Pwc Tp Perspectives Europe e

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Global TransferPricing Perspectives*

Tax & Legal Services

Transfer Pricing

Europe, Autumn 2007

*connectedthinking


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Transfer pricing

Transfer pricing is a multidisciplinary practice that involves close cooperation between subject matter experts in economic analysis,

tax law and accounting.

Our global network of dedicated transfer pricing professionals assist multi-jurisdictional companies with determining intercompany

prices in accordance with the arms length standard. Intercompany pricing is applicable to companies conducting both international

and domestic intercompany transactions. PwCs Transfer Pricing services include helping companies understand and assess the tax

impact of business operations and transactions in multiple jurisdictions, allocate taxable profits to jurisdictions in accordance with tax

jurisdiction regulations, understand the economic substance of the transactions and the arms length standard, and document anddefend these positions.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and

enhance value for its clients and their stakeholders. More than 140,000 people in 149 countries work collaboratively using Connected

Thinking to develop fresh perspectives and practical advice.

PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a

separate and independent legal entity.


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PricewaterhouseCoopers International tax perspectives i

Jean-Baptiste Colbert, French Finance Minister underLouis XIV in the 17th century, stated that the art of

taxation consists in so plucking the goose to obtain thelargest amount of feathers with the least possible amountof hissing With hindsight, one might think this was acommentary on transfer pricing some two centuriesbefore the actual introduction of the concept knownthese days as tax authorities Number One Soft Target.

One of the most challenging developments ininternational taxation has been the transformation ofmultinational companies into globally integratedbusinesses. The lure is both strong and legitimate tocreate business centres withpan-European responsibilities to replace the traditionalcountry-by-country approach.

But this transformation raises important questions. Forexample, if a group with a presence in multiple countriesacts as a single operating unit, e.g., under clientspressure to deliver under one contract, the questionarises how to allocate the overall income of the group tothe various legal entities in the different jurisdictions.

Is it productive to draw an imaginary borderline in themiddle of a truly global supply chain so as to make sureeach national jurisdiction gets a fair share of the tax pie?Further, one may wonder if it is worthwhile from abusiness perspective for tax authorities to look into thepast to substantiate transactions that may have occurred

years ago.

Needless to say, such processes unavoidably lead toconflicts between the way management looks at thingsand the way their tax affairs are to be handled, when oneor more tax authorities start plucking a goose whoseexistence has gone unnoticed for years. Witness thesituation in which a group decides to relocate productioncapacity to a lower cost jurisdiction and the taxauthorities in the transferring state assess a tax for(deemed) goodwill upon migration. Even if no infinitely

assured profit potential is transferred, upcoming Germanrules, for instance, require a compensation for transfer of

a business opportunity.

Unlike certain countries like the United States or Brazil,many European countries do not have an aggressivetransfer pricing environment, primarily becauselegislators and administrative authorities are anxious tolure foreign investors. Consequently, a race to lower taxrates and to increase tax breaks has been marking theEuropean tax arena.

The flip side of these measures is that, in order tobalance government budgets, measures to policetransfer pricing are constantly being strengthened tosafeguard effective enforcement and prevent artificial

tax-base erosion. Such offensive initiatives, which areoften accompanied by penalty regimes, are aimedpredominantly at counter-attacking measures fromoverseas (either East or West or a combination of both)that incentivise taxpayers to over-apportion taxableprofits to those regions to the detriment of their nationalbudgets so as to avoid harsh audits and penalties.

Luckily, the Joint EU Transfer Pricing Forum plays apivotal role in mitigating the risk that compliance effortswill result in a disproportionate cost compared topossible transfer pricing adjustments and penalties.Milestone achievements by the Forum include not onlythe code of conduct on pan-European documentation,

but also the consensus reached in terms of disputeResolution initiatives on a pan-European basis, bothbefore transfer prices are subject to the scrutiny of taxauthorities (through an efficient advance pricingagreements infrastructure), or after (in the area of thearbitration convention).

The business community can welcome the fact that itsinput has been heavily solicited by policy making bodiesat both national and international levels, such as theOECD, e.g., the OECDs ongoing efforts in the area of

A note from Isabel Verlinden


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PricewaterhouseCoopers International tax perspectives iii

profit attribution to permanent establishments andbusiness restructurings.

Another positive development we have seen is that taxauthorities are more often recognising the operationalrealities that mark specific industries, rather thanapplying merely theoretical transfer pricing enforcementrules. Indeed, both prefiling meetings with APAcommissions and pre-audit meetings with field taxinspectors are proving to be helpful in communicatingthe specific business context in which transfer pricingrules should be assessed. This communication isparticularly important in post-deal integration issues,where an effective dialogue between taxpayers and taxauthorities is pivotal to ensure that sure transfer pricingaudits focus on the essential. This means nothing more

than enabling tax authorities to focus their attention onareas of risk that require further scrutiny rather thanfocusing on irrelevant details that do nothing more thanwaste valuable management time.

There are other broad trends in European transfer pricingas well. For example, it is becoming increasinglycomplicated to assess whether the arms length principleshould come into play. Indeed, many forms of co-operation with parties that are at first glance unrelated,such as when groups embark on open innovation

initiatives or joint development, risk being captured bytransfer pricing rules at the end of the day. New EU

accession states appear to struggle with this issue moreso than mature transfer pricing countries. Thisphenomenon also arises in strategic supplier marketsbeyond the EU, such as Kazakhstan.

I am confident that the following articles will assist you tostep into the breach to safeguard the achievement of asustainable and effective after-tax profitability to thesatisfaction of all stakeholders in an increasingly complexbusiness environment that is also marked by tightgovernance rules. Such an approach will therefore alsobalance the need for compliance by tax authorities withthe need for businesses to achieve that compliance withreasonable efforts.

I take pride in presenting to you in this issue acomprehensive overview of insights from our PwCEuropean Transfer Pricing network, awarded last May forthe third consecutive time as the European TransferPricing Firm of the Year by International Tax Review.

Enjoy the reading!

Isabel VerlindenEurofirms Transfer Pricing Leader


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PricewaterhouseCoopers International tax perspectives v

Table of contents

The EU transfer pricing landscape - a review of the regulatory environment 1

OECD Business advisory group on business restructuring 9

Dispute resolution, including tax audits, APAS, and rulings

Dispute resolution in Belgium - the latest developments 17

The APA landscape in Denmark, Finland and Sweden 21

Dispute resolution and double taxation prevention in Germany 27

International rulings in Italy: an opportunity for multinational companies 31

Dispute resolution and double taxation prevention in France 37

European Union transfer pricing documentation - the status of the EUTPD 41

Industry specific Issues

Transfer pricing in the automotive industry 47

Pharmaceuticals and transfer pricing: An EU and German perspective 53

Will your intercompany financial transactions withstand a transfer pricing audit? 59

Integrating intellectual property pransfer pricing planning with earlystage M&A post transaction activity 65

OECD - Report on the attribution of profits to permanent establishments 71

The European Commission

European Court of Justice - the impact of case law on transfer pricing 77

The European Commission - heading towards a common consolidated corporate tax base 83

Central and Easter Europe: transfer pricing comes from behind 93

Contacts 99

Events 101

The global core documentation implementation tool 103


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The EU transfer pricinglandscape - a review ofthe regulatory environment

author


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PricewaterhouseCoopersInternational tax perspectives2

The coexistence of 25 different direct taxationregimes is seen by some policy makers as anobstacle to an efficient and competitive singleEuropean market. Therefore, efforts are beingmade to reduce income tax complianceburdens and to alleviate double taxation withinEurope. As part of this broader effort, theEuropean Union (EU) Joint Transfer PricingForum (JTPF) has already adopted codes ofconduct calling for (1) better adherence to theEU arbitration convention in order to assisttaxpayers in avoiding double taxation on theirintra-group trade within the EU and (2) thestandardisation of EU transfer pricingdocumentation requirements across member

states.However, despite the growing efforts beingmade by the JTPF towards standardisation,member states still adopt widely differingapproaches to transfer pricing documentationand enforcement. This article presents asnapshot of the diversity evident in theEuropean transfer pricing environment.

