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Introduction to transfer pricing in Austria
Transfer pricing rules
- Austria’s transfer pricing (TP) legislation can be found in the Income Tax Act (ITA), § 6 para 6, and is based on the arm’s length principle as per Article 9 of the OECD Model Tax Convention on Income and Capital, ie it follows the OECD Guidelines. The rules are not heavily formulaic but instead are principles-based.
- The filing of transfer pricing documentation with the ATA is not mandatory outside the scope of the Transfer Pricing Documentation Act (TPDA; see below the chapter on Transfer Pricing Documentation for further details), but because of the self-assessment regime, transfer pricing analysis and documentation (according to the general principles of the Federal Fiscal Code [FFC]) is required to avoid unfavorable adjustments in the course of a tax audit by the ATA.
- Within the scope of the TPDA, the filing of transfer pricing documentation is mandatory. Non-compliance with those filing obligations may lead to penalties.
- Austria’s transfer pricing rules follow the OECD Guidelines. The Guidelines, updated in October 2017, are not mentioned in Austrian legislation, but form the basis for the Austrian Transfer Pricing Guidelines (ATPG 2021, which form a publicly-available, non-binding guidance that want to ensure uniform interpretation of TP through tax auditors and therefore for taxpayers as well).
- The ATPG 2021 explicitly states that due to Art 31 Vienna Convention on the law of treaties, the OECD Guidelines (in their function of providing guidance on the interpretation of Double Tax Treaties), include a binding guidance on the interpretation of the arm’s length principle. Dynamic interpretation is to be applied in this context. However, it has to be seen that, as mentioned above, the ATPG themselves are non-binding. Still, the OECD Guidelines are of course very important in practice.
- The OECD has also released further guidance, including its report on Financial Transactions in February 2020, which are also of relevance from an Austrian point of view. Finally, Austria also follows the Authorized OECD Approach (AOA) for the profit appropriation to branches / permanent establishments.
Transfer pricing methods
- The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split methods are all accepted, but the method used must be in line with the functional and risk profile of the entity. Other methods can also be used if justifiable and appropriate.
- There is no set hierarchy as the ATPG 2021 refer to the methods of the 2017 OECD Guidelines and BEPS Actions 8-10 Final Reports published by the OECD on 5 October 2015. In practice, however, a ‘natural hierarchy’ favors the comparable uncontrolled price method, where reasonably applicable. This can also be derived by the order in which the transfer pricing methods are mentioned in the ATPG.
- The TP rules apply to Austrian taxpayers, including Austrian branches of foreign companies and there is a self-assessment regime, ie in principle, the onus is on the taxpayer to confirm its transfer pricing meets the standard or to adjust its tax return accordingly. However, once there is proper TP documentation shared with the Austrian Tax Authorities (ATA) (either due to mandatory transfer pricing documentation or due to document requests by the ATA), the onus is on them to prove that the transfer prices used are not at arm’s length.
Transfer pricing documentation
Preparation of transfer pricing documentation
- Austria accepts the OECD transfer pricing documentation model based on the Master File and Local File (BEPS Action 13) approach. This approach is considered best practice in Austria. If the thresholds for the TPDA (see below) are not fulfilled, filing a CbCR-Report / Master File and Local File is not mandatory, but can be done in order to fulfill the general documentation obligations according to the FFC. Those state that the documentation must be able to “provide an expert third party with an overview of the business transactions within a reasonable period of time” (without defining this reasonable period of time, hence this may depend very much on the facts and circumstances as well as the complexity of each case).
- Lack of carefully prepared documentation will generally be seen as (at least) “careless” behavior. In those cases, the ATA have the power to estimate the tax basis.
- It is sufficient to prepare transfer pricing documentation within the general scope of the FFC in German. However, it is recommendable to have the transfer pricing documentation also available in English.
