Transfer pricing studies supported by a benchmarking analysis using publicly available databases may reduce the risk associated with a transfer pricing audit conducted by the Austrian tax authorities.
In such cases, the determination of what is deemed to be an appropriate transfer price between related entities is measured by taking into account previously fixed target margins as determined by a benchmarking analysis. For certain entities (depending on their activities), application of the transactional net margin method (TNMM) can be considered an appropriate transfer pricing method.
Still, this process can present a challenge to taxpayers, in that it can be difficult to make the necessary determination of transfer prices in advance—i.e., for each transaction, instead of waiting until the end of the fiscal year when the actual amounts (such as turnover and costs) are known.
Typically, preliminary transfer prices are provided at the beginning of the fiscal year, only to be adjusted over the course of or at the end of the fiscal year.
In Austria, there is no specific law addressing subsequent transfer pricing adjustments, so taxpayers may consult guidance from the OECD transfer pricing guidelines and the Austrian transfer pricing guidelines.
With respect to the general application of TNMM-based studies, the Austrian tax authorities, in practice, will accept this method (1) only for companies with a low functional and risk profile, and (2) if one of the other standard methods (comparison, resale price or cost plus method) is not applicable because of missing or non-comparable arm's length data.
Still, it has been observed that the Austrian tax authorities—while skeptical of the use of retroactive transfer pricing adjustments similar to the OECD transfer pricing guidelines—have not categorically denied their use. Paragraph 33 of the Austrian transfer pricing guidelines (öVPR) addresses the principle of an "ex ante" approach. The subsequent adjustment (or correction) of taxable results achieved with given transfer prices—by adding or reducing transfer prices for actual costs incurred—is allowed if such an approach is also common with respect to third parties. In practice, therefore, subsequent price adjustments may not be allowed unless also used in third-party transactions, even though there is no legal basis for this restrictive position taken by the Austrian tax authorities.
Based on OECD guidelines and German administrative practice, a retroactive price adjustment may be allowed under the following circumstances:
- If the price adjustment only serves to bring the results of the transaction from a value outside the range of an arm's length price to an appropriate value within this range (OECD VPR Tz 1.48)
- The subsequent price determination is based solely on previously defined computations (Tz 126.96.36.199 German administrative guidelines) and, therefore, the price cannot be subsequently influenced by a party to the transaction, but is only determined based on a “pricing formula” agreed upon by the related parties in advance of the transactions
Given this, tax professionals note that it is absolutely necessary that suitable written contracts are concluded in advance of the transactions.
As is common among unrelated parties, subsequent price adjustments would be allowed to take into account, among other things, rebates including volume discounts, loyalty discounts, and annual bonuses. Also, price adjustments may be allowed when the purchaser has a high degree of transparency regarding the actual costs of the contractor, and risks are assumed by the purchaser (e.g., contract manufacturing).
When implementing transfer pricing models with subsequent price adjustment, VAT/sales tax and possibly customs implications, as well as the technical implementation of such subsequent price adjustments in the accounting system, also need to be considered.
Alternative adjustment mechanisms
To avoid issues during tax audits or in the practical implementation, alternative adjustment mechanisms may need to be considered and verified in each situation (industry- and transaction-specific) with respect to their suitability.
A common practice is to conduct a quarterly review of the target margin, coupled with a timely adjustment of (only) the future transfer prices (if necessary).
There are other variations that may be suitable, depending on industry and functional risk profile, that each company could use to monitor whether the transfer prices are at arm's length and make adjustments if necessary.
Read a 2012 report (German), prepared by the KPMG member firm in Austria: Nachträgliche Preisanpassungen - Year End Adjustments
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Austria:
Werner Rosar, senior tax manager, Vienna
Sabine Bernegger, tax partner, Vienna
Or contact a tax professional with KPMG's Global Transfer Pricing Services.