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Companies that carry out transactions with related parties often face financial, tax and legal obstacles that impact their 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.
General Transfer Pricing rules have been implemented in the Romanian legislation in 2003 via the Tax Code, mentioning arm´s length principle and the specific methods provided by OECD in order to determine the market value of transactions between related parties.
Currently, Romanian companies are obliged to keep Transfer Pricing documentation for both cross-border and domestic transactions. According to the Romanian tax legislation, all related parties are obliged to prove the method applied for setting the prices of controlled transactions (domestic or cross-border) between related parties and keep a relevant documentation justifying this method.
In recent years, the number of tax inspections on Transfer Pricing rapidly increased, that is why we recommend focusing on this area and, especially, on preparation of the proper Transfer Pricing documentation.
The arm’s length principle is based on a comparison of the terms which were agreed in any business or financial transactions between related parties and the terms which would have been agreed between unrelated parties in similar business or financial transactions, in comparable circumstances.
The review of comparability of the terms is made by confronting, in particular, the businesses conducted by the parties, including, but not limited to, their production, assembly works, research and development, purchase and sale, the scope of their business risks, the characteristics of the compared property or the service, the terms agreed between the parties to the transaction, the economic environment in the marketplace, and the business strategy. The terms shall be considered comparable if there is no difference at all or if only minor adjustments would compensate any such difference.
If there is a difference between the prices agreed in transactions of related parties and the prices applied between unrelated parties in comparable business transactions, the tax authorities may adjust the taxable base of the related parties involved in the transactions.
Any Romanian taxpayer that carries out transactions with related parties, for both domestic and cross border transactions, is subject to Transfer Pricing rules.
Related parties are defined as:
Transfer Pricing documentation represents a set of information, data and facts which demonstrate and explain the method of taxpayer’s price formation in controlled transactions. Transfer Pricing documentation, in general, consists of two parts: a general one and a specific one.
The general part contains a set of information giving an overall picture of the group of related parties
The specific part contains specific information related to the taxpayer and to the controlled transactions in which the taxpayer is engaged
Transfer Pricing documentation shall be prepared for each controlled transaction separately or for each group of aggregated controlled transactions and in Romanian language. Transfer Pricing documentation refers to each fiscal year.
Even if each Romanian taxpayer performing economic transactions with affiliated parties should prepare a Transfer Pricing documentation, there are some differences when it comes to deadlines and timing, as detailed in the following two subsections.
Based on the classification detailed above, the deadlines for drafting/presenting the Transfer Pricing documentation are as follows:
Taxpayers in category 1 should present the Transfer Pricing documentation within 10 days of the tax authorities’ request.
Taxpayers in category 2 should present the Transfer Pricing documentation within 30-60 days of the tax authorities’ request. The taxpayers may ask for maximum 30-day postponement.
Due to the short preparation period, it is recommended having the documentation prepared in advance.
Any traditional and other Transfer Pricing methods according to OECD Transfer Pricing Guidelines can be used while the principle of the best method shall be applied. Also, a combination of more methods is possible if necessary. If appropriate, other methods may be used, too.
Comparable uncontrolled price method – used mainly for transactions with tangible and intangible assets and financial transactions
Resale minus method – used mainly for distributors of products
Cost plus method – used mainly for transactions related to manufacturing and sale of semi-finished products/finished products which do not include high added value
Net trading margin method – mainly for comparable transactions that significantly differs in functions
Profit split method – suitable for very integrated transactions when the parties contribute in a unique way or they possess valuable tangible asset
Advance Pricing Agreements (APA) are available under Romanian legislation. APA are valid up to 5 years with possibility of extension in case of long-term contracts.
For large taxpayers and other taxpayers with consolidated value of transactions higher than EUR 4,000,000, the fee is EUR 20,000 for the initial APA and EUR 15,000 for amending the initial APA.
For other taxpayers and consolidated value of transactions lower than EUR 4,000,000, the fee is EUR 10,000 for the initial APA and EUR 6,000 for amending the initial APA.
For non-compliance regarding the preparation and presentation of the Transfer Pricing documentation, penalties are applicable:
Separately, adjustment of tax base plus late payment interest and penalties may be applicable.