- The ATPG 2010 (valid until October 2021) recommended that keeping documentation of transfer pricing-relevant business cases in the following fields may be required, depending on the facts and circumstances of each individual case:
- Information on the main assets used,
- terms of the contract,
- business strategy,
- market and competitive conditions relevant for the price agreement,
- position of the company in the international market,
- record of transactions with associated businesses and
- documentation to demonstrate an arm’s length result.
- The ATPG 2021, led to general transfer pricing documentation requirements that became closer connected to the transfer pricing documentation requirements due to the Master / Local File concept.
Master and local file
- Austria has also introduced CbCR (Country by Country Reporting) and Master File / Local File regulations in accordance with the EU-Directive 2016/881 and the multilateral intergovernmental agreement on the exchange of country-by-country reports. Those are regulated in the TPDA. The regulations are effective for fiscal years starting on or after
1 January 2016.
- The threshold for the obligation to file a CbCR-Report is a group revenue over €750m in the preceding business year. The threshold for the obligation to file a Master File and Local File is revenues over €50m in the two preceding business years.
- If ATA requires transfer pricing documentation according to the TPDA, the taxpayer would typically have a deadline of 30 days to respond.
- Any documentation according to the TPDA should be prepared in German or English and be available by 12 months from the accounting period end. For some aspects concerning the CbCR, reporting in English is mandatory. Generally it is recommendable, to prepare the whole CbCR, Master File and Local File in English.
- ATA’s view is that transfer pricing documentation according to the TPDA should usually include:
- a background to the company,
- a group structure,
- an outline of the key intercompany transactions under analysis,
- an analysis of the key functions, assets and risks of the company,
- an industry analysis and
- an economic analysis including supporting evidence such as comparables, if required.
The key is that it explains the value driving activities and the management of risk in the group and shows that the policies are at arm’s length.
- Transfer pricing documentation must be preserved at least seven years from the end of the accounting period.
Some risk factors for challenge
- High risk business models include commissionaire and toll manufacturing.
- Limited risk distributor and contract services/ contract R&D arrangements could also potentially be affected, especially where significant people functions are in Austria.
- Persistent losses in a “low risk” entity
- Licensing payments to low tax jurisdictions (which are not tax deductible according to the Corporate Income Tax Act)
- Business restructurings, or changes in TP model, can also trigger a challenge but needless to say, businesses can evolve, and if the previous TP method no longer appears the most appropriate, it should always be reviewed, rather than being ignored for the sake of maintaining consistency.
- Non-compliance with the obligation to file a (correct) CbCR-Report or late filing may be subject to a penalty of up to € 25k in case of gross negligence and up to € 50k in case of intention.
- There is no penalty for the non-compliance with non-mandatory transfer pricing documentation. However, non-compliance with the obligation to disclose information that is relevant for the assessment of taxes according to the FFC to the ATA upon request may be subject to a penalty of up to € 5k.
- Furthermore, in case of a lack of sufficient TP documentation, the ATA have the power to make estimates of the tax basis. Those estimates mustn’t have the characteristics of a penalty, but might still be unfavorable for the taxpayer.
Economic analysis and how to demonstrate an arm’s length result
- ATA will expect to see that a search for potential internal comparables has taken place before defaulting to an external database search for comparables.
- Local comparable companies are preferred, whilst EMEA or regional comparable companies can be accepted.
- According to the ATPG 2021, when databases are used, the whole interquartile range may only be used for the ultimate price in case of comparability. While the ATPG 2010 stipulated “complete” comparability, according to the ATPG 2021 “very high” comparability with other companies / business cases is sufficient.
- Note also that ATA are not permitted to use “secret comparables”. There are also no published TP “safe harbors” or norms in Austria, and the key is always the facts and circumstances of the specific case.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advance Pricing Agreements (APAs) in Austria can be divided into unilateral and bilateral measures.
