By Iris Burgstaller, Transfer Pricing Partner TPA Austria, Transfer Pricing Leader Baker Tilly, Vienna
On 7 October, the Austrian Ministry of Finance published the final version of the revised Austrian transfer pricing guidelines. The 2021 guidelines replace the 2010 Austrian transfer pricing guidelines, which were in place for more than 10 years. An update was necessary to incorporate OECD developments, particularly the OECD/G20 work in the context of the base erosion and profit shifting (BEPS) project.
Content and structure of the Austrian 2021 guidelines
The structure of the Austrian guidelines was maintained. The main chapters – as in the 2010 version – are: multinational group structures, multinational permanent establishment structures, documentation and reporting requirements, transfer pricing audits, and an appendix with reference documents (OECD and EU).
Relevance of the OECD transfer pricing guidelines 2017 and EU Joint Transfer Pricing Forum
The Austrian 2021 guidelines are meant to constitute an interpretative aid to the arm’s length principle and are intended to ensure its uniform application. In this context, it is clarified that the 2021 guidelines are to be used for the interpretation of the respective applicable double tax treaty provisions – in the sense of a dynamic interpretation – in their latest valid version.
Only if a more recent version of the OECD transfer pricing guidelines contains an explicit departure from statements made in earlier OECD guidelines, and not merely clarifying or supplementary statements, should the respective transaction be based on the version of the OECD transfer pricing guidelines in force at that time.
The 2021 guidelines also state that the OECD transfer pricing guidelines and tax recommendations are legally relevant at the level of local law, namely to the extent that they fill gaps in interpretation.
The reports of the EU Joint Tax Policy Forum can be used as an interpretative aid for the arm’s length principle, but they are not legally binding.
More focus on economic substance and written contracts
In line with the OECD, the Austrian 2021 guidelines place significantly more focus on the actual (economic) circumstances as well as the economic substance. In a first step, the actual economic substance of a transaction must be delineated, taking into account an economic approach (based on Section 21 Austrian Federal Tax Act) as well as general principles of income allocation. A profit can only be attributed to an (intermediary) company if the company bears economically significant risks or performs an economic function along the value chain. If this is not the case, transactions may be reclassified or not recognised if they lack economic rationality.
In addition, the Austrian 2021 guidelines stress the legal concept of a prudent and conscientious business manager which is to be applied to check the adequacy of the related party transaction. The respective case law of the Austrian Supreme Administrative Court on transactions between related parties must be considered. This case law mainly focuses on the existence of written contracts for a transaction to be accepted for tax purposes. Such contracts should be in writing and have unambiguous and clear content that excludes any doubt and are concluded between third parties under the same conditions.
Application of transfer pricing methods
Generally, Austria refers to all the OECD transfer pricing methods. In individual cases, other methods may also be used, provided they satisfy the arm’s length principle and prove to be more suitable than the methods recognised by the OECD.
The 2021 update envisages some fine-tuning regarding the application of the transaction net margin method. The 2021 guidelines state that when determining transfer prices on the basis of a cost-oriented net margin, only operating expenses are generally to be taken into account, while taxes, interest expenses, and extraordinary expenses are to be excluded from the cost basis. Furthermore, they clarify that no profit mark-up should be applied on so-called “transitory items” if third parties would calculate in the same way in comparable situations. Since this information is hardly available, this clarification is highly critical for the practical application of the transactional net margin method.
The application of the profit split method is now regulated in more detail in the guidelines based on the OECD revised guidance on the application of the transactional profit split method.
Correction in case of interquartile ranges
An improvement in the Austrian 2021 guidelines is that the correction to the median – which was heavily criticised already in the previous version of 2010 – is now changed. If the taxpayer reports a margin outside the interquartile range, the tax auditor may still correct to the median value. However, if the taxpayer proves that another value within the interquartile range is more reliable, this other value shall be applied.
Price adjustments are only possible under specific conditions
A year-end adjustment is only considered to be at arm’s length if the price-determining factors are agreed in advance, the ex-ante pricing is subject to significant uncertainties (e.g., with regard to sales figures and operating expenses or in the case of fluctuations in capacity in production) and reasonable efforts have been made by the taxpayer during the year to achieve an arm’s length transfer price (intra-year monitoring).
Service transactions
For routine services, mark-ups based on the report of the EU Joint Transfer Pricing Forum between 3% and 10% (often 5%) may be applied.
The previously mentioned range of profit mark-ups between 5% and 15% may only be referred to for business years before 1 January 2021.
