European Transfer Pricing Directive

On 12 September 2023, the European Commission published a proposal for a directive on transfer pricing.

The draft directive is part of a package known as Enterprise Europe and, in addition to the proposal to implement uniform transfer pricing rules into EU law, includes a separate proposal to calculate a common tax base for large multinational groups.
Let us first look back historically at what preceded the proposal for a directive. The basic rule for pricing cross-border transfers of assets and services between related parties, known as the arm's length principle, is enshrined in Article 9 of the Model Double Taxation Convention. However, this article does not provide detailed guidance on how to set transfer prices in practice. The 1995 OECD Directive, which explains in detail, with examples, how to apply the arm's length rules in practice, is a non-legally binding instrument for EU countries, designed to help multinational groups and tax administrations find mutually accepted practices that would minimise the number of cases to be litigated.
Article 9 of the Model Convention cannot be used as a binding rule in the EU unless the arm's length principle is directly enshrined in local tax legislation. The Czech Republic has implemented the obligation to determine arm's length pricing between related parties in the Income Tax Act through Section 23(7). To apply this provision uniformly in practice, the Czech Tax Administration has issued methodological guidelines (e.g. Instruction D-34) which are binding on the Czech tax administrator, but often differ significantly from the guidelines of foreign tax administrations across the EU, leading to a high level of uncertainty for taxpayers carrying out cross-border transactions.
What the effectiveness of the Directive would bring in the future can be briefly described in the following paragraphs:

  1. The OECD Transfer Pricing Directive would become a legally binding instrument, with the binding nature of the latest version of the document coming directly from European legislation.
  2. EU Member States would apply the rules across Europe on the basis of a single methodology set in a coordinated way. 

In particular, the draft directive aims to unify in a binding manner the rules for:
  • the conditions under which price adjustments will be made, both in the form of additional adjustments by the tax administrator and voluntary compensations by the taxpayer (group member);
  • an analysis of the economic circumstances in which the transaction under review is actually carried out;
  • selecting the most appropriate method for determining transfer prices;
  • compiling a comparative analysis using publicly available databases;
  • the use of the median as a market-clearing value for the purpose of any price adjustments for values outside the interquartile range;
  • the format and content of transfer pricing documentation, as well as the periods to be mandatorily documented;
  • the mandatory scope of documented transactions.

The draft directive provides for safe harbours, which are conditions for the application of exemptions from the obligation to set and document transfer prices according to the above proposed binding rules in cases where such a procedure would impose a disproportionate administrative burden on the company.
The Commission proposes that the Directive should be effective on 1 January 2026. When and whether we can expect the rules to be implemented in Czech legislation is still a question.