Overview of the transfer pricing landscape inWestern Europe

The table at the end of this article presents a summary

of the transfer pricing environments in Austria, Belgium,Denmark, Finland, France, Germany, Greece, Ireland,Italy, Netherlands, Norway, Portugal, Spain, Sweden,Switzerland1 and the United Kingdom (UK). The tableportrays the local legislation, documentationrequirements, level of enforcement activity, applicationof penalties, tax return disclosure requirements,guidelines on selection of comparable firms and eachcountrys approach towards Advance PricingAgreements (APAs).

As evidenced by the table, most countries in WesternEurope have enacted transfer pricing regulations andimplemented requirements for documentation. However,

the extent of legislation and level of enforcement variessignificantly from country to country.

Fourteen of the sixteen countries have chosen to enactsome form of transfer pricing legislation. The only twocountries that have not yet done so are Ireland andSwitzerland. Of those countries that have enactedtransfer pricing legislation, only Belgium and Norwayhave not yet implemented documentation requirements.In Belgium, taxpayers are urged to compiledocumentation based on an Administrative Circular.Norway is expected to introduce documentationrequirements as of 2008.

Diversity is evident in the level of local enforcement. Taxauthorities in Belgium, Denmark, France, Germany,Greece, Italy, the Netherlands, Norway, Sweden and theUK tend to be most active in enforcing transfer pricingrules, with the level of enforcement generally increasing inthe remaining countries. While most countries do notrequire explicit disclosure of intercompany transactionson the corporate tax return, this is explicitly required inseven of the countries surveyed. Transfer pricingpenalties vary widely across the sixteen countries, fromno specific penalties (eight countries) to up to 200percent of the underpayment in Italy.

Local comparables are generally preferred when

conducting benchmarking studies but in practice Pan-European comparables are widely accepted in line withthe EU Joint Transfer Pricing Forum code of conduct ondocumentation with certain exceptions. The taxauthorities in Italy and Portugal only accept Pan-European comparables under exceptional circumstanceswhile in Norway and Spain such practice will only beaccepted if local comparables are not readily available.

Consistent with efforts to avoid double taxation, APAshave become accepted in many jurisdictions. HoweverDenmark, Finland, Greece, Ireland, Norway, Portugal andSweden have not yet formalised APA procedures. TheGerman tax authorities will only accept bilateral APAs (asdiscussed in the article beginning on page XX).

The EU transfer pricing landscape -a review of the regulatory environment


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To explore the diversity within the transfer pricingenvironment in Europe, seven countries have beenselected for a more detailed analysis: Ireland, Finland,Spain, Belgium, France, the UK and Germany. These

countries illustrate the various points on the continuum ofEuropean transfer pricing regulatory enforcement, fromIreland - which has limited transfer pricing legislation - toGermany, a country in the process of enacting aggressivetransfer pricing legislation.

Ireland - still holding out

Unlike the majority of Organisation for Economic Co-Operation and Development (OECD) member countries,Ireland has yet to introduce broad-based transfer pricinglegislation. Irelands position in this regard is somewhatunderstandable in the context of favorable tax

opportunities available to multinationals doing business inIreland. Taxation policies in Ireland are commonlyregarded as one of the key success factors in attractingforeign direct investment to Ireland. In this context, Irelandhas not experienced the pressures on taxation revenuethat has led to the introduction of broad-based transferpricing legislation in many other countries.

Given the lack of transfer pricing legislation, fewresources are devoted to the issue by Irelands taxauthority, the Revenue Commissioners. Further, thecorporation tax return form in Ireland does not requiretaxpayers to make any disclosures in relation to thenature and value of international related party dealings, or

make any disclosure on the extent to which transferpricing documentation has been prepared to support anysuch dealings.

Unsurprisingly, the Irish tax authorities have yet to releaseguidance on the expected scope and content of transferpricing documentation. Given the regulatory environment,a decision by a taxpayer in Ireland to prepare transferpricing documentation would be based more onrecommended best practices rather than any specificlegislative or tax authority requirement. In these situations,an Irish transfer pricing report is typically prepared byreference to the guidance contained in the OECD transferpricing guidelines. Comparability studies based on Pan-

European or North American databases are typicallysufficient for an Irish transfer pricing report.

While no formal APA process exists, a ruling can beformally requested from the Revenue Commissioners inrespect of specific tax issues. This process can effectivelyprovide an APA where a reciprocal APA or other rulingfrom a foreign tax authority is also obtained.

Finland - joining the game

New legislation on transfer pricing documentation rulesbecame effective on 1 January 2007. Documentationrules will apply to accounting periods starting on or after

1 January 2007. The Finnish documentation rulesconform to the principles established in the TransferPricing Guidelines for Multinational Enterprises (MNEs)and Tax Administrations (OECD Guidelines) as well as the

Code of Conduct for Transfer Pricing Documentation inthe EU.

The Finnish rules provide that documentationestablishing the arms length nature of transactionsundertaken between related parties must be drafted forcross-border transactions. According to the rules, Finnishtransfer pricing documentation should include adescription of the business, related party relationshipsand transactions, as well as a functional analysis,comparability analysis, and description of the pricingmethod chosen and its application.

Transfer pricing documentation must be submitted to the

tax authorities within 60 days of a request. However, ataxpayer would not be required to submit transfer pricingdocumentation earlier than six months after the end ofthe accounting period in question.

No contemporaneous documentation is explicitlyrequired. However, the legislation states that a taxpayershould monitor its transfer prices during the tax year, asit is not possible to amend taxable income downward ona tax return in Finland.

Relief from the documentation requirements is availablefor small and medium-sized enterprises. The definition ofsmall and middle-sized enterprises follows the European

Commission recommendation.

A failure to comply with the documentation requirementscould result in a tax penalty being applied. A tax penaltyof a maximum of 25,000 euro could be imposed.

Finland does not have a formal APA program.

Spain - significantly raising the bar

In late 2006, Spain enacted the Law for Prevention of TaxFraud. This law, which introduced significant changes totransfer pricing in Spain, applies to all fiscal years

beginning on or after 1 January 2007.

Although the Law for Prevention of Tax Fraud introducesvarious changes to the transfer pricing environment inSpain, and applies to fiscal years beginning on or after30 November 2006, it leaves certain sections of the lawto be further developed.

As a result, although certain obligations (e.g.documentation requirements), are introduced by the Lawfor Prevention of Tax Fraud, they will not become bindinguntil the accompanying regulations are published, whichis expected to occur at the end of 2007. Thesedocumentation requirements will enter into force threemonths after the publication of the final regulations.

1 Although Switzerland is not an EU member state and therefore not party to the JTPF and arbitration convention, Switzerland is included here due to itscommercial integration with the rest of Europe and its relevance to a discussion of transfer pricing in the region.


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The new law shifts the burden of proof of compliance withthe arms length principle to the taxpayer, since itexplicitly introduces the obligation to value intercompanytransactions at arms length. The law also extends the

obligation to value at arms length some domesticSpanish intercompany transactions. Under the new law,taxpayers also will be required to prepare documentationjustifying their transfer prices with affiliated companies(unless they belong to the same fiscal group as well aswith third parties operating in tax havens, and to makethe documentation available to the Tax Administration.During an inspection, a taxpayer will have10-15 days after receipt of notification to present thedocumentation. In addition, taxpayers will be required todisclose in their tax returns information pertaining tointercompany transactions.

A taxpayers documentation should include two

documents: group-level documentation anddocumentation specific to the local taxpayer. Theserequirements follow very closely the master file andcountry-specific approach recommended by the JTPF(see article beginning on page XX). The documentationrequirements will be less onerous for small companies(with net revenues of less than 8m for the consolidatedgroup in the previous accounting year), and will not applyto the domestic transactions of companies making up aconsolidated fiscal group for Spanish tax purposes.

In addition, a specific transfer pricing penalty regime hasbeen introduced. Compliance with documentationrequirements also allows for the avoidance of the general

penalties for not declaring sufficient tax.

The new legislation also encompasses the so calledsecondary adjustment leading to a re-characterisationof any difference between the arms length price and theprice applied by related parties. The re-characterisationmay mean that a transfer pricing adjustment has taxconsequences even in cases where the correspondingadjustment is immediately accepted by the TaxAdministration of the counterparty company subject tothe primary adjustment, i.e., either by the TaxAdministration in Spain (in a domestic transaction) or bythe local Tax Administration of the related party (in aninternational one).

The Spanish tax authorities have confirmed that the newlegislation and documentation requirements will lead tomuch greater focus on intercompany transactions andthus lead to an increase in tax audit pressure in relation totransfer pricing. Various tax inspections focusing solely ontransfer pricing matters are currently underway.

