The primary domestic legislative provision for the arm's-length principle regarding cross-border transactions is Section 6(6) of the Austrian Income Tax Act, which is interpreted by the Austrian Ministry of Finance along the lines of Article 9 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. As far as inter-company economic relationships within the European Union are concerned, it is Article 4(1) of the European Arbitration Convention that requires the application of the arm's-length principle. Accordingly, transfers of assets or services between related parties must be valued at a price that would also be realised if the asset or service was sold or rendered to unrelated parties (market value). The amount of a transfer price that exceeds this market value is not tax-deductible for the entity acquiring the asset or service, and amounts below the market value result in a profit markup for the entity transferring the asset or rendering the service.
As a general principle, Section 8(2) of the Austrian Corporate Income Tax Act (which is also applicable to typical domestic deals) provides that constructive dividends from a corporation to its shareholders do not reduce the taxable profit of the corporation. Correspondingly, Section 8(1) of the Austrian Corporate Income Tax Act provides that constructive dividends by a shareholder to its corporation do not increase the taxable income of the corporation (which is – together with the general rules for dividend withholding tax – the basis for secondary transfer pricing adjustments; see Section VIII).
Additionally, the Transfer Pricing Documentation Act2 and an implementing ordinance3 were enacted in 2016 on the basis of the OECD and G20's Base Erosion and Profit Shifting (BEPS) Project,4 which comprises special provisions on transfer pricing documentation for large multinational enterprises whose annual turnover exceeds certain thresholds (see Section II).
The Austrian Ministry of Finance follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations for the interpretation of the arm's-length principle. In general, for means of interpretation, the version of the OECD Transfer Pricing Guidelines that was applicable at the time of the transaction should be used. A more recent version may be used, however, at least to the extent that the more recent version does not deviate from the previous one, but clarifies and specifies it.5
Additionally, several decrees and the Austrian Transfer Pricing Guidelines 2010 have been issued by the Austrian Ministry of Finance, all of which are also based on a (dynamic) interpretation of the OECD Transfer Pricing Guidelines.6 The arm's-length principle interpreted along these lines is applicable for all economic transactions between related parties (i.e., regardless of the assets transferred or services rendered between related parties).
As stipulated in Section 6(6) lit a of the Austrian Income Tax Act, taxpayers holding over 25 per cent of the share capital in a foreign corporation or foreign taxpayers holding over 25 per cent of the share capital in an Austrian corporation, as well as taxpayers under the management, control or influence of a third-party taxpayer, are treated as related parties. Also, the owner is regarded as a related party to its enterprise, and the partners of a partnership are regarded as related parties to the partnership. Individuals and Austrian private foundations can be related parties as direct or indirect shareholders of corporations. The same is true for foreign estates or trusts if they are treated as legal entities for tax purposes (i.e., if they are comparable to an Austrian corporation on the basis of a comparability analysis).
ii FILING REQUIREMENTS
The Austrian tax authorities require the taxpayer to prepare transfer pricing documentation, based on the OECD Transfer Pricing Guidelines and in accordance with the Austrian Transfer Pricing Guidelines 2010 issued by the Austrian Ministry of Finance. The transfer pricing documentation must be maintained by any related party subject to tax in Austria (i.e., whether it is an Austrian corporation, shareholder or partner of a foreign related party, or an Austrian permanent establishment of a foreign corporation). The transfer pricing documentation should enable the Austrian tax authority to investigate in the case of a tax audit whether the transactions of the Austrian taxpayer with its related parties were carried out at arm's length.
The transfer pricing documentation should comprise a function and risk analysis regarding the transactions with related parties. The documentation should include the main assets concerned, the contractual conditions agreed upon, the taxpayer's business strategy, the conditions of the market (as far as they are relevant for the pricing), and a chart detailing the position of the taxpayer in the international group.7 The taxpayer is subject to an increased 'duty of cooperation' in international tax cases, which has been implemented in the national law,8 but was formerly based on standing case law of the High Administrative Court.9 On the basis of this increased duty of cooperation, transfer pricing documentation of foreign related parties can be requested by the Austrian tax authorities from an Austrian enterprise in an Austrian tax audit if it is relevant for the Austrian transfer pricing question.
