Eu urope Ecofin considers draft Transfer Pricing Code of conduct The draft Transfer Pricing Code of Conduct will improve how the EC Arbitration Convention works. Heinz-Klaus Kroppen and Stephan Rasch of Deloitte assess the progress made by the TPF and the impact of the draft Code on new EU member states he European Commission pro-(Commission Study), that transfer pricing Ecofin adopt the proposed code as it should posed a draft Transfer Pricing issues represent a major tax obstacle in resolve a number of the deficiencies of the Code of Conduct on April 23 establishing the Internal Market. To analyze Arbitration Convention that are identified in 2004(COM(2004)297 final), and develop pragmatic improvements to the Commissions Study. The Commission is based on recommendations made by the specific EU transfer pricing issues, the also of the opinion that the Code of Conduct EU Joint Transfer Pricing Forum (JTPF). European Commission established the JTPF should be helpful in the practical implemen The Code of Conduct specifically would in 2002, consisting of experts from the tax tation of the Arbitration Convention provisions of the EC Arbitration authorities of each EU member state Notably, to date, only one full proceeding ntion that have been subject to dis- (including the new member states) and 10 including both the MAP and the arbitration d differing interpretations experts from the business community. The phase (in a case involving France and Italy) The Arbitration Convention entered TPF met during 2002 and 2003 to examine has been finalized under the Arbitration into effect in 1995 for an initial five-year the practical functioning of the Arbitration Convention. The experience of the French period as a mechanism to resolve cross- bor- Convention and to tackle the problems that and Italian competent authorities in that der transfer pricing disputes within the EU. have arisen in the last few years because not case clearly illustrate many of the adminis- The primary benefit of the Convention is all member states have ratified the trative obstacles inherent in the Convention that, unlike a mutual agreement procedure Accession Convention of Austria, Finland (MAP)under a tax treaty, resolution of a and Sweden (Accession Convention) and Application of Convention until it dispute under the Convention is guaran- the Protocol amending the original re-enters in force teed. The Arbitration Convention gives the Convention(Prolongation Protocol As mentioned above, the Arbitration competent authorities two years to resolve (Greece has not ratified the Accession Convention, which has been the subject a dispute; if no resolution is reached, the Convention, and italy and Portugal have not of discussion at various levels for nearly case then may be referred to an arbitration ratified the Protocol). The JTPF also con- three decades, has not been in effect panel, which must render a decision within sidered the following issues related to the since December 31 1999. The lapsing of six months. The panel's decision is binding Arbitration Convention: the Convention at the end of 1999 has unless the competent authorities have the need to clarify the deadline for sub- created issues relating to applicable pro- pproved an alternative settlement elimi- mitting a case to competent authority cedures during the period in which not all nating double taxation. (that is, when the three-year period member states have ratified th The Convention expired at the end of starts) Prolongation Protocol 1999, and although the Council of the start of the two-year period for pur The jTf has achieved considerable Economic and Finance ministers of the poses of the MAP progress and has developed some practic (Ecofin) agreed to extend the Arbitration procedural aspects of the MAP, solutions for proceedings during the interim Convention in 1998, the ratification proceedings during the arbitration period that the Convention not has been in process of the extending Protocol did not phase; and effect. with the exception of Denmark, all take place in time giving rise to issues dis-. the interaction of the MAP and arbitra- member states are willing to conclude cases sed below. In addition, because the tion proceedings with domestic adminis- initiated before January 1 2000 under the Convention is worded in broad and general trative and judicial procedures rules of the Arbitration Convention terms, the member states'interpretation The JTPF concluded that the Convention Denmark will resolve such cases under the has differed, and sometimes conflicted, could best be implemented by the introduc- applicable tax treaty. For requests made resulting in potential double taxation and tion of a Code of Conduct setting out com- after January 1 2000, there is a consensus legal uncertainty taxp mon standards and guidance for all EU that the Arbitration Convention is still The Commission had highlighted in its member states. The European Commission valid, although member states differ 2001 study, Company Taxation in the supports the conclusions and recommenda- regarding the deadlines for the MAP and Internal Market(COM(2001)582 final) tions of the JTPF, and has requested that the the arbitration phase 46Jne2004Europe 46 June 2004 www.internationaltaxreview.com