Transfer Pricing, the Arm’s Length Standard and European Union Law

Abstract

The European Court of Justice has confirmed the compatibility of transfer pricing adjustments under the arm’s length standard in its “SGI” judgment. In this decision, the ECJ has stated that transfer pricing control is justified as a means to fight “artificial arrangements” while commercially valid transactions have to be accepted by the tax authorities. This article shows that the economics of integrated business and the commercial purpose of transfer pricing (setting the right incentives for intra-firm services and supplies) justifies non-arm’s length transfer pricing in many situations. Against this background, the article proposes a new approach to international allocation of taxing rights: Any “rents” derived by a group company from transactions with other group companies shall be taxable in the latter’s country of residence by an extension of limited tax liability for foreign group companies.

Keywords: Transfer Pricing, Freedom of Establishment, International Taxation, Related-Party Transactions, Corporate Groups, International Tax Allocation