Special rules are set out in the Transfer Pricing Documentation Act, as mentioned above. Austrian group companies are subject to the Transfer Pricing Documentation Act if they have an annual turnover of over €50 million over two consecutive years (or €5 million in commission fees from the principal). Such companies must prepare and maintain the master file or their local file and file it directly with the tax administration if so required by the competent tax authority. As far as the contents of the master file are concerned, an Austrian ordinance based on the Transfer Pricing Documentation Act follows the description in Annex I to Chapter V of the OECD Transfer Pricing Guidelines. Annex II to Chapter V of the OECD Transfer Pricing Guidelines describes which core information is expected to be found in the local file.
Large multinational enterprises with a consolidated group revenue of at least €750 million must take part in the country-by-country reporting for accounting periods beginning on or after 1 January 2016. Austrian enterprises that are required to submit a country-by-country report must do so electronically, using the standardised forms to the Austrian Tax Office of the Austrian company responsible for the report, within 12 months of the end of the accounting year (Section 8(1) of the Transfer Pricing Documentation Act). In general, the ultimate parent company of the multinational must annually file the standardised country-by-country report with its tax administration, which then distributes it to all participating jurisdictions where entities of the multinational have been set up. The Austrian Ministry of Finance must exchange the information included in the country-by-country reports 15 months after the final day of the relevant accounting year at the latest. The participating jurisdictions are listed on the OECD's website.10
If the ultimate parent company is not legally obliged to file a country-by-country report in its country of residence, the resident country is not a participating jurisdiction. If a 'systematic failure' in submitting country-by-country reports occurs, the Austrian tax administration may request, by formal decree, that an Austrian entity belonging to the multinational group take over the filing responsibility for the group, unless another entity of that multinational is prepared to replace the ultimate parent company with regard to the filing obligation.11
iii PRESENTING THE CASE
i Pricing methods
Pursuant to the Austrian Transfer Pricing Guidelines 2010, all methods as set out in the OECD Guidelines (traditional transaction-based methods, such as the comparable uncontrolled price, resale price, and cost-plus methods; and transactional profit methods such as profit split and transactional net margin methods) are recognised. Other methods are also allowed, but are not often used in practice.
With respect to the comparability analysis, Austria strictly follows the comparability analysis of the OECD Transfer Pricing Guidelines. The Austrian Transfer Pricing Guidelines describe the relevant comparability factors in Paragraph 50 as concerning the product and service,12 the functions performed,13 the contractual conditions agreed upon,14 the market conditions15 and the business strategy.16
In principle, if all methods are evaluated with more or less the same degree of appropriateness, the 'traditional methods' (comparable uncontrolled price method in the first place and then resale price method or cost-plus method based on gross margin comparisons) should be preferred compared to the 'profit methods'.17 If no reliable data can be identified with respect to the gross margin, the net margin methods should be used.18
The application of the comparable uncontrolled price method faces practical difficulties as it requires a high level of comparability. However, where it is possible to identify comparable uncontrolled transactions, especially if services similar to those rendered to associated enterprises are also rendered to independent parties, this method is considered very reliable and is used with respect to goods, intellectual property (IP) or financial services.
The cost-plus method is, in principle, applied with respect to goods and services, especially for the delivery of semi-finished products to related parties.19 The Austrian Transfer Pricing Guidelines stipulate a markup of 5 to 15 per cent with respect to routine services.20 A markup of more than 5 per cent is applied for high-quality services. Markups should always be determined case by case, taking into account the functions, risks borne and assets employed by the relevant tested related party. When using gross markups, comparable enterprises with the same cost base and functions must be given; for example, a routine distribution function cannot be compared with a distribution based on self-generated intangibles (e.g., owing to self-generated market access).21 In some cases, a cost allocation without a profit margin is admissible for ancillary services.22
Whenever a cost-plus method is applied, all costs that are economically related to the controlled transaction (e.g., services rendered or goods manufactured) have to be included in the markup. Hence, in the case of production costs, it is not only all direct costs, but also the indirect costs incurred over the course of the production (with the exception of general overheads such as advertising expenses) that have to be taken into account.23
As regards the sale of goods, a distinction must be made between toll manufacturers and distribution companies. Whereas the cost-plus method can be used for toll manufacturers,24 the resale-minus method or comparable uncontrolled price method should be used for distribution companies.25 Based on comparability factors, benchmark studies are also used to find the appropriate markup. Benchmark studies are, however, usually based on net margins (earnings before interest and taxes) instead of gross margins, and always require exact documentation of the comparability of the compared enterprises with special focus on functions, assets and risks.
