Whenever a multinational enterprise wishes to carry out transactions, it must have the capacity to meet the costs surrounding it: these are transfer pricing. These are the prices charged between associated companies established in different countries for their intra-group transactions, such as the transfer of goods and services. The prices that are charged do not reflect the independent market price because they are set by associate members dependent on the multinational. The risk of this system is the establishment of higher transfer prices to reduce the taxable profit in the territory. This situation has led to the implementation of regulations applicable to transfer pricing, leading to the imposition of tax obligations on companies.
The OECD sets rules, in terms of taxation, which are based on the arm’s length principle, which means that the price charged between companies dependent on each other must be the same as that which would have been charged on the market between two independent companies. Article 9 of the OECD tax convention </ a> provides that when “ two companies are, in their commercial or financial relations, bound by conditions agreed or imposed, which differ from those which would be agreed between independent companies, the profits which, without these conditions, would have been made by one of the companies but could not in fact be due to these conditions, can be included in the profits of that company and taxed accordingly . “
In 2001, the Commission carried out a study on corporate taxation , it It emerges from this that transfer prices pose a problem from the point of view of the internal market and are one of the factors preventing its realization.
Within the European Union, direct taxes, unlike indirect taxes, are not harmonized. However, the treaties envisage a harmonization of the legislation on indirect taxes of the member states. Article 115 of the TFEU provides that “ the Council, acting unanimously in accordance with a special legislative procedure, and after consulting the European Parliament and the Economic and Social Committee, shall adopt directives for the approximation of legislative provisions, regulations and administrative procedures of the Member States which have a direct impact on the establishment or functioning of the internal market . “.
National tax rules are subject to respect for the fundamental freedoms of the European Union. These are the subject of special attention by the European institutions because they constitute an element which allows the internal market to be realized. But unlike other elements of direct taxation, transfer pricing legislation is not subject to European harmonization. Each of the member states sets its own legislation while taking into account the OECD guidelines. Despite the recognition by member states of the applicable OECD transfer pricing principles for multinational companies and national tax administrations which form a general transfer pricing framework for all states, the different interpretations of these guidelines on the part of the States – which have a fairly wide margin of appreciation – are detrimental to the proper functioning of the internal market.
In order to reduce the negative effects linked to transfer costs and to allow coordination of the national laws of the Member States, the European Commission created in 2002 the transfer pricing forum. The intervention of the European Union is justified when national practices negatively impact the internal market. The Joint Transfer Pricing Forum has set a general framework on this subject within the European Union. It follows a logic similar to that of the convention relating to the ‘elimination of double taxation in the event of correction of associated business profits . It provides for a procedure for resolving disputesresulting from the double taxation of companies from different Member States due to the upward correction of the profits of one of these companies in a Member State.
Many states have concluded bilateral conventions in order to avoid this double taxation: the France-Ireland convention of March 21, 1968, the convention between Spain and Belgium of June 14, 1995, that of January 21, 1993 between Switzerland and Switzerland. Luxembourg etc.
The Union’s arbitration convention provides for this elimination of double taxation through an agreement between the contracting states. The purpose of this measure is to create a more favorable context for the development of the internal market because companies will only be taxed in one state. This convention now applies to all member states of the Union. However, its application requires an active approach on the part of States and companies: what procedure must a company subject to double taxation follow to put an end to this situation? The convention directly involves companies which would be affected by double taxation, it is provided in article 4 of this one that: “ When a company considers that, in any of the cases in which the present convention applies, the principles set out in Article 4 have not been respected, it may, independently of the remedies provided for by the internal law of the Contracting States concerned, submit its case to the competent authority of the Contracting State whose it is a resident or in which its permanent establishment is located ”. Consequently, two procedures are foreseen: either the competent authorities of the States reach an amicable agreement to eliminate, or they did not reach an agreement then “ they constitute an advisory commission which they charge to issue an opinion on how to eliminate the double taxation in question . “And” companies may use the possibilities for redress provided for by the domestic law of the Contracting States concerned; however, when a court has been seized of the case ”.
But just as some businesses pay twice the tax, there are some things they can do to avoid being taxed. New regulations have been adopted to fight against corporate abuse: the anti tax avoidance directive (ATAD); which mainly targets tax evasion practiced by large multinationals.
The parent company should reallocate the income of its controlled subsidiary in its tax base
As a first step, the European institutions introduced a limitation on the deduction of interest. Indeed, when a company takes out a loan, it can deduct its interest from its tax base. Lack of regulation and limitation can lead to a concentration of multinational debt in the countries with the highest corporate taxes to reduce the tax base. For example, if an Irish company has a permanent establishment in France, if it takes out a loan, it will deduct the interest therefrom on the taxable base of the French establishment because the corporation tax is higher in France than ‘in Ireland. This possibility was already regulated in Belgium, the European Union followed this orientation by limiting the deductibility to 30% of the profit (article 4 ATAD directive) or to 3 million euros, the interest resulting from the loans of the company. To take into account already existing situations, it is expected that this limitation will not apply to all borrowings.
