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During past years, intragroup transactions have become a reality and a status-quo for recent business models. Financial wise, companies belonging to a group, either national or international, are prone to tailoring operational and financial flows efficiently depending though on the business model pursued.
Yet, from a tax point of view, such transactions do create an additional pressure and administrative burden for taxpayers that are required to fulfil certain principles set forth by international tax law transposed also into domestic law. Basically, such intercompany transactions shall observe the arm’s length principle.
In brief, the price agreed and charged between related parties belonging to the same group (affiliation relationship being assessed based on Romanian tax rules) shall be in line with the price that would have been agreed between totally independent parties for a similar transaction, under similar conditions.
This principle represents the base root of the taxpayers’ obligation to prepare a transfer pricing file according to Romanian tax law. The transfer pricing file represents a comprehensive and complex document aimed to describe the business structure and activities, undertaken functions, risks borne by the parties – that are expected to facilitate the documentation of whether the transfer prices agreed are in line with the arm’s length principle. Even though there are multiple transfer pricing methods to check to document the observance of the arm’s length principle, the most used and preferred by the Romanian tax authorities is the net margin method which supposes to compare the net margin obtained by the concerned taxpayer out of the analyzed transaction with the net margins derived on the market by independent suppliers with a similar functional profile. The analysis consists in a benchmarking study prepared using a specialized database.
First of all, we would like to mention that the fine that a taxpayer may be subject to is the lowest risk the company is exposed to. Actually, failure to present the transfer pricing file or a robust documentation (which is the common mis-practice) is expected to trigger significant additional tax liabilities in the area of corporate tax in case of a tax audit. Thus, if tax authorities were to consider that the sale price was undervalued, the taxable basis will be adjusted accordingly so as the net margin of the taxpayer reflects the market level. Also, additional tax liabilities are backed up by late payment interest and penalties.
Therefore, the tax team of Accace Romania, by way of its tax and legal department, would be glad to support you in any of the following directions: