On 22 February 2024 the European Parliament Committee on Economic and Monetary Affairs (ECON) published a draft report that includes proposals for a transfer pricing (TP) directive drafted by the European Commission. The ECON draft report generally supports the Commission’s proposal to align the TP requirements across the EU, yet it recommends a number of crucial amendments. This article explores the ECON amendments that could affect Latvian TP requirements, too.
The TP directive mainly aims to:
The member states enjoy wide latitude in interpreting and applying recommendations made by the OECD TP guidelines, which create tax obstacles and risks for businesses. The TP directive has another key objective:
While ECON generally agrees with the draft TP directive, it proposes to make specific amendments to the TP directive, which could affect the requirements for preparing TP files.
The ECON draft report proposes to simplify the TP directive and align it more closely with the latest TP guidelines, instead of referring to the version of 2022, as prescribed by the TP directive. In particular, the draft report proposes to:
ECON has said the unilateral methods (e.g. Resale Price, Cost Plus, and Transactional Net Margin) are not considered reliable where each party makes a unique and valuable contribution to the transaction or if the parties carry out very integrated activities. The Profit Split method would be best suited for this case because independent parties would possibly price the transaction in proportion to their contributions.
ECON also recommends deleting the definition of an arm’s length range, which provides for a comparatively strict approach to determining this range from the bottom quartile to the top quartile.
To ensure the TP directive is able to stay compliant and change with the times, ECON recommends making a dynamic reference so the definitions (e.g. of unrelated parties, of an arm’s length range, and of TP methods) are applied across the EU according to the latest version of the OECD TP guidelines.
The ECON draft report recommends the TP directive should take effect from 1 January 2025. The member states are to pass it into their national laws by 31 December 2024, a year earlier than what the Commission proposed.
The ECON draft report includes a sunset clause that provides for phasing out the TP directive by 1 January 2035 for multinational enterprise (MNE) groups covered by BEFIT1 and by 1 January 2040 for the rest of MNE groups operating in the EU, except for transactions with related parties in third countries. In this regard the draft report states that the long-term distribution of profits and payment of taxes between jurisdictions should be made by introducing calculation-based group consolidations and profit distributions to apportion profits between countries fairly and recognise the reality of MNE operations.
The ECON draft report has been put to a vote representing the European Parliament’s opinion on the TP directive (a plenary session scheduled for 10 April 2024). It’s important to note, however, that the European Parliament’s opinion does not bind the EU Council, i.e. the 27 member states will have to agree on the TP directive’s final version.
If you have any comments on this article please email them to lv_mindlink@pwc.com
Ask questionRecent years have seen the State Revenue Service (SRS) increasingly focus on transfer pricing (TP) risks, particularly management services and business support services rendered within a multinational enterprise (MNE) group. These services between related companies aim to promote a group member’s business, to cut costs it would have incurred in performing the particular functions on its own, or to offer some other comparable benefit from the synergy of doing business together. Yet there is also the other side of the coin – TP and corporate income tax (CIT) risks may arise if the recipient of services is unable to prove they were actually received and the fee was justified.
The European Central Bank (ECB) has been increasing its key interest rates since June 2022 to mitigate the high inflation caused by Covid-19. Taxpayers have good reason to debate whether they should revise the interest rates historically applied in their long-term financing transactions between related parties and apply new rates that are arm’s length and reflect the current economic conditions. This article explores the vision of the State Revenue Service (SRS) and recommendations for mitigating potential transfer pricing (TP) risks.
Setting an arm’s length fee for your intragroup services is one of the transfer pricing (TP) challenges you might face. In 2018 Latvia decided to offer relief for low value-adding services (LVAS) to facilitate this process for companies. If certain criteria are met, LVAS can be analysed under a simplified procedure, meaning the service provider can apply a 5% markup on costs without undertaking a detailed benchmarking study. This article serves to remind you of a key requirement when it comes to taking the simplified approach to LVAS.
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