European Union: Proposal on Transfer Pricing Adjustments: Understanding Primary, Corresponding, and Compensating Adjustments

Proposal of EU Council Directive on Transfer Pricing contains Memorandum describing Transfer Pricing Adjustments envisaged by the Council Directive.

Transfer pricing adjustments can be broadly categorized into two main types:

1. Adjustments by Tax Administration After Filing (Primary and Corresponding Adjustments):

• • Primary Adjustments: These involve increasing a company's taxable profits due to cross-border transactions with associated enterprises not conducted at arm's length.
  • Corresponding Adjustments: These are made to eliminate double taxation resulting from primary adjustments. For instance, if one tax jurisdiction increases a company's taxable profits, a corresponding adjustment may lower the tax liability in another jurisdiction.

Article 6 of the proposed directive outlines rules for Member States regarding primary and corresponding adjustments. The primary goal is to ensure an adequate mechanism for corresponding adjustments to prevent double taxation, which can occur if adjustments are not made.

Member States should have the flexibility to perform corresponding adjustments, including fast-track procedures or joint audits, where there's certainty about the validity of the primary adjustment. However, corresponding adjustments should not be granted in certain cases, such as if the primary adjustment doesn't align with the arm's length principle or if no double tax treaty exists with a third-country jurisdiction.

2. Voluntary Adjustments Before Filing (Compensating Adjustments):

• • A "compensating adjustment" is when a taxpayer reports a transfer price that they believe is an arm's length price, even if it differs from the actual charged amount between associated enterprises.

Article 7 addresses the recognition of compensating adjustments by Member States to avoid double taxation. It provides conditions for recognizing such adjustments, taking into account the OECD Transfer Pricing Guidelines and the report on compensating adjustments approved by the Joint Transfer Pricing Forum in 2013. The aim is to establish a common approach within the Union and minimize disputes related to compensating adjustments.

SOURCES:

• Report on Compensating Adjustments (europa.eu)
• COM_COM(2023)0529_EN.pdf (europa.eu)