The Tax Administration strongly favors local comparabledata (which is available from commercial databases). Pan-European comparables are acceptable, particularly in thecase where insufficient Spanish companies can beidentified or when more than one affiliate is being tested.

Finally, the new rules extend the validity of APAs so thatthey may run for four years. It is expected that increasedtransfer pricing audit activity alongside these changes willsee an increase in the take-up of APAs in Spain. Bothunilateral and bilateral (or multilateral) APAs are possible.

Belgium - looking both ways

Belgium is becoming more aggressive and more skilled inthe field of transfer pricing as it becomes increasingly

aware of the active interest in this area (typically) insurrounding countries and the risk of the erosion ofBelgiums taxable bases.

Until recently, the Belgian Income Tax Code (ITC) did notprovide any specific rules on intercompany pricing. Thiscame to an end in mid-2004 with the formal introductionof the arms length principle in Belgian tax law. Article 185ITC not only introduces the arms length principle inBelgian tax law (and thus allows for upward profitadjustments), but also contains a provision on the basisof which Belgium will refrain from taxing profits that aBelgian company would not have realised if it would nothave been part of related party dealings. As such, Article

185, paragraph 2 ITC allows for a unilateral adjustment ofthe Belgian taxable basis, similar to the correspondingadjustment of Article 9 of the OECD Model DoubleTaxation Treaty.

Belgian tax regulations provide for both bilateral andunilateral APA procedures. Unilateral APAs wereintroduced in Belgium in 1993 but became widespreadafter revisions in 2003 and 2005. Bilateral andmultilateral APAs are also available, but will be dealt withon a case-by-case basis, according to the relevantcompetent authority provision as laid down in the taxtreaty.

In November 2006, the Belgian tax authorities issued along-awaited practice note on transfer pricingdocumentation, which provides additional guidance forsituations where information requests are issued by thetax authorities. The Practice Note also contains detailsregarding requests for documentation and how taxpayersshould reply to such requests with regard to the cross-border transfer pricing policies of an MNE.

Tax inspectors are encouraged to conduct transfer pricingaudits in specific cases, for example, when certain redflags are raised. The Practice Note contains a non-exhaustive list of characteristics that may warrant aninvestigation of a taxpayers transfer prices. Another

potentially effective tool, the pre-audit meeting, has beenintroduced. This consultation takes place before the taxauthorities issue their request for transfer pricingdocumentation.

Together with the introduction of a special transfer pricinginvestigation squad in July 2006, the release of thisPractice Note is intended to put some muscle intoBelgiums means of enforcing transfer pricing compliance.

France - high levels of enforcement

In France, transfer pricing rules comply with the armslength principle, and OECD Guidelines are consulted bythe French Tax Authorities (FTA). No contemporaneousdocumentation is required in France. However, during atax audit very short deadlines are imposed to answer theFTAs often very detailed transfer pricing questions.


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Therefore, it is highly advisable to have properdocumentation ready for presentation to the taxinspectors.

Recent regulatory developments and enforcement activityhave also emphasised the FTAs interest in transfer pricingissues. See the article beginning on page XX for a moredetailed explanation.

As indicated in that article, French tax regulations providefor bilateral and unilateral APA procedures. MultilateralAPAs are also available, but only with States that havesigned a tax treaty with France in line with the OECDmodel tax treaty. In addition, in 2006, an APA procedurerequesting simplified documentation became available forSMEs. Currently, approximately 30 APA procedures are inreview by the FTA concerning all sectors of activity (mostare bilateral, but there are also some multilateral and

unilateral).

Approximately 250 MAP cases are currently under reviewby the FTA, of which 100 concern transfer pricing. A MAPnow suspends the collection of taxes in France.

UK - seeking a more streamlined approach

Her Majestys Revenue and Customs (HMRC) is active intransfer pricing audits, particularly in cases of businessrestructuring, dealing with related issues such as exitcharges and permanent establishment (PE) issues. HMRCtakes an active role in the OECDs work on taxation of

multinationals and is at the forefront of the OECD work onbusiness restructuring and on comparability and profitsmethods.

The UK transfer pricing rules closely follow the OECDprinciples and include a requirement that they should beinterpreted so as to give the best consistency with theOECD Guidelines.

Under current transfer pricing legislation, which wasintroduced in 1998 and took effect on April 1, 2004, UK-to-UK transactions came within the transfer pricing rules,and thin capitalisation rules were brought wholly withinthe transfer pricing regime. Further changes affecting the

financing of companies were effective as of 4 March2005. These changes were aimed at private equityhouses, but have wide-ranging effect beyond privateequity structures.

Transfer pricing documentation requirements are basedon the UKs general rule for self-assessment that requirestaxpayers to keep and preserve the records needed tomake and deliver a correct and complete return. HMRChas also published guidance on transfer pricing recordkeeping. In addition, the UK supports the Masterfileconcept published by the JTPF (see article beginning onpage XX).

Similarly, there is no separate penalty regime for transferpricing, and the general penalty rules apply. Tax-basedpenalties apply where tax is underpaid because ofnegligent or fraudulent errors. In a normal case, interestwill be charged on tax underpaid and is calculated from

the day on which the tax was originally due. The UKGovernment has announced changes in the operation ofthe penalty regime, which are expected to take effect forreturn periods beginning after 31 March 2008 where the

return is filed after 31 March 2009.

HMRC has access to its own sources of comparablesdata and HMRC International uses a commerciallyavailable database of UK company results. HMRCgenerally accepts Pan-European comparables, in linewith the EU Masterfile approach; however, the Pan-European comparables sample must have sufficientcoverage of the UK market to the extent it exists, andfurther UK evidence on comparability may be requestedin an audit.

The UK has had formal APA procedures since 1999. Todate, the APA process has been initiated by a number of

companies, and many APAs have been concluded. WhileHMRC has generally resisted undertaking APAs exceptfor highly complex and material transactions, the recentguidance material published by HMRC suggests a moreflexible and open APA regime.

In 2006, the UK Government commissioned a review ofHMRCs links with large businesses, resulting in anumber of proposals that impact transfer pricing in theUK. HMRC published its Litigation and SettlementsStrategy document on June 7, 2007, which sets outprinciples and consistent standards for bringing taxdisputes to a conclusion, whether by agreement with thetaxpayer or by litigation.

On June 20, 2007, two further consultation documentsentitled HMRC approach to transfer pricing for largebusiness and Giving certainty to business throughrulings and clearances were released. The expectedoutcome of these documents is a review ofdocumentation and disclosure requirements, a fasterexamination process, and a risk-based approach toselecting cases for examination. In addition, HMRCproposes to introduce a system of advance rulings andextend existing clearances, including potentially a moreaccessible APA regime.

With the introduction of a more efficient approach to

undertaking transfer pricing enquires, the UK is likely toadvocate the wider adoption of the principles of its newapproach to transfer pricing in the internationalcommunity.

Germany - new concept of transfer package

As early as 1983, Germany issued its first detailedtransfer pricing regulations (so-called administrativeprinciples), which established general principles oftransfer pricing (including the adoption of the armslength standard) as well as the authorities position onthe application of transfer pricing methods and onvarious categories of intercompany transactions.

In 1999, the authorities began to revisit the administrativeprinciples and started to issue revised regulations onspecific subjects such as:


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permanent establishments (1999); cost sharing (1999); cross-border assignments of employees (2001).

The legislature then introduced statutory documentationrequirements as well as provisions on sanctions for non-

fulfillment of the requirements to the German General TaxCode. The documentation requirements apply to fiscalyears starting after 31 December 2002; i.e., in most casesfrom 1 January 2003, whereas the sanctions apply tofiscal years 2004 onwards. The statutory documentationrules were supplemented by an ordinance (2004) as wellas very detailed regulations (administrative principles -procedure issued in 2005). In line with the increasingregulatory environment, the authorities are expanding andfurther training their task force for transfer pricing audits.

While, in the past, German authorities were very reluctantto enter into APAs, they have recently established acentral dedicated task force for APAs and have

encouraged taxpayers to apply for bilateral APAs. In orderto stress their commitment to this goal, the authoritiesissued a circular letter in 2006 that outlined detailed rulesfor an APA procedure including Germany. The central taskforce will also act as Competent Authority in MAPs.

