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Review and adjustments
Review and audit
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
The tax authorities review the compliance of a company with transfer pricing rules during ordinary tax audits. Broadly speaking, the Tax Office has an obligation to investigate the facts, while the taxpayer has an obligation to cooperate and to disclose truthfully any information requested. With regards to the burden of proof, the taxpayer must provide evidence of the advantages that it requests (eg, the applicability of a double taxation convention (DTC)), whereas the Tax Office has the obligation to investigate ex officio, unless this is impossible. An increased burden of proof for the taxpayer exists in relation to cross-border transactions, as it is normally the taxpayer who is able to clarify the cross-border situation more easily than the Tax Office.
When requesting information from the taxpayer, the Tax Office must consider the principle of proportionality – that is, where the Tax Office can obtain information itself more easily that by requesting the taxpayer to submit it, it would be questionable to request such information from the taxpayer.
In the ordinary tax procedure, the Tax Office can assume the existence of facts if their existence is predominantly likely. If the taxpayer violates its obligation to cooperate reasonably (eg, no or insufficient documentation on transfer pricing is available), the Tax Office has the possibility to estimate the tax base on a reasonable basis. In the criminal tax procedure, however, no doubts must remain with regard to the facts in order to reach a conviction of the taxpayer for criminal tax evasion.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
The general principles of investigation and cooperation by the taxpayers apply in transfer pricing audits as well. The taxpayer has a right to be heard and must be informed about new findings or assumptions of the tax authority at every stage of the audit. Before the end of the tax audit, a meeting takes place between the tax authority and the representatives of the taxpayer, in which the final results are discussed before the report is written.
Where criminal tax evasion is at stake, the taxpayer has a last opportunity to submit a voluntary self-accusation at the beginning of the tax audit, relieving the taxpayer from punishment upon payment of an additional 35% of the evaded taxes.
Where a primary adjustment takes place and is not appealed against, a corresponding adjustment should be made in the other contracting state.
What penalties may be imposed for non-compliance with transfer pricing rules?
In general, if transfer pricing corrections lead to the assessment of additional amounts of tax, interest for late payment is assessed for arrears of corporate income tax. In addition, late payment penalties of 2% + 1%+ 1% can be assessed in that context for arrears of value added tax or withholding tax for hidden profit distributions.
Prosecution under criminal law can arise in case of deliberate tax evasion due to non-compliance with the taxpayer's obligation of truthful disclosure of facts and circumstances in connection with transfer pricing rules.
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
Transfer pricing adjustments can be made only where the transfer price under examination is outside the arm's-length range (Article 3(55) of the Transfer Pricing Guidelines of the Organisation for Economic Cooperation and Development (OECD)). If the relevant condition of the controlled transaction (eg, price or margin) is within the range, no adjustment is made (Article 3(60) of the OECD Transfer Pricing Guidelines), even if the taxpayer has deliberately selected the lowest point in the range.
Upward transfer pricing adjustments are made in case of profit shifting from an Austrian company to another associated enterprise (eg, by underpricing services rendered or goods delivered, or by overpricing services acquired or goods received). The primary adjustment consists in an increase of the profit by the Austrian tax audit to the amount that deviated from the fair market level. Additionally, secondary adjustments take place that vary depending on certain underlying circumstances, as outlined below.
Firstly, in case of upstream or sidestream shifting of profits to a parent company or sister company, a ‘secondary adjustment’ generally consists of the assessment of a hidden profit distribution; however, the profit adjustment may also result in a transfer pricing receivable as a ‘secondary adjustment’:
- The assumption of a hidden profit distribution to the direct parent company triggers withholding tax of 25% (33.33%% if the withholding tax is borne by the company and not charged to the shareholder). The withholding tax can be refunded fully or partly according to the benefits available under the applicable DTC with the residence state of the parent company or the parent-subsidiary directive.
- As an alternative, the Austrian Ministry of Finance accepts that the profit shift is effectively neutralised by a transfer pricing receivable to be booked on the balance sheet of the Austrian company against the foreign affiliated company or foreign shareholder to which the benefit has been granted by the Austrian company. This option, however, requires a corresponding treatment on the part of the debtor company; for fiscal purposes, the amount receivable must be booked as an amount payable by the debtor company.