The European Commission pro￾posed a draft Transfer Pricing Code of Conduct on April 23 2004 (COM (2004) 297 final), based on recommendations made by the EU Joint Transfer Pricing Forum (JTPF). The Code of Conduct specifically would address provisions of the EC Arbitration Convention that have been subject to dis￾pute and differing interpretations. The Arbitration Convention entered into effect in 1995 for an initial five-year period as a mechanism to resolve cross-bor￾der transfer pricing disputes within the EU. The primary benefit of the Convention is that, unlike a mutual agreement procedure (MAP) under a tax treaty, resolution of a dispute under the Convention is guaran￾teed. The Arbitration Convention gives the competent authorities two years to resolve a dispute; if no resolution is reached, the case then may be referred to an arbitration panel, which must render a decision within six months. The panel’s decision is binding unless the competent authorities have approved an alternative settlement elimi￾nating double taxation. The Convention expired at the end of 1999, and although the Council of Economic and Finance Ministers of the EU (Ecofin) agreed to extend the Arbitration Convention in 1998, the ratification process of the extending Protocol did not take place in time, giving rise to issues dis￾cussed below. In addition, because the Convention is worded in broad and general terms, the member states’ interpretation has differed, and sometimes conflicted, resulting in potential double taxation and legal uncertainty for taxpayers. The Commission had highlighted in its 2001 study, Company Taxation in the Internal Market (COM (2001) 582 final) (Commission Study), that transfer pricing issues represent a major tax obstacle in establishing the Internal Market. To analyze and develop pragmatic improvements to specific EU transfer pricing issues, the European Commission established the JTPF in 2002, consisting of experts from the tax authorities of each EU member state (including the new member states) and 10 experts from the business community. The JTPF met during 2002 and 2003 to examine the practical functioning of the Arbitration Convention and to tackle the problems that have arisen in the last few years because not all member states have ratified the Accession Convention of Austria, Finland and Sweden (Accession Convention) and the Protocol amending the original Convention (Prolongation Protocol) (Greece has not ratified the Accession Convention, and Italy and Portugal have not ratified the Protocol). The JTPF also con￾sidered the following issues related to the Arbitration Convention: ● the need to clarify the deadline for sub￾mitting a case to competent authority (that is, when the three-year period starts); ● the start of the two-year period for pur￾poses of the MAP; ● procedural aspects of the MAP; ● proceedings during the arbitration phase; and ● the interaction of the MAP and arbitra￾tion proceedings with domestic adminis￾trative and judicial procedures. The JTPF concluded that the Convention could best be implemented by the introduc￾tion of a Code of Conduct setting out com￾mon standards and guidance for all EU member states. The European Commission supports the conclusions and recommenda￾tions of the JTPF, and has requested that the Ecofin adopt the proposed code as it should resolve a number of the deficiencies of the Arbitration Convention that are identified in the Commission’s Study. The Commission is also of the opinion that the Code of Conduct should be helpful in the practical implemen￾tation of the Arbitration Convention. Notably, to date, only one full proceeding including both the MAP and the arbitration phase (in a case involving France and Italy) has been finalized under the Arbitration Convention. The experience of the French and Italian competent authorities in that case clearly illustrate many of the adminis￾trative obstacles inherent in the Convention. Application of Convention until it re-enters in force As mentioned above, the Arbitration Convention, which has been the subject of discussion at various levels for nearly three decades, has not been in effect since December 31 1999. The lapsing of the Convention at the end of 1999 has created issues relating to applicable pro￾cedures during the period in which not all member states have ratified the Prolongation Protocol. The JTPF has achieved considerable progress and has developed some practical solutions for proceedings during the interim period that the Convention not has been in effect. With the exception of Denmark, all member states are willing to conclude cases initiated before January 1 2000 under the rules of the Arbitration Convention. Denmark will resolve such cases under the applicable tax treaty. For requests made after January 1 2000, there is a consensus that the Arbitration Convention is still valid, although member states differ regarding the deadlines for the MAP and the arbitration phase. Ecofin considers draft Transfer Pricing Code of Conduct The draft Transfer Pricing Code of Conduct will improve how the EC Arbitration Convention works. Heinz-Klaus Kroppen and Stephan Rasch of Deloitte assess the progress made by the JTPF and the impact of the draft Code on new EU member states