The Enterprise Tax Reform 2008

The Enterprise Tax Reform Bill 2008, which was adoptedby the Upper House in July 2007, contains severalmeasures that clearly increase the burden to taxpayers inthe area of transfer pricing. The main elements of the newtransfer pricing rules are described in the rest of thearticle.

Business restructurings

The statute explicitly addresses business restructurings or- in German terminology - the cross-border transfer offunctions (Funktionsverlagerungen). The statute applies tocases where operative functions such as production anddistribution, will be shifted across the border (typicallyfrom a German entity to a foreign entity), or where suchfunctions will be reduced, as in the case of transforming afully-fledged production entity to a contract manufacturer.In these circumstances, an exit charge will increase thetaxable income of the party transferring the function.

The new law establishes with respect to the transfer offunctions, the concept of a transfer package, whichconsists of all business changes and risks as well asunderlying tangible and intangible property and otheradvantages relating to the operative functions. Avaluation of each function, which will determine the basisof the exit charge, will have to be done based on thetransfer package in its entirety.

Comparability

The new law contains provisions on the use of transferpricing methods as well as on comparability. With respectto the latter, the statute distinguishes betweenunconditionally comparable arms lengths values andconditionally comparable arms lengths values. Basedon such distinction, it will be required that a transferpricing range be properly narrowed.

Retroactive adjustments

If profits from intangibles that have been subject to anintercompany transaction develop differently thanoriginally envisaged, the statute assumes thatindependent third parties would have agreed upon price

adjustment clauses before concluding the originalbusiness transaction. If such an adjustment clause hasactually not been agreed upon and the actual profitdevelopment determined by the transfer price deviatesfrom the expected profit development, the German taxauthorities are entitled to make a one-time priceadjustment within ten years of the original businesstransaction.

Other measures

The bill contains additional aspects relevant to transferpricing. Among others, if foreign related parties will notdisclose information that is relevant for the transfer prices

of the German entity, the transfer price of the Germanentity can be estimated at the end of the range that ismost disadvantageous for the German taxpayer. Inaddition, the time period for documentation relating toextraordinary business transactions that must besubmitted to the authorities is reduced from 60 days to 30days.

Timing and additional provisions

The law applies, in general, for the first time to allbusiness years ending in 2008. Accordingly, if ataxpayers business year corresponds to the calendaryear, the bill will apply from January 1, 2008 forward. In

cases of fiscal years deviating from the calendar year, thenew principles will apply for the fiscal year that begins in2007.

Conclusion

Over the years the German government has introduced aconsiderable number of measures in the transfer pricingarea that should be thoroughly considered by taxpayers.Corresponding to the increasing regulatory complexity,local tax inspectors have been instructed to focus inevery tax audit on transfer pricing matters, if the taxpayerengages in cross-border intercompany transactions. In

addition, central training programs have commenced fortax inspectors, and specifically-trained transfer pricingstaff is also centrally available who will participate inlarger audits. Thus, taxpayers will be more than likely tofind themselves in the position that they need to defendtheir transfer pricing policy in their next German tax audit.

Summary

Despite the recent efforts by the EU to standardiseaspects of tax policy across member states, includingtransfer pricing, it is clear that significant diversity in bothtransfer pricing legislation and enforcement existsthroughout Europe. MNEs operating in Europe face abroad spectrum of transfer pricing regimes, and taxpayersmust continue to be aware of and address this diversity indesigning their overall transfer pricing strategies.


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Legislation Documentation Enforcement Penalties Disclosure Local Pan-European APAsrequirements Activity requirements Comparables Comparables

Austria Yes Yes Developing No specific TP No Preferred Accepted Nopenalties

Belgium Yes No Aggressive No specific TP No If available the Accepted Yespenalties BTA will tend to

rely on localcomparables asa sanity check

Denmark Yes Yes Aggressive Twice the Annual tax return Preferred Accepted Limited activityamount saved + but no formal

10% penalty regulations

Finland Yes Yes Developing Up to 25.000 euro Annual tax return Preferred Accepted Noadded tax

France Yes Yes Aggressive No specific TP No Preferred Accepted Yes

penalties

Germany Yes Yes Aggressive 5-10% Upon request Preferred In practice often Yes (but onlyused bilateral)

Greece Yes Yes Fairly 10% fine on No Preferred Possibly No(approval by a Aggressive difference plus

special committee penalties forrequired for inaccurate tax

Management filingfees/royalties)

Ireland No No Developing No specific TP No No Accepted Nopenalties

Italy Yes Yes Aggressive Up to 200% Annual tax return Strongly In exceptions Yes

preferred

Netherlands Yes Yes Aggressive No specific TP Annual tax return Preferred Accepted Yespenalties

Norway Yes Yes Aggressive No specific TP Annual tax return Preferred If local Nofrom 2008 penalties: up to comparables

60% additional tax not available(from 2008 lack of

documentation mayresult in loss ofright to appealassessments)

Portugal Yes Yes Developing No specific TP Annual tax return Strongly In exceptions Nopenalties preferred

Spain Yes Yes Developing 15% of adjustment Annual tax return Strongly If local Yes(with minimum) & preferred comparablescertain specific not availabledocumentation

penalties

Sweden Yes Yes Aggressive General tax Upon request Preferred Accepted Developingpenalties apply(20% of 40%)

Switzerland No No Developing No specific TP No No Accepted Yespenalties

United Yes Yes Aggressive Max 100% of the No Preferred Accepted YesKingdom underpaid tax


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OECD businessadvisory group onbusiness restructuring

Isabel Verlinden,

Partner, PricewaterhouseCoopers, Belgium.


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Given the vast importance of businessrestructurings and the relative lack of successof national measures in effectively dealing withthe taxation of business restructurings, theseissues have begun to have a profound effecton the work of the OECD. One of the strongestfeatures of the current approach of the OECDfor dealing with business restructuring issues isthat it stresses the importance of gooddialogue with business, both through itsBusiness Advisory Group on BusinessRestructuring (Business Advisory Group), andbeyond. The Business Advisory Group wasestablished shortly after the OECD started itswork on the model double taxation treaty and

on the transfer pricing aspects of businessrestructurings. The group is an informal groupof academics, business representatives, andconsultants who work together to obtaintechnical and factual input from the businesscommunity.

This contribution has been submitted to theBusiness Advisory Group by Isabel Verlinden ina personal capacity with the help of the PwCTransfer Pricing Network and was discussedwith the relevant OECD working parties.

Basic issues

Transactions that are specific to MNE Groups

Paragraph 1.10 of the TP Guidelines recognises thatassociated enterprises may engage in transactions thatindependent enterprises would not undertake. The JWGwould welcome examples of such transactions that areimplemented by MNE groups, but which are not, or areseldom found between third parties and therefore raisedifficulties in the application of the arms length principleand comparability analysis. The JWG would also beinterested in your views of why third parties would notimplement such transactions: if a transaction is beneficialto all the parties involved, why wouldnt independentparties be willing to implement it (given third parties alsohave the possibility to operate in a coordinated fashionthrough joint venture agreements, cartels, etc.)?

The very essence of a companys existence may be thefact that it minimises the transaction costs ofcoordinating an economic activity. Indeed, by bringingassets and people in-house, one reduces the cost ofnegotiating and concluding a separate contract for eachexchange transaction. According to Nobel Prize winnerRonald Coase2, companies make sense when thetransaction costs associated with buying things on themarket exceed the hierarchical costs of maintaining abureaucracy. The traditional economic theory of the timesuggested that, because the market is efficient (that is,those who are best at providing each good or servicemost cheaply are already doing so), it should always be

cheaper to contract out than to hire.

Coase noted, however, that there are a number oftransaction costs to using the market; the cost ofobtaining a good or service via the market is actuallymore than just the price of the good. Other costs,including search and information costs, bargaining costs,keeping trade secrets, and policing and enforcementcosts, can all potentially add to the cost of procuringsomething with a firm. This suggests that firms will arisewhen they can arrange to produce what they needinternally and somehow avoid these costs.

One may therefore safely assume that there are

transactions occurring in an open-market context thatalso tend to exist among entities between which someform of economic solidarity exists.

