EU Joint Transfer Pricing Forum adopts compensating adjustment recommendations

When related companies engage in transactions, should they be required to determine an arm’s-length price at the time of the transaction? Or should they be allowed to demonstrate that the outcome of the transaction was consistent with arm’s-length principles after the fact? When a transfer price does not meet the arm’s-length principle, how should the price be adjusted?

This question of compensating adjustments—adjustments in which the taxpayer reports a transfer price for tax purposes that differs from the amount actually charged between the associated enterprises—was the subject of a report by the EU Joint Transfer Pricing Forum released this week. The report makes some general recommendations for approaches EU members should take, but it also leaves some unanswered questions.


Some EU countries follow a price-setting approach to transfer pricing: They require companies to make a reasonable effort to establish transfer prices at the time of the transaction. Others follow an outcome-testing approach, allowing (or requiring) companies to test and, if necessary, adjust transfer prices at the end of the year, before closing their books, or when filing a tax return.

The EU Joint Transfer Pricing Forum has concluded, however, that when related companies are in two countries that both follow an outcome-testing approach, there is a risk of double taxation or of non-taxation. This is because the two countries may have different requirements respecting when the adjustment must be made, what data must be used to determine the adjustment, whether both up and down adjustments can be made, and how much of an adjustment must be made.

If the two countries involved each follow a different approach (one price setting and the other outcome testing), the report says there is some question whether compensating adjustments can be made at all.

The Organisation for Economic Co-operation and Development’s (OECD’s) transfer-pricing guidelines offer little guidance in these situations, so the EU Joint Transfer Pricing Forum conducted a questionnaire of EU member states and has now published recommendations for resolving these issues.


The report sets out two principles for providing a practical solution to these problems:

  1. The profits of the related companies should be calculated symmetrically, that is, both companies participating in a transaction should use the same price for the transaction; and
  2. A compensating adjustment initiated by a company should be accepted if certain conditions are met.

The conditions in item 2 are that the company must:

  • Make reasonable efforts to achieve an arm’s-length outcome;
  • Make symmetrical adjustments in both countries;
  • Apply the same approach consistently over time;
  • Make the adjustment before filing the tax return;
  • Be able explain why the adjustment is required (if one of the countries involved requires this explanation).

The report offers little guidance on determining the appropriate amount of a compensating adjustment, other than to say that the adjustment “should be made to the most appropriate point in an arm’s length range.” It points to the OECD’s transfer-pricing guidelines for further direction. The report does recommend that upward as well as downward adjustments should be permissible.

While setting out principles for compensating adjustments, the report also recommends that where EU member states have less prescriptive rules on compensating adjustments, these less prescriptive rules should apply and the EU member state should not introduce more conditions for compensating adjustments.

Alistair Nevius ( is editor-in-chief, tax, for CGMA Magazine.