EU and G20 TRANSFER PRICING HANDBOOK

Transcription

EU and G20
TRANSFER PRICING
HANDBOOK
www.dfk.com
DFK International I EU and G20 TRANSFER PRICING HANDBOOK
EU AND G20: TRANSFER PRICING HANDBOOK
Transfer pricing – a key issue for all multinationals
With the growing complexity of multinational inter-company transactions and the increasing sophistication
of tax authorities worldwide, transfer pricing is a critical tax issue for all multinational companies, irrespective
of their size. Meanwhile, most jurisdictions have established special transfer pricing regulations and formal
documentation requirements to counter tax avoidance and profit shifting strategies.
In the context of transfer pricing, the Organisation of Economic Co-operation and Development (OECD)
plays an important role. Since 1979 the OECD has published the OECD Transfer Pricing Guidelines (OECDGuidelines, latest update July 2010) which are generally accepted in most jurisdictions as a global directive
for all parties involved (multinationals and tax authorities). The OECD-Guidelines aim to determine a common
international understanding of the arm’s length principle.
Detailed regulations and comprehensive documentation requirements from the respective governments
are geared towards the OECD-Guidelines. Nevertheless, there are substantial differences between transfer
pricing regulations in the EU and G20 countries. Multinational enterprises have to comply with diverse
transfer pricing regulations and a variety of formal requirements in different jurisdictions to avoid double
taxation and penalties.
Adjustments of transfer prices for inter-company transactions can produce complex interactions with a
multiplicity of duties and taxes. Internal pricing may influence direct taxation such as (corporate) income
taxes, trade/business taxes or withholding taxes as well as indirect taxes including VAT, custom duties
or consumption taxes. Managing the interdependences and correlations between the different tax types
requires a transparent and practical transfer pricing system that ensures day-to-day business transactions
between related parties in the EU and the G20 countries can be undertaken without a high burden of
bureaucracy and with a minimum of compliance costs.
In order to avoid the substantial penalties that could arise from a tax audit scrutinising your transfer
prices, carefully considered analysis, planning and structuring of your inter-company transactions is highly
recommended.
This handbook will give you an initial overview of the current regulations in each country in which you are
interested. For further support and information please feel free to contact the local DFK adviser. Through DFK
International you have access to a worldwide team of experienced professionals who understand all aspects of
transfer pricing including developing pricing strategies and methods, preparing analysis and documentation to
support pricing methods used, and defending pricing positions with tax authorities during audit.
October 2014
Roland W. Graf
[email protected]
DFK International Tax Committee
1
EU AND G20 TRANSFER PRICING HANDBOOK:
PARTICIPATING CONTRIBUTORS
Country
Contributor
Name
Argentina
Estudio Sambuccetti y Asociados
Gabriel Sambuccetti +54 11 4374-4989
[email protected]
Australia
DFK Lonsdale SA
Dario Gamba
+61 03 9655 3900
[email protected]
Austria
IB Interbilanz
Roland Teufel
+43 1 505 43 13-0
[email protected]
Belgium
Juribel
Johan Dens
+32 3 232 23 28
[email protected]
Brazil
Adviser
Roberta Zara
+55 (11) 97541-9513 [email protected]
Canada
Kenway Mack
Slusarchuck Steward
Mark Servello
+1 (403) 536-5120
[email protected]
China
Sinobridge
James Ji
+86 (852) 35798745
[email protected]
Croatia
iAudit
Filip Zekan
+38 5 98 97 98 447
[email protected]
Cyprus
DFK Demetriou, Trapezaris Ltd.
Lacovos Raoukkas
+35 7 22879300
[email protected]
Czech Republic
IB Interbilanz
Helmut Hetlinger
+42 0 296 152 111
[email protected]
Finland
Tilintarkastusryhmä DFK Oy
Tom Lindblom
+35 8 9 604 204
[email protected]
France
SNA Experts DFK
Norbert de Montety
+33 155 30 09 90
[email protected]
Germany
Peters Schönberger
& Partner München
Dr. Alexander Reichl +49 89 381720
[email protected]
Greece
DFK PD Audit S.A.
Dimosthenis
Papadimitriou
+30 210 328 86 82
[email protected]
Hungary
IB Group Hungary
Melinda Kriston
+36 1 455 2000
waltraud.koerbler@ ibgroup.at
India
Sathguru Management Consultants Ragunathan Kannan + 91 40 3016 0204
[email protected]
Indonesia
Anwar, Sugiharto & Rekan
Anwar Setya Budi
+62 (21) 83780750
[email protected]
Ireland
Crowleys DFK
Edward Murphy
+353 1 6790800
[email protected]
Italy
Studio Piccinelli Del Pico
Pardi & Partners
Giusy Pisanti
+39066819091
[email protected]
Mexico
Calvo Nicolau y Marquez
Cristerna
Oscar Marquez
Cristerna
+(52-55) 5246-3470
[email protected]
Netherlands
Alfa Accountants en Adviseurs
Bart Schuver
+31 088 2531037
[email protected]
New Zealand
DFK Oswin Griffiths Carlton
Steve Darnley
+64 93793890
[email protected]
Poland
Audyt i Doradztwo Pawlik,
Modzelewski i Wspólnicy sp.zoo
Barbara Pawlik
+48 322039630
[email protected]
Portugal
DFK & Associados
Luis Falcato
+35 1 213243497
[email protected]
Romania
Accordserve Advisory SRL
Mihaela Manea
+40317309000
[email protected]
Russia
Althaus Group
Sergey Gerasimov
+7 499 678 22 98
[email protected]
Serbia
Revizori i Savetnici d.o.o.
Milos Mitric
+381 658655511
[email protected]
Slovakia
IB Interbilanz
Wilfried Serles
+421 2 59 300 400
[email protected]
Slovenia
IB Interbilanz
Dean Košar
Marco Egger
+0038614341800
[email protected]
marco.egger @ibgroup.at
South Africa
Levitt Kirson
Elza Prinsloo
+27114834000
[email protected]
South Korea
Woori Accounting Corporation
Doo-Yeol Lee
+8225657083
[email protected]
Spain
Abante Pich Auditores
Mireia Guarro
+34 902734200
[email protected]
IBERIAN DFK
Pedro Avila
+34 915422046
[email protected]
Sweden
Cederblad & Co
Magnus Haak
+46 040 6018865
[email protected]
Switzerland
Fidinter
Michel Jaggi
+41 44 297 20 50
[email protected]
Turkey
Ser & Berker Bagimsiz Denetim
VE YMM A.S.
Serhan Akkoyunlu
+90 312 2846222
serhanakkoyunlu@
serberkerymm.com
United Kingdom Chantrey Vellacott DFK LLP
Tony Steinthal
+44 020 7509 9000
[email protected]
United States
Ben Miller
+1404-678 3021483 [email protected]
2
Bennett Thrasher LLP
Telephone
Email
TABLE OF CONTENTS:
COUNTRY SPECIFIC ISSUES
Argentina4
Australia6
Austria10
Belgium14
Brazil19
Canada23
China31
Croatia36
Cyprus41
Czech Republic
43
Finland46
France50
Germany55
Greece60
Hungary65
India70
Indonesia80
Ireland85
Italy92
Mexico98
Netherlands102
New Zealand
106
Poland110
Portugal115
Romania119
Russia124
Serbia131
Slovakia135
Slovenia139
South Africa
143
South Korea
147
Spain151
Sweden156
Switzerland161
Turkey163
United Kingdom
168
United States
175
3
Argentina
1. Statutory rules
Articles 8 and 15 Income tax act.
Regulatory decree of income tax act, arts. 20 and following.
Resolution 1122, A.F.I.P.
2. OECD transfer pricing guidelines
Although Argentina adopted certain general guidelines and standards stipulated by the OECD, the ITL and
related regulations make no explicit reference to the OECD Guidelines for transfer pricing purposes. However,
Argentinian tax authorities and courts typically recognise and apply the provisions of the OECD Guidelines in
practice as long as they do not contradict local rules and regulations. Also with respect to the transfer pricing
documentation requirements, the principles and content of the OECD Guidelines are generally followed.
3. Definition of related party
According to Annex III Resolution R.G. 1122/2001 (AFIP), related parties must be considered as such when:
•
One holds the majority of shares of the other party, directly or indirectly.
•
One has significant influence over the other party, directly or indirectly.
•
One has enough power to take the decisions in the Shareholders’ meetings of the other party.
•
Both parties share directors, executive managers and managers.
•
One party is distributor or franchisee acting with exclusivity.
•
One party develops its business through a technology provided by a third party.
•
Two parties agree special terms and conditions in sales, compared with the rest of clients/vendors.
•
One party is the only client/vendor of the other party.
•
One party deals with the losses of the other party.
•
Directors, managers or administrators of one party act upon instructions of the other party.
•
There are special agreements that grant the control of one party to the minority interest of a third party.
4. Accepted transfer pricing methods and priority
CUP, RSM, C+, PSM and TNMM are accepted to be applied. Best method: It is required to consider all the
above mentionend methods on a yearly basis. The assessment must be implemented with the domestic
tested party being in focus. This implies i.e., that it is not allowed to use prices of operations performed that
does not involve the domestic party.
4
For commodities, the best method is set by article 15 ITL, as market price at the boarding date.
No APA’s are accepted by the Argentinian legislation.
Documentation requirements
Annually, a tax form F 969/742/743 must be filed containing details of each operation carried out during the
fiscal year. Due date: beginning of 8th month after closing day of the fiscal year.
Also a form F 4501 with digital signatures must be submitted electronically by the same date, containing:
•
A report from the company with all the things considered to evaluate the transfer prices applied during
the FY, the framework, activities, risks, functions, etc.
•
A report from an accountant including a review of figures stated in the company’s report, e.g. assets
deployed, identification of operations between related parties, adjustments, median, quartiles and etc.
Supporting documentation must remain in the taxpayer’s premises, available for fiscal audit.
5. Tax audit procedure
There are no special procedures. Although there is a specific division within the fiscal authority bureau, a tax
audit must be carried out by whoever is designated to conduct a fiscal audit.
6. Income adjustment, surcharges and penalties
If the taxpayer determines that an adjustment must be made to reach the arm’s length principle, that
adjustment must be stated in the income tax calculation.
If there is an objection resulting from a fiscal audit, normally the fiscal inspectors ask the taxpayer to review
and modify the transfer prices and proceed with an adjustment.
An adjustment made to transfer prices does not have any other effect rather than income tax calculation. So
far, there was no discussion if it could eventually affect custom duties or VAT tax base on imports.
Penalties for not submitting the above mentioned forms on time are regulated by the tax procedure´s act.
Aggravated penalties for not submitting forms, information or documentation when being under tax review
will be imposed.
7. Advanced Pricing Agreements
No APA’s are allowed under the Argentinian legislation.
8. Ex post measures to prevent double taxation
Argentina has signed double taxation treaties with many countries. Some of them are under review. However,
there are no special procedures or agreements foreseen in our laws.
5
Australia
1. Statutory rules
a.Law
•
Subdivisions 815-B to D of the Income Tax Assessment Act 1997 (“ITAA 1997”) and Subdivision 284-E
of the Taxation Administration Act 1953 (“TAA”); and
•
Australia’s double tax agreements (DTA’s) are also relevant.
b. Draft rulings and draft practice statements
•
Draft Taxation Rulings TR 2014/D5 and, TR 2014/D3; and
•
Draft Practice Statement Law Administration PS LA 3673 and PS LA 3672.
The Australian Taxation Office (“ATO”) fully endorses the OECD Guidelines and the concepts contained in the
new law are largely taken from these guidelines.
Australia has been an active participant in the global Base Erosion and Profit Shifting (“BEPS”) movement
and has introduced new laws which adopt a process that should be undertaken in determining a transfer
pricing outcome.
The main changes that the new legislation brings are self-assessment, a strict approach to documentation,
and the need to consider the hypothetical reconstruction of the commercial and financial relationships for the
purpose of determining the tax liability.
In applying Subdivisions 815-B to D to a matter, a taxpayer and the ATO has to apply the law so as to best
achieve consistency with the OECD Guidelines.
3. Definition of associated party
Broadly speaking, Australia’s transfer pricing rules apply to transactions or dealings with international related
parties.
International related parties are persons who are not dealing wholly independently with one another in their
international commercial or financial relations. The term includes:
•
An overseas entity or person who participates directly or indirectly in the company’s management,
control, or capital;
•
Any overseas entity or person in which the company participates directly or indirectly in the
management, control or capital; and
•
Any overseas entity or person in which persons who participate directly or indirectly in its management,
control or capital are the same persons who participate directly or indirectly in the company’s
management, control or capital.
6
Australia’s transfer pricing rules do not prescribe any particular methodology or preference for the order in
which methodologies might be applied to arrive at an arm’s length outcome. All of the methods outlined in
the OECD Guidelines are acceptable.
The statutory objective should be interpreted as allowing the greatest possible scope to use methodologies
appropriate in the circumstances, given the myriad of different and possibly unique cases that may arise.
The use of a comparable uncontrolled price (CUP) or cost plus (CP) are the preferred methods as they
provide the most reliable comparables and where data and information within Australia is readily available.
The CUP method compares the dealings between associated enterprises to third party dealings in terms of
product characteristics and market characteristics.
The CP method compares the dealings between associated enterprises to third party dealings in terms of
the costs incurred and the arm’s length gross margins in the light of the functions performed and the market
conditions.
5. Documentation requirements
Documentation must be prepared that meets the requirements set out in Subdivision 284-E of the TAA to
ensure a taxpayer has a Reasonably Arguable Position (RAP).
The documentation needs to be more than an economic analysis and must include a comparison of the
arm’s length conditions and the actual conditions in order to determine where there is a transfer pricing
benefit.
The documentation must also explain how it has achieved consistency with the OECD Guidelines and needs
to be prepared at the time that the taxpayer lodges their income tax return.
A significant recent concept introduced within Australia’s transfer pricing rules is that of reconstruction.
Documentation must consider the potential use of reconstruction in order to conclude that section 815-130
has been properly addressed and the arm’s length conditions have been determined based on the correct
commercial and financial relations.
Australia’s transfer pricing compliance operates on a self-assessment basis. Public Officers and Tax agents
that sign off on the taxation return are making a statement that the laws in relation to transfer pricing have
been correctly applied to determine the taxable income of an entity. A through risk assessment is required
including applying a level of certainty in relation to each matter having regard to materiality and the likelihood
of challenge
There is no statutory requirement for a taxpayer to maintain transfer pricing documentation. However, Inland
Revenue expects a tax payer to be able to support the prices used in its associated party cross border
transactions. Preparing transfer pricing documentation shifts the burden of proof to Inland Revenue to prove
that the prices used are not at an arm’s length rate.
7
There is generally a five step process adopted for transfer pricing documentation to be followed by ATO
personnel when undertaking a review of transfer pricing documentation. The process is broadly similar to the
process outlined by the OECD Guidelines and is as follows:
•
Identification of the conditions that operate in connection with the commercial and financial relations;
•
Select the most appropriate and reliable method to be used to identify the arm’s length conditions;
•
Identify the comparable circumstances relevant to identifying the arm’s length conditions;
•
Application of the transfer pricing rules so as to best achieve consistency with the relevant guidance
material; and
•
Monitor, review and update transfer prices as necessary.
