Updated domestic transfer pricing guidelines reflect OECD guidelines
On 7 October 2021, the Austrian Ministry of Finance published an updated version of the Austrian Transfer Pricing Guidelines (Austrian TPG) that were first issued in the form of an administrative decree in 2010. The guidelines, which are legally binding on the tax authorities, set out the tax administration’s general posture on transfer pricing and provide an interpretive aid to the arm’s length principle and help to ensure its consistent application.
The 2021 update takes into account developments at the OECD level. In particular, the comprehensive changes to the 2017 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TPG), based on actions 8-10 of the OECD BEPS project, are now incorporated into the Austrian TPG, such as guidance on low value-adding intragroup services, financing transactions, hard-to-value intangibles and permanent establishments. The revised Austrian TPG also incorporates new guidance on year-end adjustments and the transactional profit split method, but it does not address the impact of the COVID-19 pandemic on transfer pricing.
Revised guidance on the application of the transactional profit split method
The Austrian TPG 2021 follows the Revised Guidance on the Application of the Transactional Profit Split Method published by the OECD in 2018 and references the profit split report issued by the EU Joint Transfer Pricing Forum (EU JTPF) in the same year. The profit split method is considered the most appropriate method when both parties to a transaction make unique and valuable contributions, jointly bear the significant risks and the business activities are so closely related that the contributions of each transaction partner cannot be reliably assessed separately.
In December 2020, the Ministry of Finance published an initial consultation draft updating the Austrian TPG. Although the statements on year-end adjustments in the updated TPG continue to be less restrictive as compared to the draft, very high standards on the legitimacy of such adjustments are still required compared to international tax standards. A year-end adjustment will be deemed to be on arm’s length terms only if the following requirements are cumulatively met:
- Price-determining factors are agreed in advance;
- Ex-ante pricing is subject to significant uncertainties; and
- The taxpayer made reasonable efforts during the year to achieve an arm's length transfer price (intra-year monitoring).
Further, an adjustment must lead to a result within an arm’s length range.
The cumulative requirements often create uncertainties and problems in practice and in situations that involve customs duties. Taxpayers should carefully consider how these items are stated in intercompany agreements.
Low value-adding intragroup services
The Austrian TPG 2021 adjusts the application of profit mark-ups for routine services from 5%-15% to 3%-10% (often 5%) in line with the EU JTPF report. From an Austrian tax perspective, the tax authorities are likely to scrutinize any mark-up exceeding 10% (especially in inbound cases). For outbound cases, 10% may be considered too low for higher value services, such as contract research and development (R&D), where applicability of the method sometimes could be borderline.
The low value-adding services concept in the 2017 version of the OECD transfer pricing guidelines was adopted to simplify the application of the arm’s length principle for charging for such services (i.e., simplified benefit test, profit mark-up of 5%). Taxpayers may thus opt into the low value-adding intragroup services scheme, which can be applied only to support services that are not part of the core business of a multinational group. According to the Austrian TPG 2021, the following services cannot be characterized as low value-adding intragroup services:
- R&D services;
- Manufacturing and production services, including related purchasing activities;
- Sales, marketing and distribution activities;
- Financial transactions, insurance and reinsurance;
- Extraction, exploration or processing of raw materials; and
- Management services of the executive board.
As a result, the application of the cited profit mark-ups could appear problematic, for example, for marketing support activities, so that database studies should generally be prepared for these activities to demonstrate the arm's length nature of the pricing. Potentially affected taxpayers may wish to consider reviewing bundles of services provided under management fee contracts as to their eligibility for the low value-adding intragroup services approach.
New Chapter X of the OECD TPG is incorporated into the Austrian TPG 2021. The Austrian TPG deals with the application of the arm's length principle in transactions, such as intercompany loans, cash pooling, guarantees, hedging transactions and captives.
In the case of intragroup loans, the Austrian TPG 2021 clarifies that article 9 of the OECD model tax treaty serves to distinguish between debt and equity and a further analysis must be carried out on a case-by-case basis to determine whether a loan constitutes a liability or equity for tax purposes. Examples of situations where payments on a “loan” may be nondeductible include where the agreement between the parties lacks a repayment clause, an interest due date or an available credit line.
In determining an arm's length interest rate, the comparable uncontrolled price method should be preferred over other methods if comparable arm's length transactions can be identified on the money or capital market. The interest rate for group loans can be determined based on internal comparative values or publicly available data for loans with comparable conditions from companies with comparable ratings. Other financing transactions with comparable economic characteristics (e.g., bonds, debt securities) may also be used as a comparable transaction in certain circumstances. For instance, a credit offer from a commercial bank that is based on a detailed credit assessment can now be used as an appropriate price comparison, but a standalone statement by a commercial bank regarding potential conditions for a loan is not sufficient.
The Austrian TPG 2021 adopts the OECD principles on intangible assets and, in particular, the DEMPE concept (Development, Enhancement, Maintenance, Protection and Exploitation), the concept used for the allocation of income from the transfer or use of intangible assets. If a group company outsources all DEMPE functions and does not exercise any control over those functions, it is not entitled to remuneration from the exploitation of the intangible assets, but rather only routine remuneration for any services rendered. If all DEMPE functions are exercised and controlled by a company other than the legal owner of an intangible asset, the company will need to be regarded as the beneficial owner under domestic tax law.
The statements on the determination of arm's length royalties, as well as the requirements for the offsetting of trademark licences to distribution companies, are revised and described in the updated TPG.
The revised Austrian TPG also follows the hard-to-value intangibles approach as recommended by the OECD. Thus, where intangible assets are difficult to value, the tax authorities can use ex-post results to determine the appropriateness of the pricing if there is a substantial deviation between ex-post and ex-ante results (20%), provided no adequate price adjustment clause has been agreed.
Permanent establishments (PEs)
The Austrian TPG 2021 follows the international trend to lower the requirements to create a PE. For example, the physical presence of consultants in a country may lead to a PE for a nonresident company even in the absence of a specific “service PE” provision in a relevant tax treaty. The revised TPG also includes explanations on the creation of a PE where an employee works from a home office. If an employee carries out his/her work activities from a home office on more than an occasional basis and this work represents part of the core business activity of the employer, the employer may be deemed to have a PE in Austria. Unfortunately, uncertainty remains as to whether a home office PE can be avoided in situations where the employee initiates working from home. (Please note that this general rule may not be applicable during the COVID-19 pandemic and working from home will not create a PE.)
With regard to the allocation of the profits of a PE, the Austrian TPG introduced the term "AOA light." The "Authorised OECD Approach" (AOA) must be observed in the allocation of profits between a parent company and a PE(s) to the extent they are covered by the wording of the OECD model treaty, as amended before 2010. Thus, arm's length interest and royalty settlements between the parent company and the PE are not admissible, but adequate cost allocations must take place. For services that are not part of the core business, only costs may be allocated.
Since the AOA has been implemented differently by other countries, it is possible that a tax treaty partner may interpret the determination of PE profits differently than Austria. In this case, the Austrian TPG refers to the possibility of resolving the conflict within the framework of a mutual agreement procedure.
Although the amended Austrian TPG 2021 predominantly corresponds with the 2017 OECD transfer pricing guidelines, some new policies have been introduced. Taxpayers in Austria should become familiar with the revised TPG and consider reviewing their existing transfer pricing policies and transactions in light of the revised rules.