According to the latest statistics, Romanian tax authorities rank transfer pricing ("TP") high on their agenda. Companies are increasingly aware of the risks they face unless they have the TP documentation ready when asked by the tax inspectors, yet many fail to take action in due time.
In 2017, the Romanian tax authorities conducted over 41,000 tax audits, which resulted in over RON 8bln (approx. EUR 1.76bln) additional tax liabilities. Out of this amount, the additional taxable base established following TP adjustments amounted to RON 1bln, with over RON 60m representing additional corporate income tax and related ancillary liabilities due to TP adjustments, while the tax authorities decreased the available tax losses of companies with RON 316.4m.
The top high-risk industries under increased scrutiny are construction and building materials, production and trade of agri-food and energy products, transport and timber processing.
But regardless of the sector or size of the taxpayer, the tax authorities are clearly keeping a close eye on TP matters. Companies can mitigate the risks by having the TP file available before the tax authorities request it.
Who should prepare a TP documentation file?
A TP documentation file is required from any company that performs transactions with entities of the same corporate group (having a minimum 25 % direct or indirect shareholding and/or economic control).
By documenting the transfer prices, the company justifies the price used in the intragroup transactions, in order to prove that it is at arm's length. Later, based on this justification, tax inspectors decide whether to accept or adjust the transfer prices applied.
Large taxpayers which carry out transactions with related parties over certain significance thresholds are required to prepare their TP documentation files annually, no later than the legal deadline for submitting the annual corporate tax returns. The term for presenting the TP documentation file to the Romanian tax authorities is a maximum of 10 days from the date of the request.
Large taxpayers carrying out transactions with related parties below these thresholds, and all other taxpayers which carry out transactions with related parties over certain other significant thresholds are required to provide their TP documentation files to the Romanian tax authorities in the event of a tax audit. In this case, the term for presenting the TP documentation file to the Romanian tax authorities is between 30 and 60 days, with the possibility to extend this term once by at most 30 days. In practice, this is not a realistic term, as preparing the TP documentation file normally takes around two to four months. The TP file should be prepared on an annual basis.
Why do it?
As the tax inspectors are entitled to request the TP documentation file in a very short timeframe, companies have to make sure they have the updated TP file available before the tax authorities request it. This mitigates the risk of:
- adjustments of the taxable base for corporate income tax / micro-company tax purposes, based on a TP analysis performed by the tax authorities; and
Did you know that…
Starting in 2017, Multinational Enterprise Groups (MNE) present in Romania face new compliance requirements (i.e. notification and/or reporting obligations) in the field of TP, subject to certain criteria. It is recommendable that during the upcoming period these companies take actual steps towards ensuring compliance with these obligations.
Thus, (i) if a company in Romania is a subsidiary, a branch or a permanent establishment of a foreign entity and (ii) the relevant Group of which that company is a member has registered consolidated group revenue in the fiscal year prior to the reporting fiscal year higher than EUR 750m, then that Romanian entity may be obliged to comply with the following:
- The obligation to notify the Romanian tax authorities, including information regarding the capacity of the Romanian company, as well as information regarding the reporting entity (its residence for tax purposes, the fiscal year of the Group).
- The obligation to prepare and submit the Country-by-Country ("CbC") report, which includes aggregated information for each jurisdiction in which the MNE group operates regarding: total revenues, gross profit/loss, income tax paid/accrued, stated capital, accumulated earnings, number of employees and tangible assets, and details regarding the tax jurisdiction and the nature of the main business activities for each constituent entity of the MNE group.
Consequently, in order to establish the specific obligations of a Romanian entity which is part of the MNE Group, it is necessary to establish the position of that entity within the MNE Group (i.e. ultimate parent controlling the MNE Group / surrogate parent / designated constituent entity / constituent entity) and that the conditions for the automatic exchange of CbC report information between Romania and the country of tax residence of the reporting entity are met.
Failure to provide the CbC report, failure to provide it in time or providing incomplete or incorrect data would trigger fines of up to RON 100,000.
The Romanian tax authorities' focus on TP will continue, as it is also supported by Romania's 2018 – 2020 governance programme, which envisages consolidation of the Transfer Pricing Directorate with a specialised department focusing on companies with continuous losses (over three years in a row), companies with no turnover and loans granted by private shareholders to their own companies registering losses.
We recommend that companies conduct an internal audit to identify whether they need to prepare a TP documentation file and, if so, to start preparing it. While it might take between two and four months to complete the file, it is advisable for companies to have the TP file ready when the tax authorities ask for it during a tax audit.
By Theodor Artenie, Managing Director Tax Schoenherr