Tax Point of Concern: Transfer Pricing Adjustments and the Elimination of Double Taxation in the EU and under Income Tax Treaties

Excerpt from article “Making Transfer Pricing Adjustments Effective: Are the Tax Authorities Obliged to Reopen Fiscal Years for Which Corrective Tax Assessments Have Been Issued, after a Full Tax Audit?” by Dr. Aikaterini Perrou – postdoctoral research fellow, IBFD, Amsterdam; Assistant Lecturer, University of Athens Law School, published in the International Transfer Pricing Journal, March/April 2017

The EU Arbitration Convention (Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of transfers of profits between associated undertakings, EU Law IBFD), contains an obligation for the elimination of double taxation in transfer pricing cases. As the Convention applies equally to associated enterprises and to permanent establishments situated in EU Member States, in principle both international juridical and economic double taxation are covered by the Convention. The Convention contains specific provisions as to how and when the double taxation will be considered eliminated. Indeed, under article 14, for the purposes of the Convention, the double taxation of profits will be regarded as eliminated if either (i) the profits are included in the computation of taxable profits in one state only or (ii) the tax chargeable on those profits in one state is reduced by an amount equal to the tax chargeable on them in the other state.
This means that when a transfer pricing adjustment is made in one state, a corresponding adjustment must be made in the other state, so that (i) the profits are included in the computation of taxable profits in one state only or (ii) if the profits have been taken into account twice, a credit is granted. A problem arises when the relevant fiscal years have been finalized (a full tax audit has taken place and a corrective tax assessment has been issued). In such a case, in many countries it is not possible to reopen the tax years to allow the transfer pricing adjustment. However, this would be contrary to the provisions of the Convention, as the elimination of double taxation in cases of adjustment of profits is expressly provided for in the Convention.
Failure of a state to honor its obligations under the Convention could be remedied only by recourse to the domestic courts.