Author(s) Maria João da Cruz Maurício
Advisor(s) João Sérgio Ribeiro
Synopsis At the present moment, the majority of cross border transactions take place between related enterprises. Transfer pricing has grown and constitutes one of the core issues on the tax agenda of multinational enterprises. Under this framework, the so-called arm´s length principle is the universal method used for tax purposes in order to allocate profits between related enterprises operating in different countries. This standard has become accepted both internationally and within the EU. In the EU, the legal challenge against the transfer pricing rules is found in the Treaty provisions which refer to the fundamental freedoms laid down in the Treaty on the Functioning of the European Union. Although, this principle has been targeted by many critics. It has been argued that it does not take into consideration the interrelation and integration existent between related parties and is of difficult administrative application. Notwithstanding these shortcomings, the fact is that this principle is rather flexible and effective in the majority of the cases. Several US federal states apply formulary apportionment instead of separate accounting as in the arm´s length principle. In fact, this formulary apportionment method does not share the same flexibility of the arm´s length principle, however its main advantage lies on the consideration that related business groups are integrated and interdependent. The question that remains is whether formulary apportionment can be the solution for the problems posed by transfer pricing. Thus, since the interaction of national tax systems often leads to over-taxation and double taxation, with heavy administrative burdens and high tax compliance costs for businesses, the idea of adopting common corporate tax rules emerged in the European arena. Therefore, the Commission published a proposal directive to implement a Common Consolidated Corporate Tax Base. This paper focuses on this new EU transfer pricing framework. This Project comes across as a highly sensitive issue that generated heated debate in the academic, political and business arena since it represents a radical departure from traditional taxing principles and could fundamentally change the way multinational groups are structured throughout Europe.
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