The ATO usually examine the adequateness of intercompany transfer pricing only during risk reviews or tax
audits. A risk review is generally conducted as an initial step and depending on the outcomes of a risk review
the ATO will decide whether a tax audit is required.
Risk reviews are undertaken at the discretion of ATO and targets are selected based on certain criteria such
as low profitability, tax losses or targeting particular industries. Typically, most large companies can expect to
be audited every 5 years, including those with an annual turnover exceeding $200m.
The ATO has undergone significant change over the last few years and specifically to transfer pricing.
The ATO has established the International Structuring and Profit Shifting (ISAPS) program to focus on
international and transfer pricing issues and structuring activity that is believed to facilitate profit shifting
opportunities.
Data analytics and risk assessment are important elements of the program which has involved analysis of key
ratios and overall financial outcomes.
A focus point for the ATO is to leverage data mined from International Dealing Schedules that are submitted
with income tax returns where international related party dealings are disclosed.
PSLA 3672 provides a good overview and explanation of when an entity will be liable for penalties, how the
penalty will be assessed, and how the Commissioner’s discretion in relation to remission should be exercised.
A penalty will be applied where an amended assessment gives rise to a shortfall although an exemption to
the shortfall penalties applies where the amount of the shortfall is equal to or less that a taxpayer’s reasonably
arguable threshold.
A base penalty is applied and calculated as a percentage increase on the transfer pricing shortfall amount.
The base penalty rate ranges from 10% to 50% and will depend on whether the taxpayer entered into the
scheme with the sole or dominant purpose of obtaining a transfer pricing benefit and/or has a reasonably
arguable position.
8
Shortfall penalties may be reduced upon voluntary disclosure to the Commissioner of the details of the
shortfall.
A base penalty of 10% applies even where a taxpayer has a reasonably arguable position and there was no
purpose or intention in obtaining a transfer pricing benefit.
An exemption to the scheme shortfall penalties may apply where the amount of the shortfall is equal to or
less than a taxpayer’s reasonably arguable threshold. A taxpayer’s reasonably arguable threshold is generally
the greater of $10,000 or 1% of a taxpayer’s taxable income for the particular year.
8. Advance pricing agreements
A taxpayer can seek from the ATO an advance pricing agreement (“APA”) in the form of a private binding
ruling. This is especially encouraged for multinationals with large transactions but equally encouraged for the
SME market where the understanding and compliance with the transfer pricing rules are not understood or
considered to be onerous.
An APA establishes what transfer pricing methodologies should be used to determine arm’s length prices or
results for future transactions, agreements, or arrangements covered by the agreement.
An APA should, where possible, be concluded bilaterally through the Mutual Agreement Procedure Article
under the relevant DTA. The mutual agreement procedure would involve exchanges between the revenue
authorities appointed under the relevant DTA.
During the application process the ATO will discuss any issues with the tax payer to facilitate the process.
Australia has a number of DTAs with both countries with which it has strong trading and investment ties and
with developing countries that Australia may have trading ties with in the future. It has also signed transfer
pricing agreements with certain jurisdictions with which it has information exchange agreements.
All New DTAs contain a provision that is substantially the same as Article 25 of the OECD Model Tax
Convention. The taxpayer could apply for a Mutual Agreement Procedure (MAP) according to Art. 25 of
OECD Model Convention to prevent a double taxation in case of transfer pricing related income adjustment.
Within a MAP, tax authorities of the involved countries consult each other to resolve disputes regarding the
transfer pricing related double taxation. If the involved tax authorities cannot agree upon a result, the taxpayer
usually can apply for an arbitration procedure.
9
Austria
1. Statutory rules
a. Tax Law
Austria has general statutory rules which are also applicable for transfer pricing issues. The following rules
constitute the obligation of an adequate documentation and the application of the arm´s length principle.
Sec. 6 Item 6 Income Tax Act;
Sec. 8 (1) and (2) Corporate Income Tax Act;
Sec. 12 (1) Item 10 Corporate Income Tax Act;
Sec. 115, 119, 124, 131 and 138 Federal Fiscal Code
Furthermore, section 118 Federal Fiscal Code regulates the possibility to obtain unilateral APAs.
b. Relevant regulations and rulings
The most important regulations with regard to transfer pricing are the Transfer Pricing Guidelines “VPR
2010” which were published in 2010 by the Austrian Ministry of Finance with the intention to facilitate the
implementation of the OECD Guidelines in Austria. The VPR 2010 have been released as a ministerial decree
which means that they are binding for tax authorities but not for Austrian courts and taxpayers. Thus, they
are an important indication for the establishment of transfer prices as the tax authorities in Austria are likely to
adapt the VPR 2010.
Besides the VPR 2010, the following regulations are also relevant for transfer pricing issues:
Income Tax Guidelines
Corporate Income Tax Guidelines
Ministerial decrees (AÖF no 114/1996, 12271997, 155/1998 and 171/2000)
Several opinions published by the Austrian Ministry of finance on selected transfer pricing issues (so called
Express Answer Service EAS)
As a member of the OECD, Austria subscribes to the principles displayed in the OECD transfer pricing
guidelines. The OECD Guidelines 1995 were published in Austria in the form of a ministerial decree. Thus, tax
authorities are likely to follow the principles of the OECD guidelines and any updates thereto.
The Austrian VPR 2010 also refer to the OECD Guidelines. Concerning the arm`s length principle, the VPR
2010 explicitly regulates that it has to be construed in line with the OECD Guidelines and any updates
thereto.
Additionally the tax authorities also observe the OECD reports (e.g. partnership report, report on the
Attribution of Profits to Permanent Establishments).
10
The Austrian Transfer Pricing Guidelines states the application of the arm`s length principle for transactions
between related companies. The term “related companies” is interpreted according to Article 9 OECD model
convention. There is no legal definition of the term “related party“ in Austria.
Based on the Austrian Transfer Pricing Guidelines, traditional methods such as CUP (comparable
uncontrolled price), Resale Minus or Cost Plus are accepted by the Austrian tax authorities as well as the
profit methods TNMM (transactional net margin method) and profit split. Hereby it is obligatory to select the
method providing the highest degree of certainty for the determination of an arm´s length transfer price. In
case of the same certainty rate the standard methods should be preferred to the profit methods. If no secure
data on gross margins is available, the profit methods might be more reliable methods according to the
Austrian Transfer Pricing Guidelines.
Regarding intercompany financing transactions the CUP method is to be preferred over other methods if
comparables of third parties can be found on the money or capital market according to the VPR 2010.
With regard to general services the VPR 2010 consider the Cost Plus Method as the appropriate method as
comparables usually cannot be found.
Regarding the attribution of profits to a permanent establishment, this matter should be based on the
separate entity approach according to the VPR 2010. Therefore, business relations between the head office
and the PE have to be at arm’s length and an appropriate transfer pricing methodology has to be applied.
The separate entity approach is applied with certain restrictions.
The Austrian Transfer Pricing Guidelines clearly state that there is an obligation to prepare transfer pricing
documentation. This is based on the general provisions of the Austrian Federal Fiscal Code concerning
bookkeeping, record-keeping and disclosure requirements. The documentation should be in line with the
requirements defined in the OECD Guidelines (in particular Chapters V, VIII and IX). The tax authorities also
accept documentation that follows the Code of Conduct on Transfer Pricing Documentation for Associated
Enterprises in the European Union.
According to the Austrian Transfer Pricing Guidelines the taxpayer has to prepare reasoned documentary
evidence of the issues considered when determining the transfer prices. Also the documentation should be
prepared before any transactions occur. Documentation should cover the following aspects:
•
Transactions are in line with the arm´s length principle.
•
Transfer pricing method used.
•
Functional and Risk Analysis.
•
In case of intentional set-off a written agreement.
•
In case of using database research information on the research procedure.
Documentation should be prepared contemporaneously and must be provided to the tax authorities upon
request. Such a request will usually be submitted during a tax audit.
11
The Austrian tax authorities usually examine the adequateness of intercompany transfer pricing during a
regular tax audit. The implementation of an audit focused only on transfer prices is not common. In case of
multinational enterprises being audited, it is very likely that transfer pricing will be reviewed.
Tax audits typically cover periods from three to five consecutive fiscal years. The likelihood of an annual tax
audit is generally characterised as high for companies exceeding certain size thresholds.
In case of a tax audit, the taxpayer is generally obliged to cooperate with the tax auditors. In case of the
involvement of foreign countries in the transaction, this duty is enhanced. This also includes the duty to
obtain evidence and submit it to the tax authorities. According to the Administrative High Court information
which can be classified as impossible to provide, unreasonable or unnecessary cannot be demanded.
However, transfer pricing documentation for all types of transactions must only be submitted upon the
request of the tax inspector who will then define a submission deadline which can vary from case to case
( e.g. from one week to several weeks). An extension of the deadline is possible upon the tax auditor`s
consent.
Usually, possible tax adjustments are discussed by the auditor with the company and/or its tax advisor.
After that the final audit report, including suggestions for any tax adjustments, is presented to the local tax
office where the revised tax assessments will be prepared. If the taxpayer does not agree with the revised
assessments, he has the possibility to apply for an appeal procedure as described below.
There are no specific transfer pricing penalties in Austria. As transfer pricing adjustments have a direct effect
on the corporate income tax base, a late payment interest may be assessed. If the tax liability relating to
past years is increased as a result from a transfer pricing adjustment in the context of an audit, the interest
will be charged as the difference between the tax already paid and the final tax assessed. Interest will be
levied for the period from beginning of October following the assessment year until the revised assessment.
The maximum interest period is 48 months. The interest rate amounts to 2% above the base interest rate
(published by the European Central Bank). The interest is not tax deductible.
In case of late payment of assessed tax a surcharge of 2% of the unpaid amount will be imposed. An
additional surcharge of 1% would be levied if tax is not paid within 3 months and another 1% in case of late
payment of the second surcharge. The surcharges are not deductible for tax purposes.
No specific penalties are applicable if no or insufficient transfer pricing documentation is available. However,
a lack of documentation increases that risk that the tax authorities regard the transactions as not at arm´s
length and assess a transfer pricing adjustment by using an estimate.
In case of tax evasion or fraud fines and imprisonment charges may be assessed.
12
According to Art 118 Federal Fiscal Code it is possible to apply for a unilateral, binding, appealable advance
ruling issued by the competent tax office on the tax treatment of a particular transfer pricing issue. The
taxpayer must submit a written application which includes the relevant facts, the critical assumptions and the
legal valuation of the facts. The fee for such a unilateral APA amounts from €1.500 up to €20.000 depending
on the size of the company asking for the ruling.
Ít is also possible to ask the Austrian tax authorities to participate in negotiations of a bilateral APA on the
basis of the applicable double taxation treaty under certain circumstances.
In case of a transfer pricing related income adjustment, the taxpayer could take two possible approaches to
prevent double taxation.
Firstly, the taxpayer has the possibility to appeal against the transfer pricing related income adjustment
within the national appeal procedure. Thereby, the taxpayer has to submit an appeal against the revised
assessment with the competent tax office. If the tax office denies the appeal, the taxpayer has the possibility
to take court’s action against the decision. If the Federal Fiscal Court (“Bundesfinanzgericht”) denies the
appeal a further appeal may be filed with the Administrative High Court.
Secondly, the taxpayer could apply for a Mutual Agreement Procedure (MAP) according to Art. 25 of OECD
Model Convention to prevent a double taxation in case of transfer pricing related income adjustment.
transfer pricing related double taxation. If another contracting state of the Arbitration Convention is involved
settlement could also be achieved under the Convention.
If no Double Taxation Treaty is applicable Austrian law also provides for a unilateral measure to avoid double
taxation. According to sec. 48 Federal Fiscal Code taxpayers subject to taxation on income from an Austrian
source may file an application for double taxation relief with the ministry of Finance.
The taxpayer can follow both approaches (national appeal procedure and MAP) contemporaneously.
However, in practice, it is often more efficient, to follow the approaches one after another.
13
Belgium
1. Statutory rules
The arm’s length principle is codified in Article 185, Par 2, of the Belgian Income Tax Code 1992( BI I
-C 1992)( Wetboek van de Inkomstenbelastingen 1992- Code des Impóts sur les Revenus 1992). This
paragraph is the codification into the Belgian legislation of article 9 of the OECD Model Tax Convention.
Other articles of the BITC 1992 relating to transfer pricing are:
•
Article 26: granted abnormal or benevolent advantages are added back to the tax base;
•
Article 49: basic conditions for the deductibility of expenses;
•
Article 54: deductibility of the payments of interest, royalties and management/services fees to tax
havens or to recipients benefiting from a favourable taxation regime for these payments;
•
Articles 55 and 56: deductibility of interest paid;
•
Articles 7ß and 207: non deductibility of certain items such as current and carried forward tax losses,
dividends received deduction, investment deduction being made from that part of the profit relation to
abnormal or benevolent advantages received; and
•
Article 334, Par 2: sale, transfer or contribution of shares, bonds, accounts receivable or other titels
to tax havens or to recipients benefiting from a favourable taxation regime need to have economic
substance.
The Belgian tax administration has issued two circular letters on transfer pricing. The first circular letter
(AFZ/98-0003-AAF/98-0003 of 28 June 1999) describes the general guidelines regarding transfer pricing.
The second circular letter (Ci.RH.421/580.456(AOIF 40/2006-AFER 40/2006) of 14 November 2006) deals
with transfer pricing audits and documentation whereby the Belgian tax authorities fully align themselves with
the Code of Conduct on Transfer Pricing Documentation and its embedded European Union Joint Transfer
Pricing Forum (EU JTPF) and approved by the European Council of Ministers of 27 June 2006.
2. OECD transfer pricing guidelines and accepted transfer pricing methods and priority
Transfer pricing methods: Consistent with the OECD Transfer Pricing Guidelines, the CUP method, the resale
price method, the cost plus method, the profit split method and the transactional net margin method are
acceptable. Other methods may also apply, provided that the resulting pricing is in accordance with the
arm´s length principle. Taxpayers should seek to apply the most appropriate method in respective to the facts
and circumstances, and may apply secondary methods to strengthen their position, although there is no
requirement to perform an analysis with more then one method. Consequently taxpayers may benefit from
preparing a defense file upfront, substantiating their transfer pricing methodology.
14
Belgian tax legislation does not give a proper definition of a related party.
The tax authorities state that two parties are related if one of them participates directly or indirectly in the
management, control or share capital of the other or if a third party or third parties participate directly or
indirectly in the management, control or share capital of both parties.
The Belgian tax authorities furthermore make reference to the recommendation of the European Commission
of 6 May 2003 (2003/361/EU). According to this recommendation, related enterprises are those which have
one or more of the following relations:
•
One enterprise has the majority of the shareholders´ voting rights of another enterprise;
•
One enterprise has the authority to nominate or dismiss the majority of the members of the board of
directors, the management or the supervisory board of another enterprise;
•
One enterprise executes a dominant influence on another enterprise on the basis of an agreement
concluded between them or on the basis of the articles of association of the influenced enterprise; or
•
An enterprise being a shareholder of another enterprise has, on basis of an agreement concluded with
other shareholders, exclusive control over the majority of the voting rights of all shareholders of the
enterprise.
