The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
June 9 — The European Commission's preliminary notice on how it will regulate state aid in transfer pricing cases constitutes a conditional endorsement of the OECD transfer pricing guidelines, a commission official said.
“Given the fact that the application of the OECD transfer pricing guidelines requires a judgment in full by transfer pricing practitioners, we have built in a degree of caution in the way in which we endorse the guidelines,” Gert-Jan Koopman of the commission's directorate-general for competition said June 9.
“This is simply to convey the message that it is not pick and choose in terms of taking whatever bit of the OECD guidelines one likes,” Koopman said. “That is what we sometimes see in our company files and that worries us.”
Koopman said the OECD transfer pricing guidelines are a reference point for applying the methods described in the guidelines to real cases “if they are applied at all. Ultimately it's a matter of looking at the degree of rigour with which this is done.”
“We like the OECD guidelines and see them as the only show in town, but they need to be applied rigorously and we reserve the right to test,” he said.
Under the commission's May 19 notice “on the notion of state aid,” when examining whether a transfer pricing ruling complies with the arm's-length principle inherent in Article 107(1) of the Treaty on the Functioning of the European Union, the commission “may have regard to” the guidance provided by the OECD transfer pricing guidelines (25 Transfer Pricing Report 96, 5/26/16).
Koopman and Robert Stack, the U.S. Treasury's deputy assistant secretary for international tax affairs, spoke on an EU state aid panel at a transfer pricing conference in Washington sponsored by Bloomberg BNA and Baker & McKenzie LLP.
At the conference, Koopman announced the release of the commission's Oct. 20, 2015, 80-page decision, finding that selective tax advantages granted by Luxembourg to Fiat Chrysler Automobiles NV, are illegal under EU state aid rules.
The commission's May 19 notice said the OECD guidelines don't deal with matters of state aid per se, but they “capture the international consensus on transfer pricing, and provide useful guidance to tax administrations and multinational enterprises on how to ensure that a transfer pricing method produces an outcome in line with market conditions.”
According to the notice, if a transfer pricing arrangement complies with the OECD transfer pricing guidelines, including the guidance on the choice of the most appropriate method, and leads to a reliable approximation of a market based outcome, “a tax ruling endorsing that arrangement is unlikely to give rise to state aid.”
Reacting to Koopman's remarks, Stack said applying a one-sided method, like a transactional net margin method (TNMM), would produce result x, and applying a comparable uncontrolled price (CUP) method would produce result y.
The difference between x and y could appear to be a manifest breach of state aid rules “because you have a totally different number with the CUP than with the TNMM,” Stack said. The U.S. has very specific rules about when a CUP is a CUP, and indeed what kind of adjustments might be made even if you are in the CUP method, “so at least a practitioner can sanity test a CUP against some other transactional method.”
Koopman could get into a loop with his logic because the commission has not announced a standard of what is sufficient to be CUP, Stack said. “You kind of bootstrap yourself into state aid.”
Koopman said “When we look at these company files, in essence, what we ask ourselves really is, whether for the type of transaction at hand a CUP would be desirable.” The commission tests the taxpayers' reasoning by conducting a “a plausibility check. Essentially we have to make a judgment call.”
Koopman rhetorically asked: “What do you think we should do as a competition authority if we have a major multinational that gets a tax relief where there is no transfer pricing report, and where the file has abundant evidence of extensive discussions about the employment consequences of the company locating in a certain territory, maybe in the context of the tax rates that would apply.”
That case looks surprisingly similar to a smoking gun, Koopman said.
In some cases, transfer pricing reports appear to post-date the relevant tax ruling by many years, he said. Sometimes companies use very exotic formulas with caps and floors for which there is no rationale.
“I fully take the point that if we were sitting here second-guessing whether a nuance in terms of whether a CUP was going to be applied was wrong, or right, then we would be tremendously overshooting, but that is not what we will do,” Koopman said.
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