Austrian Transfer Pricing Guidlines
Published on January 14, 2021
In connection with transfer pricing many companies have difficulties to specify a price for a transaction between members of a MNE. The arm’s length principle is dominating when determining the transfer price.
The Austrian transfer pricing guidelines serve as an interpretation and are in line with Article 9 of the OECD-MC. They have been adapted in 2020 and were published in a draft version. The assessment period ended on 10 January 2021 and it is expected that they will be officially announced within the next weeks.
The focus is now more on economic substance and on determining the true economic content. Only if a company has on the basis of a functional analysis a significant risk or exercises an economic function within a value chain, then profit shall be attributed to such a company. Also, the risk analysis is becoming increasingly more important. That means a larger profit is very likely to be attributed to a company exercising a control and risk reduction right, or that is affected by positive and negative consequences of risk development or that has financial capacity for the risk bearing.
In connection with R&D services, cost plus shall according to the transfer pricing guidelines only be accepted by the Austrian tax authority if the relevant processes are properly documented and complied with.
In order to figure if chargeable intra-group services are given, each entity has to go through a benefit test (analysis of advantages/benefits). Benefits from merely belonging to the group (synergy effects, better credit rating) do not count as an intercompany service.
As for the correct application of methods, it has been clarified in the amendments of the Austrian guidelines that the cost-based TNMM method shall be applied based on the costs that are in connection with a concrete business case. As a rule, only operating expenses are to be considered, whereas taxes, interest and extraordinary expenses are not. Furthermore, it has been clarified, that transitory items do not require a mark-up, if this would be calculated the same between independent parties.
A regulation regarding “year-end-adjustments” has been adopted as well to the guidelines. Based on this, it should now be possible to adjust transfer prices at the year-end if the ex-ante determination of a price is subject to uncertainties, if the price-determining factors are agreed on beforehand, and if the adjustment lead to price within the arm’s length range.
In general, it is to be assumed that the arm's length principle requires the recognition of a profit mark-up. The amount of the appropriate mark-up cannot be determined in general, but must be decided case-by-case. As a guideline, the mark-up published by the EU-JTPF can be used for services of a routine nature (range between 3% and 10%). If services of a higher value are rendered, it must always be examined whether one can still speak of a "routine function" and in this respect whether it is more appropriate to apply the transaction-based profit allocation method. As regards “low-value-adding intra-group services” the regulations from the OECD have been taken over.
As far as the attribution to a permanent establishment is concerned, Austria applies the Authorized OECD Approach only to a limited extent. The business relations carried out between the parent company and the permanent establishment, which are not part of the core business, are not to be valued according to the arm's length principle. Instead, an allocation on the basis of expenses is made.
Finance transactions were adjusted as well. From now on, more stringent requirements will be applied when proving an arm’s length price in connection with finance transactions. The adopted regulations correspond more or less to the chapter X of the OECD-Guidelines and are applicable in particular to intercompany loans, cash pooling, guarantees, hedging transactions or captives.
Also, in connection with cost allocation or pool allocation contracts amendments through the changes in OECD-TP-Guidelines were necessary. Based on these changes participants of such contracts can only be companies that can expect an advantage from such cost allocations activities. The value of contributions must be an amount which an independent party would have been willing to contribute. A company can only participate when they have control over risk and the financial capacity to bear the risk.
For taxpayers who have to provide documentation in accordance with the Transfer Pricing Documentation Act (VPDG) (=turnover of more than EUR 50 Mio. in the two previous years) the Austrian transfer pricing guidlines 2020 essentially adopt the information of the Ministry of Finance already issued in this regard. This means that essential information on the master file, local file and country-by-country reporting can now be found directly in the Austrian guidlines. In addition, the Austrian TP guidlines also specify for the first time how taxpayers not covered by the VPDG have to document their transfer prices. In the latter case, the ministry surprises with an unexpectedly high level of requirements. On the one hand, the minimum content required for general transfer pricing documentation (according to the Austrian guidlines) largely corresponds to the VPDG-specific local file. On the other hand, it is stated that the (general) documentation must in principle already be prepared at the time of the business transaction. In this respect, the requirements under the general documentation regulations even go beyond what the VPDG provides for larger companies.
Interest limitation rule
In line with the Covid-19 Tax Measures Act it is intended to implement the interest limitation rule in Austria and make it applicable for financial years beginning after December 31, 2020. With the implementation of this Act, Article 4 of the Anti-BEPS Directive will be incorporated into the Austrian Corporate Income Tax Act. The aim is to reduce tax advantages resulting from disproportionate debt financing of individual group companies (interest deduction in high-tax countries, taxation of interest in low-tax countries). The implementation is carried out in such a way that the potential of the tax interest deduction is to depend on the amount of value created (30% from EBITDA). An excess of deductible interest expenses over taxable interest income shall only be deductible at 30% of the taxable EBITDA (irrelevant whether from intra-group or external financing). As companies in Austria have very high debt ratios, and a large part of the interest would therefore be lost, the Austrian legislator decided to make use of the exception scope provided by the anti-BEPS directive:
• Interest overhang of 3 million is deductible in any case
• Exception for companies that are not included in consolidated financial statements and do not have an affiliated company (25% shareholding) and do not maintain a foreign permanent establishment.
• Possibility to carry forward non-deductible interest (by reason of reaching the interest cap)
• Interest deduction is possible if the equity ratio of the corporation is higher than that of the group to which the company belongs.
• Exception for old contracts (concluded before 17.6.2016) up to the assessment year 2025.
In the case of corporate groups, overhanging interest and the tax EBITDA of the individual members of the corporate group must be recorded by the group parent.
The interest limitation rule shall in principle be applicable to all legal entities under private law with unlimited tax liability and to foreign corporations with limited tax liability that maintain a permanent establishment in Austria. The option granted by the Anti-BEPS Directive to exclude financial companies from the scope of application of the interest limitation rule is not used. The exemption allowed by the Anti-BEPS Directive for loans to finance long-term public infrastructure projects is also not implemented.
To sum up, the transfer pricing guidelines have significantly increased higher requirements due to the integration of the changes in the OECD-Guidelines. From this background clients are highly recommended to make sure that transfer prices are in line with the new regulations. Potential for changes could be in the field of contract designing, documentation of services and the used mark-up.
The way the interest limitation in Austria is implemented in Austria is to be welcomed. Small and medium-sized companies with typically lower interest expenses and lower “BEPS”-risk are excluded from the scope of application. Many companies in Austria will therefore not have to deal with this rule in detail.
If one of your clients intends to take up a business in Austria during the next years, they will be pleased to hear that the Austrian government plans to reduce the income tax rates (started already in 2020 with the low income tax rate from 25% to 20%) as well as the flat tax rate for corporate income tax by 2023 at the latest (from 25% --> 21%).