In Austria, there is no single comprehensive statute on transfer pricing. Rather, there exist a number of separate legal provisions and instruments that are relevant for transfer pricing, namely:
a Section 6(6) of the Income Tax Act, dealing with the realisation of profits in cases where assets are transferred from Austria to foreign permanent establishments or where Austrian permanent establishments are transferred abroad;
b Section 8(1) to (3) of the Corporate Income Tax Act, dealing with the allocation of profits in transactions between a company and its shareholder;
c Section 2(1) of the Income Tax Act, which is considered as the basis for attribution of income to taxpayers;
d Section 4(4) of the Income Tax Act, dealing with the deduction of business expenses by taxpayers;
e Sections 21 to 24 of the Federal Fiscal Procedures Act, dealing with substance over form, abuse of law, sham transactions and beneficial ownership;
f Section 124 et seq. of the Federal Fiscal Procedures Act, dealing with the requirement of taxpayers to keep books and other records;
g the Transfer Pricing Documentation Act, dealing with documentation requirements; and
h an implementing ordinance issued on the basis of the Transfer Pricing Documentation Act.
In addition to statutory law, case law has to be taken into account; in the area of transfer pricing, decisions by the Federal Tax Court and the Supreme Administrative Court are of particular relevance.
Moreover, other important sources of transfer pricing law are the guidance notes issued by the Ministry of Finance from time to time, which are binding for the tax authorities, but not for taxpayers. Most notable are the Transfer Pricing Guidelines 2010, which deal with multinational group structures, permanent establishments, documentation obligations, transfer pricing audits and tax planning by use of intermediate companies.2 The Income Tax Guidelines 2000 contain guidance on the recognition of agreements between related parties.3 The Ministry of Finance has also issued a decree on mutual assistance procedures and arbitration proceedings pursuant to double taxation treaties and the EU Arbitration Convention,4 which deals with various procedural topics.5 Finally, there are numerous published no-name rulings issued by the Ministry of Finance in international tax matters and specifically regarding transfer pricing.
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, notwithstanding their being a mere recommendation of an international organisation, are seen by the tax authorities as a significant means of interpreting double taxation treaties.6
As a general rule and as a result of the substance over form approach, agreements between related parties are only recognised for tax purposes if (1) they have been concluded in writing; (2) their content is clear and unambiguous; and (3) they are concluded in line with the arm’s-length principle, meaning on terms that unrelated parties would have agreed upon.7
II DOCUMENTATION AND FILING REQUIREMENTS
Until recently Austria did not have any statutory transfer pricing related documentation and filing requirements. Nevertheless, the Austrian tax authorities have for many years required that taxpayers set up transfer pricing documentation based on the OECD Transfer Pricing Guidelines. In particular, taxpayers are obliged to carry out a function and risk analysis regarding transactions with related parties. In this context, information regarding (1) the main assets employed; (2) the contractual conditions agreed upon; (3) the taxpayer’s business strategy; (4) the market and competitive conditions insofar as they are relevant for the pricing; and (5) the position of the taxpayer in its group of companies, has to be documented.8
This lack of statutory rules partly ended in 2016, when the Transfer Pricing Documentation Act was enacted. It contains the obligation for taxpayers to, under certain circumstances, prepare and file (1) country-by-country reports; (2) master files; and (3) local files. All of these documents may be prepared in German or English.