ii Authority scrutiny and evidence gathering
The compliance of a company with transfer pricing rules is reviewed by the tax authorities during ordinary tax audits. The competent tax authorities have the obligation to investigate the tax positions ex officio. For the same period, only one tax audit is admissible. The taxpayer has an increased obligation to cooperate and to fully disclose any information requested by the tax authorities in cross-border matters.26 Therefore, sufficient and structured documentation on transfer pricing is mandatory to provide evidence of arm's-length pricing. Such evidence may, for example, also be obtained through expert opinions or transfer pricing studies in the case of extensive transactions. If the taxpayer violates its obligation to cooperate reasonably (e.g., no or insufficient documentation on transfer pricing is available), the tax authorities have the possibility to estimate the tax base on a reasonable basis.
iv INTANGIBLE ASSETS
There are no special transfer pricing rules as regards intangibles in Austrian transfer pricing legislation. Austria, however, follows the approach stipulated by the OECD Transfer Pricing Guidelines. In practice, for determining arm's-length pricing in relation to intangible property, the transactional profit split and comparable price methods are most suited, although the latter can only be used if comparable data on intangible assets exists, which is generally a difficulty (i.e., for valuable and unique intangibles). An accepted and widely used means of determining the transfer price for intangibles is the determination of the expected discounted cash flows from the use of the intangible.
As regards the identification of intangible assets (also defined in BEPS Actions 8–10) Austria fully follows the interpretation of the OECD, as it is also laid down in Chapter VI of the Transfer Pricing Guidelines 2017. In this context, in the case of the transfer of a business or parts of it between related parties, it is often disputed whether an appropriate remuneration was paid for the goodwill (including the profit potential) to the Austrian corporation that has transferred its (partial) business. However, profit potential also has to be remunerated in cases where no business was transferred (e.g., in the case of contractual positions).
Austrian tax authorities follow the principle that the economic owner of the IP is regarded as the person to which the income derived from the IP has to be allocated for tax purposes. By the same token, the principles regarding the development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE principles), as described in BEPS Action 8, are followed by the Austrian tax authorities (i.e., that the person or persons who control these aspects of the intangibles are relevant to the determination of the economic owner of the intangibles, and this should be documented appropriately).
In Austria, the following possibilities for transfer pricing settlement with the tax authorities are available: the taxpayer may obtain an informal tax ruling that provides protection on a good-faith basis if, inter alia, the tax ruling has been issued by the competent tax authority and the taxpayer has made exactly the dispositions or transactions described in the ruling request that he or she otherwise would or would not have made.
Since 2011, taxpayers have also been able to apply for a legally binding advance tax ruling to determine an appropriate set of criteria (e.g., transfer pricing methods and appropriate adjustments) with respect to transfer pricing matters. Such an application must comprise a comprehensive description of the envisaged transaction; an explanation of the applicant's special interest in the issuance of the requested ruling; a description of the legal issue; the concrete legal questions; a legal opinion; and information with respect to the administrative costs. Thus, rulings issued by the tax authorities are unilateral (i.e., with no involvement of the tax authorities of other treaty states) and based on the facts and circumstances presented by the taxpayer with respect to the envisaged transaction. Such rulings must be communicated in the frame of a mandatory automatic exchange-of-information system to all other Member States, as well as to the European Commission within the European Union. The fee depends on the size of the taxpayer's annual turnover (the basic amount of €1,500 is gradually increased up to a maximum of €20,000 for a turnover of €40 million). Advance tax rulings, as well as informal tax rulings, are not released publicly. Only advance tax ruling decrees can be appealed to the Austrian Federal Fiscal Court (first judicial instance in Austria's two judicial instance system for tax disputes). Any deviation of the implemented structure from the described facts will have adverse impacts on the binding effect of both the informal tax ruling and the advance tax ruling.