Furthermore, reference is made to the notion “consortium” as laid down in Article 10 of the Belgian company
law. Two enterprises are deemed to belong to a consortium if they are under the same central management
even if one of them does not directly or indirectly participate in the other or if both of them are not directly or
indirectly held by a third enterprise.
Relationships between head office and permanent establishment and between permanent establishments
are also relationships that require that inter-company dealings be disclosed and documented for transfer
pricing purposes.
4. Documentation and disclosure requirements
Tax Return Disclosures: There are no formal transfer pricing disclosure requirements.
Level of Documentation: Belgian income tax legislation does not contain any specific rules with regard to the
nature or level of transfer pricing documentation.
The Belgian tax authorities fully align themselves with the Code of Conduct on Transfer Pricing
Documentation and its embedded EU Transfer Pricing Documentation (TPD) concept as developed by the
EU Joint Transfer Pricing Forum (JTPF) and approved by the European Council of Ministers of 27 June 2006.
This EU TPD contains two parts:
•
A set of documentation containing common standardised information relevant to all EU group members
(masterfile); and
•
Several sets of standardised documentation each containing country specific information (country
specific documentation).
15
The use of the EU TPD concept to document a company´s transfer pricing and relating policy remains
optional for the taxpayer. However, this concept, if opted for, should be applied in a consistent way.
The Belgian tax authorities consider the EU TPD to represent a maximum level of basic documentation when
starting an audit and which does not prevent them from requesting additional information.
The Belgian tax authorities also give guidance to taxpayers wishing to document their transfer pricing in
a pro-active way by providing a non-exclusive list of documentation that can be repeated. They hereby
apply the principle of a “prudent business manager”, i.e. someone acting according to standard economic
principles and adhering to the arm´s length principle. This non-exclusive list comprises amongst others:
•
The nature and conditions of intergroup transactions;
•
The transfer pricing method to which the nature and the conditions of the transaction have lead,
including a comparability analysis and a functional analysis;
•
The conditions of relevant commercial relations with third parties and related parties (e.g. service and
distribution agreements, financing agreements, budgets, prognoses, and other documents containing
information which was used to determine the arm´s length price or which are necessary to determine
possible adjustments;
•
Information with regard to related enterprises: activities, shareholders´ structure, transactions with related
enterprises, etc.;
•
Information regarding the transactions: operational circumstances, market share, circumstances of
competitors, regulatory frame, technological progress, etc.; and
•
Information regarding the exercised functions, assumed risks and used assets.
Record keeping: Belgian income tax legislation does not include any specific rules relative to keep
transfer pricing records or documentation, so the general income tax rules relative to keep records and
documentation apply.
Accordingly, all documentation useful to determine the taxable profit should be kept until the end of the fifth
year or calendar year following the taxable period to which it relates.
The Belgian tax authorities have demonstrated their increased attention to transfer pricing by the set-up
of a knowledge group on transfer pricing at the end of 2003, of a special transfer pricing audit centre at
the end of 2004 to perform transfer pricing audits and, in July 2006, of a specialist transfer pricing team of
professionals within the Belgian central tax administration to focus on transfer pricing. The level of transfer
pricing scrutiny has increased significantly since.
Enterprises likely to be scrutinised are those (non-exhaustive):
•
Having financial ratios or profit level indicators significantly deviating from the standard ones in their
industry/sector;
•
Having structural losses;
•
Having transactions with tax haven entities when no or little economic value is added in these countries
or when direct or indirect payments are made to these entities;
16
•
Using back-to-back transactions disguising real transactions;
•
Using complex or circular structures that add little or no value;
•
Involved in reorganisation and transfer of entities, especially with respect to the valuation and
remuneration of intellectual property; and
•
Have a pre-audit meeting with the taxpayer in order to determine which elements are relevant so that
only relevant information and documentation is requested.
•
A ‘routine’ audit always possible.
In case of offsetting of carried forward tax losses over a longer period then the above five-year term, the
records relative to the taxable period in which the tax losses were incurred, should be kept until the date the
Belgian tax authorities are authorised to audit the taxable period during which the carried forward tax losses
are offset (in principle three years as from the first day following the taxable period during which the carried
forward tax losses are offset).
Note that other Belgian legislation (company law, VAT legislation) can prescribe longer periods of record
keeping than the above five-year term.
Documentation must be in writing but may be kept electronically, under certain conditions.
Language of documentation: Documentation should in principle be drafted in one of the official Belgian
languages (Dutch, French or German) depending upon the location of the company concerned.
However, the Belgian tax authorities agree that, as stated in the European Code of Conduct, transfer pricing
documentation in another commonly understood language (e.g. English) should be accepted as much as
possible. Taxpayers are invited to discuss this issue with the tax authorities and the tax authorities are invited
to display a practical approach in order to limit the administrative burden for the taxpayer.
Transfer pricing penalties: There is no specific transfer pricing penalty regime but the general penalty regime
applies (cumulatively) as follows:
• Tax increases varying from 10% to 200% of the unpaid taxes relating to the income not declared;
• Administrative fines varying from EUR 50 to EUR 1,250; and
• Penal fines varying from EUR 250 to EUR 125,000 if the intention to mislead or damage was present.
7. Advance pricing agreement
The Belgian ruling practice (officially denominated “Office for Advance Decisions in Tax Matters”) underwent
a reorganisation in 2005 making it more time-efficient, business-minded and pro-active. Ever since transfer
pricing rulings (unilateral APAs have become an important instrument to obtain upfront certainty on the arm´s
length character of a taxpayer´s transaction with related parties.
The Belgian tax authorities intend a standard term for a decision on a ruling request of about three to six
months although more complex cases may take longer.
Bi- and multilateral APAs are handled by the international department of the Belgian tax authorities. The term
to conclude the first multilateral APA in Belgium was less than eighteen months.
17
8. Small and medium sized enterprises (SMEs)
The Belgian tax authorities agree that the same level of detail and complexity within the transfer pricing
documentation of a “small company” should not be expected as within the transfer pricing documentation of
a large and more complex company.
For a definition of “small companies” and “small groups” reference is made to Belgian company law and to
the recommendation of the EU Commission regarding micro, small and medium-sized companies of 6 May
2003 (2003/361/EU).
Deadline to prepare documentation: Except for the deadline to submit documentation (see below), there
is no requirement that transfer pricing documentation must be prepared with a certain deadline. Thus it is
advisable, it is not a prerequisite that transfer pricing documentation has been prepared before the corporate
income tax return is filed.
Deadline to submit documentation: The deadline for submitting information to the Belgian tax authorities
upon their request is one month. This general rule also applies to requests regarding transfer pricing. An
extension from one to two months can be obtained.
Statute of limitations: The standard statute of limitations is three years from the first day following the taxable
period concerned. If the taxpayer did not comply with the tax legislation because he had the intention
to mislead or damage, the standard statute of limitations can be extended to another two years. Longer
statutes of limitation can apply in case carried forward tax losses are offset.
Comparables: The Belgian tax authorities have access to databases (a.o. Belfirst (local) and Amadeus
(European)). Pan-European comparables might be acceptable where a sufficient number of local
comparables is not available to reasonable economic reference.
18
Brazil
1. Statutory rules
Transfer Price rules in Brazil are determined by the Law nº 9.430/96 and art. 1º of IN SRF nº 38/1997.
Brazil is not a member country of the OECD. Therefore, the methodology applied is restricted to the local
legislation.
According to the local regulations, related parties will be considered as such under the following relationship
circumstances (Art.23, Law No. 9430/1996 and art.2 °, SRF No. 32 dated March 30, 2001):
i.
the mother company of the entity if it is domiciled abroad;
ii. a branch or subsidiary which is domiciled abroad;
iii. the person or entity which is domiciled abroad, whose shareholding in capital characterises it as a parent
company or affiliate, as defined in §§ 1 and 2, art. 243 of Law 6,404 of December 15, 1976;
iv. the legal entity domiciled abroad which is characterised as its subsidiary or affiliate, as defined in §§ 1
and 2, art. 243 of Law 6,404 of December 15, 1976;
v. if the legal entity domiciled abroad and the company located in Brazil are under common corporate or
administrative control or when at least ten percent of the share capital of each belong to one person or entity;
vi. person or legal entity domiciled abroad, which together with the legal entity (domiciled in Brazil), has an
ownership interest in the share capital of a third entity whose sum of people characterise them as parent
companies or affiliates thereof, defined by §§ 1 and 2, art. 243 of Law 6,404 of December 15, 1976;
vii. a person or legal entity domiciled abroad, regardless of their ties, in form of a consortium or
condominium person, as defined in Brazilian law, in any endeavor;
viii. to a resident abroad who is a relative or related to the third degree, spouse or partner of any of its
directors or your partner or controlling shareholder as an either direct or indirect person;
ix. a person or legal entity domiciled abroad, which enjoys exclusivity as its agent, distributor or dealer
concerning the buying and selling of goods, services or rights;
x. the person or entity domiciled abroad, for which the legal entity domiciled in Brazil enjoys exclusivity, as
agent, distributor or dealer for the purchase and sale of goods, services or rights.
For purposes of item V, it is considered that the company domiciled abroad is under control:
Common administration, when the same person or entity, regardless of the location of their residence, has
rights of membership in each of these companies, enabling to take corporate resolutions and ensuring the
power to elect a majority of its directors;
19
Common Administrative is when:
•
The same person is chairperson of the board of directors or chief executive of both entities;
•
The same person exercises chairperson of the board of directors or director and is president of the other
entity;
•
One person holds a position of leadership and is a decision-maker in both companies.
•
In case of item VII, companies will be considered as restricted only during the duration of the consortium
or condominium whilst which the association occurs.
•
For purposes of item VIII, the considered fellow director, partner or controlling shareholder of the
company domiciled in Brazil who coexists with him in conjugal character, as provided in Law No. 9278,
of May 10, 1996.
•
In the cases set forth IX and X:
•
Linking only applies in relation to transactions with goods, services or rights to which exclusivity appears;
•
Shall be deemed distributor or sole concessionaire, physical or legal person who holds the right for a
part or for the whole country, including Brazil;
•
Exclusivity will be verified by a written contract or, in the absence of this, the practice of commercial
operations related to a type of good, service or right, made exclusively between the two companies or
exclusively by one.
The law prescribes methods, in order to ensure that the prices used to determine the actual market prices,
presumed or arbitrated profit and the tax basis of social contribution on net income to approach as much as
possible.
Methods of price-parameter calculation
For import:
•
Method of Comparative Independent Price (PIC);
•
Method Resale Price Less Profit (PRL Sale), with a profit margin of twenty percent;
•
Method Resale Price Less Profit (PRL Production), with a profit margin of sixty percent; and
•
Method of Production Cost More Profit (CPL).
For exports:
•
Method Sales Price in Exports (PVEx);
•
Price Method wholesale the Country of Destination Less Profit (PVA);
•
Price Method of Retail Sale to the Country of Destination Less Profit (PVV); and
•
Cost Method of Acquisition or Production More Taxes and Income (CAP).
20
To support the Transfer Pricing calculation:
•
Documentary evidence;
•
Policy-term purchase and sale in import and export;
•
Policy interest in buying and selling in the import and export;
•
Policy interest in forward transactions in the internal market;
•
Strict control of inventory;
•
Charges levied on the purchase and sale;
•
Segregation, in the case of industrialisation in the total cost of the imported product cost.
It is recommended to separate all the elements that will be a basis for the calculation price and the
parameter-price and to verify that the data used, is in accordance with the accounting records in order to
facilitate for future reviews before starting the calculation.
The legislation may require the dismissal of the calculated transfer price under certain circumstances.
Documentation needed to prove the costs of goods abroad.
The documents proving the production costs of imported goods and services may be copies of documents
supporting the records contained in the accounting books such as:
•
Commercial Invoices for the purchase of raw materials, other goods and services used in production;
•
Spreadsheet apportionments of the cost of labor;
•
Copies of payroll;
•
Vouchers with cost of rental, maintenance and repair of the equipment applied in the production;
•
Statements of percentages and charges for depreciation, amortisation or depletion;
•
Breakdowns and allocated losses;
•
Copy of the income tax given to the tax authorities of the other country, equivalent to the DIPJ Brazil.
Any document of foreign origin, in order to achieve legal effects in Brazil and to enforce against third parties
and in offices of the Union, the States, the Federal District, the Territories and Municipalities or in any
instance, the tribunal or court, should be poured into the vernacular. Furthermore, the document should be
legalised in your country of origin, ie, notarised, notarised and consular registration of deeds and documents
and translated by a sworn translator.
21
The company which is subject to the inspection procedures should provide the Tax Accountants Treasury –
AFTN, in scope of the audit:
I.
indication of the method adopted by it;
II. the documentation which is used as support for determining the price charged and their memories of
calculation.
In case of an inspection, the company needs to provide all the supportive documents which have been
used to calculate the transfer price. In case that the fiscal auditors of the IRS are not being provided with the
required documents or if the documents are insfficient or unsuitable, a different transfer price amount, based
on other documents, by application of the methods referred to in SRF No. 243/2002, may be determined.
There is no specific determination of penalties besides the payment of the fines and interests related to the
delay of the payment. This is also valid for the difference identified by the inpectors.
The Brazilian law does not provide the anticipated agreement or APA (Advanced Pricing Agreements) price
as the OECD defines in its “Guidelines” glossary.
Brazil is not a member of the OECD, but adopted international treaties to avoid double taxation and signed
the OECD Model Convention. The established methodology for transfer prices adopted by the OECD should
not be applied in Brazil, considering that Brazil has its own laws concernung the methodology.
Although Brazil has firm agreements with any country to avoid double taxation, it is not excused from
calculating the transfer price, should it operate with related, resident or domiciled parties in countries with the
agreement.
22
Canada
1. Statutory rules
a.Law
•
Section 247 of the Income Tax Act (“ITA”)
Circulars, Memoranda, and Folios
•
IC 87-2R – International Transfer Pricing
•
IC 71-17R5 – Requests for Competent Authority Assistance under Canada’s Income Tax Conventions
•
IC 94-4R – International Transfer Pricing: Advanced Pricing Arrangements (APAs)
•
IC 94-4R-(SR) – Advanced Pricing Arrangements for Small Businesses
•
IC 06-1 – Income Tax Transfer Pricing and Customs Valuation
•
Pacific Association of Tax Administrators (PATA) – Transfer Pricing Documentation Package
•
TPM-02 – Repatriation of funds by Non-residents – Part XIII Assessments
•
TPM-03 – Downward Transfer Pricing Adjustments under Subsection 247(2)
•
TPM-04 – Third-Party Information
•
TPM-05R – Requests for Contemporaneous Documentation
•
TPM-06 – Bundled Transactions
•
TPM-08 – The Dudney Decision: Effects on Fixed Base or Permanent Establishment Audits and
Regulation 105 Treaty-Based Waiver Guidelines
•
TPM-09 – Reasonable efforts under section 247 of the Income Tax Act
•
TPM-11 – Advanced Pricing Arrangement (APA) Rollback
•
TPM-12 – Accelerated Competent Authority Procedure (ACAP)
•
TPM-13 – Referrals to the Transfer Pricing Review Committee
•
TPM-14 – 2010 Update of the OECD Transfer Pricing Guidelines
•
S1-F5-C1 – Related Persons and Dealing at Arm’s Length
23
Canada has adopted the OECD guidelines. The OECD guidelines are referred to and are endorsed by
Canada Revenue Agency (“CRA”) in many of its administrative publications.