Whether all relevant attributes are sufficiently similar tocompare these transactions following the five standardsof comparability is less straightforward. Concepts asOrganisational Capital3 and/or simply best practicesmay render internal transactions more efficient. It maythough be impossible to price these attributes as theymay not be tradable since they may only have value in aspecific context and may fade away over time shouldthey be lifted out of that context. Indeed, knowledge isoften context-specific; even though one knows how afirm does something, it may be very hard to replicate it

2 Micklethwait, J., and Woolridge, A., The Company-A Short History of a Revolutionary Idea, Weidenfeld & Nicholson London, 2003, at 10 and 175-176.3 Aston, A., Brainpower on the Balance Sheet, Business Week, August 26, 2002 at 59.4 Davenport., T.H., How much knowledge should a business give away?, European Business Forum, Issue 24, Spring 2006, at 21.

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elsewhere4. Organisational Capital is a term used byProfessor B. Lev to describe the qualities that enable GEto boost efficiency and profits at the companies itacquires; organisational processes can thus grow into

important value simply because a company is well run.

Being well run over time is a necessity to be able tosurvive in a competitive global marketplace. A constantincrease of efficiency and innovative behavior is essential.Examples can be found on centralisation throughout theworld. In a transparent market, there would be little or nodifference between transactions conducted by MNEs andthird parties. There are however differences by nature. Iffor example several independent companies create a jointprocurement center to allow all participants to benefitfrom the economies of scale and strengthened buyingpower (such as in the FMCG business), the situation iscomparable to a MNE initiating central purchasing for

several business units. For a MNE it would be easier toexecute such transactions without a lot of time beingspent on negotiations, especially when there is also someform of centralised regional or global management. Thethird parties would first need to reach agreement howtheir cooperation would be managed and how it benefitseach member.

Finally, it should also be borne in mind that given thespecific dynamics of related and third party dealings,open market references such as joint ventures will oftenproof to be far less comparable than one might initiallyhave expected. Indeed, joint venture arrangements arenormally the result of complex negotiations covering a

basket of transactions which on a stand alone basis maynot be comparable at all with intra-group transactions.

Examples of transactions that are implemented withinMNE Groups and which may at first glance appear lessobvious in a third party context even though they doexist are:

Specific forms of contract manufacturing

It appears to us as if contract manufacturing as used incommon parlance in transfer pricing jargon may coverdifferent things. Outsourcing the entire manufacturing of aproduct occurs more often these days in an open-market

context as it allows original equipment manufacturers(OEMs) to reduce labor costs, free up capital and improveworker productivity while concentrating themselves onR&D, design and marketing5. Contract manufacturersstrengths include location in a low-wage jurisdiction,economies of scale, manufacturing prowess andexposure to the engineering and development processesof products it handles for other OEMs. Consequently,even though launching a brand would not be a trivialundertaking for any contract manufacturer, a brandidentity rooted in its production prowess would haveimmediate credibility. Moreover, a contract manufacturerworking for several OEMs has experience in making awider range of products than do most of its clientspermitting it to concentrate on producing the most

profitable ones while not necessarily having to bear theburden of R&D investment. This means that reality showsthat it is probably not wise to compare such contractmanufacturers to instances where a low risk manufacturer

is exclusively linked to one principal. The combination ofstandardisation and flexible manufacturing lets OEMsreplace underachieving or uncooperative contractmanufacturers smoothly. The reciprocal nature of theserelationships and conversely the ability of either party towithdraw at first sign of a hold-up by its partner makethem easy to embrace. Leading OEMs cannot afford toretreat to the safety of vertical integration as the benefitsof specialisation are too great6.

Franchising (commercial and even more extreme inindustrial franchising)

Franchising operations are a hybrid form of economic

organisation and the term can be employed to labeldiverse business relationships. A franchising relationshipis a continuing relationship with the franchisor providinggeneral advice and support, research and developmentand marketing assistance. In return, the franchisee usuallypays an ongoing royalty or fee, normally based on thelevel of turnover.

Generally speaking, franchising is an arrangement underwhich the contracting parties agree to enter for theirmutual interest into a close link of cooperation, wherebythe franchisor would grant its local business units asfranchisees, in exchange for direct or indirect financialconsideration, the right to exploit its particular business

approach.

First generation franchising mainly covers the grantingof a right or license to a retailer or distributor to sellproducts or services according to a predeterminedmarketing method through outlets using a known name ortrademark. Such franchising emerged mainly inmarketing-intense environments and can be viewed uponas a privileged license, including assistance in organising,training and management. Traditional franchisingarrangements can be found in the food or service industryand heavily rely on the use of a marketing or retailconcept owned by large institutions. Essential elements inthis respect are the use of a well-known trademark, joint

advertising and purchasing.

Modern franchising can be defined as a business formatfranchising. It includes a complete package of tried andtested work methods of the franchisor, which transfers asuccessful system or business concept surpassing themere marketing level and more focusing on businessmanagement in general. Such franchising process forinstance also refers to support with respect tomanufacturing performance and related IP, whilst theformer traditional franchising did not cover manufacturingoperations as such.

Franchising is in fact based on the premise that it iseasier to develop a local business under the guidance of

5 X, Incredible shrinking plants -Special Report-Car Manufacturing, the Economist, February, 23rd, 2002, 75-77.6 Arrunada, B., and Vazquez, X.H., When Your Contract Manufacturer Becomes Your Competitor, Harvard Business Review, September 2006, 135-144.


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an established organisation, rather than by trial and error.The franchisor offers to maintain a continuing interest inthe business of its franchisees, particularly in such areasas know-how and training. An implicit feature of a

franchise system is indeed the technological transfer andthe access it provides to the global learning organisation.It is the responsibility of the franchisor to support thefranchisee in all the relevant areas of their businessoperations. Therefore the franchising concept does notpotentially only accommodate both the licensing of themarketing intangibles (such as the trade-mark) and atechnology and IP transfer, but it may also cover theprovision of the general functional and technicalassistance to the business units.

In summary, it is very unlikely that unrelated parties wouldsell their key value drivers though several attributesthereof may be subject of a transaction among unrelated

parties. In essence, in a commercial franchising context,the franchisee is spending money to enhance the brandvalue of the brand owner as the quality of its customerservices creates a win-win for both parties. (It is to benoted that also the issue of network effects may comeinto play here).

Risk profile and volatility

How would you measure the trade-off between a relativelyhigh profit, possibly subject to volatility, and a relativelylow profit with a guarantee clause? How would you takeinto account historical data on past years actual returnsand volatility to determine the appropriate level of low

but guaranteed return a party would be willing to acceptat arms length? The JWG would welcome factualexamples where arms length parties have entered intothese transactions or arrangements, as well as commentson the economic/business arguments that could causetwo arms length parties to enter into such arrangements.

We are aware of a case where a product with an uncertainproduct life cycle was developed by a closely-heldbusiness. The founders of the family business decided atsome point to enter into an agreement with a third partyequity provider. A steady, though relatively low return wasopted for rather than continuously bearing fullentrepreneurial risk which would mean undergoing the

potential hazards of a premium profit generating thoughpotentially short-lived fully fledged operation. In otherwords, a constant trade-off between risk and reward alsooccurs in the open-market. Future profits are not certainto materialise and should therefore be discounted. Thediscount rate is positively correlated to the rate of returnon alternative investments, the riskiness of the projectand the country inflation rate.

Whether parties operating in an open-market contextfactor in past years actual returns to determine futureprofitability is not a given. Indeed, parties may start fromfunctionality & risk profile at a certain point in time todetermine corresponding fair returns rather than bylooking at what was given up compared to the past.Others might factor in past experiences. I dont believe aclear-cut assessment can be made of what is likely tooccur as there are probably as many possibilities as thereare deals.

Low risk activities and market risk

Do you consider that low risk manufacturers (e.g. tollmanufacturers) which work for a related party should be

protected against market risk, and in particular that theyshould be protected against the risk of plant closure?Please indicate whether your response is based on factualevidence of unrelated transactions or on other arguments.Please also indicate how such a protection can beimplemented in the relations between the parties. TheJWG would welcome detailed examples of tollmanufacturers that have only a single arms length clientand the arrangements between them, to the extent thisinformation is available.

On the topic of protection against plant closure, I refer tothe contribution Potential Tax Consequences UponRelocation Of Production Capacity as posted to the

OECD website in the framework of the 2005 Roundtable.