Multinational enterprise (MNE) groups with consolidated group revenues of at least €750 million in the preceding fiscal year are required to prepare a country-by-country report.9 Such document consists of three parts: (1) an overview of allocation of income, taxes and business activities by tax jurisdiction; (2) a list of all the constituent entities of the MNE group included in each aggregation per tax jurisdiction; and (3) additional information, if relevant.10 In general, the country-by-country report has to be filed by the ultimate parent entity of the MNE group, if it is tax-resident in Austria, until at the latest 12 months after the end of the fiscal year.11 Within 15 months of the end of the fiscal year, Austria will automatically exchange the country-by-country reports with the other EU Member States (or with the signatories of the OECD’s Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports).12
Separate business units of MNE groups are required to prepare transfer pricing documentation in the form of a master file and a local file, if such separate business units are tax-resident in Austria and had revenues of at least €50 million in the two preceding fiscal years.13 The master file, on the one hand, has to contain (1) an overview of the MNE group’s organisational structure; (2) a description of the MNE group’s business(es); (3) documentation on the MNE group’s intangibles; (4) documentation on the MNE group’s intercompany financial transactions; and (5) documentation on the MNE group’s financial and tax position.14 The local file, on the other hand, must include (1) a description of the local separate business unit; (2) documentation of significant intercompany transactions; and (3) financial information.15 Both the master file and the local file have to be transmitted to the competent tax office within 30 days of filing the corporate income tax returns.16
III TRANSFER PRICING METHODS
In the following, a high-level overview will be given regarding the treatment of certain transactions as prescribed by the Ministry of Finance’s Transfer Pricing Guidelines. As a general rule, the method that will most reliably lead to the determination of an arm’s-length price shall be used. In the case of equal reliability, traditional transaction methods (the comparable uncontrolled price method, resale price method and cost plus method) are generally given priority over transactional profit methods (the transactional profit split method and transactional net margin method).17
In the case of manufacturing companies qualifying as contract manufacturers, generally the cost plus method is to be applied, while in case of distribution companies generally the resale price method is more appropriate.18
Expenses incurred in connection with intra-group services are generally tax-deductible to the extent that they are in line with the arm’s-length principle. Headquarter services should preferably be charged based on the direct allocation of costs, especially if such services are also rendered in relation to third parties. If this is not possible, generally a group allocation method may be used, in which case a mark-up for profits must be applied.19 For lack of comparable transactions, the cost plus method should be utilised.20 Mark-ups should be determined on a case-by-case basis. Routine services should be marked up by between 5 per cent and 15 per cent; a mark-up of more than 5 per cent should be applied for the charging of high-quality services.21
While arm’s-length management fees are generally tax-deductible, a parent company may not charge the costs of so-called shareholder activities to subsidiaries. These generally include: (1) costs of the management board, the supervisory board, and the shareholders meetings; (2) costs relating to the legal organisation of the group as a whole; (3) costs regarding group management, corporate policy, financial planning and reorganisation; (4) costs in connection with the acquisition and holding of shares in subsidiaries; (5) costs for services imposed on subsidiaries that they are not in need of; and (6) costs for the right to use the name of the group and to benefit from its higher creditworthiness.22
iv Financial services
In the case of intra-group financing, in order to determine an appropriate interest rate, the application of the comparable uncontrolled price method is preferable over other transfer pricing methods if comparable third-party transactions exist on the money and capital markets. The tax authorities understand that comparing intra-group financing transactions with third-party commercial banking transactions might sometimes lead to inappropriate results, as commercial banks aim to make a profit, while in a group the allocation of liquidity to different group companies according to their needs is more relevant. Thus, when assessing arm’s-length interest rates, the upper limit is the interest rate offered by independent commercial banks to third-party borrowers. However, the interest rate that an intra-group lender could get when depositing cash with a commercial bank is also relevant. Further, in order to determine an arm’s-length interest rate, factors such as currency, term, creditworthiness, currency risks and third-party refinancing costs should also be taken into account.23
As regards intra-group financing, thin capitalisation considerations are also important. While there are no Austrian statutory thin-capitalisation rules, the Supreme Administrative Court has established broad and rather liberal guidelines used to determine whether the equity funding in a specific case is adequate. In practice, debt-to-equity ratios of 3:1 to 4:1 are not uncommon. In the event the equity is inadequate, part of the indebtedness to shareholders may be regarded as shareholders’ equity.
