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The EU’s TP Directive – will there be further changes?

As part of the BEFIT (Business Europe Framework for Income Taxation) package, published at the end of 2023, the European Commission has presented a draft of directive to harmonise transfer pricing regulations (the ‘TP Directive’). Currently, EU Member States have their own transfer pricing regulations, but the divergence between implemented rules leads, in the European Commission’s view, to problems related in particular to double taxation and undermines the competitiveness and efficiency of the EU single market. So, after a temporary period of relative calm in Polish transfer pricing regulations, are we in for another revolution? Let us take a closer look at the solutions contained in the TP Directive draft.

Purpose of the TP Directive

The European Commission points out that although all Member States have introduced transfer pricing rules at domestic level, these remain inconsistent due to too much leeway in their interpretation and application. It was therefore decided to harmonise the rules at EU level. The main objectives of the TP Directive are:

  • to simplify transfer pricing tax rules,
  • increase tax certainty for EU taxpayers,
  • eliminate double taxation,
  • reduce the risk of litigation and compliance costs,
  • increasing the resilience of EU businesses to changing market conditions.

The achievement of the above objectives is expected, in the view of the European Commission, to improve competitiveness and enable the gradual development of a common and coherent approach to transfer pricing by tax authorities in EU countries.

Assumptions of the TP Directive

Among the most important points of the TP Directive are:

1. Definition of related party

Related parties are to be considered by management, voting rights, capital, a profit share of at least 25% (currently 50% in some EU countries). Permanent establishments (PEs) are also considered related parties if the conditions are met.

2. Arm’s length principle

The TP Directive draft indicates that the market interval should be the interquartile range and that no deviation may be allowed.

3. Indication of the point in the range to be taken into account for the transfer pricing adjustment

If the price in the transaction is outside the market price range, the adjustment should be made to the median of the interquartile range indicated.

4. Transfer pricing adjustments

If the prices under consideration are within the market price range, no adjustment should be applied. It is proposed to harmonise the rules for correlating and compensating adjustments and to introduce a fast-track procedure (“fast-track”) to be completed within 180 days without the need to initiate a mutual agreement procedure (MAP) when there is no doubt that the original adjustment is justified.

5. Documentation obligation and elements of documentation

The TP Directive draft currently does not indicate transfer pricing documentation requirements. The scope of the documentation will be determined at a later stage.

6. Transfer pricing verification methods

The TP Directive confirms that the most appropriate method for determining the arm’s length price should be a method selected from the five methods contained in the OECD TP Guidelines.

The draft also indicates that the use of other valuation methods and techniques is allowed if it can be reliably demonstrated that none of the traditional methods are appropriate and that the other chosen method is more reliable for determining the arm’s length price.

7. OECD Transfer Pricing Guidelines

The OECD Transfer Pricing Guidelines are intended to become a binding instrument for taxpayers and are intended to promote the development of a common practice in the application of transfer pricing.

The TP Directive and Polish TP legislation

Taking into account, the content of the TP Directive draft and the scope of the Polish regulations, it should be pointed out that in practice not much will change for Polish taxpayers. Polish regulations are based on the OECD TP Guidelines, while being more restrictive and detailed. It seems that many of the assumptions contained in the TP Directive, we already have in domestic regulations.

The TP Directive certainly introduces a rather restrictive approach in terms of the market range, which would be the interquartile range only and an adjustment of the result on the transaction to the median if the price is not within the market range. Currently, Polish regulations do not indicate such a solution now.

Significantly, the draft TP Directive, unlike the Polish regulations, does not provide for any exemptions or documentation simplifications at this point, including no limitations in relation to the value of transactions (documentation thresholds) to be documented. It is unclear whether such restrictions will be introduced under the TP Directive and what the safe harbour issue will be (in Polish regulations, we have a safe harbour for low value-added services and loans).

The current content of the TP Directive will certainly not cause a revolution in Polish legislation, which is already more detailed than the proposed regulations. However, further changes that will affect the content of the current regulations cannot be ruled out.

The draft assumes that the implementation of the TP Directive in its current form by member states will take place by the end of 2025 and the regulations will become effective on 1 January 2026. Are these deadlines feasible? At this point it is difficult to say due to the fact that we are waiting for the final version of the TP Directive.