Transfer Pricing
The transfer pricing (“TP”) environment has become more challenging, especially when regulations are changing to enhance transparency. Growing businesses are not only required to develop a tax efficient and viable transfer pricing policy to enhance competitiveness, but also need to manage potential TP risk in a cost-effective manner.
Transfer pricing documentation is, therefore, not only a compliance requirement, but also represents the first line for audit defense.
Our specialists can assist to assess your compliance and strategic needs holistically, and re-imagine the future businesses operational model.
Our transfer pricing services include:
- Transfer pricing planning: design practical and efficient transfer pricing policies and procedures;
- Transfer pricing compliance: Prepare transfer pricing documentation;
- Operational transfer pricing: implement and review transfer pricing processes and controls;
- Supply chain planning: consider strategic policy design and tax planning;
- Transfer pricing benchmarking: benchmark royalty rates, interest rates, and entity profitability;
- Advance pricing agreements: unilateral and multilateral transfer pricing agreements with tax authorities.
Appropriate attention to transfer pricing helps your business:
- Identify possible opportunities and implement transfer pricing policies for improved tax efficiencies;
- Be compliant with national and global transfer pricing regulations reducing the chance of transfer pricing adjustments by tax authorities;
- Be protected against transfer pricing penalties;
- Reduce long-run tax compliance costs by establishing efficient policies, procedures, and documentation;
- Reduce risks associated with uncertain tax positions.
What is Transfer Pricing?
The term Transfer Pricing (usually referred to as TP) refers to how related parties price goods, services, intangible assets, loans and other transactions between them. TP Rules/ Regulations are established in various countries to ensure that related party prices are reasonable and fair. Romanian tax authority expects related party transactions to be carried out at arm’s length.What is Transfer Pricing Documentation?
Many countries around the world have transfer pricing documentation requirements. Transfer Pricing documentation refer to the records prepared as evidence that the pricing is at arm’s length.
Transfer Pricing Documentation requires the analysis of the company, industry and functions (including assets and risks) to be able to “characterise” the entity and transactions. Once “characterised” for transfer pricing purposes a transfer pricing method is selected and applied using an economic analysis (often called a comparable search). This comparable search is compared to the financial information of the entity being reviewed to evaluate whether the international related party transactions have been conducted at arms-length.
When is Transfer Pricing Documentation required to be prepared?
In accordance with Art. 108 para. (2) of the Fiscal Procedure Code, to document the observance of the market value principle, the taxpayer/ payer who carries out transactions with affiliated parties has the obligation to prepare the transfer pricing file.
At the request of the fiscal body, the taxpayer has the obligation to present the transfer pricing file. The amount of transactions for which the taxpayer/ payer has the obligation to prepare the transfer pricing file, the deadlines for its preparation, the content of the transfer pricing file, as well as the conditions under which it is requested are approved by order of the ANAF president.
Thus, OPANAF no. 442/2016 issued based on the provisions mentioned above establishes that in the case of companies that are not large taxpayers or have this quality but do not reach any of the thresholds of significance provided in par. (2) in art. 2 of the order, the fulfillment of one of the significance thresholds established at par. (4) calculated annually for all operations with affiliates, namely:
- 50.000 euro in case of interest received / paid for financial services;
- 50.000 euro, in case of transactions regarding the provision of services received/ provided;
- 100.000 euro, in the case of transactions regarding the acquisition/ sale of tangible or intangible assets.
If one of the thresholds is met, the preparation of the transfer pricing file is mandatory for any of the affiliates involved in the transaction, but only in the case of the fiscal inspection and only at the request of the control body.
If none of the thresholds is met, the company will not be obliged to prepare the transfer pricing file, justifying the observance of the market value principle in case of operations between affiliates to be performed by other means based on the general rules of financial legislation. accounting is the case, for example, of an evaluation report prepared by an authorized evaluator.
Thus, art. 4 para. (4) of OPANAF no. 442/2016 expressly states that for taxpayers in the category of large taxpayers, who do not fall within the criteria established according to the provisions of par. (1), as well as taxpayers from the categories of small and medium taxpayers, who carry out transactions with affiliates with a total annual value, calculated by summing the value of transactions with all affiliates, excluding VAT, greater than or equal to any of the significance thresholds , provided in this paragraph, there is the obligation to prepare and present the transfer pricing file only at the request of the fiscal body, within a fiscal inspection action.
The obligation to prepare an annual report falls only on large taxpayers who meet any of the following significant requirements:
- 200.000 euro, in case of interest collected / paid for financial services, calculated at the exchange rate communicated by the National Bank of Romania valid for the last day of the fiscal year;
- 250.000 euro, in the case of transactions regarding the provision of services received / provided, calculated at the exchange rate communicated by the National Bank of Romania valid for the last day of the fiscal year;
- 350.000 euro, in the case of transactions regarding the acquisition / sale of tangible or intangible assets, calculated at the exchange rate communicated by the National Bank of Romania valid for the last day of the fiscal year.
- up to RON 27,000 (approximately EUR 5,600) for large taxpayers who carry out intra-group material transactions and who are required to transfer transfer pricing in addition to a substantive tax inspection;
- up to RON 14,000 (approximately EUR 2,900) for medium and large taxpayers who are required to transfer the transfer pricing file during a substantive tax inspection;
- up to RON 3,500 (approximately EUR 700) for small taxpayers who are required to transfer the transfer pricing file during a substantive tax inspection.
2. Penalties derived directly from transfer pricing adjustments
- additional revenues/ additional income tax (i.e. 16% of the additional profits / income established by the tax inspection team);
- calculable penalties on income tax / additional income (calculated for the period from the time when they should have been paid until the time when the tax decision is issued by the tax authorities and the principal is paid):
◌ late payment interest (0.02%/ due day); and
◌ delay penalties (0.01%/ due day); or
◌ non-declaration penalties (0.08%/ due day).
Most important, however, is that the non-presentation/ incomplete presentation of the file entitles the tax authorities to estimate the market value of the transfer prices used by the taxpayer in intra-group transactions: the inspector will choose three similar transactions and make the arithmetic mean, without considering the particularities of the analyzed transaction or the functional and risk profile of the company.
This “forced” estimate may lead to a sharp adjustment of the transfer prices charged by the affiliates and, consequently, to the payment of significant additional taxes. Moreover, it will be an adjustment that the taxpayer can no longer dispute, no longer having the opportunity to exercise this right.
- Transfer pricing policies
- Transfer pricing documentation
- Review transfer pricing processes and controls
- Tax planning
- Transfer pricing benchmarking
- Transfer pricing agreements
- Assistance in relation with tax authorities