The OECD simplification regarding low value-adding intra-group services is now also adopted. Austria follows this concept recommended by the OECD for services provided. The simplification means that it is not necessary to prove for each individual service provision that the recipient obtains a benefit, but rather an abstract benefit test is sufficient. The mark-up on direct and indirect costs is fixed at 5% for services being charged under the concept.
Financing transactions
The previous chapter on financing was completely updated and incorporates the main statements in chapter X of the OECD transfer pricing guidelines.
Regarding loan transactions, the Austrian 2021 guidelines state that the arm´s length test for loan transactions also includes the debt-equity ratio. For the analysis, typically ratings are necessary. Standalone ratings may need to be corrected to reflect the implicit group support. The group rating may only be used as a rating for the individual company if it proves to be the most reliable indicator. The analysis of a loan transaction must be two-sided and refer both to the lender and borrower perspective. Typically, the applied methods are the comparable uncontrolled price method or the cost of funds approach in limited cases (e.g., in the case of passed-through group loans).
Cash pooling, guarantees, and hedging transactions are also updated in line with the OECD.
Intangible assets
The chapter in the Austrian guidelines regarding intangible assets is completely revised in accordance with the amendments to chapter VI of the OECD transfer pricing guidelines. Accordingly, the Austrian 2021 guidelines now also include explanations of the concept of DEMPE (development, enhancement, maintenance, protection, and exploitation), which is decisive for the allocation of income from the transfer or use of intangible assets.
If a group company outsources all DEMPE functions and does not exercise any control over the outsourced functions, it shall not be entitled to any remuneration from the exploitation of the outsourced functions but only a routine remuneration for any services rendered. If in such a case all DEMPE functions are carried out by a company other than the legal owner, this other company must also be regarded as the beneficial owner within the meaning of the Austrian Federal Tax Act.
Regarding the trademark and its secondary meaning, it is often discussed if a local marketing or distribution company contributes to the commercial value of the trademark and is, therefore, entitled to additional compensation for the further development of the brand or trademark. The 2021 guidelines stress that such an additional compensation to a local marketing or distribution company is only acceptable if there is proof that the company actually increased the value of the trademark or the other intangible marketing assets as a result of its activities and does not only perform routine services.
The Austrian 2021 guidelines also state that, in general, a distribution company acting as a reseller of branded products will not additionally pay royalties for the usage of the brand. This is because the reseller regularly does not obtain the right to use the trademark, but the right of ownership to the goods supplied.
Also, the mere use of a group name is not in itself eligible for remuneration. The distribution company may, however, pay additional royalties if the brand or trademark is not included in the purchase price for the goods or if the company itself manufactures the goods using a brand name owned by another group company.
Hard-to-value intangibles
Austria follows the hard-to-value intangibles approach recommended by the OECD. Accordingly, in the case of intangible assets that are difficult to value, the tax authorities may also use ex-post results to assess the appropriateness of the pricing. However, transfer price adjustments are only possible in accordance with national procedural rules.
Location savings and group synergies
The OECD statements on locational advantages and group synergies were also incorporated into the Austrian guidelines. Accordingly, location savings are to be allocated between the participating companies in accordance with the principles of chapter I of the OECD transfer pricing guidelines.
For Austria, it is stressed that the Austrian research and development premium (a 14% premium on local qualified research and development costs) may be considered such a location saving. The premium may only reduce the transfer price to a foreign group company if there is evidence that also third parties pass the premium on to their principals.
Group synergies are generally to be shared between the companies contributing to the creation of the advantage; however, incidental advantages would generally not be compensated.
Business restructuring
The Austrian 2021 guidelines now include the main topics arising from different types of business restructuring measures in line with chapter IX of the OECD transfer pricing guidelines. The revisions generally are only of a clarifying nature and are meant to provide more guidance on specific topics.
Documentation and reporting
The Austrian 2021 guidelines also include the previous separate guideline on transfer pricing documentation. This guideline provided guidance for those companies which fall under the legal obligation to prepare transfer pricing documentation in Austria. This is mainly the case if the local entity realises a turnover of more than EUR 50 million in two consecutive years.
Additionally, the Austrian 2021 guidelines now also clarify the documentation requirements for all those companies which do not fall under the legal obligation.
The reporting obligation under DAC6 regarding the transfer pricing hallmarks is also briefly referred to in the guidelines.
Wrap-up
The changes in the Austrian 2021 guidelines mainly refer to OECD updates that already were published a couple of years ago. In this regard, the Austrian 2021 guidelines certainly are no revolution for taxpayers with business in Austria. Some of the clarifications, however, may trigger additional and more intense discussions in tax audits and should therefore be considered in the transfer pricing setup and planning.
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