Part 1 - AL-Tax

International Taxation HandbookThe absence of cross-border consolidation is a major problem in the EuropeanUnion. Implementing cross-border loss relief could, as shown by Gérard and Weiner(2003), improve the situation by mitigating tax competition. The 1991 proposalfor a directive on this issue (European Commission, 1991) received favorable opinionfrom the European Parliament but was never discussed by the EuropeanCouncil. It was withdrawn by the European Commission in December 2001 becauseit was thought that some technicalities needed revision and that a more comprehensiveproposal would be desirable.8.7.3 Transfer pricing and profit shifting in the European UnionTransfer pricing is the second issue tackled by the European Commission (2001a).The report stressed the increasing differences between the transfer prices calculatedfor tax purposes and the underlying commercial rationale. It also pointed to the highcompliance costs imposed by the Member States in the form of documentationrequirements, the differences and uncertainty of the treatment of those operationsby national tax authorities, the lack of use of the arbitration convention (90/436/EEC),and the subsequent double taxation. The report estimated that ‘medium-sizedmultinational enterprises spend approximately €1–2 million a year on complyingwith transfer pricing rules’ and that ‘large multinational enterprises incur compliancecosts related to transfer pricing of approximately €4 up to 5.5 million ayear. These figures do not include the costs and risks of double taxation due totransfer pricing disputes’ (European Commission, 2001a, p. 343). To overcomethese difficulties, the European Commission has proposed to establish a Code ofConduct to standardize the documentation that companies must provide to taxauthorities on their pricing of cross-border intra-group transactions (EuropeanCommission, 2004a). This is a first result of the work of the EU Joint TransferPricing Forum, which brings together business and tax administration representatives.The Code was adopted by the Member States in December 2004, and alsostipulates time limits for dealing with complaints and the suspension of tax collectionduring the dispute resolution. The Code effectively and coherently implementsacross Member States the EU’s Arbitration Convention, which was originally proposedin 1976 and signed in July 1990 (European Commission, 1990).Devereux (2004) rightly pointed out the dichotomy between the EuropeanCommission’s 2001 report, which is concerned with double taxation and compliancecosts for companies, and the economic literature, which considers the issuerather in terms of profit shifting across jurisdictions and the subsequent tax revenuelosses. 15 Profit shifting can take several forms. First, companies can decide to192