The Arbitration Convention and Transfer Pricing

Amidst rapid globalisation, the corporate world is getting smaller by day and, transfer pricing inevitably remains a significant issue that draws attention from governments, in particular governments that impose higher corporate taxes. In the European Commission, an Arbitration Convention was initiated to tackle this concern. The Arbitration Convention was originated from the European Commission's 1976 proposal for a directive to eliminate double taxation in the case of profits transfers among associated entities of Member States (Official Journal C 301 of 21 December 1976) and the White Paper of 1985 on the completion of the Internal Market. After long negotiations, the Commission's proposal was finally transformed from a Directive into an inter-governmental Convention, signed on 23 July 1990. This Arbitration Convention is referred to as Convention 90/436/EEC. The Arbitration Convention sets up a procedure to resolve disputes where double taxation takes place between entities of different Member States caused by an upward profits adjustment of an entity of one Member State. Although most bilateral double taxation treaties include a provision for a corresponding downward profits adjustment of the relevant associated entity, they do not generally impose a binding obligation on the Contracting States to eliminate the double taxation. The Convention, therefore, provides for the elimination of double taxation by agreement between the contracting states including, if necessary, by reference to the opinion of an independent advisory body. The Convention, hence, improves the scenario for cross-border activities in the Internal Market.  For more practical aspects of the Convention, see the European Commission's official website.