Useful inspiration on the protection against market riskcan be found related to contract manufacturers in theaforementioned Harvard Business Review article where itsays that the duration of the relationship may be dictatedby the uniqueness and/or degree of innovativeness,complexity and maturity in the marketplace of the OEMsproduct. Contract Manufacturers may have devotedconsiderable time and resources to mastering themanufacturing which renders a long-term contractconditional to making these efforts. This is also beneficialto the OEM as it is then protecting its own investments inthe CMs mastering of the production process. It will be

difficult to find a replacement for the CM at short notice.A long-term contract will also hinder the CM fromabandoning the OEM or extracting prohibitive terms asthe price of staying in place. Conversely, if the OEM caneasily switch CMs because the product is simple to makeor is mature enough to qualify as generic, a contract ofshorter duration is called practical as nothing shouldprevent an OEM from pursuing more attractive valuepropositions from other CMs.

The article mentions the relationship between DaimlerChrysler and Magna Steyr as an example where the latterhas assembled the Mercedes-Benz M-class SUV. The firstcar left the plant within 8 months of the initial venture

agreement. A contract of limited duration was consideredto be all the parties needed in the case at hand to protecttheir investments. When BMW entered into an agreementwith Magna Steyr on the X3 SUV, a lengthier contract wasneeded (I recall HBR mentioning over 5.000 pages) asBMW sought for help in four-wheel-drive technology andthus a potential threat of intellectual property leakageneeded to be dealt with.

In an open-market context numerous forms ofmanufacturing outsourcing arrangements exist rangingfrom market agreements (i.e. one-off contracts) over moreinterdependent to and ongoing pacts (such as frameworkarrangements, joint ventures, partnerships,) reflectingvarious levels of bargaining position of the respectiveparties to the deal.

The high-tech arena products may have a short lifespan. Commodifying products result in OEMs gaining


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restructured entity, or one that can be virtually assimilatedto it based on barriers to entry, customer loyalty etc., acompensation may be appropriate. We are reluctant tosee the merits of the introduction of a loss of business

opportunity concept as parties make constant choicesbetween high risk/low risk ventures and anypreponderance of one against the other may stem fromvarious elements. In other words, if there is no sufficientlyassured profit potential of a certain high returnopportunity, a third party would probably not be ready tobuy something of value at least not without factoring inan appropriate risk element (beta factor). We feel that theGuidelines already properly address such circumstancessuch as where the low-risk distributor (acting as a mereagent) is commented versus the distributor withsubstantial marketing spend so as to create a marketingintangible.

As illustrated above on contract manufacturers, a thirdparty contract may simply become at its end without anycompensation being due. Contract manufacturersoperating in a competitive environment for fairlystandardised products are faced with potential losses,especially when it is difficult to find another principal. Inother instances, a so-called ever green arrangementmay be concluded so as to enable the contractmanufacturer to make proper capital investments and becompensated for e.g. undepreciated capital cost whenthe contract it terminated.

Remuneration of a stripped entity

- How do the principles in the 1995 TP Guidelines forselection and application of the most appropriatearms length pricing method apply in a businessrestructuring context?

The Guidelines do in our view apply equally to a strippedentity from the outset as to a converted entity. In manyinstances, a cost plus type based compensation (such ascost-plus, TNMM with cost as PLI, Berry ratio) isappropriate.

- What is the role (if any) of transactional profit splitmethods in a post conversion structure?

We are not sure whether a transactional profit splitmethod should be elevated from its current last resortstatus to serve the purpose of remunerating a strippedentity post conversion. It may be appropriate in a set-up of centers of excellence with correspondingfunctionality and/or risk profile. However, we grab theoccasion to urge for preserving the use of profit-basedmethods to those situations where both parties ownnon-routine intangibles rather than to instances where a

thorough application of the classical standards ofcomparability is felt less practical.

- What is the role (if any) of comparisons of profits

made before/after a conversion?

We feel that the Guidelines rightfully impose an analysisof functions, risks and intangibles. We do not see therelevance of adding profit comparisons.

- To what extent is cost stripping acceptable (e.g. costplus on a limited cost basis)?

The Guidelines do in our view already fairly address theissue so as to limit the need for a profit element tovalue added cost (see e.g. 6.37). This is probably alsoin line with how price setting may be dealt with bybrokers.

Synergies/efficiency gains

- How to account for synergies and efficiency gains inthe theoretical arms length environment?

- How to deal with situations where expectedsynergies/efficiency gains are not made?

The topic of synergies is extensively dealt with ineconomic doctrine though it appears as if it merelyserves to underscore the choice of vertical integrationversus transacting with third parties. In other instances,it focuses on expected synergies stemming from

mergers. The models are usually DCF-based and builton pre-merger forecasts for the stand-alone mergingfirms (excluding synergies) and one for the post-mergercombined firm including synergies. In our view, theGuidelines already extensively address the differencebetween a MNE and third party relations in 1.9-1.10.This may equally apply to efficiency gains. An affiliate isaccording to the Guidelines not be considered to havereceived a service by the sheer fact of being member ofthe group as laid down in 7.13.

The arms length principle

Does the arms length principle apply differently to an

arrangement between associated enterprises dependingupon whether or not it replaces an existing arrangement( i.e. conversion situations vs. start-up situations), and ifso how?

Compliance with the arms length principle should in myview be assessed based on a comparability analysis aslaid down in the Guidelines7. Any reference to what canonly be traced based on hindsight risks to lack fairness.

7 A reservation is made here as this contribution was prepared pending the comments we will be posting in response to the May 2006 call for interest onComparability on behalf of PricewaterhouseCoopers.


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Dispute resolutionin Belgium - thelatest developments

Thierry Vanwelkenhuyzen,

Partner, PricewaterhouseCoopers, Belgium.


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Multinational businesses tend to fall into twogroups with respect to their transfer pricingpolicy in Belgium. Some decide to take a pro-active stance: when setting up a business inBelgium or when they modify their TP policy,they often request an advance tax ruling fromthe Belgian Tax Authorities. Other businessesdo not request advance rulings. Some maypro-actively develop TP documentation, whileothers wait until a tax audit takes place. Thisarticle discusses what taxpayers may expectfrom Belgian Tax Authorities with respect totransfer pricing issues.

A new approach to taxpayer disputes

The Belgian Ruling Commission has begun to take amore business-oriented attitude, particularly regarding

transfer pricing. The Commission is much more ready toencourage positive decisions. For example, in the past,the Commissioners would listen to a taxpayerscomments, then the taxpayer would need to wait for theCommissions decision, but there was no interim dialogueallowed. Now, taxpayers may speak in pre-filingmeetings, and can add both additional documents andarguments. In addition, taxpayers can get advanceindications of the tentative position of the Commission,and, if that position is negative, taxpayers have theopportunity to add documents or arguments in order tomake the decision a positive one.

The creation of a special TP teamPrior to 2005, transfer pricing audit issues were part ofgeneral, broader tax audits. However, in 2005, the BelgianTax Authorities began to conduct transfer pricing auditsof multinationals having one or more subsidiaries inBelgium. A specific TP team was officially created in July2006 with a twofold mission:

To build up a TP expertise to the benefit of all field TaxInspectors and to develop the appropriate procedureto conduct tax audits in this area according to theOECD principles.

To carry out itself transfer pricing audits ofmultinationals being present in Belgium through asubsidiary or a branch.

Which multinationals are being audited inBelgium?

The special TP team has selected the groups to auditbased on the data-mining technique, although the teamhas been reluctant to disclose their specific criteria forselection. It is known, however, that they select Belgiancompanies making either losses every year or asignificant loss in a specific year. Moreover, when the

overall profitability or the operating profit dropsdramatically one or two years, the group is also selectedthrough the data mining.

Other selection criteria are indicated in a TP circular letterissued on November 14, 2006 by the Tax Authorities,including the use of tax havens, back-to-backagreements, transfer of intellectual property outsideBelgium and the payment of invoices for managementfees close to the end of the financial year. However, thecriteria described in the circular letter are those that theteam may use; it is not known to what extent thesecriteria are actually used in practice.

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How are TP tax audits conducted?

Until recently, the TP Team was sending a standardquestionnaire of about 20 questions covering numerous

items that we will comment below. In their new circularletter on TP documentation (which is commented byPatrick Boone in this edition), the Belgian Tax Authoritieshave accepted the guidelines comprised in the EuropeanCommissions European Transfer Pricing Documentation(EUTPD) (see article on page XX) , including the conceptof master file and local file, but also the principle of thepre-audit meeting. The pre-audit meeting isrecommended to the Tax Authorities in order to avoidraising questions which are irrelevant for the group beingaudited or because they would request an unreasonableamount of work.

