Arm's Length Principle – European Union's Attempt to Unify the Rules of Transfer Pricing Taxation in Relation to State Aid Case Law

Abstract

Transfer pricing and the taxation of intra-group transactions are not currently harmonized within the Member States through EU legislative acts, and the regulation of them depends on national laws, international tax treaties, and soft law-instruments. This regulatory environment causes problems especially with the interpretation of the Arm's Length Principle, which is a quasi-legal instrument, used to determine whether an intra-group transaction price reflects a market-based outcome. This affects corporate income taxation within the Member States, and has led for the European Commission to take multiple actions against national tax rulings on the basis that they constitute state aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union. To help the issues around transfer pricing, the Commission has given a Proposal for a Council Directive on transfer pricing, COM(2023)529 final, 2023/0322(CNS).

The research approach in the thesis is the legal doctrinal method, and the main research question is how the incorporation of the ALP into EU law through the planned Transfer Pricing Directive would affect the current legal environment around transfer pricing and corporate income taxation within the Union, and would it reduce the amount of state aid litigations. Other relevant themes are the Arm's Length Principle's current role as a quasi-legal instrument and how it is interpreted in state aid assessments regarding transfer pricing tax rulings. The aim of the thesis is to create an overall picture of the current regulatory environment around the subject of transfer pricing within the EU and the future of it. Throughout the thesis a European law perspective is held when approaching the topics.

The thesis concludes in finding that the current lack of unified regulation between the Member States creates different legal issues and tax uncertainty to multinational enterprises, and presents possible ways to prevent and remove these issues even if the planned directive is not implemented into the national legislations of the Member States.