Key considerations in transfer pricing
Transfer pricing is a crucial topic in the field of international taxation and it also holds a significant importance within the Romanian tax framework, the fiscal authorities being focused on ensuring the compliance with the “arm’s length principle” in establishing the price charged in transactions involving related entities.
In Romania, it is important for the taxpayers, irrespective of their size or field of activity, to understand and comply with transfer pricing regulations. Among the key transfer pricing requirements that Romanian taxpayers should be well-informed on, we aim to detail further the obligation to develop a transfer pricing documentation and the obligations arising in the context of Country-by-Country Reporting.
1. The obligation to prepare the transfer pricing file
The transfer pricing file is a fundamental document for taxpayers conducting transactions with related entities, serving as a method of justifying the prices charged in these transactions. As for the tax authorities, they also place significant importance on the quality of the analyses provided within the file and the associated documentation when conducting a tax audit. Hence, in the event of a tax verification, the Romanian taxpayers must be prepared to present the transfer pricing file to the tax authorities.
The content of the transfer pricing file
The transfer pricing documentation should include detailed information on the activities of the analysed company and of the multinational group, details regarding the transactions performed with the related entities, as well as a functional analysis and an economic justification on the alignment of the company’s / group’s transfer pricing policies with the transfer pricing principles.
Criteria and deadlines
For the different categories of companies, transactions or values of transactions with related parties, the obligation to prepare the transfer pricing file can occur as follows:
- Large taxpayers are required to prepare the transfer pricing file on an annual basis, until the deadline for submitting the annual tax return, if the transactions carried out with the affiliated entities exceed certain thresholds (excl. VAT): the amount of interest paid / collected is of min EUR 200 thousand; the value of services received / provided is of min. EUR 250 thousand, and the value of transactions with tangible / intangible goods is of min. EUR 350 thousand. In the event of a tax audit, these entities must present the transfer pricing file in max. 10 days from the date of request.
- Medium and small taxpayers, but also large taxpayers who do not exceed the thresholds mentioned above, must present the transfer pricing file when requested during a tax audit, within 30-60 days from the date of request. At the taxpayer’s request, entities can benefit from an extension of max. 30 days. These rules apply if the values of the transactions with the affiliated entities (excl. VAT) are of min. EUR 50 thousand for the interest paid / collected and services received / rendered, respectively EUR 100 thousand in the case of transactions with tangible / intangible goods.
- A third category is represented by the large, medium or small taxpayers that engage in transactions with related parties that have values lower than the previously mentioned thresholds. Thus, these taxpayers have the obligation to document the compliance with the transfer pricing principles, during a tax audit, in accordance with the general rules provided by the financial, accounting and fiscal regulations.
Benefits of preparing the transfer pricing documentation on an annual basis
Companies often view the annual preparation of the transfer pricing file as a complex and time-consuming process. Nevertheless, such an approach comes with several benefits, such as:
- Risk management: analysing the compliance with the transfer pricing principle helps companies to identify and correct possible deviations, prior to a tax audit. Companies would therefore be in a favourable position to take appropriate corrective measures in order to prevent adjustments (often of significant amounts) from being made by tax inspectors. Thus, voluntary adjustments of the intra-group transactions can be made to ensure compliance with the “arm’s length principle” for previous periods, but also for future ones, both at the level of the Romanian company, as well as at the level of the other companies in the group.
- Efficient allocation of resources: the voluntary preparation of the transfer pricing file, with an annual/regular frequency, allows companies to manage the process more efficiently and collect/analyse the necessary information without experiencing the pressure inflicted by a tax audit.
- Easy access to relevant data: the data required for the preparation of the transfer pricing file, which may be voluminous and complex, can be more easily accessed if an annual analysis is carried out, as opposed to preparing the file for a longer period of time under the pressure of the deadline imposed by the tax inspection team.
2. Country by Country Reporting
Multinational groups with annual consolidated revenues of at least EUR 750 million, irrespective of their involvement in intercompany transactions, are required to submit one of the following two documents to the tax authorities:
- Country-by-country report: the document is prepared by the parent company of the group or by a designated reporting entity and must be submitted within 12 months from the end of the group’s fiscal reporting year. If the parent / designated entity is based outside the territory of the European Union and Romania has not concluded a country-by-country reporting information exchange agreement with that country, the Romanian entity is required to submit this report as well. This provides the tax authorities with information on the income, profits, taxes declared in each jurisdiction, and other matters relating to the group of companies.
- Notification of the position of the Romanian constituent entity and the identity of the reporting entity: this document is submitted by the Romanian company, part of a multinational group with a consolidated turnover of more than EUR 750 million, in order to indicate the reporting / designated company, by the end of the fiscal year (or by the deadline for submitting the annual tax return).
Consequences of non-compliance with the transfer pricing obligations
The failure to comply with transfer pricing regulations can lead to significant consequences for taxpayers, including substantial penalties and adjustments to the price of the transactions. Hence, it is therefore essential to give proper consideration to these rules, since:
- If the taxpayer does not present the transfer pricing documentation, the tax authorities not only can adjust the transfer pricing amount, resulting in potentially significant tax liabilities but may also impose fines of RON 12,000 – 14,000 for large and medium taxpayers and RON 2,000 – 3,500 for small taxpayers.
- The late submission of the Country-by-Country report, as well as providing an incomplete or inaccurate form, may lead to penalties of RON 30,000 – 50,000. Failure to submit the report results in fines of RON 70,000 – 100,000. On the other hand, failure to submit the notification on the position of the Romanian constituent entity and the identity of the reporting entity may lead to a lower fine (500 – 5.000 RON depending on the type of taxpayer).
In conclusion, transfer pricing represents an area that demands significant attention from taxpayers, both in terms of compliance and justification of prices applied in transactions with affiliated parties, as well as in terms of Country-by-Country reporting obligations. In recent times, this is a topic that tax authorities closely examine during tax audits, often imposing significant additional tax obligations and regulatory penalties. Timely preparation of the transfer pricing documentation and ensuring compliance with the arm’s length principle are crucial factors for taxpayers in preventing tax adjustments imposed by tax authorities.
The experts at TPA, with their interdisciplinary know-how on tax, business, and markets, are able to help you in addressing issues relating to transfer pricing so that you can achieve targeted management of tax risks as well as the harmonisation of your business model to market conditions.
Our experts develop the best solutions for you through the provision of the following services:
- Review of your business model
- Functional analyses
- Market analyses
- Design of a transfer pricing model
- Preparation of documentation (master file, local files)
- Benchmarking using the TP Catalyst business database
- Defence of your transfer prices in tax audits
- Advanced ruling requests
