The EU Joint Transfer Pricing Forum (JTPF) report on secondary adjustments was agreed in October 2012. With the OECD Base Erosion and Profit Shifting (BEPS) Action Plan currently under discussion, it is worthy to review the process of secondary adjustments and their various implications and complexities. The report discusses the adjustments under the EU Parent Subsidiary Directive, EU Arbitration Convention, and Mutual Agreement Procedure (MAP). For non-EU countries, it is imperative to review consequences of a secondary adjustment due to additional costs, complication and double taxation risks.
It is possible that a transfer pricing adjustment is accompanied by a so-called “secondary adjustment”.
Transfer pricing legislation in some States allows or requires “secondary transactions” in order to make the actual allocation of profits consistent with the primary adjustment. Double taxation may arise due to the fact that the secondary transaction itself may have tax consequences and results in an adjustment.
The OECD MTC does not prevent secondary adjustments from being made where they are permitted under domestic law.
Secondary adjustments may in some Member States be subject to specific penalties or result in penalties under the general penalty regime.
Procedure for removing double taxation: In their responses to the questionnaire on secondary adjustments most Member States which apply secondary adjustments stated that they do not consider double taxation issues resulting from secondary adjustments as being covered by the Arbitration Convention (AC), only a few consider them covered by the AC Convention, and some other MS indicated that the applicability of the AC to secondary adjustments remains an open question for them. However, most Member States applying secondary adjustments would be willing to address them in the course of a MAP. Therefore, in cases where it is not possible to avoid double taxation at the outset, e.g. by way of applying the Parent Subsidiary Directive (PSD), a taxpayer would – in a case of (potential) double taxation resulting from a secondary adjustment – have to file two requests, i.e. a request under the Arbitration Convention and a request for a MAP. The latter would require in each case a treaty being concluded between Member States that includes a MAP provision comparable to Article 25 of the OECD MTC (preferably including an arbitration clause as per Article 25 (5) OECD MTC).
A review of secondary adjustments, and their application for transfer pricing adjustments, should be reviewed in advance of final audit settlements to ensure additional complexities do not arise.