In addition, on the basis of double-tax treaties that include a provision that reflects Article 25(3) of the OECD Model Tax Convention, cross-border advance pricing arrangements can be negotiated by the Ministry of Finance on a bilateral or multilateral basis.27 In this context, it should also be noted that Austria has signed the Multilateral Convention to Implement Tax Treaty Related Measures (known as the Multilateral Instrument (MLI)) as provided for in BEPS Action 15. Depending on the country, the standards stipulated in Articles 16 to 26 MLI may apply.
In Austria, agreement procedures of this type are initiated by the Austrian Federal Ministry of Finance ex officio or upon the request of a taxpayer, and can, for instance, be used to obtain matching (corresponding) adjustments in the other contracting state in the case of primary adjustments in one contracting state.
However, the procedures can also be used to obtain solutions to uncertain questions of interpretation of the law of a tax treaty, which can be of a generic nature or in relation to a specific case. As far as they are used for international agreements to solve discovered transfer pricing problems in an abstract manner, they can be released publicly. The tax authorities do not charge any administrative fee for the issuance of informal rulings and informal advance pricing arrangements.
With respect to Member States of the European Union, Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the European Union was transposed into national law in September 2019. This new regime provides additional effective instruments to resolve disputes concerning different interpretations and applications of bilateral tax treaties. Taxpayers facing intra-EU tax disputes may, within three years of the first notification of the tax dispute, submit a request to initiate a dispute settlement procedure. During this procedure, the Member States involved can find a common solution within two years. If an agreement is reached between the Member States, it constitutes an enforceable decision for the taxable person concerned. If, on the other hand, the Member States involved do not reach an agreement on the dispute within two years (with a possible extension of up to one year), arbitration proceedings must be carried out. The final decision by the Advisory Committee then binds the Member States involved if no agreement can be reached within a further six months.
The assessments of corporate income tax and value added tax (VAT) by the Austrian tax authorities, which are made annually based on the taxpayer's annual tax returns, are audited by the tax authorities ex post at more or less regular intervals. There are no specific time limits for the tax authorities to conduct a tax audit. Usually, a tax audit covers a three-year period for which tax returns have been filed or tax assessments issued. The taxpayer has to be informed of a tax audit at least one week before it commences, unless this would jeopardise the purpose of the audit.28 Transfer pricing issues are also audited by the tax authorities in the course of the regular audits on corporate income tax or VAT returns (i.e., together with other issues of these taxes related to the audited taxpayer). Transfer pricing aspects are usually an important issue in tax audits of international groups of companies. However, in the case of a tax audit regarding an individual, a transfer pricing issue in relation to his or her position as a shareholder of a company may also come up.
The tax authorities have to investigate the facts that form the basis for taxation ex officio. The taxpayer has a duty to cooperate with the tax authorities and to clarify the taxpayer's standpoint, to prove the statements in the taxpayer's declarations and to provide the tax authorities with all the information required to analyse the alleged facts relevant for taxation. This includes business books, accounts and records, and the information necessary to understand the records, such as, in the case of a transfer pricing audit, adequate transfer pricing documentation. The duty to cooperate is increased in cases of international tax matters, as far as non-Austrian circumstances are concerned.29
At the end of the transfer pricing audit, the auditor discusses the tax audit's findings with the taxpayer in a final meeting. The auditor's final report (a copy of which has to be handed over to the taxpayer) is the basis for the adjusted assessment decrees issued subsequently. Upon finalisation of the tax audit, a decree on the re-opening of the original assessment and an amended tax assessment are issued by the tax authorities. Unless the taxpayer opted for a waiver of the appeal, the appeal can be lodged by the taxpayer against both the assessment decree of the tax audit and the adjusted tax assessment decrees within one month of the issuance of the decree. The period for lodging the appeal can be extended upon the request of the taxpayer. If the appeal submission period elapses without any appeal being lodged, it is possible to lodge an extraordinary remedy within one year of the issuance of the re-opening decree or the adjusted tax assessment decrees in the event of mistakes on the part of the tax authority as regards the legality of the decrees (but not regarding wrongful fact-finding).
If the taxpayer wants to challenge the results of the tax audit, he or she may lodge an administrative appeal against the assessment decree within one month of the issuance of the contested tax assessment notice by the tax authority. The period for the administrative appeal can be extended by the tax office upon request of the taxpayer.