In the case of non-recourse factoring the purchaser of receivables should be remunerated for taking over the risk of default.24
As regards cash pooling arrangements, all involved group companies must benefit from such arrangements. Services rendered by a cash management provider should generally be remunerated in line with the cost plus method.25
v Intangible property
The Transfer Pricing Guidelines do not define the term ‘intangible property’, but in connection with royalties cover payments for industrial property rights and other rights enhancing business activity, such as distribution rights. As regards the appropriate transfer pricing methods, reference is made to the OECD Transfer Pricing Guidelines.26 Explicit guidance is only given on the provision of know-how, where intangible property is bundled with services: for that part of the compensation relating to services, the arm’s-length price is generally to be determined by using the cost plus method, and any excess payments are generally to be seen as a royalty.27 Regarding the determination of upper and lower limits for arm’s-length royalty payments, on the one hand the licensee’s additional yield due to the licence may be seen as an upper limit, while the total costs of the licensor may be considered as a lower limit.28
vi Cost contribution arrangements
In the case of cost contribution arrangements, costs should be allocated among participants on the basis of the benefits expected by each participant, with adaptations for the future being necessary in the event the actual benefits differ considerably from the expected benefits.29
vii Business restructurings
If tangible or intangible assets are transferred from one group company to another as a result of a business restructuring, or a group company is deprived of profit potential, adequate remuneration has to be provided.30 While the tax authorities acknowledge that many types of business restructurings take place for genuine business reasons, in the case of business restructurings that lead to a significant decrease in profits of Austrian group companies, tax audits as to whether arm’s-length principles were complied with may be expected.31 Generally, the fact that limited intra-group contracts are not prolonged or are terminated is, on its own, not reason enough not to pay a remuneration.32
viii Permanent establishments
Regarding permanent establishments by virtue of a fixed place of business, these must carry out operational activities; however, this does not mean that such activities have to be carried out by humans, so that self-service petrol stations, tanning beds, snack machines and satellite dishes may also constitute permanent establishments.33 While the relevant time period for permanent establishments is generally six months, under certain circumstances recurring use of facilities for periods of less than six months can lead to the existence of a permanent establishment.34
Regarding permanent establishments by virtue of a dependent agent, the Transfer Pricing Guidelines state that an agent is not required to conclude contracts in the name of the principal; rather, concluding contracts in its own name is sufficient in the event the principal is contractually obliged to fulfil these.35
Regarding the attribution of profits to permanent establishments, Austria has implemented the Authorised OECD Approach; however, only insofar as it does not contradict the 2008 version of the OECD commentary to Article 7. This is due to the fact that the new Article 7 is generally not yet included in Austria’s double taxation treaties.36 As a result, (deemed) payments under loan, rental or licence agreements between the head office and a permanent establishment are currently not recognised for Austrian tax purposes.37
IV TRANSFER PRICING RULINGS
In Austria, three different types of rulings exist that may be used in transfer pricing matters.
