Our team often faces issues regarding transfer pricing, which are more and more diverse – from comparability adjustments made without observing the documentation provided by our clients, to the illegal application by the tax authorities of the rules on the presentation of the transfer pricing file.
While welcoming the extended period of reflection, today we will address the issue of transfer pricing documentation, analysing, on this occasion, the solution imagined by the Romanian legislator to excuse the taxpayer from the obligation to prepare and submit the transfer pricing file.
As expressly provided by the national legislator in paragraph (2) of Article 108 of the Tax Procedure Code, the issue of transfer pricing documentation is limited to the notion ofaffiliated persons entering controlled transactions, as defined by the OECD Transfer Pricing Guidelines.
As a matter of principle, the obligation to prepare the transfer pricing file in this case is expressly provided in Article 108 paragraph (2) of the Tax Procedure Code. The article also indicates the reason for its establishment – the documentation of the observance of the ”arm’s length” principle, or, in a bolder language, the justification of the observance of the ”arm’s length” principle.
Related to the obligation to prepare the transfer pricing file is also the obligation to submit it at the request of the competent tax authority. Undoubtedly, the latter derives from the general obligation to provide information necessary to determine the fiscal state of affairs, provided by Article 58 of the Tax Procedure Code, corroborated with the general obligation of the taxpayer to present the documents necessary to establish his fiscal state of affairs, provided by Article 64 of the Tax Procedure Code, in both cases even in the absence of an express request to that effect issued by the tax authority.
In case of violation of any of the two obligations regarding the transfer pricing file (to prepare and to submit the transfer pricing file), the taxpayer is subject to the risk of bearing a fine, according to Article 336 paragraph (1) letter e) corroborated with paragraph (2) letter c) of the same article from the Tax Procedure Code, amounting to 12,000–14,000 lei for medium-sized or large taxpayers and 2,000–3,500 lei for other legal persons.
Since we consider that these two obligations are just another aspect of the obligation to provide information and of the obligation to present documents in order to establish the tax state of affairs of the taxpayer, we consider that the latter becomes subject to criminal sanctioning if they fulfil the constitutive elements of the offenses provided in Articles 4 and 9 of Law no. 241/2005 for preventing and combating tax evasion.
Although it faithfully follows the provisions of Article 108 paragraph (2) of the Tax Procedure Code from its very first article, Order no. 442/2016 restricts, at first sight, the scope of application of the obligation to prepare the transfer pricing file for taxpayers within the category of large taxpayers, but only if they meet one condition: the total annual value of the price of the transactions concluded with affiliates (price without VAT) to be greater than or equal to the threshold established in Article 2 paragraph (1) of the same normative act, depending on the type of transaction carried out between affiliates.
We consider that this cannot constitute a real restriction of the mentioned obligation, as it is related to the same method of calculation for other persons as well, who are not part of the category of large taxpayers, respectively of those who are part of this category, but do not meet the value threshold established by Article 2 of Order no. 442/2016.
Although this obligation also exists for the latter taxpayers, it bears a number of differences which can be easily illustrated in the following table, having as a delimitation criterion the category in which the taxpayer falls:
The Obligation to Prepare and Submit the Transfer Pricing File According to the Category in which the Taxpayer Falls
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Delimitation Criterion |
Large Taxpayers that Fulfil the Threshold Laid Down in Article 2 of Order No. 442/2016 |
Large Taxpayers that DO NOT Fulfil the Threshold Laid Down in Article 2 of Order No. 442/2016, Small and Medium-Sized Taxpayers |
| 1. the threshold laid down in article 2 of Order no. 442/2016 | – 200,000 EUR, in case of collected / paid interest for financial services, calculated at the exchange rate notified by the National Bank of Romania, valid for the last day of the tax year;
– 250,000 EUR, in the case of transactions regarding the provision of services, calculated at the exchange rate notified by the National Bank of Romania, valid for the last day of the tax year; – 350,000 EUR, in case of transactions regarding acquisitions / sales of tangible or intangible assets, calculated at the exchange rate notified by the National Bank of Romania, valid for the last day of the fiscal year.