Next, one of the innovations of the directive is the introduction of a specific regime for foreign subsidiaries. Its aim is to avoid the artificial displacement of profits from a company to its subsidiary abroad, which benefits from a more favorable tax regime. The income of the controlled foreign company is reallocated in the tax base for calculating the corporate tax of the parent company: but how to define what is a more favorable tax regime? Article 7 of the ATAD directive defines this concept, it allows the Member State in which the parent company is located to include in the tax base certain undistributed income of a subsidiary owned at more than 50% which is located in a state in which it pays income tax “ less than the difference between the corporation tax that would have been borne by the entity or the permanent establishment under the tax system applicab companiesthe in the taxpayer’s Member State and the actual corporate tax that the entity or permanent establishment pays on its profits ”. For example, a subsidiary established in Tunisia pays 50,000 euros in corporation tax. If this subsidiary were taxed in the country of the parent company, for example Belgium, it would pay 60,000 euros. The difference is 10,000 euros so it does not benefit from more favorable taxation within the meaning of the ATAD directive. On the contrary, if the subsidiary paid less than € 30,000 in corporation tax, the parent company would have to reallocate the income of its controlled subsidiary in its tax base. But exemptions from this regime are provided, in particular to avoid double taxation.
To go further in preventing tax abuse, the European Union adopted in 2017 the ATAD 2 directive which aims to fight against” hybrid systems resulting from the interaction between the corporate tax systems of the Member States “, a situation which favors the ‘Tax optimization. ”
The hybrid device is defined by the ATAD 2 directive as a situation involving a taxpayer or an entity when a payment made under a financial instrument gives rise to a deduction without inclusion. This concerns, for example, transactions which give rise to a tax deduction in one State without there being a corresponding taxation in another State, or when a loss or an expense leads to a tax deduction in more than ‘a state.
In France, this new regulation broadens the scope of the anti-hybrid system, until then Article 212 I b) of the General Tax Code only applied to financial interests. From now on, all types of income are concerned.
“ Believing that third parties independent of each other would, in identical or similar circumstances, have agreed to remuneration in return for the guarantees thus granted “
The Court of Justice of the European Union had the opportunity to comment on German transfer pricing law. It provides companies with guidance on what evidence they need to provide to escape redress.
The facts of the May 31, 2018 judgment relate to a German parent company which indirectly owned two subsidiaries in the Netherlands. The equity of these subsidiaries was negative, for the pursuit of their activities, they needed several million euros. They turned to a credit institution which agreed to provide them with the necessary funds on the condition that the parent company guarantees by letter of intent. The parent company issued these letters of intent without asking for compensation.
In view of this activity, the German tax administration carried out a tax adjustment of the parent company by reintegrating in its taxable income an amount corresponding to the assumed value of the remuneration of the guarantees granted “ Believing that independent third parties one another would, in identical or similar circumstances, have agreed to a remuneration in return for the guarantees thus granted ”.
The problem which arises with regard to European Union law concerns the freedom of establishment because in a purely internal situation where the subsidiaries were established in Germany and not in the Netherlands, it would not have been possible to proceed to the reintegration into the results of the parent company of the remuneration in principle required in exchange for the granting of guarantees, therefore under German law, the German resident parent company, which holds a stake in a company established in another State member, is treated less favorably than it would be if it had a stake in a company resident in Germany.
The European judges consider “ that a regulation of a Member State establishing a difference in tax treatment between resident companies, depending on whether the companies to which they have granted abnormal and voluntary advantages and with which they have ties of interdependence are or are not established in that Member State, constitutes, in principle, a restriction on the freedom of establishment. As a result, the judges argue that these transfer pricing regulations are an obstacle to the freedom of establishment. ”
However, the Court of Justice notes “ that such national legislation pursued legitimate objectives compatible with the Treaty and relating to reasonsimperative in the general interest, and that it should be regarded as such as to ensure the achievement of these objectives. “. So once a regulation is justified for reasons of general interest, it will not be incompatible with the freedom of establishment. The problem which arises is to know if a regulation does not go beyond what is necessary to guarantee the achievement of the objectives pursued.
The CJEU has ruled on the basis of the principle of proportionality and the procedures for assessing it. The Court is based on the concept of “commercial reasons” which could justify the conclusion of the transaction in question under conditions different from the transaction which would have been concluded between third parties: “ When the development of the activities of a subsidiary depends a contribution of additional capital, due to the fact that it does not have sufficient own funds, commercial reasons may justify the mobilization of funds by the parent company, under conditions which would be unusual between third parties. “She adds that:” since the continuation or expansion of the activities of the said foreign companies depended, in the absence of sufficient equity capital, on a contribution of capital, the granting free of charge of letters of The intention to declare a guarantee, even though companies that are independent of each other have agreed to a remuneration in return for such guarantees, could be explained by the own economic interest of e Hornbach – Baumarkt AG to the commercial success of the group’s foreign companies, in which it participates through the distribution of profits, as well as through a certain responsibility of the applicant in the main proceedings, as a partner, in the financing of those companies. / em> “
The Court concludes from this that it is for the referring court to verify whether the parent company was able to produce such evidence, without being subject to excessive administrative constraints and without it being excluded that economic reasons resulting from its position as a partner of its foreign subsidiaries may be taken into account.
Finally, this judgment shows that despite the desire to bring down all tax barriers within the internal market, the fact remains that reasons of general interest can justify transfer pricing. Therefore, it is possible, as a company, to benefit from certain tax advantages due to these transfer prices, but they must be justified.
The Eternoscorp team remains at your disposal to assist you in all your transactions with your subsidiaries abroad and to find the tax regime that will be most advantageous for you.