CRA uses the OECD guidelines in its administration of the ITA. The OECD guidelines are not law. With
respect to transfer pricing, CRA and the taxpayer are bound by section 247 of the ITA and any other
applicable provisions in the ITA as well as the provisions in the various Tax Treaties that Canada has with
other countries. However, if a taxpayer uses a transfer pricing method other than one that is included in the
OECD guidelines, it is very likely that method will be challenged by CRA on audit.
The transfer pricing rules set out in section 247 apply to any transactions between a taxpayer and a nonresident person with whom the taxpayer does not deal at arm’s length.
Section 251 of the ITA is the provision which deals with the concept of arm’s length. Pursuant to paragraph
251(1)(a) of the ITA, related persons are deemed not to deal with each other at arm’s length. The term
“related persons” is defined in subsection 251(2) of the ITA as follows:
“related persons”, or persons related to each other, are:
a. individuals connected by blood relationship, marriage or common-law partnership or adoption;
b. a corporation and
i.
a person who controls the corporation, if it is controlled by one person,
ii. a person who is a member of a related group that controls the corporation, or
iii. any person related to a person described in subparagraph (i) or (ii); and
c. any two corporations
i.
if they are controlled by the same person or group of persons,
ii. if each of the corporations is controlled by one person and the person who controls one of the
corporations is related to the person who controls the other corporation,
iii. if one of the corporations is controlled by one person and that person is related to any member of a
related group that controls the other corporation,
iv. if one of the corporations is controlled by one person and that person is related to each member of
an unrelated group that controls the other corporation,
v. if any member of a related group that controls one of the corporations is related to each member of
an unrelated group that controls the other corporation, or
vi. if each member of an unrelated group that controls one of the corporations is related to at least one
member of an unrelated group that controls the other corporation.
For the purposes of subsection 251(2), control is de jure control, which generally means the right of control
that rests in ownership of such number of shares as carries with it the right to a majority of the votes in the
election of the board of directors of the corporation.
24
In determining control, the ITA contains provisions which deem certain share or share related transactions to
have taken place in determining the ownership of shares of the capital stock of a corporation where a person
has a right under a contract in equity or otherwise, either immediately or in the future and either absolutely or
contingently, related to such share and share related transactions.
Unrelated persons can also be considered not to be dealing at arm’s length with each other. Paragraph
251(1)(c) states that it is a question of fact whether persons not related to each other are, at a particular time,
dealing with each other at arm’s length.
The following criteria have been used by the courts in determining whether unrelated parties to a transaction
are not dealing at arm’s length:
•
whether there is a common mind which directs the bargaining for both parties to a transaction;
•
whether the parties to a transaction act in concert without separate interests; and
•
whether there is de facto control.
Canada’s transfer pricing legislation incorporates the arm’s length principle and, for tax purposes, it requires
that the terms and conditions agreed to between non-arm’s length parties be those that one would have
expected had the parties been dealing with each other at arm’s length.
CRA endorses the OECD guidelines for transfer pricing methods. Those methods are divided into two
groups: the traditional transaction methods and the transactional profit methods.
Traditional transaction methods:
•
the comparable uncontrolled price (CUP) method;
•
the resale price method; and
•
the cost plus method.
Transactional profit methods:
•
the profit split method; and
•
the transactional net margin method (TNMM).
CRA’s view is that there is a natural hierarchy in the methods. Certain methods provide more reliable results
than others, depending on the degree of comparability between controlled and uncontrolled transactions.
CRA takes the same view as the OECD, which view is that the traditional transaction methods are preferable
to the transactional profit methods and the transactional profit methods are used as methods of last resort
when the use of traditional transaction methods cannot be reliably applied or cannot be applied at all.
In IC 87-2R, CRA states the CUP method, if applicable, clearly provides the highest degree of comparability
for the traditional transaction methods because it:
•
focuses directly on the price of a transaction; and
•
requires both functional and product comparability.
25
CRA goes on to say that although the CUP method provides the most direct and reliable means of
establishing an arm’s length price, other traditional transaction methods may have to be used where:
•
there is not enough quality information available with respect to uncontrolled transactions; or
•
it is not possible to reliably quantify the differences between controlled and uncontrolled transactions.
The cost plus and resale price methods operate at the gross margin level, therefore, product differences have
a less significant impact on the reliability of the results than in the CUP method.
If the CUP method is not appropriate in the specific circumstance, the choice between the cost plus method
or the resale price method will depend on the comparability of quality data available. The cost plus method
begins with the costs incurred by a supplier of a product or service to a non-arm’s length person, and a
comparable gross mark-up is then added. The resale price method begins with the resale price to arm’s
length parties (of a product purchased from a non-arm’s length person), reduced by a comparable gross
margin.
Taxpayers will have to consider the transactional profit methods if:
•
no quality data is available to apply the cost plus or resale price methods; or
•
the available data to apply the cost plus or resale price methods have material differences that cannot be
reliably adjusted.
If a transactional profit method must be used, CRA is of the view that the profit split method will generally
provide a more reliable estimate of an arm’s length result than the TNMM unless a high degree of
comparability, including the comparability of intangible assets, can be established.
There are transfer pricing documentation requirements in Canada.
The taxpayer or partnership has to have prepared or obtained records or documents which provide a
description that is complete and accurate in all material respects of:
•
the property or services to which the transaction relates;
•
the terms and conditions of the transaction and their relationship, if any, to the terms and conditions of
each other transaction entered into between the participants in the transaction;
•
the identity of the participants in the transaction and their relationship to each other at the time the
transaction was entered into;
•
the functions performed, the property used or contributed, and the risks assumed for the transaction by
the participants in the transaction;
•
the data and methods considered and the analysis performed to determine the transfer prices or the
allocations of profits or losses or contribution to costs, as the case may be, for the transaction; and
•
the assumptions, strategies, policies, if any, that influenced the determination of the transfer prices or the
allocation of profits or losses or contribution to costs, as the case may be, for the transaction.
26
The documentation does not get filed annually with the tax return. There are no thresholds that would allow
small and medium sized enterprises to avoid the documentation requirements. However, there is a form
which is required to be filed annually to report non-arm’s length transactions with non-residents – form
T106. There is a threshold with respect to the filing of form T106 – the form is not required to be filed if the
aggregate fair market value of the taxpayer’s total reportable transactions for all non-residents combined is
$1,000,000 Cdn or less (the de minimis exemption). Form T106 is filed separately from the tax return.
If form T106 is not filed on a timely basis or if there are false statements or omissions on the form, penalties
are applicable.
If any transfer pricing documentation that is submitted to CRA is not in English or French, the taxpayer must
provide an official translation within 30 days of a request by CRA.
The Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union
(EU TPD) has not been adopted in Canada.
Generally, a transfer pricing audit will be conducted in the same fashion as any other audit under the ITA.
With a transfer pricing audit the CRA auditor will be looking to see that transaction prices between the
taxpayer and related non-residents are economically sound and that they agree with CRA’s transfer pricing
approach.
Tax services offices are responsible for identifying taxpayers who may have failed to make reasonable efforts
to determine and use arm’s length prices as part of the normal audit review.
As soon as it becomes apparent that a transfer pricing assessing position may be recommended, the auditor
must seek assistance from the appropriate International Advisory Services Section.
The first step in the audit is that the CRA auditor will review the information that is readily available. This
includes the corporate income tax return, financial statements, schedules, prior audit reports etc., and may
include information specific to the industry in which the taxpayer operates.
The auditor will then prepare the audit plan and contact the taxpayer to determine when the audit will be
conducted and to discuss how it will be conducted.
The auditor will send a letter to the taxpayer requesting various information and documentation.
The information that CRA will generally request first is the taxpayer’s contemporaneous documentation which
supports the amount of the transfer prices that were used.
Contemporaneous documentation is required to be kept by the taxpayer pursuant to subsection 247(4) of
the ITA. If a taxpayer does not have contemporaneous documentation, then the taxpayer will be deemed,
pursuant to subsection 247(4), not to have made reasonable efforts to determine and use arm’s length prices
or arm’s length allocations in respect of a transaction.
If the auditor decides that it is appropriate to propose an assessment, it has to be referred to the Transfer
Pricing Review Committee (“TPRC”) before the assessment is issued. This is to ensure fair and consistent
application of the transfer pricing rules.
27
For final consideration of cases involving transfer pricing adjustments, a manager from the Aggressive Tax
Planning Division and a senior official from the Tax Policy Branch of the Department of Finance of Canada will
be consulted.
If the TPRC agrees with the auditor’s recommendation, a proposal letter will be issued.
Although the taxpayer normally has 30 days to respond to the proposal letter, an extension of time for
a response will generally be granted by CRA upon request. The taxpayer will then send CRA additional
information to refute the proposed adjustments if such information is available.
If the additional information does not change the auditor’s position, an assessment will be issued.
At this point, if the taxpayer disagrees with the assessment, the appeals process will begin.
The first step in the appeals process is to file a Notice of Objection on a timely basis. The Notice of Objection
will be looked at by a separate division of CRA.
Once a taxpayer has filed a Notice of Objection, the taxpayer’s rights of ultimately appealing CRA’s
assessment are preserved until CRA makes its decision on the objection.
Competent authority review can be initiated without having to wait for CRA’s decision on the Notice of
Objection. CRA will normally agree to hold the Notice of Objection in abeyance pending completion of the
competent authority review process. The competent authority review is done through the Mutual Agreement
Procedure process which is discussed in more detail under 9. Ex post measures to prevent double taxation.
If the competent authority review undertaken by CRA does not produce a satisfactory result for the taxpayer,
the filing of a Notice of Objection will keep the taxpayer’s appeal rights under the ITA open.
The competent authority review process deals only with transfer pricing adjustments and not penalties.
Penalties can only be appealed by filing a Notice of Objection with CRA.
If the Notice of Objection is not successful, the taxpayer can then take the case to court. The appeals
process, even before getting to the court stage, is a long and arduous process.
If transfer pricing adjustments are not in line with the arm’s length principle, penalties will apply. The penalty
is equal to 10% of the net result of certain adjustments for the particular year. The adjustments are calculated
as follows:
•
the total of the transfer pricing income and capital adjustments (upward adjustments, whether there are
reasonable efforts or not);
•
minus,
•
the total of transfer pricing income and capital adjustments for which a taxpayer has made reasonable
efforts to determine and use arm’s length transfer prices or arm’s length allocations (upward adjustments
for which there are reasonable efforts); and
•
the total of transfer pricing income and capital setoff adjustments for which a taxpayer has made
reasonable efforts to determine and use arm’s length transfer prices or arm’s length allocations
(downward adjustments for which there are reasonable efforts).
28
If the taxpayer has not made reasonable efforts to determine and use arm’s length prices or allocations, there
is no reduction in the amount of the penalty.
The penalty will apply only where the net amount calculated above exceeds the lesser of $5,000,000 and
10% of the taxpayer’s gross revenue for the year.
CRA will determine the amount of the transfer pricing adjustment based on the arm’s length principle as
previously discussed (the terms and conditions agreed to between non-arm’s length parties be those that
one would have expected had the parties been dealing with each other at arm’s length).
The transfer pricing adjustment will result in an increase to taxable income resulting in additional income
taxes payable plus interest.
The transfer pricing adjustment may result in the assessment of Part XIII tax (including interest and penalties)
which is withholding tax applied to benefits considered to have been conferred on a non-resident person
attributable to a transfer pricing adjustment. These benefits are generally deemed to be dividends paid by a
corporation resident in Canada to a non-resident person subject to Part XIII withholding tax.
Canada has an advanced pricing arrangement (“APA”) program which is administered through CRA’s
Competent Authority Services Division (“CASD”). The CASD is part of the International and Large Business
Directorate.
Different types of APAs may be entered into by a taxpayer including unilateral APAs, bilateral APAs, and
multilateral APAs.
The APA process includes the following stages:
•
pre-filing meeting(s);
•
the APA request;
•
the acceptance letter;
•
the APA submission;
•
preliminary review of the APA submission and establishment of a case plan;
•
review, analysis, and evaluation;
•
negotiations,
•
agreements;
•
the post settlement meeting; and
•
APA compliance.
There is a user charge which must be paid to CRA. The user charge will be outlined in the acceptance letter.
CRA publishes an annual APA program report. At the start of its 2013-2014 fiscal year, CRA had 99 ongoing
APA cases, in 2013-2014 there were 39 new APA cases accepted to the program. At the end of its 20132014 fiscal year, CRA had 110 ongoing APA cases.
29
Canada allows a taxpayer to apply for a rollback with the APA request if certain criteria are met. In TPM-11,
CRA states:
The CRA will usually consider a request to expand the period of an APA to cover transactions in open
taxation years where:
•
a request for contemporaneous documentation has not been issued by a tax services office (“TSO”);
•
the facts and circumstances are the same;
•
the foreign tax administration and relevant TSO have both agreed to accept the APA rollback request;
and
•
appropriate waivers have been filed.
CRA also has a streamlined APA process for taxpayers that meet certain conditions. The key elements of the
Small Business APA program are:
•
CRA’s CASD administers the program.
•
The program has a fixed non-refundable administrative fee of $5,000.
•
Taxpayers must have gross revenue of less than $50 million or a proposed covered transaction of less
than $10 million to be considered for the program.
•
The program covers only transactions of tangible goods (which have not been bundled with non-routine
intangibles) and routine services.
•
Site visits are not performed. The only material CRA requires the taxpayer to submit is a functional
analysis.
•
Only requests for a unilateral APA, without rollback, are accepted into the program.
•
Annual reporting under the program is limited to stating, in writing, whether the critical assumptions have
or have not been breached.
There are no safe harbour rules in Canada for specific types of transactions.
The Mutual Agreement Procedure (“MAP”) process is the only mechanism under Canada’s network of tax
treaties to relieve double taxation or taxation not in accordance with a convention.
In addition to the APA program discussed above, the CASD also has responsibility for the MAP program. As
of March 31, 2014, the CASD consisted of 59 employees, including one director, eight managers, one chief
economist, and forty-nine staff.
CRA publishes an annual MAP program report. At the start of its 2013-2014 fiscal year, CRA had 315
ongoing MAP cases, in 2013-2014 there were 2,952 new MAP cases accepted to the program. At the end
of its 2013-2014 fiscal year, CRA had 344 ongoing MAP cases.
When the CRA receives an MAP request from a taxpayer, the request is entered into its internal tracking
system and assigned to one of the four MAP-APA Sections or to the MAP-Technical Cases Section.
The MAP is then assigned to a lead analyst, who is responsible for the review, analysis, negotiation, and
resolution of the MAP case.
