In January 2014, the EU Joint Transfer Pricing Forum (‘JTPF’) finalised its Report on Compensating Adjustments (‘the Report’). The document offers practical solutions to both EU tax administrations and taxpayers on how to deal with the issue of compensating adjustments.
1. Background
The Report is the response of the JTPF on the level of available guidance on compensating adjustments, which was perceived to be limited. Compensating adjustments particularly arise in intra-group transactions where one of the entities involved has a limited functional and risk profile and where, from a transfer pricing perspective, it is considered appropriate to e.g. apply a target net margin for this entity. Such adjustments are usually performed at year-end.
2. Practical solutions to dealing with compensating adjustments in the EU
The Report outlines a number of issues that may typically arise when dealing with compensating adjustments. This outline is also based on Member States’ responses to a questionnaire of the JTPF on the topic in 2011. To address these problems, Member States have now agreed a list of criteria under which compensating adjustments that have been initiated by the taxpayer should be generally accepted by EU tax authorities. These criteria and proposed guidance apply for compensating adjustments which are made in the accounts and explained in the taxpayer’s transfer pricing documentation.
3. Observations
The Report will likely help to avoid or even resolve conflicts related to the acceptance of both upward and downward adjustments and as such, helps to reduce uncertainty on this matter for taxpayers. Companies applying compensating adjustments should consider whether the conditions included in the Report are fulfilled or assess the opportunity of complying with these conditions in order to benefit from the more aligned approach to compensating adjustments within the EU.
