17 November 2023 — Publication

Harmonising EU transfer pricing – EC proposal to reduce tax compliance costs

Harmonising EU transfer pricing – EC proposal to reduce tax compliance costs


The European Commission (EC) has proposed a legislation on transfer pricing to reduce tax compliance costs for SMEs that engage in cross border business using a permanent establishment. This Directive is part of the EC’s BEFIT package released on 12 September. It aims to harmonise EU transfer pricing rules and tax treatment of intra-group transactions. Accountants should consider the proposal’s impacts on clients that have cross border transactions with associated enterprises.

This webpage provides the key features of the proposal. For more details, please refer the proposed Directive full text.

As this is a proposed Directive, all details and timelines are subject to change during the legislative process.


Transfer pricing rules are not harmonised in the EU. Member States have a considerable discretion in interpreting and applying the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (‘OECD Guidelines). This “gives rise to complexity and an uneven playing field for businesses” according to the EC.

The EC specifically mentions differences between Member States’ definitions of ‘associated enterprises’, the thresholds for which can vary between a 25 and 50%. This creates barriers to cross border operations and leads to the risk of double or over-taxation.

The EC also highlights additional issues from non-harmonised transfer pricing rules such as profit shifting and tax avoidance by cross-border businesses, increased litigation, and high compliance costs.

Proposal’s key features


The proposal has four objectives:

  1. enshrine the ‘arm’s length’[1] principle into EU law and ensure its common application
  2. embed the OECD Guidelines as a common EU approach
  3. develop certain core elements in transfer pricing procedures
  4. develop future common rules on documentation and on specific technical aspects

The arm’s length principle

Member States are required to ensure that businesses engaged in cross-border commercial or financial transactions with an associated enterprise use the arm’s length principle.

Where transactions are not conducted on an arm’s length basis, Member States are required to include the appropriate amount of profit that would have been included had the transaction been conducted at arm’s length in the tax assessment and tax the additional profits. This is the primary adjustment.

Associated enterprises are broadly defined as those over which significant influence or common control is exercised or where direct or indirect holding of over 25% of the share capital, right to profits etc. exist (see Article 5). Associated enterprises includes permanent establishments.

Corresponding adjustments

Where a primary adjustment has been made, Member States must ensure that they make a corresponding adjustment to prevent double taxation, subject to all the following conditions:

  1. The Member State that requested to make the corresponding adjustment agrees that the primary adjustment is consistent with the arm’s length principle in both principle and monetary amount
  2. The primary adjustment has resulted in additional tax in another jurisdiction and the Member State in question has already subjected to tax the amount of the primary adjustment
  3. If the primary adjustment comes from a third country jurisdiction, a tax treaty is in force to prevent double taxation.

Corresponding adjustments can also be granted under mutual agreement procedures (MAP). Taxpayers can also request them, provided that the taxpayer’s request contains all of the following information:

  • all factual and legal circumstances necessary to evaluate the primary adjustment
  • a certificate (or equivalent) attesting to the nature of the primary adjustment in the other jurisdiction – either the final agreed position or an indication of the adjustment and then the definitive certificate once the position has been finalised

If double taxation has occurred, Member States are obliged to conclude the corresponding adjustment within 180 days of receipt of the taxpayer’s request irrespective of whether the request has been accepted or rejected.

Member States are also obliged to accept a compensating adjustment requested by a taxpayer in the form of a year-end adjustment if certain conditions are met (Article 7).

OECD Guidelines

Member States are obliged to ensure that their transfer pricing rules are applied in a manner consistent with the OECD Guidelines. This is part of the transposition of the proposed Directive into national law.

As the OECD Guidelines are periodically updated, a mechanism will need to be introduced so that updates to the Guidelines are also reflected in EU and national law.

Harmonised core elements

Permitted transfer pricing methods

Member States must ensure that the arm’s length price is determined by applying the most appropriate transfer pricing method to the circumstances of the case, by default by ensuring that one of the five transfer pricing methods listed in Article 9 is used.

However, Member States must also permit businesses to use an alternative to the five prescribed methods if it can be demonstrated that:

  1. none of the five prescribed methods is appropriate or workable given the circumstances of the case, and
  2. the method selected is consistent with the arm’s length principle and provides a more reliable estimate than that achieved using the prescribed methods

Comparability analysis

Member States must evaluate whether a transaction is at arm’s length by comparing its conditions with the conditions that would have existed for a comparable transaction under comparable circumstances had the associated enterprise been independent.

Such factors as legal terms, functions performed and business strategies must be compared (the full list of factors is in Article 11 2.). The transactions are comparable if material differences do not exist or if reasonably accurate adjustments can be made to eliminate any material differences.

Determination of the arm’s length range

Where the application of a transfer pricing method produces a range of values, Member States must ensure that the arm’s length range is determined between the 25th to the 75th percentile of the results obtained between unconnected enterprises.

A Roadmap for future development


Member States are obliged to ensure that affected enterprises have ‘sufficient information and analysis’ available to verify the assessment of:

  • commercial or financial relationships
  • transfer pricing methods and the choice of the most appropriate method
  • comparability analysis, and
  • the determination of the arm’s length range.

The proposed Directive gives the right to the EC to adopt delegated acts in the future to further harmonise documentation – such as common templates, setting linguistic requirements and specifying which types of taxpayers would be obliged to use such templates and timelines.

Specific matters

The proposed Directive gives the right to the Council to lay down further rules specifying how the arm’s length principles are to be applied to specific transactions, such as transfers of intangible or hard to value assets, financial transactions etc.

Any such specific rules must be consistent with the OECD Guidelines.

Who will be affected, and when?

The proposals would be applied to all taxpayers that are registered in, or subject to, corporate income tax in one or more Member States, including permanent establishments. It is proposed that the rules would come into effect on 1 January 2026.

Preliminary thoughts

The proposals should provide significant benefits for businesses that have cross border transactions with associated enterprises.

In particular, there should be a reduction in administrative costs from Member States taking a common approach and for faster corresponding adjustments would be very useful.

The commitment to remain as close as possible to the OECD Guidelines will be beneficial for those businesses that also have transactions with associated enterprises in third countries.

However, it will not completely remove all differences in the treatment of transfer pricing between Member States as, for example, considerable divergences exist at a more granular level – for example, how Member States’ tax authorities believe that specific transfer pricing methods should be applied. The proposals do not contain any provisions to force Member States to agree on such issues or propose additional forms of dispute resolution other than the MAP or that contained in the tax dispute resolution Directive.

Next steps

The proposal will follow the normal legislative process for a tax file, meaning unanimity decision by all EU Member States in the Council, and a non-binding opinion by the European Parliament.

[1] “‘arm’s length principle’ means the international standard that prescribes that associated enterprises must transact with each other as if they were independent third parties”.