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– 50,000 EUR, in case of collected / paid interest for financial services, calculated at the exchange rate notified by the National Bank of Romania, valid for the last day of the tax year;
– 50,000 EUR, in the case of transactions regarding the provision of services, calculated at the exchange rate notified by the National Bank of Romania, valid for the last day of the tax year; – 100,000 EUR, in case of transactions regarding acquisitions / sales of tangible or intangible assets, calculated at the exchange rate notified by the National Bank of Romania, valid for the last day of the fiscal year. |
| 2. the initial moment and the condition of the obligation to prepare the transfer pricing file | – the initial moment: annually, in compliance with the legal deadline set for the submission of the annual income tax returns, for each fiscal year | – the initial moment: the term established by the tax authority
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| – the condition: Ø independent of any request submitted by the tax authority | – the condition: the tax authority’s request
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| 3. the initial moment and the condition of the obligation to submit the transfer pricing file | – the initial moment: from the establishment of the term by the tax authority, a term of maximum 10 days from the date of the request, but not earlier than 10 days from the expiration of the term established for the elaboration of the transfer pricing file | – the initial moment: from the establishment of the term by the tax authority, a term between 30 and 60 days, with the possibility of a single 30-day extension following the written request of the taxpayer
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| – the condition: the tax authority’s request | – the condition: the tax authority’s request | |
| 4. the legal framework of the tax authority’s request | – either during the tax inspection
– either independent of a tax inspection, pursuant to Articles 58 and 64 of the Tax Procedure Code (the general obligation to provide information and present the relevant documents)
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– exclusively during the tax inspection
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The issuance by the central fiscal body of an advance pricing agreement, similar to the individual anticipated tax solution, is equivalent to the excusing of the taxpayer who requested the agreement from the obligation to prepare and submit the transfer pricing file. The advance pricing agreement is defined in Article 52 of the Tax Procedure Code as ”the administrative act issued by the central tax authority in order to resolve a request of the taxpayer regarding the establishment of the conditions and methods used to determine, during a fixed period of time, transfer prices, in the case of transactions carried out with affiliated persons”.
Of course, the exemption from the obligation to prepare and submit the transfer pricing file is restricted only to the transactions referred to within the agreement issued by the tax authority in order to establish the conditions and the elements of their conclusion with the affiliated persons.
We have little official data on the actual use of the procedure for issuing such an agreement. The specialists in the field talk about less than 5 advance pricing agreements concluded annually in Romania, the number of requests for such an agreement being significantly higher. The reason why taxpayers are reluctant are limited to the lengthy and costly procedure they have to follow in order to strike such a bargain.
However, we have to draw our readers’ attention to the main advantage of concluding an advance pricing agreement: it ensures the taxpayer of the certainty of the tax regime of the transfer prices covered by the advance pricing agreement for a determined period of time, as this agreement is mandatory for the tax authority.
In other words, as long as the agreement is respected by the taxpayer (there is an obligation to report in this respect), the risk of the tax authority subjecting the taxpayer to a tax inspection regarding transfer pricing that has an unexpected outcome – the much feared procedure of price adjustment / estimation – is lessened.
In the following paragraphs, we shall present the procedure for issuing the advance pricing agreement under the Romanian law, together with the costs related to it, as described by the regulations in force:
- if the taxpayer finds it appropriate, the written request of the taxpayer for the issuance of the advance pricing agreement submitted to the competent tax authority;
- the communication, in writing, by the tax authority, of the time and place where the preliminary discussion with the taxpayer interested in obtaining an advance pricing agreement;
- conducting the preliminary discussion;
- payment of the fee for issuing the advance pricing agreement; according to paragraph (17) of Article 52 of the Tax Procedure Code, the fee is, as a rule, either 20,000 EUR in the case of large taxpayers, or 10,000 EUR for the other categories of taxpayers;
- submitting the application for the issuance of the advance pricing agreement with the related documentation and proof of payment of the agreement issuance fee; its detailed content, but also the method of submission are provided in Annex 2 of Order no. 3735/2015; by this request, pursuant to paragraph (5) of Article 52 of the Tax Procedure Code, the taxpayer proposes the content of the advance pricing agreement;
- if necessary, the request by the tax authority for clarifications regarding the application or the submitted documents;
- providing the additional information requested;
- the preparation by the tax authority of a draft of the advance pricing agreement and the opportunity of the taxpayer to express their point of view within 60 working days from the date of communication of the draft of the advance pricing agreement;
- admitting or rejecting the taxpayer’s request to obtain the advance pricing agreement; the rejection can be ordered only in the cases provided in Annex 2 of Order no. 3735/2015; the term for solving the request must respect the legal limits provided by Article 52 paragraph (12) of the Tax Procedure Code; in case of rejection, the issuance fee is refunded to the taxpayer;
- in case the taxpayer’s request is accepted, the issuance of the advance pricing agreement for a maximum period of five years (which can suffer exceptions in case of longer-term contracts), for each particular transaction with an affiliated person;
- communication of the advance pricing agreement to the recipient taxpayer and to the tax authority responsible for the taxpayer’s administration;
11bis. in case the taxpayer does not agree with the issued administrative act, they will proceed to submitting a notification to the tax authority within 30 days from the date of communication; upon receipt of the notification, the advance pricing agreement shall remain without an effect; it loses its validity even if, according to Article 52 paragraph (20) of the Tax Procedure Code, the legal provisions based on which the decision was taken change.
Our firm is preoccupied with assisting taxpayers in transfer pricing matters all the time, within a team coordinated by Atty. Cosmin Flavius Costaș, PhD, affiliated with the Arad Bar Association. We show a great interest in treating even the most complicated disputes in the matter of transfer pricing, being permanently connected to the recommendations of the Organisation for Economic Co-operation and Development.
This blogpost was prepared for the Costaș, Negru & Asociații Lawyers’ Civil Partnership by Atty. Irina Galiș, affiliated with the Arad Bar Association.