Upon the filing of the administrative appeal, the tax authorities first have the option, in an administrative appeal decision, to amend or withdraw the contested tax assessment, unless the taxpayer has requested a direct referral to the Austrian Federal Fiscal Court in the appeal and the tax authorities (chose to) refer the appeal without an administrative appeal decision, or unless the appeal only pleads issues to be raised before the constitutional court (i.e., that a law is unconstitutional or an ordinance does not correspond to a law).30
An administrative appeal decision can be contested by the taxpayer in court within one month, and this period can also be extended. Upon the taxpayer contesting the administrative appeal decision, the Austrian tax authorities have to refer the case without delay to the Austrian Federal Fiscal Court, where it will be heard. Against the decision of the Austrian Federal Fiscal Court, the taxpayer can again appeal to the Austrian Supreme Administrative Court (the second-level judicial appeal is only admissible regarding matters of interpretation of tax law with fundamental importance) or the Constitutional Court (if the assessment or decision violates a constitutional right or guarantee, or an unconstitutional law was applied when rendering the contested decision).
The Austrian Federal Fiscal Court is not bound by the reasons brought forward in the appeal. The court has full power of recognition (i.e., it can either cancel the contested decree or amend it in any way, including to the appellant's detriment). The Austrian Federal Fiscal Court can examine both the fact-finding and the discretion applied by the tax authorities in relation to the fact-finding, as well as examining matters of interpretation. However, the Austrian Supreme Administrative Court (the second and ultimate judicial instance in Austria) will neither investigate the facts, nor will it review the facts and circumstances provided by the Austrian Federal Fiscal Court. If the first instance determined facts and circumstances by violating fundamental procedural rules, the decision of the Austrian Supreme Administrative Court will cancel the Austrian Federal Fiscal Court's decision and refer the case back to the first instance.
After an administrative appeal is filed, the tax authorities have to render their decision within a period of six months, provided that no direct referral was requested (see above). If the decision is not made within six months, the taxpayer is entitled to file a complaint of delay with the Austrian Federal Fiscal Court. If such a complaint is filed, the tax authorities have an additional period of three months to render their decision. The same time frame applies to the tax courts, whereby complaints of delay against the Federal Fiscal Court have to be filed with the Austrian Supreme Administrative Court. In practice, it usually takes courts more time to come to their decision than envisaged by the statute. First level judicial tax procedures may take approximately from six to 30 months, depending on the competent legal office of the court and the subject matter of the case. A second level judicial appeal before the Austrian Supreme Administrative Court may take from nine to 36 months, whereas the Austrian Constitutional Court is usually quicker to decide on the claims levied that fall within the scope of its competency.
viii SECONDARY ADJUSTMENT AND PENALTIES
Tax-increasing transfer pricing adjustments are made in a tax audit if a profit shift from an Austrian company to a related party leads to a reduction of profits (e.g., by underpricing services rendered or goods delivered or by overpricing services acquired or goods received). The primary adjustment consists of an increase in profit of the Austrian related party by the Austrian tax authority as far as a deviation from the fair market level was given.
Additionally, the following 'secondary adjustments' are made:
- In the case of upstream or side-stream profit-shifting to a shareholder, parent or sister company a constructive dividend to the direct shareholder or parent is assumed. Alternatively, the profit adjustment may also result in a transfer pricing receivable:
- a constructive dividend to the shareholder triggers withholding tax of 27.5 per cent (37.93 per cent, if the withholding tax is borne by the company and not charged to the beneficiary of the distribution – 'cascade effect'), respectively 25 per cent (or 33.33 per cent under the cascade effect) in the case of a parent company being the direct shareholder (and treated as dividend at the level of the receiving parent company). The secondary adjustment can fully or partly be relieved according to a double-tax treaty or EU regulation such as the parent-subsidiary directive, if applicable between Austria and the state of residence of the direct parent or shareholder (if the subsidiary is resident in Austria) or the state of residence of the subsidiary (if the shareholder is resident in Austria); and
- alternatively, the Austrian Ministry of Finance accepts that the profit shift is effectively neutralised by a transfer pricing receivable (in the case of a profit shift made) or liability (in the case of a profit shift received) versus the related party in the balance sheet of the Austrian corporation.
