What is Transfer Pricing?

In brief, transfer pricing refers to the prices at which companies within the same group sell products, provide services, or offer loans to each other. These prices must resemble those used between independent companies—essentially, they should reflect a “fair market price.”

To ensure prices are appropriate, an analysis is conducted to evaluate the functions performed, risks assumed, and resources used by the companies. The most commonly employed method for this is the Transactional Net Margin Method (TNMM), as per OECD guidelines.

Who is ElectroPower?

ElectroPower is a group operating in the energy sector, with two main divisions:

1. 1. 1. Production Division – responsible for generating electricity.
      2. Distribution Division – handles energy delivery to customers.

The Production and Distribution Divisions are separate legal entities within the same group. The Production Division sells energy to the Distribution Division, and these transactions must comply with transfer pricing rules.

Why Conduct This Analysis?

The primary objective is to ensure that the prices used by ElectroPower between its two entities are fair and market-compliant. For this, we analyzed:

• Production Division: Profitability relative to costs (RRCT).

• Distribution Division: Profitability relative to revenues (RRCA).

Financial Snapshot

Production Division:

• Total Costs: 10.8 million RON

• Revenue from Sales to Distribution: 7 million RON

• Revenue from External Sales: 5 million RON

• Operating Profit: 1.2 million RON

Distribution Division:

• Energy Procurement Costs: 7 million RON

• Other Costs: 2 million RON

• Total Revenue: 12 million RON

• Operating Profit: 3 million RON

Analysis Results

Production Division – Profitability Relative to Costs (RRCT):

a. Calculation: (Operating Profit / Total Costs) × 100 = (1,200,000 / 10,800,000) × 100 = 11%

b. Market Comparison: The RRCT market range for this activity, under CAEN code 3511 (Electricity Production), is between 10% and 15%.

c. Result: The Production Division’s profitability is within the acceptable range.

Distribution Division – Profitability Relative to Revenues (RRCA):

a. Calculation: (Operating Profit / Total Revenue) × 100 = (3,000,000 / 12,000,000) × 100 = 25%

b. Market Comparison: The RRCA market range for energy distribution, under CAEN code 3513 (Electricity Distribution), is between 20% and 30%.

c. Result: The Distribution Division’s profitability is also within the acceptable range.

Key Conclusions

1. 1. 1. Compliance Achieved: Both divisions operate within market benchmarks, ensuring transfer prices are fair and legally compliant.
      2. Proactive Monitoring: Given the dynamic nature of the energy market, it’s advisable to review this analysis annually.
      3. Internal Collaboration: Effective communication between the divisions and entities within the group helps maintain compliance and prevents costly surprises.

By partnering with the Cabot Transfer Pricing team, ElectroPower has successfully adhered to regulations, avoided costly tax adjustments, and maintained a positive relationship with authorities. Moreover, the group is well-positioned to handle future market changes.

For more details on how Cabot can benefit your group, feel free to contact our representatives: https://cabot-tp.ro/contact/