This is often characterised by a strong contrast between multinational enterprises (MNEs) and small and medium-sized enterprises (SMEs): MNEs account for around 60% of global trading transactions while SMEs focus more on internal markets. Indeed, a European Commission report from 2011 showed that although SMEs in Europe accounted for 99.8% of all companies, only 5% said they had overseas subsidiaries or joint ventures. On the other hand, that is still more than 1.2m companies.
Against this global backdrop, transfer pricing issues have become particularly relevant. And there are two stakeholders with competing agendas:
- Companies trying to understand their profitability, reduce tax and prevent double taxation when repatriating profits
- Tax authorities who see only lost tax revenue, and pursue and penalise poor transfer pricing practices, which they consider as tax avoidance schemes
Increasing compliance burden
The rules and regulations surrounding transfer pricing are strict and are set to become even stricter. The Organisation for Economic Co-operation and Development (OECD) confirmed as much in a January 2014 discussion document on transfer pricing documentation, which predicted an increased compliance burden, particularly for MNEs but SMEs do not escape. Where SMEs often feel the pinch is the cost of complying with complex transfer pricing rules, faced with the lack of the necessary expertise and resources in-house.
Easing the burden for SMEs
Inside the European Union transfer pricing compliance has received particular attention. As for SMEs, the EU Joint Transfer Pricing Forum (JTPF) has acknowledged the need to stick to the EU’s own proportionality principle (the principle that any EU measure must be appropriate, necessary and reasonable); this should help balance the need to apply transfer pricing rules with any burden it creates for SMEs who have to comply with the rules.
The European Commission recently produced a set of initiatives aimed at helping SMEs:
- An electronically accessible source of information with details of whom to contact for help
- Create clarity and certainty by raising SMEs’ awareness of transfer pricing processes
- Member States to develop simplification measures to reduce the compliance burden for SMEs
- Assure appropriate treatment of SMEs
- Consider simplification measures already in place in other Member States and contained in earlier JTPF reports
- Fast-track dispute resolution for the simpler, low-value SME claims
- Explore and implement auditor-to-auditor contact within the framework of mutual agreement procedures, and the EU Arbitration Convention
We can perhaps draw some interesting conclusions from two recent JTPF studies of the transfer pricing situation across EU Member States. These were compiled in January 2011 and September 2012 and asked some probing questions. Here are some of the main findings.
Measures to make life easier for SMEs
Twenty-two of twenty-eight Member States have already introduced measures aimed at making life easier for SMEs (which are at times defined differently across Member States):
- Denmark, Estonia, Finland, Hungary, Ireland, Latvia, Portugal, UK: total exemption of SMEs from transfer pricing rules
- Belgium, Czech Republic, France, Germany, Greece, Italy, Slovakia, Spain, Sweden: simplified transfer pricing documentation requirements
- Lithuania, Netherlands, Romania: help from the tax authorities and lower costs for advanced pricing arrangements
- Bulgaria, Slovenia: ‘benevolent’ attitude shown by tax authorities
Austria, Croatia, Cyprus, Luxembourg, Malta and Poland are the six Member States that have no facilitating measures in place.
So Member States have made efforts to help SMEs when dealing with transfer pricing, although there is still a lot to do. Despite these steps to simplify transfer pricing it is still a complex area, and European tax consultants have an important role to play in assisting the 1.2 million SMEs with potential transfer pricing issues.
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