INTERNATIONAL TRANSFER PRICING AND THE EU CODE OF CONDUCT

Abstract

International transfer pricing concerns the prices charged between associated enterprises across national borders. Associated enterprises, also known as related parties, are enterprises that control each other either directly or indirectly by means of capital participation. International transfer pricing decisions have to be made, for instance, when a mother company delivers goods, services or intangibles to its foreign subsidiaries, particularly when it receives them from its affiliates. The tax rates on company profits differ from country to country. In the EU member states the tax rate differential on company profits range between 10 % in Bulgaria to about 35 % in France. Such tax rate differentials encourage associated enterprises to set transfer prices that shift profits from high-tax to low-tax countries in order to reduce the overall tax burden for the whole Multinational Corporation. No country can allow its tax base to suffer because of international transfer pricing. It is therefore necessary to set up guidelines in order to avoid arbitrary pricing. The OECD member countries have agreed that international transfer prices shall be determined according to the “Arm’s Length Principle”. The “Arm’s Length Principle” is an important element of the tax jurisdictions in EU member states. In order to reduce bureaucratic burdens imposed on Multinational Corporations operating on the European Common Market the European Commission has proposed an EU-wide common approach to transfer pricing documentation requirements. This EU Code of Conduct on transfer pricing documentation (EU TPD) shall help to prevent Multinational Corporations with affiliates in different EU Member States from taking a country-by-country documentation approach. This article describes economic implications of international transfer pricing. Furthermore it classifies and compares the possiblities to determine an „arm’s length price“ according to the OECD Guidelines 2010. Based on empirical data concerning the actual taxes on company profits in EU member states  the article shows that the EU Code of Conduct on transfer pricing documentation (EU TPD) can only be an intermediate remedy towards an inevitable tax harmonization in the European Union.

DOI: http://dx.doi.org/10.5755/j01.eis.0.5.1085