The following discussion provides a brief overview of transfer pricing developments that may be expected in Europe in 2020.
As a result of the base erosion and profit shifting (BEPS) project, companies must document their transfer pricing policies in a format that is quite different from previous OECD and local country guidance and that requires more in-depth information in certain areas. Companies are also increasingly required to provide this documentation to tax authorities. For the most recent years, this documentation includes a Master file and multiple Local files and, if applicable, country-by-country (CbC) reporting and notification requirements. Updated rules on topical issues such as intangibles and intra-group services also came into effect as a result of BEPS.
In 2020, the OECD intends to undertake a review of the effectiveness of CbC reporting, including a peer review. With regard to the most recent years, there has been a patchwork of inconsistent documentation deadlines across countries, a clear increase in transfer pricing documentation reports to be produced by companies, and enhanced enforcement of these new rules by tax authorities, specifically in Eastern Europe. The impression is that the compliance burden for transfer pricing will certainly not decrease in 2020, and the number of transfer pricing audits are expected to increase in various countries.
Financial transactions are one of the last missing pieces in the OECD Transfer Pricing Guidelines, but OECD guidance on the transfer pricing aspects of intra-group financing transactions is expected this year. This guidance is intended to provide more clarity for companies in audit situations.
In addition to a review of the CbC reporting requirements, the OECD also intends to introduce new disclosure rules in 2020. New disclosure rules include EU Directives such as DAC 5, which focuses on beneficial ownership, and DAC 6, which provides a specific link to transfer pricing. DAC 6 requires the reporting of cross-border arrangements if they meet certain hallmarks. Specific transfer pricing hallmarks include the transfer of hard-to-value intangibles and business restructurings. According to DAC 6, a business restructuring will need to be reported if profits, before interest and taxes, fall below 50% of the projections when evaluated after three years. This implies that a mere change in financial results could constitute a business restructuring within the meaning of DAC 6. From the perspective of economic reality however, this may not necessarily be the case. The DAC 6 initiative may well lead to tax authorities being increasingly eager to receive more information from companies operating in an international environment.
The “unified approach” is the OECD’s most recent attempt to reach international consensus on transfer pricing in a digital economy environment. It appears that the OECD proposals go beyond the current arm’s length principle and will have a significant impact on companies across industries, regardless of their digital or non-digital footprint. One view of the broad range of comments from the business community on the proposals, as presented to the OECD, is that it will be a challenging task for the OECD to come up with a final proposal in 2020 accommodating all these divergent views.
The implementation phase of the transfer pricing lifecycle, i.e., the calculation of transfer prices, their reporting and entry into the accounts and records, as well as the monitoring of this process, is continuously evolving. In practice, some companies appear to struggle with a lack of clear accountability or responsibility in controlling transfer pricing, with manually intensive processes and calculations that consume expensive resources, as well as an absence of automated processes that allow for real-time monitoring, adjusting and reporting of transfer pricing results. An important aspect of operational transfer pricing is technology. The use of technology means that the right data can easily be made accessible and controlled.
There has been an increase in both the complexity and the number of transfer pricing audits across Europe. This increased scrutiny is resulting in more and more transfer pricing disputes, with countries sometimes applying divergent approaches. This trend is expected to continue in 2020 with more complex transfer pricing disputes.
Another important transfer pricing issue for 2020 relates to value chain analysis. In a changing business environment, companies are optimizing operating models to realize growth, capture efficiencies, and control risks. As a result of these changes, prudent companies assess the numerous tax implications and opportunities available to them.
Read a January 2020 report prepared by the KPMG member firm in the Netherlands
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