First there is something like an informal tax ruling, which is a statement provided in writing by a tax authority upon a taxpayer’s request as to the tax implications of a particular situation described by the taxpayer. Such rulings have no legally binding effect. Nevertheless, the taxpayer may still under certain circumstances be protected by the general principle of equity and good faith. This is an unwritten maxim applicable to all persons in a legal relationship, meaning that every person is obliged to adhere to his or her own words and actions and shall not without cause act in contradiction to what he or she has announced beforehand and upon which others have relied. Such principle applies if (1) the tax ruling has been rendered by the competent tax authority; (2) the tax ruling is not patently incorrect; (3) the incorrectness of the tax ruling was not easily noticeable for the party; (4) relying upon the correctness of the given tax ruling, the party has made dispositions or transactions that it would not otherwise have made or would have made differently if it had known about the incorrectness of the tax ruling; and (5) taxation contrary to the tax ruling would result in damage for the party. Informal rulings are not published and do not involve any administrative costs.38
Secondly, there are legally binding formal tax rulings, which can be applied for, inter alia, in transfer pricing matters. They are issued upon an applicant’s written request, which must contain (1) a comprehensive and consistent description of the envisaged transaction; (2) an explanation of the applicant’s vested interest in receiving the ruling; (3) an explanation of the legal issues at hand; (4) specific legal questions; and (5) a comprehensive analysis of the legal issues raised. In contrast to the informal ruling mentioned above, the competent tax office must issue a formal tax ruling. Such ruling must contain (1) the facts and statutory provisions on which it is based; (2) a legal assessment of the facts; and (3) the time frame during which it is valid. In addition, the applicant may be required to report on whether the facts of the case have been implemented as planned. Obtaining such formal ruling (irrespective of whether the result is in line with the applicant’s view or not) involves administrative costs amounting to €1,500 to €20,000, depending on the applicant’s turnover.39
While both types of rulings outlined above are unilateral measures aiming at increasing planning certainty for taxpayers, they do not protect taxpayers from foreign tax authorities assessing the same facts differently for transfer pricing purposes. Pursuant to the tax treaty provisions corresponding to Article 25 of the OECD Model Convention, the Austrian tax authorities may conclude advance pricing agreements (APAs) with the tax authorities of other states. However, APAs have hardly any practical relevance in Austria.40
Corporate income tax is assessed by the local tax office based on the tax returns filed annually by taxpayers. Such assessment notices become binding after a period of one month following notification to the taxpayer41 and can only be amended by the authorities under specific circumstances (e.g., if new facts have surfaced which, if they had been known earlier by the tax authorities, would have led to a different tax assessment).42 The statute of limitations is normally five years.43
Taxpayers are regularly audited by the tax office, with transfer pricing aspects usually being an important part of tax audits of international groups of companies. Generally, and also outside the scope of a formal tax audit, the tax authorities may interview both the taxpayer as well as any other person who may be in a position to give information on tax-relevant aspects, such as the directors of a company or its employees; may ask to be shown written documentation, including transfer pricing documentation; and may enter the premises of a company (without, however, having the right to search them).44 A formal tax audit generally encompasses the last three tax years for which tax returns have been filed or which have been assessed.45 The taxpayer generally has to be informed of a tax audit at the latest one week before its start, unless such information would jeopardise the purpose of the audit.46 While the burden of proof is on the tax authorities, the taxpayer has a duty to cooperate with the tax authorities as far as this is reasonable; in international tax matters a heightened duty to cooperate is assumed.47 At the end of the tax audit, the auditor generally has to present and discuss his or her findings with the taxpayer and its tax representative, thereby giving the taxpayer the possibility to be heard.48 The auditor’s final report on the audit, a copy of which has to be provided to the taxpayer,49 is the basis for adjusted assessment notices, if any.
If a taxpayer is not satisfied with an adjusted assessment notice issued after completion of a tax audit, an appeal may be filed with the Federal Tax Court within one month.50 The Federal Tax Court generally has to take into account new facts presented by the taxpayer.51 Decisions of the Federal Tax Court may in turn be challenged before the Supreme Administrative Court and, in special cases, the Constitutional Court.