- In the case of downstream profit shifts to the direct or indirect subsidiary, the secondary adjustment is either the assumption of a constructive dividend to the subsidiary that leads to an increase of the acquisition costs of the participation at the level of the Austrian parent (for tax purposes) if the parent is resident in Austria, or capital reserve (for tax purposes) if the subsidiary receiving the advantage is resident in Austria. Alternatively, the secondary adjustment can (again) be the booking of a transfer pricing receivable and corresponding liability in the balance sheets of the related enterprises.
- In the event of a profit markup due to a primary transfer pricing correction, a matching corresponding adjustment can be made in the other country, in which the related party is resident. This is to avoid international double taxation under a double-tax treaty (see Section IX.ii).
If transfer pricing adjustments lead to the assessment of additional (corporate) income tax, interest for late payment of 2 per cent above the base interest rate (published by the tax authorities) is assessed.31 Interest for late payment is calculated from 1 October the following year, and is assessed for a maximum of 48 months of the tax arrears. Upon request, no interest for late payment is assessed if the taxpayer had a surplus on the tax account during the time in which the arrears accrued.
In addition, late payment penalties of 2 per cent can be assessed for arrears of VAT (or withholding tax for constructive dividends), which can be increased by two further percentage points.32 Upon the taxpayer's request, no late payment penalty is imposed where the taxpayer can prove that the failure to pay the appropriate amount of tax was not the result of gross negligence. This also supports the considered view that the transfer pricing structure should be included in the transfer pricing documentation (see Section II and Section III.ii, above, for transfer pricing documentation information). In the event of deliberate tax evasion through non-compliance with the taxpayer's obligation to disclose truthfully facts and circumstances in connection with transfer pricing rules, prosecution under criminal law can arise.
ix BROADER TAXATION ISSUES
i Diverted profits tax and other supplementary measures
In Austria, there are currently no diverted profits taxes, as well as no BEAT or GILTI provisions in effect. Following the proposal of the European Commission for new rules regarding the taxation of digital business companies (e.g., 'Google tax'), however, the Austrian federal government announced in January 2019 its intention not to wait for co-ordinated action by the Member States but to introduce unilateral measures. The result so far has, however, only been a digital tax passed in September 2019, targeting online advertising services against consideration provided by domestic online advertising providers. In this respect, an online advertising service is deemed to be provided domestically if it is received via the device of a user with a domestic IP address and its content and design are (also) directed at domestic users. A tax of 5 per cent is levied on the consideration received by the advertising provider from its client, whereby only companies with a worldwide turnover of at least €750 million and a domestic turnover of at least €25 million from the provision of online advertising services are affected.
ii Double taxation
In the case of transfer pricing adjustments in Austria, international double taxation can occur if no corresponding adjustment is made abroad in the country in which the related party is resident. It may be possible to achieve a corresponding adjustment upon the request of the related party; otherwise, the parent can request the initiation of a mutual agreement procedure under Article 9(2) OECD Model Tax Convention with the competent authority of its state of residence.33 In the EU, it is possible to obtain a corresponding adjustment by means of the EU Arbitration Convention. Further, as mentioned above, there is the possibility of dispute settlement under the transposition of Council Directive (EU) 2017/1852 since September 2019.
There are no automatic matching adjustments of transfer prices by the Austrian tax authorities in cases of primary adjustments abroad. However, in the case of primary adjustments inflicted to a related party in another contracting state of a double-tax treaty, the Austrian tax authority in charge is, in principle, willing to reopen the relevant tax assessment of the Austrian related party to make a matching primary adjustment either upon request of the Austrian related party34 or ex officio35 if the Austrian related party can demonstrate and document the correctness of a transfer pricing markup made in the other contracting state.
