EU AND TRANSFER PRICING. TOWARD PETRIFICATION OR REVOLUTION?

Abstract

Two EU documents important for transfer pricing were announced in 2021 and 2023. The first one is a framework of the EU’s tax strategy disclosed in a document called “Communication on Business Taxation for the 21st century” published in 2021. The next one is Transfer Pricing Directive (TPD) proposal published in 2023. TPD proposes cementing current TP rules proposed by OECD decades ago. The first document contains some very significant proposals, one of which calls for the introduction of a new taxation mechanism imposed on “groups of companies “as the term is used in the document. This new tax would be based on the Formulary Apportionment Mechanism (FA) of income allocation. The article puts forward the thesis that the choice between the directive and the strategy addressed in “Communication on Business Taxation for the 21st century” will have a significant impact on the global development of TP standards and the entire global tax order. The article is to analyse the possible impact of the EU’s adoption of FA approach and not petrification of ALP standard through TPD on evolving global taxation principles (which are currently based on the Arm’s Length Principle - ALP). We will go on to analyze the impact of its adoption on further development with respect to ALP, potential transformation of the transfer pricing to-date model and e-commerce taxation, and, finally, the emergence of a new global system of taxation.