accepted. 
18.  Accepting an
adjustment in the aforementioned manner should be regarded as a practical
solution to issues arising from the application of compensating adjustments and
should not be understood as indicating a MS's view on the more fundamental
principles referred to in Section 3, paragraph 6 above. Further it should not
be understood as limiting a tax administration's ability to make an adjustment
at a later stage (e.g. in an audit) and has no bearing in a MAP procedure.
[1] Paragraph 9 of the Commentary on Article 9 OECD MTC.
[2] Reservation by Italy: Italy does not have
internal provisions on secondary adjustments and is of the opinion that it
should be primarily up to those Member States with legislation on secondary
adjustments to structure these adjustments in such a way so as to minimize the
possibility of double taxation as a consequence thereof. In principle, Italy will not grant relief for the withholding tax arising from the secondary adjustment made by
the other Member State which led to double taxation.
[3] Minimising the possibility of double taxation as a consequence of
secondary adjustments is recommended in paragraph 4.71 of the OECD TPG.  
[4] Austria, Denmark, Germany, Luxembourg, the Netherlands, Slovenia and Spain.
[5] Bulgaria and France.
[6] http://www.oecd.org/document/1/0,3746,en_2649_33753_36195905_1_1_1_1,00.html

[7] Paragraph 14, Commentary on Article 25 of the OECD MTC
[8] EU JTPF Summary report on Penalties accompanying the communication
on the work of the JTPF in the period March 2007 to March 2009 (COM(2009)472
final).
[9] See document JTPF/016/2011/EN.
[10] The Netherlands (JTPF meeting of 26 October 2011, Agenda Item 6), Austria and the United Kingdom (JTPF meeting of 8 March 2012, Agenda item 6 (ii)).
[11] JTPF meeting of 26 October 2011, Agenda Item 6.
[12] OECD FTA study "How to deal effectively with the Challenges of
Transfer Pricing” (2012); OECD Handbook on Transfer Pricing Risk Assessment (2013).
[13] The OECD has identified transfer pricing, in particular in relation
to the shifting of risks and intangibles as one of the key pressure areas in
the context of its project 'Base Erosion and Profit Shifting' (BEPS).
[14] See document JTPF/001/FINAL/2011/EN.
[15] See paragraph 19 and Recommendation 10 below.
[16] Commission Communication (COM(2005)543) from 10 November 2005.
[17] See e.g. Chapter 3 of the OECD FTA Study "Dealing Effectively
with the Challenges of Transfer Pricing" and Chapter 4 of the OECD Draft
Handbook on Transfer Pricing Risk Assessment.
[18] See e.g Chapter 2 of the OECD FTA Study "Dealing Effectively
with the Challenges of Transfer Pricing" and Chapter 4 of the OECD Draft Handbook
on Transfer Pricing Risk Assessment.
[19] See e.g. European Commission: Risk Management Guide for Tax
Administrations (2006) ("2006 EC guide") 
http://ec.europa.eu/taxation_customs/resources/documents/taxation/tax_cooperation/gen_overview/risk_management_guide_for_tax_administrations_en.pdf
and Chapter 5 of the OECD Draft Handbook on Transfer Pricing Risk Assessment.
[20] Such approaches are for example followed in the Netherlands and the United Kingdom. Guidance is provided by the European Commission in the
Compliance Risk Management Guide for Tax Administrations (2010) ("2010 EC
Guide"): 
http://ec.europa.eu/taxation_customs/resources/documents/common/publications/info_docs/taxation/risk_managt_guide_en.pdf
and Chapter 6 of the OECD Handbook on Transfer Pricing Risk Assessment.
[21] Council Directive 2011/16/EU of 15 February
2011 on administrative cooperation in the field of taxation  and repealing
Directive 77/799/EEC, OJ L 64, 11.3.2011. 
[22] For further guidance see Chapter 5 of the OECD FTA study: „Dealing
effectively with the Challenges of Transfer Pricing”. 
[23] See OECD Transfer Pricing Guidelines (OECD
TPG), item 4.125 in the new
section on safe harbours (http://www.oecd.org/ctp/transfer-pricing/Revised-Section-E-Safe-Harbours-TP-Guidelines.pdf).
[24] Commission Communication (COM(2011) 16 final) from 25 January 2011.
[25] Commission Communication (COM(2012) 516 final) from 19 September 2012.
[26] Article 12 of the Directive on administrative cooperation in the
field of taxation of 15 February 2011 (2011/16/EU) provides for simultaneous
controls. In a simultaneous control, two or more Member States agree to
conduct a control simultaneously in their own territory, of one or more
persons of common or complementary interest to them, with a view to exchanging
the information thus obtained.
As in the context of direct taxes and transfer pricing
the term "audit" is more common, this report uses the term
simultaneous audit which should be understood as simultaneous control in the
meaning of the directive.
[27] Following paragraph 7 of the OECD Forum on Tax Administration's
2010 report, "a joint audit can be described as two or more
countries joining together to form a single audit team to examine an
issue(s) / transaction(s) of one or more related taxable persons (both legal
entities and individuals) with cross-border business activities, perhaps
including cross-border transactions involving related affiliated companies
organized in the participating countries, and in which the countries have a
common or complementary interest; where the taxpayer jointly makes
presentations and shares information with the countries, and the team includes
Competent Authority representatives from each country."   
[28] See Chapter 6 of the OECD FTA Study "Dealing Effectively with
the Challenges of Transfer Pricing".
[29] See Chapter 6, section on Alternative Dispute Resolution of the
OECD FTA Study "Dealing Effectively with the Challenges of Transfer
Pricing". 
[30] See document JTPF/020/REV1/2012/EN.
[31] 3.68 TPG
[32] 3.30 ff. TPG
[33] 3.73 TPG
[34] 3.69 TPG
[35] 3.70 TPG 
[36] 4.38/4.39 TPG
[37] 3.71 TPG and 4.39 TPG