Otherwise, a mutual agreement procedure with Austria can be initiated. The request has to be made by the parent to which a primary adjustment was made in its resident state36 or in the case of transactions between sister companies in either of the resident states of the sister companies.37 On the basis of the EU Arbitration Convention, it should be possible to initiate the arbitration procedure in either of the states.38
From the Austrian perspective, double taxation may be unavoidable if it is based on different interpretations of the double-taxation treaty by the contracting states and no solution can be found in a mutual agreement procedure. Furthermore, where the interpretative mismatch is due to differences between the domestic laws of the contracting states, the taxpayer's state of residence will have to provide the relief according to the method for the elimination of double taxation set out in the applicable double-taxation treaty (exemption or credit method).
iii Consequential impact for other taxes
Transfer pricing is mainly a matter of corporate income tax or personal income tax (in the case of individuals as shareholders). Dividend withholding tax of 27.5 per cent (to be relieved according to applicable double-tax treaties or EU law) is applied as a secondary adjustment for constructive dividends if the taxpayer concerned does not decide for a correction of the profit shift by booking a transfer pricing receivable against the other related party (see Section VIII).
The company's deduction of input VAT is denied insofar as the price for goods or services obtained from a related party is above the market level.39 The company's deduction of input VAT is denied in total for goods, assets or services, which are acquired primarily from third parties (more than 50 per cent) for the benefit of a related party.40
In the case of the sale of goods to a related party below the acquisition cost, only the difference between the sale price and the acquisition cost would be regarded as a deemed turnover subject to VAT,41 whereas, in the case of a sale at or above acquisition cost, the difference to the fair market value is subject to VAT42 (unless, in both cases, the place of the supply is outside Austria or an exemption applies).
In principle, in these cases, for VAT purposes a correction of the invoice would be necessary. However, for the sake of simplicity, the Austrian Ministry of Finance accepts that increases of the taxable turnover do not have to be assessed on the occasion of a transfer pricing correction if the profit shift and the effect of the additional VAT liability is neutralised.43 This is especially the case if the supply is exempt (as export or intra-community supply)44 or the counterparty is entitled to an equal deduction of input VAT.45 Regarding goods received from related parties of third countries, the Ministry of Finance normally dispenses with an assessment of import VAT so long as the assessment would be neutral because of a correspondingly high entitlement to deduction of input VAT.46 For customs-duty purposes, transfer pricing is relevant and has been subject to increased attention by the customs authorities.
x OUTLOOK AND CONCLUSIONS
Austria has adopted several OECD BEPS recommendations and has already implemented most of them, such as BEPS Action 13 on 'Transfer Pricing Documentation and Country-by-Country Reporting', in the Transfer Pricing Documentation Act and its implementing ordinance (see Section II). Austria was also the first country to sign the MLI, as provided for in BEPS Action 15.47 Regarding the work of the Inclusive Framework for BEPS Action 1 (Pillar One; and Pillar Two – GloBE proposals) it is likely that the measures presented in the statement issued in January 202048 are going to be reviewed and considered as soon as final results are available.
There will be no specific implementations of BEPS Actions 8–10 with regard to transfer pricing rules on value creation. However, these Actions are already respected by the Austrian tax authorities, as they are largely reflected in the update to the OECD Transfer Pricing Guidelines, which are used by the Austrian tax authorities in their interpretation of the arm's-length principle. As regards the provision in the BEPS Action Plan for controlled foreign company (CFC) legislation, the first CFC regime has been adopted with effect for fiscal years starting as of 1 January 2019. As provided for in the EU Anti-Tax Avoidance Directive (ATAD), low-taxed passive income (interest income, licence income, dividends, income derived from sales of shares, income from finance leasing, and income from activities of banks and insurance companies) realised by controlled corporations and permanent establishments of controlling domestic corporations becomes subject to Austrian corporate income tax. Income is considered to be low-taxed if the effective rate of taxation is less than or equal to 12.5 per cent. With respect to provisions denying the deduction of interest and royalty payments to related parties in cases where low taxation abroad is an issue, the Austrian government took the position that the Austrian rules limiting interest deduction are equally as effective as the interest deduction regime introduced by the ATAD. The EU Commission, however, took a divergent view and opened formal infringement proceedings against Austria. As of April 2020, there is still no implementation in effect and due to the recent covid-19 crisis a transposition in the near future is not foreseeable. As regards transfer pricing conflicts between jurisdictions, Austria has opted for the arbitration provision of the MLI. In its double-tax treaties, Austria has comprehensive provisions that provide for the mutual agreement procedure between contracting states according to Article 25 of the OECD Model Tax Treaty, and it is ready to further extend the arbitration procedure in treaty negotiations.
