Companies that carry out transactions with related parties often face financial, tax and legal obstacles that impact the daily business activities. Therefore, in order to comply with domestic and international transfer pricing regulations and to ensure a smooth transfer of goods and services among related parties, it is necessary to have a sound and coherent transfer pricing policy.
Taking into consideration the increased focus placed by tax authorities on transfer pricing, companies established in Romania also assign increased resources in order to observe the transfer pricing legal requirements. We have also observed that companies tend to expand outside their domestic markets which subsequently imply an increased number of related parties transactions.
To this end, we have considered useful summarizing the main Romanian transfer pricing legal requirements and we have outlined the main risks faced by Companies not observing these any requirements.
The transfer pricing documentation should be prepared by Romanian tax payers that carry out transactions with related parties, irrespective if the related parties are Romanian or non-Romanian tax entities. A proper transfer pricing documentation should contain at least the following information, as provided by Order 442 / 2016:
- Information about the Group, such as the general description and historic information regarding Group, financial information, legal and organizational structure, description of the Group transactions and the applicable transfer pricing policy
- Information about the Company, such as the general description and historic information regarding Group, financial information, legal and organizational structure, the Company’s strategy and key success factors;
- Industry analysis such as general description and main factors that impact the industry
- Functional analysis should contain details regarding the allocation of functions, risks and assets within the Group
- Information about the related party transactions
- Economical analysis should contain details of the study regarding the market value applicable to the analyzed related party transactions.
As you can observe from these minimum information requirements, the mere translation of the master file prepared by the mother company will not suffice as it will lack the information and the focus on the Romanian company and its transactions.
Even if any Romanian tax payer should prepare a transfer pricing documentation, there are some differences when it comes to deadlines and timing, as detailed below:
1. Large tax payers are obliged to prepare the transfer pricing documentation if they carry out transactions with related partied exceeding the following thresholds:
- Euro 200,000 – cashed in / paid interest for financial services
- Euro 250,000 – services rendered / received towards/from related parties
- Euro 350,000 – acquisitions / sales of tangible / intangible assets
2. Large tax payers which do not meet the above thresholds or medium or small tax payers are obliged to prepare the transfer pricing documentation if they carry out transactions with related partied exceeding the following thresholds:
- Euro 50,000 – cashed in / paid interest for financial services
- Euro 50,000 – services rendered / received towards/from related parties
- Euro 100,000 – acquisitions / sales of tangible / intangible assets
3. The other tax payers which do not fall in any of the above mentioned categories are not obliged to prepare the transfer pricing documentation, however they should document that the arm’s length principle is observed in the dealings with the related parties in line with financial and tax applicable principles.
Based on the classification detailed above, the deadlines for drafting / presenting the transfer pricing documentation are as follows:
- Tax payers in category I should present the transfer pricing documentation within 10 days of the tax authorities’ request.
- Tax payers in category II should present the transfer pricing documentation within 30-60 days of the tax authorities’ request. The tax payers may ask for maximum 30 day postponement.
Failure to comply with these requirements could trigger fines, penalties as well as late payment interest. The fine for not presenting a transfer pricing file varies from RON 12,000 – 14,000. Some may be tempted to compare the value of the file against the fee for the preparation of the transfer pricing documentation and decide that it is worth the risk. For these it is worth mentioning that besides the fine, companies may face transfer pricing adjustments which may lead to additional tax liabilities, penalties and late payment interest. In this scenario, the bill for not preparing the transfer pricing documentation may be quite expensive.
Romanian tax payers have the possibility to mitigate the risk of transfer pricing penalties and adjustments imposed by tax authorities by seeking to obtain advanced pricing arrangements (APA). The APA issuance request should contain a detailed description of the transactions the tax payers intend to carry out with related parties as well as details regarding the transfer pricing policy they intend to apply. The fees for APA issuance may appear high, but taking into consideration their advantages (i.e. tax payers will be protected from any transfer pricing adjustments, the transfer pricing file is no longer mandatory), they may prove a good value for money. The APA issuance fees are as follow:
- Euro 20,000 for large tax payers with consolidated value of transactions higher than Euro 4,000,000. The fee of amending a APA for these tax payers is Euro 15,000
- Euro 10,000 for non-large tax payers and consolidated value of transactions lower than Euro 4,000,000. The fee of amending a APA for these tax payers is Euro 6,000
Accace recommends companies that carry out transactions with related parties to pay special attention to transfer pricing legal requirements as failure to comply could trigger significant fines as well as transfer pricing adjustments which are followed by additional tax liabilities, penalties and late payment interest.