30
China
1. Statutory rules
a.Law
•
Sec. 36 Law of the PRC China Concerning the Administration of Tax Collection (TCL) as of Sep 4, 1992,
last revision on Apr 28, 2001;
•
Sec. 41-48 Enterprise Income Tax Law of the People’s Republic of China (EITL) as of Mar 16, 2007.
b. Detailed implementation regulations
•
Sec. 51 Detailed Rules for the Implementation of the Law of the People’s Republic of China on the
Administration of Tax Collection (DIR of TCL) as of Oct 15, 2002;
•
Sec. 109-123 Detailed Implementation regulations on the Implementation of the Enterprise Income Tax
Law (DIR of EITL) as of Jan 1, 2008.
c. Selection of important administrative circulars
•
Circular of the State Administration of Taxation on the Issuance of the Implementation Measures for
Special Tax Adjustments (Trial Implementation) (Guo Shui Fa [2009] No. 2);
•
Circular of the State Administration of Taxation on Printing and Issuing the Annual Report on the Affiliated
Transactions of Enterprises of the People’s Republic of China (Guo Shui Fa [2008] No. 114);
•
Circular of the State Administration of Taxation on the Issuance of Requirements of Annual Reporting
Forms for Related-Party Transaction of Enterprises (2008 version)(Guo Shui Han [2009] No. 72);
•
Circular of the State Administration of Taxation on the Notice on Relevant Issues Concerning Enhancement
of the Follow-up Administration on Transfer Pricing Adjustments (Guo Shui Han [2009] No. 188).
In general, the Chinese transfer pricing regulations are in line with the OECD-Guidelines. Thus, the arm’s
length principle and transfer pricing methodologies of the OECD-Guidelines are largely adopted in the
relevant legislations.
The term “related party” is defined in sec. 51 DIR of TCL.
According to this provision, a company, enterprise or other economic organisation is to be qualified as
related to a Chinese taxpayer if one of the following requirements is met:
•
direct or indirect ownership or control in terms of capital, business operations, selling and purchasing, etc.;
31
•
being directly or indirectly under the common ownership or control of a third party;
•
another affiliation of interests.
Further definitions and examples of related party refer to sec. 109 DIR of the EITL and sec. 9 Circular 2.
4. Acceptable transfer pricing methods and priority
In general, Chinese tax authorities accept the transfer pricing methods described in the OECD-Guidelines.
According to Chapter 4 of Circular 2 these methods are:
•
Comparable Uncontrolled Price Method (CUP);
•
Resale Price Method (R-);
•
Cost-Plus method (C+);
•
Transactional Net Margin Method (TNMM);
•
Profit Split Method (PSM);
•
other methods consistent with the arm’s length principle.
There is no statutory hierarchy or preference in transfer pricing methods. Instead, the most appropriate
method for the transaction under review is to be used. In this respect, a comparability analysis is to be
carried out to indentify the most appropriate method.
In practice, the transfer pricing method TNMM seems to be the most common one, since it was used by
67% of signed Advance Pricing Agreements (APA) announced by the 2011 annual APA report released by
SAT for the period from Jan 1, 2005 to Dec 31, 2011.
The Chinese transfer pricing regulations provide two levels of documentation requirements.
First level: Documentation within income tax return package
The annual income tax return package includes a set of nine related party transaction disclosure forms.
According to Circular 114 the disclosure files contain the following forms:
•
Form 1: Related Party Relationships Form;
•
Form 2: Summary of Related Party Transactions Forms;
•
Form 3: Purchases and Sales Form;
•
Form 4: Services Form;
•
Form 5: Financing Form;
•
Form 6: Transfer of Intangible Assets Form;
•
Form 7: Transfer of Fixed Assets Form;
•
Form 8: Foreign Investment Status Form; and
•
Form 9: Foreign Payments Status Form.
32
Second level: Contemporaneous documentation
In addition to the documentation within the income tax return package, the taxpayer is obliged to provide a
contemporaneous documentation. In contrast to the documentation within the income tax return package,
exemption rules for contemporaneous documentation apply. The taxpayer is not obliged to prepare
contemporaneous documentation if one of the following criteria is met:
•
The annual amount of related-party supply of goods is less than RMB 200 m (ca. €23.5m) and the
annual amount for all other types of transactions (i. e. services, royalties, interest) is less than RMB 40m
(ca. €4.7m), or
•
the related party transactions are covered by an APA, or
•
the foreign shareholding of the Chinese enterprise is below 50%, and the enterprise has only domesticrelated party transactions.
Loss-making enterprises with limited functions and risks (e. g. limited-risk distributors, contract R&D service
providers) are required to prepare and submit contemporaneous documentation and other relevant materials,
regardless of whether they exceed the above mentioned materiality thresholds.
The contemporaneous documentation has to cover 26 specific items which are structured under the
following five areas:
•
organisational structure;
•
description of business operations;
•
description of related party transactions;
•
comparability analysis; and
•
selection and application of transfer pricing method.
The contemporaneous documentation must be prepared for each tax year and submitted by the filing date of
the annual income tax return (31 May of the following year). It must be kept for 10 years. In case of a request
by tax authorities, the contemporaneous documentation must be provided within 20 days of request. The
whole documentation must be provided in Chinese language.
The Chinese tax authorities can select which enterprises will be subject to a tax audit. The selected
enterprise is obliged to cooperate with the tax auditors.
Enterprises with following characteristics shall typically be selected as targets for a transfer pricing audit:
•
enterprises with significant amount of intercompany sales or numerous types of related party
transactions;
•
constant loss-making enterprises, enterprises with low profitability or volatile results;
•
enterprises with a lower profitability than other enterprises in the relevant industry, or enterprises with
profitability that does not match their function and risk profile;
•
enterprises dealings with related parties in a tax haven;
33
•
enterprises with a lack of contemporaneous documentation or transfer pricing-related tax return
disclosures; and
•
enterprises which are involved in other situations clearly indicating a violation of the arm´s-length principle
in intercompany transaction.
The contemporaneous documentation has to be provided to the authorities within 20 days of a request.
Other documents have to be provided within the prescribed time frame according to the “Notice of Tax
Related Issues”.
In case of a transfer pricing an adjustment, Chinese tax authorities will monitor the transactions with related
parties within a five-year post-audit follow-up period. During this period, decreases in operating profits or
sustaining business losses will be closely scrutinised and disallowed if the underlying nature of the related
party transaction remains unchanged.
7. Income estimation, surcharges and penalties
Surcharges and penalties:
If the taxpayer
•
fails to file the related party transactions disclosure forms, or
•
does not maintain the contemporaneous documentation or other relevant documents, a penalty of RMB
2,000 (ca. €235.3) to RMB 50,000 (ca. €5,882.4) shall be assessed.
If the taxpayer
•
refuses to provide contemporaneous documentation and other information on related party transactions,
or
•
provides false or incomplete information that does not truly reflect the situation of their related party
transactions, the taxpayer shall be subject to a penalty which ranges from at least RMB 10,000 (ca.
€1,200) up to RMB 50,000 (ca. €5,900).
In case of transfer pricing adjustments, a special interest levy is applicable, which is based on the RMB loan
rate published by the People´s Bank of China plus penalty interest rate of 5%. The penalty interest rate is not
to be considered if the annual related party transactions are below the materiality threshold. Besides, the
penalty interest rate may be waived if contemporaneous documentation is prepared.
If a taxpayer wants to apply for APA, in general, the following requirements are cumulatively to be met:
•
Annual amount of related party transactions is over RMB 40m;
•
the taxpayer complies with the related party disclosure requirements; and
•
the taxpayer prepares, maintains and provides contemporaneous documentation in accordance with the
requirements.
34
The term of an APA normally covers 3 to 5 years and with approval of the tax authorities the APA may be
rolled back for the same or similar related party transactions in the year of application.
Although a taxpayer with an effective APA is exempted from the contemporaneous documentation
requirements, he/she is required to file an annual APA compliance report that needs to be provided to tax
authorities within 5 months of the end of each tax year.
According to sec. 54 Circular 2 unilateral APA is provided to foreign taxpayers. In case of bilateral or
multilateral APAs, taxpayers should submit their applications to both the SAT and the in-charge municipal
or equivalent level tax authorities simultaneously. According to sec. 54 Circular 2 the SAT will enter into
negotiations with the competent authority of the treaty partner.
Chinese tax authorities usually settle the transfer pricing audits through negotiation. If a taxpayer receives
an initial assessment from the tax authorities and disagrees with that, it may provide written explanations
and documents to support the reasonableness of its transfer prices. It may go on with the discussions and
negotiations until the final decision, which is in the form of either a “Special Tax Adjustment Notice” or a
“Special Tax Investigation Conclusion Notice”. A further negotiation is not possible.
If the taxpayer is still unsatisfied with the assessment, an appeal procedure is possible. However, in practice,
taxpayers shall try to avoid any appeal procedure in China.
If the tax disputes refer to related party transactions between China and a treaty country, Mutual Agreement
Procedure between SAT and the competent authority of the treaty country is available to taxpayers for
resolving the double taxation issues caused by transfer pricing adjustments.
35
Croatia
1. Statutory rules
a.Law
The Income Tax Act (CIT Act) – Article 13:
•
tax base adjustments for the profits below arm’s length;
•
related parties;
•
methods: in line with the OECD Guidelines;
•
method hierarchy (legislation, OECD Guidelines);
•
liability of information disclosure for related parties and their business transactions, methods used and
reasons for using the selected method must be provided;
•
responsibility of local companies to prepare TP documentation.
b. Statutory ordinances
Ordinance on the Profit Tax Act – Article 40 This sets out:
•
identification of the selected method;
•
description of the information considered, and reasons to use a selected method;
•
assembly of documentation which would underline comparability, functional analysis and risk analysis;
•
calculations;
•
prior year documentation updates;
•
the business relations between related entities will only be recognised if a taxpayer provides the
previously mentioned information:
General Tax Audit Instruction, Class: 471-02/09-01/65 no: 513-07-21-04/09-01 dated 9 April 2009
Manual on transfer pricing surveillance (published in Tax Gazette, August 2009)
Croatian authorities mainly adopted the OECD-Guidelines within the published administrative circulars. In
order to be consistent with the current OECD standards, the circulars are under revision from time to time.
36
•
According to the Corporate Income Tax Act, the definition of related parties is provided in Article 13,
Paragraph 2. Parties are recognised as being associated if one of them participates, directly or indirectly,
in the management, control or capital of the other party or if the same person participates, directly or
indirectly, in the company’s management, control or capital.
•
The obligation to have TP documentation is imposed to taxpayers who have transactions with foreign
related parties, but also to those who are dealing with resident related parties, where one party has
preferential tax status, i.e. pays profit tax at the decreased tax rate or has the right to utilise tax losses
carried forward from the past periods.
•
Further definitions of related parties are provided in the General Tax Act and Company Act stating that
associated parties are legally independent companies which in their mutual relations have the status of:
•
a company which holds a majority share or majority decision-making interest in another company
(according to the General Tax Act, article 41),
•
dependent and controlling companies (according to the Company Law, article 475, any legally
independent company upon which another company is regarded as a dependent or subordinate
company. companies in a concern (a main company and one or more dependent companies united
under one common management provided by the main company), under the Company Law. article 476,
•
companies with mutual (reciprocal) shares (companies with headquarters in Croatia which are joined in
such a manner that each company holds more than 25% of the shares in the other company), under the
Company Law, article 477,
•
companies linked by special contracts in accordance with the Companies Act or if profits and losses are,
or can be, transferred between them. Arm’s Length Principle.
•
The Croatian transfer pricing legislation adheres to the arm’s length principle for all intercompany
transactions (regardless of whether they are domestic or cross-border, between companies or between
individuals).
When choosing the appropriate method for calculating transfer prices, it is necessary to take the provisions
of Article 13 Law on Corporate Income Tax and the OECD Guidelines into account.
In accordance with Article 13, Paragraph 2 of the Corporate Income Tax Act, for the establishment and
assessment of whether the business transactions between the associated persons are agreed at market
prices, there are five (5) methods which can be used:
•
The method of comparable uncontrolled prices,
•
The sale price method (“resale price”),
•
The method of “adding gross profit to the costs” (“cost plus”),
•
The profit sharing method (“profit split”),
•
The net profit method (“TNMM”).
37
It should be noted that there is little specific guidance or description in the legislation about how these
methods should be applied.
Taxpayers must have and must provide (by request of the Tax Authority) the data and information about the
associated persons and their business relations with these persons, methods used for the determination of
comparable market prices and their reasons for selection of particular methods.
According to the Law on Corporate Income Tax, CUP, R- and C+ are the preferred transfer pricing methods,
if the comparable arm’s length data can be determined. These are to be qualified as fully comparable with
the transaction under review after making appropriate adjustments with regard to the functions performed,
risks assumed and assets employed.
If such fully comparable arm’s length data cannot be determined, limited comparable data shall be used
after making appropriate adjustments under the application of an appropriate transfer pricing method also
including TNMM and PSM.
Benchmarking
In the local environment (in Croatia) there is a list of requirements relating to inter-company transactions. Only
after fulfilling such requirements, the price measurement methods from the OECD model may be used.
Timing of Transfer Pricing Documentation
Croatia doesn´t currently have formal transfer pricing documentation requirements. However, the Croatian
Ordinance on Profit Tax Act, Article 40, provides the required list of activities which must be performed to
determine whether a transaction is performed at a regular market price:
•
Identify a selected method and provide reasons why this specific method was selected.
•
Describe the examined data, methods and analysis performed to determine transfer prices and explain
why this specific method was selected.
•
Prepare documents on assumptions and assessments which were established in the course of
determining the result using the unbiased transaction principle (indicate comparability, functional analysis
and risk analysis).
•
Prepare documents on all calculations made, applying the selected method relating to the taxpayer and
comparable taxpayer.
•
Adequately update documents from previous years which were relied upon during the current year, to
show adjustments caused by material changes in relevant facts and circumstances.
•
Prepare documents which state the background (basis) or are otherwise supportive or have been
mentioned in the process of analysis of transfer prices.
Please note that the documentation does not need to be submitted with the tax return, but should be readily
available in case of an request of the tax authority.
38
The Croatian tax authorities usually examine the adequateness of intercompany transfer pricing during
regular tax field audits. Tax audits typically cover periods up to three consecutive fiscal years. In case of a tax
audit, the taxpayer is generally obliged to cooperate with the tax auditors.
Transfer pricing documentation for all types of transactions must only be submitted upon request of the tax
authorities.
Content of Documentation
Although documentation is not required unless requested upon tax audit by Tax Authorities, it is recommended
that documentation contains at least the information contained in the 6 points described above.
Documentation may be prepared in English, but documentation written in Croatian will have to be submitted
to the Tax Authority in the case of an audit. If prepared in English, the Croatian tax authorities may require an
official Croatian translation.
Statute of Limitations
The tax audit deadline is generally three years following the year in which the relevant tax return is filed (i.e.,
four years from the end of the taxable period to which the documentation relates).
Immateriality Threshold
The concept of immateriality (or a de minimis transaction) does not exist in the Croatian legislation.
Burden of Proof
The burden of proof is placed on the taxpayer.
Tax Return Disclosure
The form of transfer pricing documentation is not predefined and guidelines have not been issued addressing
the appropriate level of detail. So judgment is required.
a. Estimation of tax base
Possible at discretion of the Tax Authority if they conclude non-arm’s length character of transaction or lack
of TP documentation. If the taxpayer:
•
does not submit its transfer pricing documentation, or
•
the submitted documentation is substantially unusable, or
•
it is determined that the taxpayer has not prepared the documentation contemporarily for extraordinary
transactions, it is disputably assumed that the domestic income of the taxpayer exceeds its declared
income. In such case, tax authorities are entitled to estimate the domestic taxable income of the
taxpayer. Thereby, it is permitted to make the income adjustment to the most unfavorable point of the
arm’s length range.