As mentioned above, adjustments in accordance with the EU Arbitration Convention are possible and Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms was implemented at the end of 2019.
Finally, due to the major changes in the OECD Transfer Pricing Guidelines in recent years, it is likely that the Austrian Transfer Pricing Guidelines will either also undergo a major makeover or are going to be completely renewed. However, no specific information or timetables are available in this context yet.
1 Gerald Schachner and Kornelia Wittmann are partners, Nicolas D Wolski is a senior associate and Lucas Hora is an associate at bpv Huegel.
2 Austrian Transfer Pricing Documentation Act, BGBl. I Nr. 117/2016.
3 Ordinance on the Austrian Transfer Pricing Documentation Act. 'Verrechnungspreisdokumentationsgesetz-Durchführungsverordnung' – VPDG-DV.
4 OECD final report of 5 October 2015 relating to Action 13 'Transfer pricing Documentation and Country-by-Country Reporting'.
5 See, for example, Independent Fiscal Senate, 30 July 2012, RV/2515-W/09.
6 Austrian Transfer Pricing Guidelines 2010, Paragraph 18.
7 ibid., Paragraph 310.
8 Section 115(1) Federal Fiscal Procedures Act.
9 Ritz, Bundesabgabenordnung5 Section 115(10).
11 Section 5 of the Transfer Pricing Documentation Act.
12 OECD Transfer Pricing Guidelines, Paragraph 1.39 et seq.
13 ibid., Paragraph 1.42 et seq.
14 ibid., Paragraph 1.52 et seq.
15 ibid., Paragraph 1.55 et seq.
16 ibid., Paragraph 1.59 et seq.
17 Austrian Transfer Pricing Guidelines 2010, Paragraph 43.
18 ibid., Paragraph 43.
19 ibid., Paragraph 27; OECD Transfer Pricing Guidelines, Paragraph 2.39.
20 ibid., Paragraph 77 et seq.
21 ibid., Paragraph 32.
22 ibid., Paragraph 77.
23 ibid., Paragraph 28.
24 ibid., Paragraph 70.
25 ibid., Paragraphs 24, 72 et seq.
26 Section 115(1) Federal Fiscal Procedures Act; Ritz, Bundesabgabenordnung5 Section 115(10).
27 Information of the Federal Ministry of Finance, dated 31 March 2015, BMF-010221/0172-VI/8/2015.
28 Section 148(5) Federal Fiscal Procedures Act.
29 ibid., Section 115(1); Ritz, Bundesabgabenordnung5 Section 115(10).
30 Section 262(2) and (3) Federal Fiscal Procedures Act.
31 Section 135 Federal Fiscal Procedural Act; ordinance of the Austrian Ministry of Finance, dated 21 April 2016, number 010103/0072-IV/4/2016, BMF-AV Nr. 62/2016.
32 Section 217 Federal Fiscal Procedural Act.
33 Austrian Transfer Pricing Guidelines 2010, Paragraph 352.
34 ibid., Paragraph 324.
35 Austrian Ministry of Finance, dated 19 July 2004, EAS 2493.
36 Austrian Transfer Pricing Guidelines 2010, Paragraph 352.
37 ibid., Paragraph 352.
38 ibid., Paragraph 367.
39 Austrian VAT Guidelines 2000, Paragraph 1930; Windsteig, in Melhardt/Tumpel, UStG2 § 1, Paragraph 300; Supreme Administrative Court 27 May 1999, 97/15/0067.
40 Section 12(2)(2)(a) VAT Act; Austrian VAT Guidelines 2000, Paragraph 1929; Kollmann/Schuchter, in Melhardt/Tumpel (Ed) UStG2 § 12, Paragraph 202.
41 Windsteig, in Melhardt/Tumpel (Ed) UStG2 § 1, Paragraph 297.
43 Austrian Transfer Pricing Guidelines 2010, Paragraph 338.
44 ibid., Paragraph 339.
45 ibid., Paragraph 340.
46 ibid., Paragraph 341.
47 Bendlinger, SWI 2018, 172.
48 Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges arising from the Digitalisation of the Economy as approved by the OECD/G20 Inclusive Framework on BEPS on 29–30 January 2020.