As of 2007, the TP Team has suggested organising such

a pre-audit meeting. Its purpose is indeed to reduce thequestions to those which are relevant to the grouptaking the specific activities of the Belgian companiesinto account but also the specific facts, like the absenceof intangibles in Belgium or the absence of any royaltiesbeing paid by the Belgian entities.

Other advantages of said meeting is to ask which TPpolicy is carried out within the group and which kind ofTP documentation exists and can be sent at short noticeto the Authorities.

In the questionnaire sent by the TP Team after themeeting, in the form of an official request for

information, the following information will be requested ifit has not yet been obtained during the pre-auditmeeting:

the situation of the Belgian entities in the group;

the relationship between the Belgian entities andother companies of the group;

the description of the functions carried out and therisks borne by the Belgian entities;

specific questions on intangibles (trademarks,patents, know-how);

the TP method used by the Belgian entities and othermethods used in the group and if changes to themethod have occurred;

the benchmark study if one has been carried out;

details on the contractual relationship between groupcompanies and the Belgian companies regardinggoods and services; and

whether or not tax rulings have been requested inBelgium or in other countries.

After receiving the completed questionnaire, the Teamexamines the responses, and then visits the Belgiancompany for further verifications. For example, theywant to be satisfied that a drop in profitability or a

cause of losses can be justified and that the armslength principle has been respected by both the groupand the Belgian entity.

Recently, the special TP Team sent additional questionsafter the first questionnaire regarding the profitability byline of products or regarding the implementation ofsome provisions mentioned in agreements concludedby the Belgian company. Indeed, although the approachis standardised, the TP audit becomes specific basedon the fact pattern of each group.

When the arms length principle has not beenrespected, the Team adjusts the taxable income of the

Belgian entities over a three-year period. This audit canlead to economic double taxation if the same additionalprofit has already been taxed in another groupcompany. Companies will need to undertake reliefprocedures (whether internal or through the ArbitrationConvention or the double tax treaty) to remedy thissituation.

In Belgium, no interest for late payment is due on theadjustment unless if it concerns withholding taxes. It ispossible to conclude an agreement with the Team onthe application of transfer pricing for future years. It isour experience that the Team is reasonable, providedthe group has good arguments to sustain its position.

Be pro-active

As a result of the changes begun in 2005 and thecreation of the TP Team in 2006, multinational groupsshould expect specific TP tax audits in the future inBelgium. At present, only groups with losses orsignificant drops in profitability have been selected butthis was an earlier priority of the Tax Authorities. Now,groups without losses or drops in profitability canexpect to be selected as well.

In view of this situation, multinational groups should

pro-actively prepare their TP documentation, preferablyalong the lines of the EUTPD. This will save a significanttime when the special TP Team starts its tax audit.

Another trend being observed is the initiative taken byfield Tax Inspectors to start a TP tax audit or to raisespecific TP questions in the framework of the standardtax audit of multinational companies. The Belgian entityshould be in possession of the relevant documentationin order to answer those questions. This is anotherreason to have its TP documentation readily available,even if Belgian tax law does not yet require thisdocumentation to be kept available at all time.


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The APA landscapein Denmark, Finlandand Sweden

Hans Chr. Jeppesen,PricewaterhouseCoopers Copenhagen, Denmark.

Jrme Monsenego,PricewaterhouseCoopers Stockholm, Sweden.

Veli-Matti Talaand,PricewaterhouseCoopers Helsinki, Finland.


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Although tax authorities in a number ofcountries have created formal Advance PricingAgreements (APAs) for transfer pricingmethodologies, no formal APA procedurescurrently exist in Sweden, Denmark, or Finland.However, each of these counties is consideringformal programmes. This article describes theprogress in each country towards theestablishment of APAs, and, in the absence ofAPAs, what taxpayers can expect in terms ofadvance rulings.

An overview

These three Nordic countries show a strong interest inAPAs, and formal APA programmes are expected to be

available in the near future. Sweden has explicitlyincluded on its agenda the implementation of an APAprogramme, which should be launched before 2010.Denmark expects a formalised APA procedure in 2007through administrative guidelines. Finnish authorities areinvestigating the possibility of enacting an APAprogramme, but no timetable has yet been decided.

The Communication of the European Commission relatingto Guidelines for APAs in the European Union8 is likely toaccelerate the process in the European Union as well asprovide for a valuable blueprint.

Even in the absence of formal APA programmes, advance

tax rulings have been used in Denmark and Finland fortransfer pricing purposes. However, Swedish advancerulings have so far had limited usefulness in this field-taxpayers in Sweden may apply for an advance ruling,but are likely to receive a negative answer.

Practice shows that a few MAP (Mutual AgreementProcedure) APAs have been concluded by Sweden andDenmark, based on unilateral APAs issued by foreigncompetent authorities. That possibility is available as longas the relevant tax treaty includes a MAP similar to theone provided at article 25(3) of the OECD ModelConvention.

The Swedish APA landscape

Although Sweden does not currently have a formalisedAPA programme, taxpayers may apply for advance taxrulings at the Board for Advance Tax Rulings(Skatterttsnmnden). Historically, this procedure hasseldom been applicable to transfer pricing. However,given the new regulations on transfer pricingdocumentation and increased focus on transfer pricing, itis likely that more companies will apply for advance taxrulings on transfer pricing issues.

In practice, the Swedish competent authorities may

accept foreign unilateral APAs that thus become bilateral,based on the MAP included in the relevant tax treaty.Indeed, an APA can be concluded on the sole basis ofthe MAP included in the relevant tax treaty, provided it issimilar to article 25(3) of the OECD Model Convention9.

It is difficult to assess the number of and circumstancessurrounding MAP APAs, since this information is notmade public. As far as we know, it has occurred inprobably less than five cases. USA and France seem tobe countries with which the Swedish authorities haveextended unilateral APAs to bilateral ones.

The APA landscape in Denmark, Finland and Sweden

8 Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee on the work of the EUJoint Transfer Pricing Forum in the field of dispute avoidance and resolution procedures and on Guidelines for Advance Pricing Agreements within Europe,COM (2007) 71, 26 February 2007.9 OECD Guidelines, 4.140


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Due to the advantages provided by APAs, theSwedish Ministry of Finance has asked the SwedishTax Agency to investigate the possibilities oflaunching an APA programme in Sweden. This

assignment includes looking at other countriespractice and recommendations at the OECD level.Although it is encouraging that Swedish authoritiesshow willingness to adopt an APA programme, thereare several possible weaknesses in the currentapproach.

First, the assignment encourages the Swedish TaxAgency to look at practice in other countries and atthe OECD level. However, nothing is said about takinginto consideration the EC Guidelines for APAs in theEuropean Union. These guidelines are meant toprovide for a blueprint for APAs, and the EuropeanCommission encourages member states to quickly

implement them. However, Swedish authorities areusually open to European initiatives, e.g., theyexplicitly accept transfer pricing documentationprepared according to the EUTPD approach. As aresult, they are likely to take into consideration theGuidelines for APAs in the European Union.

Second, the assignment does not include a simplifiedAPA procedure for SMEs (Small and Medium-SizedEnterprises), although several countries do offer sucha possibility. Sweden, however, adopted lightertransfer pricing documentation requirements for minortransactions.

Finally, the assignment does not include thepossibility of concluding unilateral APAs and viewsare divergent as to whether unilateral APAs are goodsolutions. Based on our discussions with the Swedishtax authorities, our understanding is that they are noteager to adopt unilateral APAs because of theabsence of binding effect on foreign authorities.

The legislative proposal is expected by 31 December2007, and the APA programme should be launched byno later than 2010.

The Danish APA landscape

Currently there is no formalised APA programme inDenmark. However, it is possible to benefit from aMAP APA with countries with which Denmark hasconcluded double taxation treaties10.

Danish law does not require the DTA (Danish TaxAuthorities) to enter into APA negotiations, andnegotiations are usually initiated upon an applicationfrom a taxpayer. Yet, it is our experience that the DTAon a case-by-case basis are willing to enter intoinformal APA negotiations.

Due to the absence of a formal APA programme, there areno guidelines for how to formulate an application.However, following EC Commissions guidelines, it is likelythat an application including the information in Annexes A

and B will be accepted. This information relates to (1)historical information - which might already exist in someformat but will need to be compiled for the APA; and (2)information that may need to be created specifically forthe APA.