VII SECONDARY ADJUSTMENTS
Transfer pricing audits effected by foreign tax authorities and resulting in primary adjustments usually lead to secondary adjustments in Austria. In the event the result of the foreign audit is that the foreign taxable profit was too low, while the Austrian taxable profit was too high, the tax authorities can effect such secondary adjustment directly on the basis of the respective double taxation treaty, without the need to apply domestic Austrian law. This is due to the fact that, while double taxation treaties do not have priority over Austrian domestic law per se, they usually have priority due to being leges speciales.52 The competent tax authority will effect a downward secondary adjustment if the taxpayer furnishes proof of the correctness of the foreign primary adjustment by submitting documentation in this respect.53
In the case of a foreign downward adjustment, however, the double taxation treaty does not prevent Austria from effecting an upward adjustment, but does not oblige Austria to do so either. Consequently, the legal basis for such upward adjustment is Section 6(6) of the Income Tax Act, thus an Austrian domestic provision.54
If a foreign primary adjustment leads to a change of the tax base for value added tax purposes, pursuant to statutory law a value added tax adjustment has to be effected.55 However, pursuant to the Ministry of Finance such value added tax adjustment is not necessary in cases that do not negatively affect the tax revenue, such as tax-exempt exports or situations where a rise in the tax base for value added tax purposes of one entrepreneur would lead to a corresponding claim for input tax of another entrepreneur.56
If a transfer pricing audit leads to an upward adjustment of the corporate income tax base, then normally late payment interest falls due at a rate of 2 per cent above the base rate. Such interest is calculated on the balance between the corporate income tax previously payable and the corporate income tax payable as a result of the tax audit. Late payment interest is charged as of 1 October of the calendar year following the audited year and is payable until the day of notification of the adjusted corporate income tax assessment notice, but at most for a period of 48 months.57
Apart from interest, penalties under the Fiscal Criminal Act may be imposed in cases of gross negligence or wilful tax evasion; such penalties may include monetary fines and imprisonment.
IX MUTUAL AGREEMENT PROCEDURES AND ARBITRATION
All double taxation treaties concluded by Austria contain a clause on the mutual agreement procedure (MAP), mostly corresponding to Article 25 of the OECD Model Convention. Normally, a taxpayer must present its case to the competent authority within three years from the first notification of the action resulting in taxation that is not in accordance with the applicable income tax treaty. Pursuant to the Ministry of Finance this is the point in time when the taxpayer becomes aware that an adjustment of profits is considered by one of the contracting states.58 In case of related parties, the MAP generally has to be initiated in the state of residence of the parent company.59 A MAP can also be initiated if an appeal is pending or the appeals procedure has not yet ended.60 Mutual agreements achieved by the Austrian authorities with the competent authorities of the other treaty state can, according to most double taxation treaties concluded since the 1980s, be implemented notwithstanding the Austrian statute of limitation provisions. In the event a double taxation treaty does not contain such wording, the implementation of a mutual agreement is only possible within the long statute of limitations period of 10 years.61 While the taxpayer has no legal claim for a certain result under a MAP, an assessment notice based thereon can be challenged by the taxpayer. There are several procedural rules contained in the Federal Fiscal Procedures Act under which a mutual agreement can be implemented.62
The income tax treaties concluded by Austria with Armenia, Azerbaijan, Bahrain, Bosnia and Herzegovina, Germany, Macedonia, Mongolia, San Marino and Switzerland contain arbitration provisions. Further, Austria is a party to the EU Arbitration Convention.
X OUTLOOK AND CONCLUSIONS
It can be expected that the area of transfer pricing will become ever more important in the future, in particular against the background of the OECD’s BEPS project, which inevitably will lead to a rise in transfer pricing conflicts between jurisdictions.
1 Niklas J R M Schmidt is a partner and Eva Stadler is a senior associate at Wolf Theiss Attorneys at Law.
2 Ministry of Finance, 28 October 2010, BMF-010221/2522-IV/4/2010.
3 Ministry of Finance, 22 March 2005, 06 0104/9-IV/6/00 as amended by Ministry of Finance, 25 August 2015, BMF-010203/0233-VI/6/2015, paragraph 1127 et seq.
4 Convention 90/436/EEC on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, as amended.
5 Ministry of Finance, 31 March 2015, BMF-010221/0172-VI/8/2015.
6 Transfer Pricing Guidelines, paragraph 18.
7 Income Tax Guidelines, paragraph 1130 et seq. with references to case law by the Supreme Administrative Court. Examples of when individuals and entities qualify as related parties are stated in paragraph 1129 of the Income Tax Guidelines.
