Presentation - BKD

Austria Transfer Pricing Overview Presented by Clemens Nowotny (LeitnerLeitner)

Agenda  Austrian Transfer Pricing Rules

 Selected Highlights from Austrian TPG 2010  Documentation Requirements  Compliance and Transfer Pricing Audits

 Advance Pricing Agreement

Austrian Transfer Pricing Rules I  Law  Sec 6 (6) Income Tax Act (ITA) 

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Sec 8 (2) Corporate Income Tax Act (CITA) 

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Hidden profit distribution (“verdeckte Gewinnausschüttung”)

Sec 8 (1) CITA and Sec 6 (14) (b) ITA 

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Transfer of assets to foreign group companies and permanent establishments (PEs)

Hidden capital contribution (“verdeckte Einlage”)

Valuation: arm„s length price 

Interpretation corresponding to Art 7 and 9 OECD-MC

Austrian Transfer Pricing Rules II  Ministerial Decrees (“Erlass”)  No binding effect as a law 

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Not binding upon taxpayers and courts but solely on Austrian tax authorities

Translation of OECD-TPG 1995 Austrian Transfer Pricing Guidelines 2010 (TPG 2010)  

No change of administrative practice Not intended to provide comprehensive guidance on determination of arm‟s length price  Merely systematic summary of selected TP issues

Austrian Transfer Pricing Rules III  Austrian TPG 2010 (cont)  Comprise 

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Earlier published opinions of Austrian Ministry of Finance (esp. public letter rulings – “EAS”) Decisions of Austrian Supreme Administrative Court (VwGH), Independent Tax Chamber (UFS) and German Federal Tax Court (BFH) German ministerial decrees

Based on OECD-TPG 2010 and aimed at facilitating their domestic implementation Congruence of domestic and international (OECD-TPG) arm„s length principle 

Later versions of OECD-TPG will prevail (dynamic interpretation)

Austrian Transfer Pricing Rules IV  Austrian TPG 2010 (cont)  Primarily aimed at avoiding “unjustified” profit transfers to foreign jurisdictions (abuse of law) But: any statement referring to outbound transaction also to be applied to corresponding inbound transaction et vice versa 5 Chapters 

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Multinational group structures Multinational PE structures TP documentation requirements TP audits by tax authorities Tax planning via intermediate companies

Selected Highlights I  Austria follows OECD-TPG 2010 to large extent

 Selected controversial issues in Austrian TPG

2010 and administrative practice     

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Dynamic interpretation (slide 5) TP adjustment to median (slide 19) Use of databases and comparability Profit margin for routine services Intra-group financing services Shareholder costs Business Restructurings

Selected Highlights II  Use of databases  “Unrestricted“ comparability required (para 66 AT TPG 2010)  

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5 comparability factors according to OECD-TPG In case of limited comparability  Database search unusable  Relevance for “rough control calculation” only (para 65 AT TPG 2010) Excessive requirement  No need for database search in case of unrestricted comparability  In practice not available – implications for tax audits?

Multiple-year data accepted to enhance reliability Qualitative screening mandatory Use of interquartile range  

“Common international practice” (para 67 AT TPG 2010) Not to enhance comparability in case of limited comparability of data (German decree on documentation requirements, 2005)

Selected Highlights III  Profit margin for routine services  C+ appropriate except if direct comparables are available (CUP)  Cost base: direct and indirect cost  Markup for routine services between 5% and 15% (para 77 AT TPG 2010)    

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No safe harbour rule but approximate guidance Not every markup within range considered arm‟s length Markup to be determined on a case by case basis EU-JTPF: arm‟s length mark up between 3% and 10% (regularly around 5%)

In specific circumstances charging at cost acceptable 

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Services not part of core business of enterprise and mere ancillary service provision towards related party with continuing transactions (maintaining customer relationship) Agency costs

Selected Highlights IV  Intra-group financing services  CUP method preferred  

Capital and money market Regularly no direct comparability of intercompany financing and financing by commercial banks (para 88 AT TPG 2010)  Different business purposes of commercial banks (profit) and intercompany financing (optimum allocation of financial means amongst group members)

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Debit interest rate 

Of commercial banks  (Theoretical) upper limit of arm‟s length interest if identical terms  Consideration of all relevant facts (amount of credit, currency, duration, creditworthiness of borrower, currency risks, refinancing costs, financial covenants, etc)

Selected Highlights V  Intra-group financing services (cont)  Debit interest rate (cont) 

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Group parent‟s ability to influence capital structure / creditworthiness of group companies  Interest rate for secured loans to be considered as (theoretical) upper limit

Credit interest rate 

Of commercial banks as (theoretical) lower limit if lending company has sufficient liquidity (alternative: bank deposit) (para 90 AT TPG 2010)

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Example on inbound case in AT TPG 2010 => corresponding application to outbound cases (para 4 AT TPG 2010)

Selected Highlights VI  Intra-group financing services (cont) 

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Range of arm‟s length interest between (theoretical) limits of debit and credit interest rate  Comprehensive functional analysis required In case of doubt: difference between (theoretical) debit and credit interest rate of commercial banks equally divided between creditor and debtor

 Cash-pooling 

Cash-pool header provides only services 

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No attribution of residual profit (merely cost plus)

Exception: assumption of unavoidable risks within group to be compensated

Selected Highlights VII  Shareholder costs  Non-exhaustive list of non-chargeable shareholder activities including (para 85 AT TPG 2010) 

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Legal organization of the group (e.g. consolidation of group balance sheet) Statutory reporting obligations (e.g. US Sox-cost) Financial planning of group, group restructuring Cost “imposed on” subsidiary such as compulsory participation in new IT-system (SAP-project)

Deductibility to be examined on case by case basis (benefit test)

Selected Highlights VIII  Business Restructurings  AT TPG 2010 generally follow Chapter IX. OECD-TPG  Relocation of functions (“downsizing”): assumed transfer and taxation of business opportunity 

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Third party not willing to give up business opportunity without compensation (para 136 AT TPG 2010) Basis for compensation of unsubstantiated business opportunity (resp “profit potential”) in OECD-TPG 2010 and Austrian domestic tax law?

