Germany: 051e. Transfer Pricing - Where We Stand - European Union Transfer Pricing Arbitratration Convention

Last Updated: 31 July 1996
KPMG Germany Webpage
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The EU convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises went into effect between the EU member states on 1 January 1995. It is regarded as experimental in nature and remains in force only until 31 December 1999. It is applicable to income taxes accruing during this five year period provided the matter is brought before a competent authority before the convention lapses. The convention is geographically limited to the European territory of the signatory states, which for the time being do not include Austria, Finland, and Sweden. It may be invoked only by enterprises of a treaty state and their permanent establishments by application to the competent authority in their state of residence.

A member state wishing to adjust the profits of an enterprise must inform this enterprise so that it can advise other affected enterprises. If all enterprises and the other treaty states affected consent to the adjustment, double taxation is avoided by means of a corresponding adjustment in the other treaty states (Article 5). Otherwise, an enterprise which considers the adjustment unjustified has three years from the first notice of the adjustment to take the matter to a competent authority in its country of residence (Art. 6 par. 1). This will generally be the competent authority which should make a corresponding adjustment in the event the adjustment is upheld. The competent authority can commence a mutual agreement procedure with the competent authority of the adjusting state (Art. 6 par. 2). If the competent authorities of the two member states are unable to find a solution which avoids double taxation within two years after first presentation of the matter to a competent authority, they must form an Advisory Committee (an arbitration panel) to render an opinion on the transfer pricing problem. There are provisions on the composition of the Advisory Committee, which has six months in which to render its opinion. Its decision is based on the convention's general restatement of the arm's length principle. After receiving the opinion of the Advisory Committee, the competent authorities have an additional six months to adopt the solution recommended by the Advisory Committee or reach some other solution which avoids double taxation. If they fail to do either, they are obligated to implement the solution recommended by the Advisory Committee. The solution reached by the competent authorities is implemented without regard to any deadlines for relief or appeal which the law of an EU member state may contain (Art. 6 par. 2, last sent.).

The convention states that a competent authority is under no obligation to commence a mutual agreement procedure if the taxpayer has committed a violation of tax law which is deserving of significant punishment (Art. 8 par. 1). Such violations are defined by the signatory states in unilateral statements appended to the convention. Furthermore, if the taxpayer has litigated the issue in the courts of the country making the adjustment, decisions rendered by the courts may prevent appointment of an Advisory Committee (Art. 7 par. 3).

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

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