39
b. Surcharges and penalties
The Croatian legislation does not provide specific penalties for the violation of transfer pricing legislation or for
not having the documentation described above. However, the risk may arise in the sense of transfer pricing
adjustments (adjustments to taxpayers’ profits by not recognising certain costs or challenging interest rates
or the mark-up on services that were not, in their opinion, charged on an arm’s length basis) for the amount
evaluated by the Tax Authority as being non-compliant with the transfer pricing policy. As a result of such a
profit tax base increase, the taxpayer will be obliged to pay corporate income tax for the adjusted amount
at the rate of 15%, increased by late payment interest at the rate of 15% annually. Furthermore, a taxpayer
shall be fined from HRK 2,000 to 200,000 (approx €140 to €28,000) if he fails to assess his tax liability in
accordance with the CIT Act after the expiry of the tax assessment period, or fails to pay the tax in the
assessed amount and within the prescribed time limits.
According to para. 4.123 of the OECD-Guidelines an Advance Pricing Agreement (APA) is an agreement that
in advance of controlled transactions, determines an appropriate set of criteria (e. g. method, comparables
and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the
transfer pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer
and requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax
authorities.
So far this is not introduced in the Croatian legislation or practice.
Croatia has signed a double taxation treaty with 58 countries.
The taxpayer has the possibility to appeal against the transfer pricing related income adjustment within the
national appeal procedure.
Model Convention to prevent a double taxation in case of a transfer pricing related income adjustment.
usually can apply for arbitration procedure. The formal regulations for the filing and procedure of a MAP are
set out in the Administration Circular regarding Mutual Agreement Procedures and Arbitration Procedures as
of Jul 13, 2006.
40
Cyprus
1. Statutory rules
The Cyprus authorities do not have statutory laws for transfer pricing rules, as they exist in other countries.
Article 33 of the Income Tax Law –N118(I)/2002 specifically provides guidelines for the application of
the arm´s length principle between related parties. If conditions are made or imposed between the two
businesses among their commercial or financial relations which differ from those which would be made
between independent businesses, any profits which occur under these conditions, may accordingly be
included in the businesses taxes.
Article 33 of the Income Tax Law –N118(I)/2002 on the arm´s length transactions is in line with Article 9 of the
OECD model and applies all double tax treaties enforced by the Cypriot authorities.
Furthermore Article 33, is bounded by the OECD Transfer Pricing Guidelines for Multinational Enterprises and
Tax Administrations.
The Cyprus tax authorities are generally bound to the OECD-Guidelines and to any updates and
introductions of new practices.
The term “related party” is defined in paragraph 2 of Article 33 of the Income Tax Law-N118(1)/2002 as
follows:
An individual is connected with another individual if the first individual is the first spouse or relative of the
second individual or the spouse, or the spouse if a relative of the second individual, or relative of the husband
or wife of the second individual.
A person is connected with any person with whom he is in partnership, and with the husband or wife or
relative or any individual with whom he is in partnership.
A company is connected with another company:
•
If the same person has control of both, or a person has control of one of them and persons connected
with him, or he and persons connected with him, have control of the other; or
•
If a group of two or more persons has control of each company, and the groups either consist of the
same persons or could be regarded as consisting of the same persons by treating ( in one or more
cases) a member of either group as replaced by a person with whom he is connected.
A company is connected with another person if that person has control of it or if that person and persons
connected with him together have control of it.
41
Any two or more persons acting together to secure or exercise control of a company shall be treated in
relation to that company as connected with one another and with any person acting on the directions of any
of them to secure or exercise control of the company.
Tax ruling can be obtained from the tax office, however for transfer pricing transactions they don’t provide
specific guidelines in terms of the amounts or rates to be charged.
No specific transfer pricing documentation is required to be kept. The law does require companies to keep
documentation for all transactions that they undertake; otherwise the expense will not be an allowable
expense for corporation tax purposes.
From 1 January 2013, documentation supporting tax returns, books and records shall be kept for a period of
six years from the end of the tax year to which it relates.
The tax returns need to be signed by the auditor/tax consultants of the company, who reconfirms to the tax
authorities that the specific tax return is in line with the circulars issued by the income tax authorities.
During Tax audit all transactions/agreements between related parties are usually examined.
In the case of income adjustment by the Tax Department, any surcharges and penalties are specifically
mentioned on the tax assessment.
An Advanced Pricing Agreement in Cyprus takes the form of a tax ruling given by the Tax Department to the
taxpayer on a related party transaction. However as mentioned above the tax authorities do not give specific
guidelines in terms of amounts and rates to be charged.
In case of an arm’s length income adjustment, the taxpayer has the right to object against the decision of the
Inland Revenue Commissioner and submit relevent supporting documents.
42
Czech Republic
1. Statutory rules
a.Law
Section 23 par. 7 of the Income Tax Act No. 586/1992 Coll.
Guideline D-332, issued by the Ministry of Finance of the Czech Republic, ref. no.: 39/86 829/2009-393,
Financial Bulletin 6/2010 dated December 1, 2010
Financial Bulletin 6/2010, dated December 1, 2010
Financial Bulletin 6/2010, dated December 1, 2010
Guideline D-10, issued by the General Financial Directorate of the Czech Republic, ref. no.: 37488/12-313113228, dated November 13, 2012, published on the web sides of the General Financial Directorate of the
Czech Republic
The Czech authorities adopted the OECD-Guidelines within the published Guidelines.
The term “related party” is defined in the section 23 par. 7 of the Income Tax Act No. 586/1992 Coll.:
a. Parties related through capital where
•
one party directly participates in another party´s capital or voting rights, or one party participates in
the capital or voting rights of more parties and this person has a holding of at least 25% in the others’
registered capital or voting rights, in such a case all are regarded as mutual related directly through
capital,
•
one party indirectly participates in another party’s capital or voting rights, or one party indirectly or directly
participates in the capital or voting rights of more parties and has a holding of at least 25 % in the others’
voting rights, in such a case all are regarded as mutually related through capital,
b. otherwise related parties
•
where one party participates in the management or control of another party,
•
where identical parties or close persons participate in the management or control of other parties and
such other parties are otherwise related parties,
43
•
involving controlling and controlled party and parties controlled by the same controlling party,
•
being close persons,
•
being parties that established a legal relationship predominantly for the purpose of reducing their tax
base or increasing their tax loss“.
•
CUP,
•
COST+,
•
RPM,
•
Profit split method,
•
TNMM.
There is no priority among the acceptable methods as long as the result is at arm’s length.
Taxpayers have no duty to prepare transfer pricing documentation. It is just recommended and only on
decision of each taxpayer, if he prefers to prepare TP documentation or defend the price method in different
way. The TP documentation is helpful and appreciated by the tax authority during the tax audit.
There are any deadlines or terms for preparing the TP documentation.
The transfer pricing documentation should describe how transfer prices have been determined and include
information which enable the tax authorities to evaluate the arm’s length nature of the transactions.
The Guideline D-334 provides the following examples for the content of such documentation: business
description, organisational structure, functional (including risk) analysis, industry analysis, contractual terms
and conditions of the transactions, financial performance, information on the intercompany transactions,
substantiation of transfer pricing method and prices actually charged.
The Guideline D-10 determine that for low value adding services will be not the TP documentation in full
range required by the tax authority.
The TP documentation could be required by the Czech tax authority in Czech language. There is an
exception – the translation to the Czech may not be required if the tax authority is fine with the foreign
language, but only in individual cases.
Both OECD Guidelines and EU Joint Transfer Pricing Forum Codes are adopted in the regulations of the
Czech jurisdiction.
The Czech tax authorities examine the adequateness of intercompany transfer pricing during the regular tax
audits of the income tax or during the tax audit focused only on transfer pricing (there is a new specialised
tax office established focusing on TP audits).
Three previous periods from the deadline of the filing of the tax return are usually examined.
44
There are some exceptions: In case of the opening of an already closed period (tax audit, additional tax
return submitted by tax payer, etc. ), this period for additional assessment is extended by 1 year and until 10
years to the maximum. In case of the claiming of tax losses, the period extended by the number of years until
the tax loss is clamed, reaches 5+3 years at maximum.
The taxpayer does not have any duty to submit his TP documentation, he just has to demonstrate that all the
prices are in accordance with the arm’s length principle.
If there is a difference between prices agreed between related parties and arm’s length prices and the
difference is not documented for the tax office in a satisfactory manner, the tax office may amend the tax
base accordingly. Such an amendment of tax basis may lead to an additionally assessed tax. The penalty for
additionally assessed tax amounts to 20% of the ascertained difference. For late payments, the late payment
interest of the repo rate of the Czech National Bank (currently 0.05 % p.a.) + 14% is applied.
The tax payers could file the APA request with tax authority, but it is not common in practice.
This request must comply with mandatory requirements, which are similar to recommended content of the
TP documentation. The tax authority has to make a decision and if it is positive, the approach is guaranteed
to the tax payer for three years.
There is a filing fee of 10.000CZK.
It is possible to apply for an unilateral, bilateral or multilateral APAs.
The safe harbor rules do not exist in the Czech jurisdiction.
Firstly, the taxpayer has the possibility to appeal against the decision of tax authority within the national
appeal procedure. It is a standard procedure which is the same for all decisions (not only for the transfer
pricing related income adjustment) and it should be submitted to the tax authorities that the decision against
which the appeal is lodged, is issued. Within this procedure, the tax authority does not decide on the appeal
itself (if it does not comply), it should relate the appeal and relevant part of the taxpayer file to the nearest
senior tax authority. Here other repair and supervisory resources are available. The tax payer may also
demand anannulment of the decision by an administrative judiciary.
Secondly, the taxpayer could apply for a Mutual Agreement Procedure (MAP) according to Art. 25 of the
OECD Model Convention to prevent double taxation in case of transfer pricing related income adjustment.
usually can apply for an arbitration procedure. The formal regulations for the filing and procedure of a MAP
are set out in the Code of Conduct to the Convention to prevent double taxation in case of transfer pricing
related income adjustment.
45
Finland
1. Statutory rules
Tax authority: Finnish Tax Administration Tax law: Finnish Tax Act on Assessment Procedure §§14 a-c, 31,
32, 75 and 89
Statutory rules are the sections 14a-14c and article 31 of the Assessment Procedure Act (VML). According
to article 31, in the event of a company and a related party agreeing on terms or determined terms that differ
from the terms that would have been agreed upon between independent parties and as a consequence,
the taxable income of the company sinks or the company’s loss increases (compared to the amount that
the taxable income would otherwise have been), then the taxable income may be increased. This increase
occurs to the amount that would have accrued in the case that the terms had followed those that would
have been agreed upon between independent parties.
Other relevant regulations and rulings in Finland are: a guidance letter on documentation on 19 October 2007
issued by The National Board of Taxes and the arm´s length principle that was implemented in 1965. The
transfer pricing documentation came into force on 1 January 2007.
Regarding different parts of transfer pricing, the Finnish tax authorities have published very detailed
instructions on several parts of the transfer pricing documentations. In general, the Finnish regulations
follow the OECD Transfer Pricing Guidelines and the Finnish legal commentary also follows the guideline´s
principles.
According to the guidelines, the specific circumstances and effects of the restructuring on the material
functions of parties should be considered under the use of the arm´s length principle.
The term related party is a broad definition in the Finnish tax codex. The matter over form rule will apply.
Acceptable transfer pricing methods are the comparable uncontrolled price (CUP) method, the resale price
method, transaction profit methods, the cost plus method, the profit split method and the transactional net
margin method (TNMM).
The priority method was established under the Finnish law, tough the preference among the acceptable
methods is based on the OECD Guidelines (2010).
Companies may choose any of the OECD transfer pricing methods, as long as the chosen method results in
an arm’s length pricing for the intra-group transaction. With his selection of the particular method, the taxpayer
should take into consideration the aspects regarding the application of methods stated in the OECD Guidelines.
46
Company-submitted written documentation should prove that the prices used in intercompany cross-border
transactions correspond to the arm´s lenght nature principle. The arm’s length principle is the generally
acceptable international standard price within a multinational company. The Finnish national legislation
contains its basic definition of the arm’s length principle in § 31, Act on Assessment Procedure.
The documentation rules are contained in Assessment Procedure Acts (Articles 14a-14c). According to the
rules, the Finnish transfer pricing documentation should include the following:
•
Description of the company´s business activities,
•
Description of related party relationships,
•
Details of controlled transactions,
•
Functional analysis of the transactions undertaken with associated companies,
•
Comparability analysis, including information on comparable transactions or companies,
•
Description of the transfer pricing method and its application.
Documentation related to transfer pricing is required to be submitted anually six months after the end of the
fiscal year at the earliest together with the corporate income tax return.
Documentation must be provided within 60 days from a request made by the tax authorities. If additional
requests are needed, a 90-days response time is allowed. Discretionary extensions are possible.
Income tax returns must be filed within four months from the end of the accounting period. Documents
related to transfer pricing need not to be filed with the tax return but a specific transfer pricing form (Form 78)
must be attached to the tax return if certain conditions are met.
For small and medium-sized enterprises, transfer pricing documentation obligations have been waived. The
European Commission’s recommendations on the definition of micro, small and medium-sized enterprises
2003/361/EC have been taken into account. According to the governmental proposal text, the reason for
this limitation is to avoid excessive costs for SMEs, especially because these costs would probably be out of
proportion considering the fiscal interest.
§ 14 a, subsection 3 includes the following definition of a small or medium-sized enterprise:
•
Number of employees’ remains below 250;
•
Net sales is below €50 million, or balance-sheet total is below €43 million; and
•
SME criteria as enumerated in Recommendation 2003/361/EC are applicable to the enterprise.
All of the above three requirements are to be fulfilled, but the second requirement with the maximum amount
of sales and balance-sheet totals will be considered as fulfilled even if one or the other figure is above the
limit. The enterprise will still be considered small or medium sized. However, if both amounts are above
the limit, the enterprise will no longer be considered small or medium sized. The third requirement with its
reference to the Commission Recommendation effectively narrows down the definition to others than group
companies. In other words, if a small company is a subsidiary of a group, it cannot be considered a SME.
47
If one of the following criteria is met the enterprise is regarded as a large company and therefore has to meet
the transfer pricing documentation obligations:
•
Number of employees is at least 250; or
•
Net sales is more than €50 million and balance-sheet total is more than €43 million; or
•
The SME criteria as enumerated in Recommendation 2003/361/EC are not applicable.
According to The Finnish rules, the transfer pricing documentation can be prepared in Finnish, Swedish or
English and a Finnish or Swedish translation is required only in exceptional cases.
According to the Finnish tax authorities, the requirements for the transfer pricing documentation are
sufficiently fulfilled by the use of the EU transfer pricing documentation.
Using EU TPD is certainly sufficient to meet the transfer pricing documentation requirements in Finland.
The overall scope of the Finnish requirements is less encompassing than the standardised country-specific
documentation requierements.