Conversion of AT sub from fully-fledged distributor into limited-risk distributor or commissionaire (para 176 AT TPG 2010) 

Austrian finance authorities: AT sub qualifies as dependent agent according to Art 5 (5) OECD-MC  Economic interpretation of “authority to conclude contracts” (para 175 AT TPG 2010)

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Application of “two-taxpayer-approach” (OECD-AOA)

TP Documentation Requirements I  No specific legislation on TP documentation requirements  Austrian TPG 2010  General provisions on bookkeeping and record keeping (Sec 124 and 131 Federal Fiscal Code [FFC]) and enhanced obligation to cooperate in cross-border transactions (Sec 138 FFC) 

supposed to serve as legal basis for obligatory TP-documentation (paras 302 et seq AT TPG 2010)

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Interpretation of FFC according to Chapter V. OECD-TPG?  Chapter V. OECD TPG 2010 itself does not provide sufficient guidance on form, content and structure of documentation

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Austrian Supreme Administrative Court confirms obligation to document transfer prices (VwGH 8.7.2009, 2007/15/0036)

EU-TPD according to EU-JTPF (master file + country-specific appendices) accepted

TP Documentation Requirements II  Content of documentation  Underlying facts (general company information, controlled transactions, analysis of functions and risks, etc)  Analysis of TP (selected method, arm's length analysis)  No statutory submission deadlines 

Public letter ruling No 3198 (24.1.2011) 

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Obligatory documentation to be prepared until filing of tax return (at the latest) Submission upon request of tax authorities (usually during tax audit) without delay

 No specific penalties if documentation missing or

inappropriate

Compliance and TP Audits I  Cooperation obligation of taxpayers relating to TP?  Tax authorities ex officio obliged to investigate factual and legal circumstances relevant for levying taxes (Sec 115 FFC)  However: in case of cross-border transactions enhanced obligation of taxpayer to cooperate 

Implications in case of non-cooperation:  Reduced standard of proof to be applied by tax authorities  Free appraisal of evidence: exceptional and ambiguous facts may not be accepted (taxation of false facts to detriment of taxpayer)

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Conclusion: the greater complexity and unusualness of the case, the more significance will attach to documentation (para 5.14 OECD-TPG)

Compliance and TP Audits II  Burden of proof that transfer price not arm‟s length  Lies with tax authorities  

Qualified counter-evidence required by finance authorities Mere reference to experience insufficient (VwGH 20.10.2009, 2006/13/0116)

 Formal deficiencies of intercompany agreements  Burden of proof de-facto transferred to taxpayer 

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Case law (VwGH) on contracts concluded between close relatives applicable on relationship shareholder - corporation Rebuttable presumption of hidden profit distribution / capital contribution  Even if TP at arm‟s length (!)

Compliance and TP Audits III  TP adjustment to median if taxpayer„s transfer

price not within arm„s length range (para 49 AT TPG 2010) 

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No legal basis for adjustment to median – adjustment to taxpayer‟s most preferential value within range (?) Not arm„s length: any point within the range acceptable Conclusion: tax authority‟s attempt to prevent taxpayer from favorable transfer pricing arrangements

Compliance and TP Audits IV  TP Adjustments  Corresponding adjustment   

Based on primary adjustment by other contracting state Obligatory according to Art 9 (2) OECD-MC (para 322 AT TPG 2010) Without mutual agreement procedure according to Art 25 (2) OECD-MC (“on short way”)  Only if finance authorities consider primary adjustment to be justified both in principle and as regards the amount  Not automatically: taxpayer must document accuracy of foreign primary adjustment  Procedural problems may occur (statute of limitation)

Compliance and TP Audits V  TP Adjustments (cont)  Secondary Adjustment 

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May be avoided by posting an account receivable or account payable (paras 326 et seq AT TPG 2010) Hidden profit distribution  If no corresponding account payable abroad accepted  25% withholding tax  No relief at source under EC Parent-Subsidiary-Directive in case of “obvious” hidden profit distributions (refund procedure)  Reduction of withholding tax rate according to DTT applicable (relief at source: certificate of residence and proof of substance of foreign company required)

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Hidden capital contribution  If transfer of profit not corrected abroad

Advance Pricing Agreement  Unilateral Advance Ruling (Sec 118 FFC)  Scope: Transfer pricing, reorganizations, group taxation  Written filing required (pre-filing recommended)  Binding effect if identity between alleged and actual facts 

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Expiration of ruling if underlying tax provisions amended

Fees: EUR 1,500 – 20,000 depending on revenue of applicant

 Bilateral APA  On basis of Art 25 OECD-MC (MAP)  Austria: first bilateral APA concluded at the end of 2011

Questions?

Contact Dr. Clemens Nowotny International Tax Partner T +43 732 70 93 - 359 E [email protected] LeitnerLeitner GmbH Wirtschaftsprüfer und Steuerberater Ottensheimer Straße 30 4040 Linz Austria www.leitnerleitner.com

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