- In Austria, there is no unilateral APA in the meaning that concrete facts and circumstances and a concrete transfer price can be agreed between a taxpayer and ATA, without involving the tax authorities of the other state. However, there are the following possibilities:
- Advance Ruling (AR) according to § 118 FFC: the AR is available for several tax areas, including “international tax law” which also covers Transfer Pricing issues. However, ATA do not confirm the correctness of specific transfer prices under specific facts and circumstances in AR. They only give answers to legal questions, raised by the taxpayers, that wil occur in future cases, if the legal questions are of particular interest. If the underlying facts and circumstances indeed are the same or only differ marginally once the facts and circumstances materialize, then the result of the AR is binding for ATA. The cost for the AR depend on the turnover of the taxpayer, and vary between € 1.5k and € 20k per case. According to the law, it should take ATA not more than 2 months to conclude an AR case. However, in practice, the waiting period is often way longer.
- Express Answer Service (EAS) by the Federal Ministry of Finance: in principle, the EAS is similar to the AR, however the result of an EAS can never be legally binding. There is only the principle of good faith. Again, like the AR, an EAS cannot provide concrete answers to a concrete transfer price under concrete facts and circumstances, but can only answer legal questions. There is no charge for an EAS. Usually, the Federal Ministry of Finance answers quite quickly to EAS requests.
- Bilateral APAs are based on the Mutual Agreement Procedure (MAP) Articles of the respective Double Tax Treaties (based on Art 25 OECD Model Convention). Bilateral APAs are usually applied for by a taxpayer. However, the taxpayer has no legal claim that the MAP will be carried out (successfully). Bilateral APAs are written agreements between ATA and the tax authorities of a treaty partner state to govern the appropriate transfer pricing method and transfer prices for a forward-looking period (usually three to five years). Austria has a wide treaty network, and the MAP will often be available when double tax occurs. However usually, MAP cases like APAs take several years to resolve. There is no charge for bilateral APAs / MAPs.
- Of course, bilateral APAs lead to a higher legal certainty than AR / EAS, as the tax authorities of the partner state have also already been involved. AR / EAS can never be binding for the tax authorities of the partner state.
- It is Austrian policy to allow for arbitration in the event that agreement cannot be achieved and it will seek to include such a provision in its tax treaties. Austria has ratified the OECD Multilateral Instrument (MLI) and hence where the other country (treaty partner) has also agreed, arbitration should be available to eliminate double taxation. This must be checked on a country by country basis.
- Usually, a “primary adjustment”, either in Austria or abroad, should lead to a corresponding “secondary adjustment” in cases where Austria is involved, in order to avoid double
- There are no explicit exemptions from transfer pricing documentation rules. The general record-keeping requirements of the FFC apply to all companies that prepare financial statements, regardless whether they do business with associated companies or not.
- However, due to the thresholds in the TPDA (€ 50m in two consecutive business years for Master / Local Files, € 750m group turnover in the previous year for CbCR), it is mostly MNCs that are subject to the transfer pricing documentation obligations.
Digital services tax
- The new digital service tax (‘DST’) levies 5 % on the remuneration for online advertising in Austria and applies from 1 January 2020.
- It is relevant to businesses that generate global revenues of at least €750m and local Austrian revenues of at least € 25m, whereas for this threshold, only revenues from online advertising count. These thresholds are designed to ensure that smaller businesses and start-ups are out of scope.
- Austria has stated that it prefers a multilateral solution to these issues and is participating in the OECD discussions on the digitalisation of the economy (BEPS Action 1: Pillar One and Pillar Two proposals).
- The economic fallout of COVID-19 is likely to have widespread impact and an increase in TP and Corporation Tax enquiries globally is expected. All MNCs should be reviewing their potential exposure to transfer pricing enquiries and updating documentation accordingly.
- It is also likely that ATA will continue to focus challenges towards companies with commissionaire/LRDs and “cost plus” service entities, especially where they are claiming losses because of the pandemic.
- Where supply chains have been disrupted or work brought to a halt due to lockdown measures, expected profits may not eventuate. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.