Tax authorities may ask a company to prepare a complete transfer pricing documentation in case of the
following events. Target companies for audits are being selected, tax audits of various types are conducted,
income tax returns are being processed, a tax-treaty country has negotiations with Finland under a mutual
agreement procedure or if any other measures connected with taxation are taking place.
Probably the most common situation where tax authorities will ask companies to present documentation will
be a tax audit. From the tax authority’s point of view, tax audits offer very good opportunities to examine the
documentation in detail.
With the aim of auditing the largest companies at least once every five years, transfer pricing may be just
one of the topics considered in the case of an usual tax audit. Also, the tax authorities may simply conduct a
transfer pricing audit.
Every piece of information which seems useful to audit the tax return may be requested by the tax
authorities. Typical potential information sources are usually books, records and also outsider information.
Outsider information can be requested from third parties such as banks, investment companies and
insurance companies.
A tax audit ordinarily consists of a visit to the company’s business properties and interviews the staff,
including an examination of correspondence on issues arising during the audit.
Although the company has a right to be heard in the audit process, this usually does not result in a
negotiation process. The tax auditors make their own judgement to the amount of the assessment, based
upon the information they have gathered from the company and other sources. The tax auditors will present
a preliminary report, against which the company may oppose, according to which the tax audit report is
finalised. The final tax audit report, to which the taxpayer may also state his opinion, may include a proposal
of tax adjustment. A tax adjustment is levied by the local tax office. After this process is finalised the
company has the opportunity to appeal in the administrative court.
48
In general, the transfer prices reflected on an income tax return must be the same as those reflected in
financial statements. Tax differences may be allowed in exceptional adjustment cases.
The maximum penalty of €25,000 per negligence may be imposed on a company in the case of
noncompliance with documentation. In addition, a tax increase (max 30% of adjusted income) is possible,
according to the regulations on general tax penalties. The penalty is payable under any circumstances.
Whether the actual tax for the reassessed amount of income is payable has no impact. In addition, penalty
interests may be imposed.
Penalties can be reduced or removed if the company presents supplementary transfer pricing documentation
that supports the arm’s length nature of the intra-group transactions. The determination of penalties will be
made on a case-by-case basis.
No formal legislation, guidelines or case law concerning APAs are currently applicable. The tax authorities
have indicated that enterprises have the opportunity to obtain a MAP APA under a treaty´s mutual agreement
procedure. Also an application for a general advance ruling on transfer pricing issues is possible.
Fees for advanced rulings are payable on invoice and depend on the case and the duration to conclude the
advance ruling. There are no APA filing fees in Finland.
An advanced ruling is granted for the ending of the period at the end of the tax year which follows the year
when the ruling was granted in. The tax authority will not publish APA data in the form of annual reports or
through disclosures of data in any public forums.
In Finland double taxation is usually prevented trough a national appeal procedure, based on the Finnish tax
codex and the tax treaties.
The information contained in this publication is for general guidance on matters of interest only. The
application and impact of the law can vary widely, based on the specific facts involved. The information in
publication is provided with the understanding that the authors and publishers are not herein engaged in
rendering legal, accounting, tax, or other professional advice and services. Therefore, it should not be used
as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before
making any decision or taking any action, you should consult a DFK professional.
49
France
1. Statutory rules
In France, transfer pricing is mainly regulated by the following rules.
a.Law
Within the Law, transfer pricing is regulated through Articles 57 and 238 A of the French Tax Code (FTC).
Recently, legal obligations regarding transfer pricing have been enhanced through December 6th 2013
Fiscal Bill (“Fight against fiscal fraud and economic and financial crime”) and Article 99 of 2014 Tax Law on
analytical accounting.
b. French Procedural Tax Code (Livre des Procédures Fiscales)
French Procedural Tax Code (FPTC) on compulsory fiscal documentations:
Art L13B, Art 188A, Art L80 B 7e and Art 13 AA
c. Tax administration Official Bulletin
Tax administration Official Bulletin (Bulletin Officiel des Impôts) dated 18th February 2014 on Tax Base, Profit
Transfer to related parties, transfer pricing control and adjustment.
In France, tax administration position meets the OECD transfer pricing guidelines. Moreover tax
administration refers explicitly to these OECD guidelines.
The related parties are the parties that can be dependent on eachother, of which one is being located
outside of France. Also the commercial links are dealt with in this way and not only through the direct or
indirect control of share capital.
There can be a transfer pricing issue when a foreign dominant or controlled enterprise can realise an artificial
increase or decrease of transfer prices.
Note that when a country is considered as a tax haven, the French tax administration may assume unfair
transfer pricing and is not required to prove that the companies are related parties.
Specific attention should be given to specific documentation requested from subsidiaries of groups having
more 400 million euro either in balance sheet total or turnover.
50
There are five accepted methods for transfer pricing:
•
The Comparable uncontrolled Profits (CUP) method. It is a direct and reliable method to determine the
conditions of commercial and financial relations in the group;
•
The Resale Price method. It fits to the sale operations especially when the retailer is not the main
entrepreneur. It involves the purchase and resale of tangible property In which the reseller does not add
value to tangible goods;
•
The Cost plus method. It is commonly used to determine an arm´s length price for services and simple
manufacturing activites;
•
The Profit split method. It is typically applied when both sides of the controlled transaction own
significant intangible properties. The profit is to be divided such as is expected in a joint venture
relationship;
•
The transactional net margin method (TNMM) is typically applied when two related parties engage in
a continuing series of transactions and one of the parties controls intangible assets for which an arm’s
length return is not easily determined.
Whatever method chosen, it should be compared with a transaction carried out by an independent
company.
There is no priority among the accepted methods. However, the French Tax Authorities prefer the
Comparable uncontrolled Profits (CUP) method as the article 57 of the French tax code is based on this
method.
There is no hypothetical arm’s length test.
Situations when transfer pricing documentation must exist are:
•
The company or its ultimate mother company has a total of more than 400 million euro balance sheet
total or turnover and belongs to a group: the company is then subject to compulsory transfer pricing
documentation every year.
•
The company has a balance sheet total of less than 400 million: in case of tax audit, it should remit the
transfer pricing documentation.
Timing: the day when a tax audit begins or within 30 days after having been summoned by Tax
administration.
If the transfer pricing documentation is not written in French, tax administration may request its translation
into French.
The regulations state that the permanent establishments are also within the scope of the transfer pricing
documentation requirements.
The new law requires formal and compulsory transfer pricing documentation, which includes the following
information among others:
51
•
General information on the group and its affiliated companies.
•
General description of the activity, including changes occurred during each fiscal year.
•
General description of the legal and operational structures forming the group identifying the related
companies engaged in the intragroup transactions.
•
Description of the functions performed and of the risks born by the related companies if they have an
impact on the company.
•
Identification of the main intangible assets having a link to the company (e.g. patents, trademarks, trade
names, know-how, etc.).
•
Description of the transfer pricing policy for the group specifying changes occurred in the each fiscal
year, if any changes indicate it o rare indicated by date.
Specific information on the company itself
In particular, the following elements should be provided:
•
Description of activities incurred including changes occurred during each fiscal year.
•
Description of operations done with group companies, indicating nature and values, of transactions
including royalties.
•
List of agreements for splitting the costs and copies of these agreements if they hit the operations
of the company. As such rulings or agreements made with foreign tax authorities -obtained in other
jurisdictions- must be supplied.
•
Presentation of policies or methods applied to respect the arm-length principle.
•
Description of the transfer pricing policy with an explanation on the selection and application of the
retained method, in compliance with the arm’s length principle and with the analysis of the functions
performed, of the risks borne and of the assets used by the audited company.
•
When the selected policy/method makes it necessary, display elements/reasons for comparison
considered appropriate by the company. Such analysis should include the specifics of goods and
services, analysis of operations,( functions, assets used, risks incurred), contractual clauses, economic
situations and business strategies of companies considered comparable.
The FTA –French Tax Authorities- usually control transactions based upon intangible properties, services and
intercompany transactions.
The tax auditor verifies the compliance of transfer pricing used by the company for purchases, sales and/or
any operation with the arm’s length standard.
Although new documents are required since the Law of December 6th, 2013, the tax auditor should get
access to the analytical accounting and to the consolidated Financial Statements to get an overview of all the
parents-subsidiaries.
The tax audit usually covers a three fiscal years period. The tax audit period can be extended backwards until
the point in time when the company had incurred tax losses which the company was able to carry forward.
52
Documentation should be provided to the French Tax authorities on the day the tax audit begins. If
documentation is not available, the tax authorities will send an official request to be provided with the
documentation within the next 30 days.
If the replies are not considered appropriate, the tax authorities may assess the tax base and could apply a
fine for each fiscal year requested.
a. Estimation of tax basis
In the course of a tax audit, in order to apply Art 57 of French Tax Code, the French Tax Administration (FTA)
must prove that:
•
The companies involved are related parties (i.e. dependent one eachother, one being located in France
and the other one abroad)
•
Profit is unfairly transferred to the entity located outside France
In such circumstances, the FTA may adjust the company tax base according to items which are specific to
the audited operations while applying the accepted transfer pricing methods (Direct Assessment Method).
When specific information is missing, the tax base may be determined by comparison to companies
operating normally (Accessory Assessment Method).
In case of a company failure to disclose transfer pricing documentation, tax administration is entitled to
assess the tax base according to available information (Direct Assessment Method). If such information is
missing, the tax base is determined by comparison to companies operating normally (Accessory Assessment
Method). The tax base adjustment will amount to the profit transferred abroad without pricing justification.
b. Surcharge and penalties
Providing transfer pricing documentation to the French Tax Auditor -FTA- is required by law. Failing to abide
exposes companies to heavy penalties.
When proven by the FTA, unfair transfer pricing generally results in tax base reassessment as well as in usual
penalties for late payment, absence of or late declaration.
In addition, the transfer pricing adjustment made by the French Tax Authorities will be considered as a profit
distribution -such as dividends- and will be taxed accordingly.
France has instituted the administrative practice of entering into advance pricing agreements. These
agreements, which are voluntary and initiated by the French corporate taxpayer, will allow the French
member of a corporate group to negotiate the modalities for determining its transfer prices for a three year
period on those categories of transactions that are submitted to the French Tax Administration for its prior
review. A transfer pricing agreement guarantees the taxpaying parties that their approved transfer prices
will not be contested during the tax period covered by the agreement unless: (i) it was entered into on false
pretenses; (ii) its terms are not followed by the private parties, or (iii) in cases of fraud.
53
A transfer pricing control by one of the two local authorities can trigger a double taxation.
The taxpayer has the opportunity to appeal against the transfer pricing related income adjustment within
the national appeal procedures. In this case, the local authorities should tend to figure out the issue with no
obligation to get results.
The taxpayer could also apply for a Mutual Agreement Procedure (MAP) according to Art. 25 of OECD Model
Convention to prevent a double taxation in case of transfer pricing related income adjustment. Within a MAP,
tax authorities of the countries involved consult each other to resolve disputes regarding the transfer pricing
related double taxation. If the tax authorities involved cannot agree upon a result, the taxpayer can usually
apply for the arbitration procedure.
The MAP was accepted by the French Tax Authorities.
The taxpayer may follow both procedures (national appeal procedure and MAP) simultaneously. However, in
practice, it is often more efficient, to apply for one procedure after the other has been conducted.
10.Yearly declaration of transactions
The tax law prescribes that the summary of transfer policies information is given every year to French tax
administration.
The declaration includes:
•
general information about the group of companies (activities of the group, assets used by the French
company, general description of transfer pricing polivies)
•
specific information regarding the French company:
•
names of group companies having transactions,
•
nature of transactions by nature with group companies indicating the countries involved,
•
methods applied,
•
any change occurred in the fiscal year.
This declaration has to be filed for every foreign company having group transactions. French companies have
to file if the value of operations is more than 100.000 Euros.
This declaration has to be submitted within 6 months after filing the yearly tax return. For FYE December
2013, the filing has to be done before November 20, 2014.
This kind of declaration exists in some countries and is enclosed in the yearly tax return.
54
Germany
1. Statutory rules
a.Law
•
Sec. 1 Foreign Tax Act (FTA);
•
Sec. 4 para. 1 Income Tax Act (ITA);
•
Sec. 8 para. 3 Corporate Income Tax Act (CITA);
•
Sec. 90 para. 3, Sec. 162 para. 3 and 4 General Fiscal Code (GFC).
•
Documentation of Profit Allocation as of Nov 13, 2003 (Gewinnaufzeichnungsverordnung – GAufzV);
•
Cross-Border Transfer of Functions as of Aug 12, 2008 (Funktionsverlagerungsverordnung – FVerlV).
c. Selection of important administrative circulars:
•
Principles relating to the Examination of Income Allocation Between Internationally Affiliated Enterprises
(Administration Principles) as of Feb 23, 1983;
•
Principles relating to the Examination of Income Allocation for Permanent Establishments of
Internationally Operating Enterprises as of Dec 24, 1999, last revision on Aug 25, 2009 (Administration
Principles – Permanent Establishment);
•
Principles relating to the Examination of Income Allocation by Cost Sharing Agreements Between
Internationally Affiliated Enterprises as of Dec 30, 1999;
•
Principles relating to the Examination of Income Allocation Between Internationally Affiliated Enterprises in
Case of Secondments as of Nov 9, 2001;
•
Principles for the Audit of Income Allocation Between Affiliated Parties with Cross-Border Business
Relations in Respect of the Duty of Determination, the Duty of Cooperation, Adjustments, Mutual
Agreement Procedures, and EU Arbitration Procedures as of Apr 12, 2005 (Administration Principles –
Procedures);
•
Principles relating to the Examination of Income Allocation Between Related Parties in case of CrossBorder Transfer of Functions as of Oct 13, 2010 (Administration Principles on Transfer of Functions).
German authorities adopted the OECD-Guidelines within the published administrative circulars to a large
extend. The circulars are under revision from time to time, to be consistent with the current OECD standards.
55
The term “related party” is defined in sec. 1 para. 2 FTA. According to this provision, a person is to be
qualified as related to a German taxpayer,
•
if such a person holds, directly or indirectly, a participation of at least 25% in taxpayer’s capital
(substantial participation), or if such a person is able to exercise, directly or indirectly, a controlling
influence or vice versa, if the taxpayer holds a substantial participation in such person’s capital or is able
to exercise, directly or indirectly, a controlling influence on such person; or
•
if a third person holds a substantial participation in both such person’s capital and the taxpayers capital
or is able to exercise, directly or indirectly, a controlling influence on both of them; or
•
if such a person and the taxpayer is able, in agreeing on the terms and conditions of a business
relationship, to exercise influence on the taxpayer or on the person based on facts beyond such
business relationship, or if one of them is personally interested in the other party’s income.
According to sec. 1 para. 3 sent. 1 FTA CUP, R- and C+ are the preferred transfer pricing methods, if
comparable arm’s length data can be determined, which are to be qualified as fully comparable with the
transaction under review after making appropriate adjustments with regard to the functions performed, risks
assumed and assets employed.
If such fully comparable arm’s length data cannot be determined, limited comparable data shall be used after
making appropriate adjustments under the application of an appropriate transfer pricing method including
also TNMM and PSM (cf. sec. 1 para. 3 sent. 2 FTA).
