The European Commission has presented a proposal for a Code of Conduct to eliminate double taxation of companies arising from intra-group transactions. The proposal, based on the work of the EU Joint Transfer Pricing Forum (see IP/02/1105), would apply in cases where an EU Member State's tax administration increases the taxable profits of a company from its cross-border intra-group transactions, for example by making a transfer pricing adjustment. The Code would ensure a more effective and uniform application by EU Member States of the 1990 Arbitration Convention (90/436/EEC). It would determine procedural rules such as the starting points of the time limits for dealing with complaints, arrangements concerning the advisory commission that must be established if Member States cannot reach agreement on the elimination of double taxation within two years, and the suspension of tax collection during the dispute resolution period. The Code would also recommend that Member States apply these rules to the dispute settlement provisions in their double taxation treaties with each other. The Arbitration Convention is not in force at present because not all Member States have ratified its extension yet.
"The proposed Code of Conduct should ensure that EU dispute settlement procedures operate more efficiently so as to eliminate double taxation of company profits within the Internal Market" stated Taxation Commissioner Frits Bolkestein. "But I must also urge those Member States that have not yet ratified the extension of the Arbitration Convention to take the necessary steps as soon as possible since the Convention cannot apply anywhere in the EU until they do so."
The EU Joint Transfer Pricing Forum's first report contains conclusions and recommendations in the form of a draft Code of Conduct to ensure a more uniform application by the tax administrations of Member States of the 1990 Arbitration Convention (90/436/EEC) and the mutual agreement procedures in double taxation conventions between EU Member States.
The draft Code of Conduct that the Commission is now proposing to the Council for adoption aims to establish common procedures concerning:
the starting point of the three-year period which is the deadline for a company suffering double taxation as a result of a transfer pricing adjustment to present its case to a competent authority
the starting point of the two-year period during which Member States' tax administrations must attempt to reach mutual agreement on how to eliminate the double taxation that is the subject of the complaint
the arrangements to be followed during this mutual agreement procedure (the practical operation of the procedure, transparency and taxpayer participation)
the practical arrangements for the second phase of the arbitration procedure (the advisory commission) that must follow if there is no mutual agreement between the tax authorities within two years, and
the suspension of tax collection during cross-border dispute resolution procedures.
The draft Code of Conduct would be a political commitment and would not affect the Member States' rights and obligations or the respective spheres of competence of the Member States and the Community.
The Commission in October 2001 proposed a two-track strategy for removing the tax obstacles that currently prevent companies doing business across borders from benefiting fully from the Internal Market (see IP/01/1468). A growing problem is the double taxation that can arise where an EU Member State increases the taxable profits of a company from its cross-border intra-group transactions and the other Member State of the associated enterprise does not make a corresponding downward adjustment to the taxable profits of that enterprise. A frequent situation is where one tax administration, for tax purposes, adjusts the transfer prices charged between associated enterprises to bring the intra-group transfer prices into line with those that it considers would have been agreed between unrelated enterprises. Tax administrations are devoting increasing resources to this area while at the same time enterprises point to the complexities and costs that they encounter in endeavouring to comply with the Transfer Pricing Guidelines of the Organisation for Economic Cooperation and Development (OECD) and their different interpretation in EU Member States. They also complain of the onerous transfer pricing documentation requirements imposed by some tax administrations.
The Arbitration Convention and the mutual agreement procedures in Member States' double tax conventions are designed to resolve disputes where double taxation occurs but Member States differ in their practical application of these measures. Furthermore, the Convention has not been in force since 2000 because not all Member States have ratified a Protocol to prolong its application. At present, therefore, companies must rely on the dispute settlement provisions in double taxation conventions that, unlike the Convention, do not impose a binding obligation to eliminate double taxation.
The EU Joint Transfer Pricing Forum that the Commission established in July 2002 to consider these problems consists of one tax expert from each Member State's tax administration and 10 high-level experts from the business community together with a Chairman. Representatives of the Accession Countries and the OECD participate as observers. The Forum will present a further report on its work in early 2005.
The full text of the report and code is available on the Europa website at:
For further information on the work of the EU Joint Transfer Pricing Forum see: