Fiscal control risks generated by transfer pricing25 January 2024
In recent years, in the framework of fiscal controls carried out at the level of companies in Romania, increased attention has been paid to the verification of the transfer pricing file. In many situations, this control of transfer prices by tax authorities at the company level has materialized through significant adjustments of transfer prices, which can lead to additional tax on profits, as well as the payment of appropriate tax accessories.
The current trend in fiscal controls is to issue compliance requests (letters) that expose the risks identified at the level of the company and that require the company in question to respond within 30 days either by submitting rectifications or by a reasoned answer. In practice, companies can respond by submitting the transfer pricing file or by submitting comparability studies.
According to the legal provisions, the transfer pricing file is the essential document for arguing compliance with the market value principle of transfer prices applied in transactions with affiliated legal entities.
This requirement was introduced into Romanian tax legislation in 2008, and starting from 2016, large taxpayers are required to prepare the transfer pricing file annually, depending on certain thresholds (these thresholds can be found in order no. 442/2016). By contrast, small and medium-sized taxpayers are required to prepare the file only at the request of tax inspectors and only in the framework of a general tax inspection. Here the consultants’ recommendation is to prepare this file annually to prevent possible transfer pricing risks and to be able to make voluntary adjustments at the end of the year. The lists of large and medium taxpayers published on January 1, 2024 can be found by accessing this link.
The issue of transfer prices is closely related to the determination of the taxable base of the profit tax. It is the responsibility of the tax authorities to supervise the correctness of the establishment of the taxable base at the level of taxes due.
Companies that face the risk of transfer pricing controls and income tax adjustments are those that have recorded operating losses or reduced profit margins and carry out intra-group transactions (there being the premise that they may have a lower taxable base as a result of intra-group flows).
Also, in the category of companies with a high risk of transfer pricing control and adjustment are also companies that submit rectification declarations. The submission of rectifications signals errors encountered in the declarations initially submitted by the company, therefore, the tax authorities tend to verify the correctness of the submitted declarations by conducting a tax inspection. Companies paying profit tax that carry out transactions with related parties that have a different tax regime (e.g. micro-enterprises) or those companies that have taxes to recover from the state budget are also subject to the risk of transfer pricing control. VAT, excise duties).
With regard to the events that lead to the emergence of a risk of transfer pricing control, the companies that have facts entered in the tax register, have opened insolvency proceedings, have registered outstanding tax obligations, have not submitted tax returns, have registered a loss, have a high degree of indebtedness or have been declared inactive.
Consequently, it is recommended for companies to evaluate fiscal and transfer pricing risks quarterly or annually, to inform themselves about the methods of control carried out by the tax authorities (an example by which we find that information about these methods is necessary is the appearance of these compliance notices, a new tax control tool) and of course to collaborate with a tax consultant specialized in transfer pricing.
Junior Transfer Pricing Consultant