Secondly, in case of downstream profit shifts from an Austrian company to the direct or indirect subsidiary, the ‘secondary adjustment’ is either the assumption of a hidden contribution to the subsidiary leading to an increase of the acquisition costs of the participation at the level of the Austrian parent company (for tax purposes) or the booking of a transfer pricing receivable against the foreign company that has received the benefit to be neutralised.
Lastly, in case of primary adjustments in another contracting state the Austrian tax authority in charge can re-open the relevant tax assessment of the Austrian taxpayer and make a matching adjustment (upon request of the taxpayer), if the taxpayer can demonstrate and document the correctness of the transfer pricing adjustment made in the other contracting state. There are no automatic matching adjustments of transfer prices by the Austrian tax authorities.
How can parties challenge adjustment decisions by the tax authorities?
An appeal can be lodged against the taxes assessed in the tax audit. The appeal is directed to the Tax Court of First Instance. The appeal must be filed within one month of the issue and delivery of the assessment decree resulting from the tax audit, whereby the time period can be extended. Before the Tax Court becomes competent for the appeal, the Tax Office may correct its decision by issuing a pre-decision on the appeal, against which the taxpayer can lodge an appeal to the Tax Court within a month of receipt of the pre-decision.
Together with the appeal, the taxpayer can request a suspension of the enforcement of the tax claims. Such suspensions are often granted, unless the taxpayer jeopardises the enforceability of the assessed tax claims or the appeal’s likeliness of success is too low. Against the decision of the Tax Court, an appeal to the Supreme Administrative Court or, in extraordinary circumstances, a complaint to the High Constitutional Court is possible.
During the tax audit, the taxpayer may file a request with the competent tax authority for the initiation of a mutual agreement procedure with the tax authorities of the other contracting state (see next point) in case of non-consistency of the findings or expected findings of the tax audit with an applicable DTC. If an appeal is already pending, the appeal procedure is normally suspended while the mutual agreement procedure is carried out.
Mutual agreement procedures
What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
Most of the DTCs signed by Austria provide for the possibility of a mutual agreement procedure between the competent tax authorities of the contracting states, along the lines of Article 25 of the OECD Model Tax Convention (MTC) (although internationally, few DTCs include such a provision). A mutual agreement procedure with the tax authorities of the other contracting state can be initiated upon request at the Ministry of Finance if the taxpayer is a resident of Austria. However, according to Paragraph 352 of the Austrian Transfer Pricing Guidelines, in case of an audit of the Austrian branch (permanent establishment) of a non-resident taxpayer or of an Austrian subsidiary of a foreign parent company, the request must be filed with the foreign residence state (of the parent company).
The EU Arbitration Convention provides for an arbitration procedure between EU countries that must start with a mutual agreement procedure as well. If the request is based on the EU Arbitration Convention, the request for the mutual agreement procedure can always be filed with the Austrian Ministry of Finance according to Article 6(1) of the convention (ie, also in case of an Austrian permanent establishment of a non-resident or in case of an Austrian subsidiary of the foreign parent company, see Paragraph 367 of the Austrian Transfer Pricing Guidelines).
For tax conventions that have already implemented Article 25(5) of the OECD MTC (2008 or later version), as is in place for instance between Austria and Switzerland, the parties can invoke an arbitration procedure before an arbitration board if the mutual agreement procedure is not successful within three years. A special arbitration clause is contained in the Austro-German Tax Treaty as that treaty provides that the arbitration procedure is conducted by the European Court of Justice.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument, or MLI for short) signed on June 7 2017 provides for a similar arbitration procedure with regard to bilateral tax treaties of the signatory states that have been nominated as being covered by the MLI and where both treaty partners of such covered treaties have made use of the ‘opting in’ clause under the MLI. According to the Austrian explanatory notes to the MLI, it is expected that besides the EU countries that have already accepted arbitration, this will extend the arbitration possibility for Austria in relation to Canada and Singapore. The arbitration decision will be binding on both contracting states except in three situations:
- if a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision;
- if the arbitration decision is held to be invalid by a final decision of the courts of one of the contracting states; and
- if a person directly affected by the case pursues litigation in any court or administrative tribunal on the issues which were resolved in the mutual agreement implementing the arbitration decision.
The term ‘final decision of the courts’ describes a decision that is not merely an interim order or decision (Article 19 of the MLI).
A constantly updated list of the signatory states is available at www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf. The text of the MLI is accessible at www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf.
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