8 Transfer Pricing Guidelines, paragraph 310.
9 Transfer Pricing Documentation Act, Section 3(1).
10 Transfer Pricing Documentation Act, Schedules 1 to 3.
11 Transfer Pricing Documentation Act, Sections 4(1) and 8(1).
12 Transfer Pricing Documentation Act, Section 11(1).
13 Transfer Pricing Documentation Act, Section 3(2).
14 Transfer Pricing Documentation Act, Section 6.
15 Transfer Pricing Documentation Act, Section 7.
16 Transfer Pricing Documentation Act, Section 8(2).
17 Transfer Pricing Guidelines, paragraph 43.
18 Transfer Pricing Guidelines, paragraphs 70 and 72.
19 Transfer Pricing Guidelines, paragraphs 75 and 81.
20 Transfer Pricing Guidelines, paragraph 76.
21 Transfer Pricing Guidelines, paragraph 77 et seq.
22 Transfer Pricing Guidelines, paragraph 84 et seq.
23 Transfer Pricing Guidelines, paragraph 87 et seq.
24 Transfer Pricing Guidelines, paragraph 99.
25 Transfer Pricing Guidelines, paragraph 101.
26 Transfer Pricing Guidelines, paragraph 102.
27 Transfer Pricing Guidelines, paragraph 103.
28 Transfer Pricing Guidelines, paragraph 108.
29 Transfer Pricing Guidelines, paragraphs 121 and 123.
30 Transfer Pricing Guidelines, paragraph 136.
31 Transfer Pricing Guidelines, paragraph 132.
32 Transfer Pricing Guidelines, paragraph 135.
33 Transfer Pricing Guidelines, paragraph 164 et seq.
34 Transfer Pricing Guidelines, paragraph 168.
35 Transfer Pricing Guidelines, paragraph 175.
36 Transfer Pricing Guidelines, paragraph 181.
37 Transfer Pricing Guidelines, paragraph 180.
38 Cf. Ministry of Finance, 6 April 2006, BMF-010103/0023-VI/2006.
39 Federal Fiscal Procedures Act, Section 118.
40 Cf. Schmidt/Stadler, Austria, in Income Tax Treaties: Competent Authority Functions and Procedures of Selected Countries (A-C), Bloomberg BNA Foreign Income Portfolios, Portfolio 6885 (2016), A-61.
41 Federal Fiscal Procedures Act, Section 245(1).
42 Federal Fiscal Procedures Act, Section 303 et seq.
43 Federal Fiscal Procedures Act, Section 207(2).
44 Federal Fiscal Procedures Act, Section 143 et seq.
45 Ministry of Finance, 31 March 2014, BMF-280000/0061-IV/2/2014, paragraph 8.4.
46 Federal Fiscal Procedures Act, Section 148(5).
47 Cf. Ritz, Bundesabgabenordnung5 (2014) Section 115 paragraph 6 et seq.
48 Federal Fiscal Procedures Act, Section 149.
49 Federal Fiscal Procedures Act, Section 150.
50 Federal Fiscal Procedures Act, Section 245(1).
51 Federal Fiscal Procedures Act, Section 270.
52 Transfer Pricing Guidelines, paragraph 12.
53 Transfer Pricing Guidelines, paragraph 324.
54 Transfer Pricing Guidelines, paragraph 13 et seq.
55 Value Added Tax Act, Section 16.
56 Transfer Pricing Guidelines, paragraph 338 et seq.
57 Federal Fiscal Procedures Act, Section 205.
58 Transfer Pricing Guidelines, paragraph 351.
59 Transfer Pricing Guidelines, paragraph 352, Ministry of Finance, 31 March 2015, BMF-010221/0172-VI/8/2015, paragraph B.2.1.1.
60 Ministry of Finance, 31 March 2015, BMF-010221/0172-VI/8/2015, paragraph B.2.1.1.
61 Cf. Schmidt/Stadler, Austria, in Income Tax Treaties: Competent Authority Functions and Procedures of Selected Countries (A-C), Bloomberg BNA Foreign Income Portfolios, Portfolio 6885 (2016), A-56.
62 Ministry of Finance, 31 March 2015, BMF-010221/0172-VI/8/2015, paragraph B.6.4.