The figure below illustrates the current APA procedures inDenmark.

The publication of statistical information on the status of

APAs by the member states is encouraged by the EUJoint Transfer Pricing Forum (EU JTPF). Yet, the DTA doesnot make such information available on a regular basis.Nevertheless, the Danish Minister of Taxation, in ananswer to the Tax Committee of the Danish Parliament,stated that in 2006 that there were three ongoing APAnegotiations and that the number of APA negotiations isexpected to increase.

The table below provides for information on the numberof APAs for previous years.

Year Concluded APAs

2002 1

2003 1

2004 1

2005 2

10As of May 2007 Denmark has concluded 97 double taxation treaties.11 This will typically include requests for binding responses from large companies that are assessed by the DTAs unit for large companies, i.e. applications forbinding responses concerning controlled transactions will always be evaluated by the DTAC.

APA

Unilateral APA

Binding response

MAP APA

appeal to highcourt

Appeal to nationaltax tribunal

Bilateral OECDprocedure

Appeal to lowercourt

Appeal to supremecourt

No deduction ofexpenses butreimbursement ofexpenses - 50% or100% dependingon the outcomeof the case

Depending onthe nature ofexpenses someare reimbursed


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Binding responses

For many years Danish taxpayers have been able to obtainbinding responses for direct taxation issues (including

transfer pricing), either prior or after any actions taken. Abinding response will give the taxpayer an answer on how theDTA will treat a certain transaction. The answer is binding forthe DTA and is provided within one month. If the questionaffects several taxpayers, concerns large economic values,interpretation of new legislation, EU law, or can attract theattention of the public, the DTA must as of 1 January 2007present the application to the Danish Tax AssessmentCommittee (DTAC). In this case an answer will be providedwithin three months.

If the documentation provided with the request is insufficientor if the request is particularly complex, the DTA or DTACmay extend its time limits. Furthermore, a request for a

binding response must be formulated in a way that the DTA(or when relevant the DTAC) can answer the question byyes or no.

Within the first seven months after restructuring of the DTA in2005 and updating the binding response procedure to includeindirect tax matters, the DTA received more than 4.000requests for binding responses.

Anticipated developments

At the end of May 2007, the DTA informed us that they intendto publish guidelines on the APA procedure during 2007. It isexpected that these guidelines will concern both unilateral

and bilateral APAs, and that the APA procedure will be similarto the one applicable to binding responses.

The Finnish APA landscape

Finland has not implemented any formal APA programme.However, Finnish taxpayers have a possibility to utilise twodifferent kinds of advance rulings in order to get a bindingsolution on a tax issue in advance. This possibility has beenused also in the area of transfer pricing. These twoprocedures have slightly different features, and the choice ofthe procedure is up to the taxpayer.

Taxpayers are entitled to submit requests for advance rulingseither to the Central Tax Board or to a local tax office. Themain distinction between these procedures is that the ruling ofthe tax office is final (i.e. it is binding and there is no appeal

possibility), whereas it is possible for a taxpayer to make anappeal on a ruling from the Central Tax Board directly to theSupreme Administrative Court (SAC), the highest court to dealwith tax issues in Finland. Therefore it is quite natural thatadvance rulings in matters containing questions of principalcharacter - and thus having general interpretative or precedentvalues - are usually requested from the Central Tax Board.

Although there are different routes available for appealing anadvance ruling, in practice, requests concerning ordinarytransfer pricing issues seem to be directed mainly to the localtax offices. In recent years, advance rulings on transfer pricingissues have been given mainly by two local tax offices: the TaxOffice for Major Corporations (TOMC) and the Uusimaa

Corporate Tax Office. There have been between two and fourtransfer pricing advance rulings per year.

The Finnish advance ruling system does not provide allpossible benefits of APAs to a taxpayer. For example, advancerulings normally deal with acceptability of one single intragroup transaction, and it is not usual to deliver an advanceruling on all of a taxpayers international transactions for agiven period of time. Additionally, local tax offices and theCentral Tax Board are handling advance rulings quiteindependently and thus there is no involvement from theCompetent Authoritys side on the cases. Therefore there is nodialogue between the Finnish and the foreign tax authoritiesand no confirmation on the acceptability of the final result.

The Finnish Competent Authority function is divided betweenthe Ministry of Finance and the National Board of Taxes.Although there are no public statistics on APAs or MAP APAs,our understanding is that the Finnish Competent Authoritieshave never been in a situation that another treaty partner wouldhave suggested the broadening of a foreign unilateral APA to abilateral APA.

Finnish authorities have recently started investigating thepossibility of launching a formalised APA programme. However,it is currently too early to estimate any date for itsimplementation.


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Dispute resolutionand double taxationprevention in Germany

Lorenz Bernhardt,

Partner, PricewaterhouseCoopers, Germany.


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TP tax audits: approach of the German taxauthorities

One principle of the German tax audit approach is that, in

general, every corporate taxpayer should regularly be thesubject of tax audits, and that eventually every year in acompanys life will be audited by the German taxauthorities. Accordingly, tax authorities do not selectindividual companies to be audited based on a catalogueof criteria, such as loss makers, certain industries,membership in an international group. There is also norandom selection. In contrast, after German companiesprepare and file their tax returns, they are routinelysubject to a desktop review by the tax authorities beforethe returns are processed. Typically, the desktop reviewsresult in assessment notices which reflect the tax payerspositions as entered in the tax return. However, withinthree to five years, the tax filings and the tax assessment

notices issued by the authorities after their limited revieware the subject of an in-detail examination by a tax fieldauditor who has authority to do a comprehensive reviewand to fully amend the assessments.

Typically, the tax auditor will be a staff member of thelocal tax office. However, in more and more instances,teams of several auditors will perform a tax audit, andone member of the team will typically be a specialist ininternational taxes if the company has cross-bordertransactions. Very large companies, predominantlyGerman MNCs, are subject to continuous audits, i.e., oneaudit will immediately follow another such that there mayalways be auditors at a companys premises.

Corresponding to the increasing regulatory complexity intransfer pricing matters, German tax authorities haveannounced that they will focus on transfer pricing in everyaudit in which a tax payer has cross-border transactionswith related parties. In addition, central training programshave commenced in order to train local tax auditors ininternational taxation, including transfer pricing. Lastly,central - and specifically trained - transfer pricing staff areavailable at the Central Federal Tax Office(Bundeszentralamt fr Steuern) and who will participate inlarger audits.

Dispute resolution - advance pricingagreements (APAs)

In 2006, the German Tax Authorities issued acomprehensive circular letter on advanced pricingagreements (APAs). The circular letter outlines, amongother things:

Transfer pricing environment

Over the years, the transfer pricingenvironment in Germany has become

increasingly complex, if not aggressive. In2003, documentation rules (including a penaltyregime) were enacted, and, for fiscal yearsending in 2008 and later, comprehensivestatutory transfer pricing rules (including ruleson business restructurings) will apply. Inaddition, the tax authorities have issuedadministrative guidelines on various topics,including, among others, cost contributionagreements (1999), and documentation andtransfer pricing methodologies (2005).

The increasing regulatory activities with respectto transfer pricing are mirrored by reactions ofthe tax administration both in the area of taxaudits and the area of dispute resolution.

Dispute resolution and double taxation prevention in Germany


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general principles governing an APA procedureinvolving Germany ;

preconditions for commencing an APA procedure;

required content for the application as well asfurther information and documents to be submittedby the taxpayer with the application;

regular term of an APA;

implementation of an APA under national law;

further aspects (including rollbacks, extensions,simplifications for small enterprises).

In the past, the German tax authorities had beenreluctant to enter into APAs. They had expressed

doubts that APAs would bring further efficiencies intax audits and no personal resources had beenavailable to administer APAs. By issuing the circularletter, the authorities confirm, which they had recentlystated on other occasions, that they are now willing toissue APAs on a regular basis. This willingness isstressed by the fact that a central team of officials hasbeen installed at the level of the Federal Tax Office(Bundeszentralamt fr Steuern) which is fully dedicatedto APAs and will act as competent authority.

Practical experience in recent months shows that theauthorities are indeed dedicated to the new program.A considerable number of APA applications under the

new program have been filed, and they have beenprocessed by the authorities within reasonable ti

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