In the case that no (fully or limited comparable) arm’s length data can be determined, the taxpayer is obliged
to perform a so-called hypothetical arm`s length test. For this purpose, the taxpayer is obliged to determine
a hypothetical minimum price of the supplier and a hypothetical maximum price of the recipient based on a
functional analysis and internal planning data. Minimum and maximum prices frame the so-called range of
mutual consent, which is determined by the capitalised profit potentials of the transferred asset under review.
If the taxpayer cannot credibly show that another price complies with arm’s length principle, the mean value
of the called range of mutual consent should be regarded as the relevant transfer price.
In practice, the hypothetical arm’s length test often applies for intercompany transfer of intangible assets or in
case of the cross-border transfer of functions. Due to the German regulations, the determination of a transfer
price for the transfer of a function has to consider the transfer package as a whole (including all tangible and
intangible assets as well as all other advantages related to the transferred function).
According to sec. 90 para. 3 sent. 1 GFC, the taxpayer is obliged to prepare documentation on nature and
content of its cross-border transactions with related parties. The German transfer pricing documentation
requirements are outlined in detail in the Ordinance relating to the Documentation of Profit Allocation as of
Nov 13, 2003, (GAufzV) and Administration Principles – Procedures as of Apr 12, 2005.
56
The documentation shall include the type, contents and scope of the cross-border transaction with related
parties, including the economic and legal basis for an arm´s-length determination of prices and other
business conditions. Documentation of extraordinary transactions (as corporate restructuring or conclusion
of or changes in material long-term intercompany contracts) must be prepared contemporarily (i. e. within six
month after the end of the fiscal year).
According to sec. 2 para. 5 GAufzV the documentation has to be prepared in German. However, upon
application of the taxpayer, the tax authorities may accept exceptions hereof. In practice, the taxpayers
mostly prepare the transfer pricing documentation in English and provide translations upon request of the tax
authorities.
Taxpayers which are to be qualified as small enterprises are exempted from the obligation to prepare a full
transfer pricing documentation according to the provisions of GAufzV. In this respect, a small enterprise
is an enterprise for which neither the sum of €5m regarding the remuneration for the supply of goods or
commodities from business relations with related parties nor the sum of €500,000 for remuneration of other
services for business relations with related parties is exceeded in the current business year.
Besides, the taxpayer has the possibility to submit a transfer pricing documentation according to the
centralised documentation approach of the EU Joint Transfer Pricing Forum, which consists of a so-called
master file and respective country specific documentation. This approach is commonly accepted within
the EU countries. It is outlined in the “Code of Conduct on Transfer Pricing Documentation for Associated
Enterprises in the European Union (EU TPD)” (cf. Official Journal of the European Union, C 176/3).
The German tax authorities usually examine the adequateness of intercompany transfer pricing only during
the regular tax field audits. Tax audits typically cover periods from three to five consecutive fiscal years. In
case of a tax audit, the taxpayer is generally obliged to cooperate with the tax auditors.
In case of multinational enterprises, the examination of the cross-border transfer prices is increasingly the
focus of German tax auditors. However, transfer pricing documentation for all types of transactions must
only be submitted upon request of the tax authorities. The time limit for the presentation is 60 days following
the request (respectively, 30 days in case of extraordinary transactions). Extensions to the above mentioned
presentation deadlines are only granted for special reasons.
The tax auditors are not authorised to issue revised assessments for the years under review. The final audit
report, including suggestions for any tax adjustments, is presented to the local tax office where the revised
tax assessments are to be prepared. The local tax office usually follows the recommendations of the tax
auditors. If the taxpayer does not agree with the revised assessments, he has the possibility to apply for an
appeal procedure as described below.
57
If the taxpayer
•
•
•
transactions,
it is disputably assumed that the domestic income of the taxpayer exceeds its declared income. In such
case, tax authorities are entitled to estimate the domestic taxable income of the taxpayer. Thereby, it is
permitted to make the income adjustment to the most unfavorable point of the arm’s length range.
If the taxpayer
•
•
the submitted documentation is substantially unusable a penalty of 5% to 10% of the income adjustment
shall be assessed, with a minimum surcharge of €5,000.
In case of delayed submission the surcharge may be up to €1m, at least €100 for each full day by which the
deadline has been exceeded.
With respect to the above described regulations, a transfer pricing documentation is to be regarded as
“substantially unusable” if the documentation does not enable a third person expert to determine within a
reasonable period of time which facts the taxpayer has realised with regard to his/her business relations with
related parties and whether and to what extent the taxpayer has complied with the arm’s length principle.
According to para. 4.123 of the OECD-Guidelines an Advance Pricing Agreement (APA) is an agreement that
determines, in advance of controlled transactions, an appropriate set of criteria (e. g. method, comparables
and appropriate adjustments thereto, critical assumptions as to future events)
for the determination of the transfer pricing for those transactions over a fixed period of time. An APA is
formally initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated
enterprises, and one or more tax authorities.
As a rule, German tax authorities only grant bilateral or multilateral APAs. Unilateral advanced rulings for
transfer pricing issues with binding effect are not provided for German taxpayers.
In general, APAs are welcomed and supported actively by German tax authorities. The Federal Central Tax
Office located in Bonn carries out the APA procedure as the German competent authority. Usually, the local
tax office and the tax auditor are involved in the APA procedure. The formal regulations for the filing and
procedure of an APA are set out in the APA-Guidelines (Administration Circular as of Oct 5, 2006).
58
According to sec. 178a GFC APA procedures are subject to a filing fee in Germany. The basic fee for each
APA application amounts to €20,000 per country involved. The extension fee for an already existing APA
amounts to €15,000. The amendment fee for amendments during a current APA procedure amounts to
€10,000. In case of small enterprises a reduction of the APA filing fees are possible.
Firstly, the taxpayer has the possibility to appeal against the transfer pricing related income adjustment within
the national appeal procedure. Thereby, the taxpayer has to appeal against the revised assessments by
the regional tax office. If the appeal’s department denies the appeal, the taxpayer has the possibility to take
court’s action against the decision. The proceeding would be heard first by regional tax court; if admitted,
then by the Federal Tax Court.
Model Convention to prevent a double taxation in case of transfer pricing related income adjustment. Within
a MAP, tax authorities of the involved countries consult each other to resolve disputes regarding the transfer
pricing related double taxation. If the involved tax authorities cannot agree upon a result, the taxpayer usually
can apply for an arbitration procedure. The formal regulations for the filing and procedure of a MAP are set
out in the Administration Circular regarding Mutual Agreement Procedures and Arbitration Procedures as of
Jul 13, 2006.
The taxpayer can follow both approaches (national appeal procedure and MAP) contemporaneously.
However, in practice, it is often more efficient, to follow the approaches one after another.
59
Greece
1. Statutory rules
a.Law
•
L.4172/2013 (Income Tax Code),
•
L.4174/2013(Code of Tax Procedures)
b. Selection of important administrative circulars:
Circular 1097/09.04.2014 as amended by Circular 1144/15.5.2014: Determination of the obligatory content
of the transfer pricing documentation file, the summary information table and the Greek documentation
file. Cases where the aforementioned files are deemed incomplete or insufficient. Accepted methods of
determining prices of transactions and methods of determining the accepted range of prices or profit margin
per the provisions of article 21 of L.4174/2013.
•
Circular 1248/31.12.2013: Procedure of Advanced Pricing Agreements pricing per the provision of article
22 of l. 4174/2013.
The Greek authorities have drafted the relevant Transfer Pricing provisions based on the principles set out
in the OECD-Guidelines. Additionally, article 50 of L.4174/2013 specifically states that the transfer pricing
provisions are applied and interpreted according to the OECD transfer pricing guidelines suggesting,
furthermore, an ambulatory approach to their application.
The term “related party” is defined in article 2 L.4172/2013. According to this provision, companies are
considered to be associated if a direct or indirect substantial managerial or financial dependence or control
exists. This could be due to either the participation in the capital or in the management of each other, or
the participation of the same persons in the capital or the management of both companies as well as in
companies that hold the aforementioned rights or any influence of the associated companies.
Especially a person qualified as related to a Greek taxpayer:
•
If such person holds, directly or indirectly, shares, stakes or a participation of at least 33% in taxpayer’s
capital, based in value or in profit rights or in voting rights; or
•
If such person directly or indirectly holds, shares, stakes, voting rights, or a participation of at least 33%
in taxpayer’s capital, based in value or in profit rights or in voting rights at one of the related persons; or
•
any person where direct or indirect substantial managerial dependence or control exists, or if such
person exercises substantial influence or is able to influence the decision making of another or in case
where both persons have a business relationship of direct or indirect substantial dependence or control
or possible substantial influence exercised from a third person.
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Article 50§2 of L.4172/2013 explicitly states that the OECD Transfer Pricing Guidelines for Tax
Administrations and Multinational Enterprises apply.
Additionally, circular 1097/09.04.2014 replicates the provisions of the OECD Guidelines.
The following methods can be applied:
1. Traditional methods:
•
Comparable Uncontrolled Price (CUP),
•
Resale Price(RPM),
•
Cost plus (CPM)
2. Non-Traditional methods:
•
Transactional Net Margin Method (TNMM)
•
Profit Split Method (PSM)
Non-Traditional methods are available only in cases where the use of the above traditional transfer pricing
methods is considered to be ineffective, provided that a detailed justification is included in the documentation
files.
The Transfer Pricing according to article 21 L.4174/2013 documentation file consists of:
•
The primary file, which is common for all group companies and contains common standardised
information for all group affiliated companies as well for all branches
•
The Greek file, which is supplementary to the primary file and contains additional information regarding
the Greek companies of the group, the permanent establishments of the foreign entity in Greece or the
permanent establishments of the Greek entity abroad.
The transfer pricing documentation file is accompanied by a summary information table.
More specifically the content of the master documentation file should include:
•
Intercompany transfer pricing policy, and reference to the method adopted by the group, in order to set
the prices of the intercompany transactions;
•
Changes to the ownership of intangibles and to financial transactions that took place within the Group
during the fiscal year, will have to be described, as well as how the consolidated taxable profits have
been affected;
•
Description of transactions that have taken within the year with parties prior to becoming or after
discontinuing being related with the taxpayer, so as to examine the comparability and the consistency of
the terms before and after the association;
•
Information about any changes within the previous year in real and intangible property, financial
transactions and tax results of the group;
•
The group corporate activities and strategy as well as the organisational, legal and operational structure,
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•
Information about the related parties engaged in the transaction (e.g. their objectives, annual gross
income, number of employees), report of intercompany transactions, including the nature of transactions
(e.g. sale of goods, provision of services) flow of invoices, transaction amount,
•
Information regarding ownership of intangible assets (trademarks, know-how, etc.) and associated
royalty payments or receipts,
•
Functions, risks and assets of the related parties, including changes from the previous fiscal year,
•
Changes to the ownership of intangibles and to financial transactions that took place within the group
during the fiscal year. This information such as how the consolidated taxable profits have been affected
will have to be described,
•
Description of transactions that have taken within the year with parties prior to becoming or after
discontinuing being related with the taxpayer, so as to examine the comparability and the consistency of
the terms before and after the association,
•
Intercompany transfer pricing policy, and reference to the method adopted by the group, in order to set
the prices of the intercompany transactions.
The content of the Greek documentation file should include:
•
Detailed description of the company and its strategy,
•
Detailed report of the intercompany transactions including the nature of transactions (sale of goods,
provision of services), flow of invoices, transaction amount,
•
Comparative analysis regarding the characteristics of the intercompany transactions and information
related to internal or external comparable, where available,
•
Functional analysis of the related parties (business risks, functions performed), the contractual terms, the
economic circumstances and corporate strategies,
•
In the case of a sale, acquisition or transfer of an intangible asset to or from a related party, there
should be additional information provided regarding the application of the arm’s length principle,
consideration of expected benefits and the usefulness of the asset for the enterprise of an independent
party in comparable circumstances. For the purpose of the relevant comparability analysis there can be
indicatively considered:
•
Expected benefits
•
Geographic limitations in the exploitation of the intangible
•
Transfer of exclusivity rights or not
•
Contribution of the acquirer in the future development of the asset
•
Description of extraordinary transactions or events, including business restructurings that have taken
place
•
Description of the transfer pricing method or methods adopted for the intercompany transactions
including the reasons why that method was considered to be most appropriate.
The transfer pricing documentation file has to be prepared within (4) four months of the fiscal year end. Within
the same period of time, the summary information table has to be submitted electronically to the General
Secretariat of Information Systems of the Ministry of Finance.
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All Greek companies irrespectively their legal form, should maintain according to article 21 L.4174/2013
a transfer pricing documentation file, for their intercompany transactions with one or more associated
companies, which exceed the amount of:
•
EUR 100,000 in total annually, in case the amount of gross revenues of the financial year for all
associated companies is not exceeded by the amount of EUR 5 million,
•
EUR 200,00 in total annually, in case the gross revenues of the financial year for all associated
companies surmounts the amount of EUR 5 million.
This obligation is referred to both cross border as well as to local transactions.
The master documentation file should be kept in an internationally accepted language, preferably in English
in case of overseas groups, with the obligation to translate it into Greek, within (30) thirty days from the
notification of the request.
Generally, the concept of the transfer pricing documentation follows the concept of the master and
respective country specific documentation of the EU Transfer Pricing Code of Conduct.
In the course of the annual audit being executed by certified auditors, the companies in Greece are also
obliged to be audited from a tax perspective. The audit program of the so-called Tax Certificate includes the
fulfillment of the company’s obligations with transfer pricing requirements, set by the Tax Law.
At least 9% of the total number of companies audited by certified auditors for their tax compliance will be
selected for a further audit by the Tax Authorities. Apart from the companies audited under the above conditions,
the Tax Authorities may choose to audit an additional number of companies under certain conditions.
Once the audit has begun, other data for review such as, a trial balance, financial statements and
explanations of how the documentation file was prepared, may be requested.
The prices of the intragroup transactions are considered as undocumented under the
following circumstances:
•
In the case that the submission of the transfer pricing file to the competent audit authority does not occur.
•
If the audit verification regarding the accuracy of calculation and documentation of the intragroup pricing
is impossible and cannot be conceived by additional information and the upkeeping of this results in an
inaccurate or insufficient transfer pricing file.
•
In the event of the audit verification of intragroup prices becoming impossible, resulting from the supply
of insufficient or inaccurate additional information.
When transactions between associated companies are carried out with financial terms different than those
which would have been agreed between unrelated parties, the profits that would have been achieved and
were not because of these terms, are added to the net profits or decreases of the company’s losses.
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In case of late filing of the summary information table according to article 56§1 of L.4174/2013 a fine
amounting to 0,1% of the declared gross income of the taxpayer is imposed. Said fine shall not be lower
than EUR 1,000 and higher than EUR 10,000.
The same fine will be imposed in the case of the master documentation file and the Greek documentation file
is not being made available to the Tax Authorities, within the period specified above (within four (4) months
from the fiscal year end) or submitted with incomplete or insufficient context.
Additionally, under article 56§2 failing or submitting an inaccurate/ incomplete summary information table
(article 21 para.3 L.4174/2013) or the failure to provide the documentation file referring to paragraph 1 of
Article 21 L.4174/2013, a fine amounting to 1% of the declared gross income is imposed, including any
correctional gains of the responsible taxpayer. This fine shall not deceed the amount of EUR 10,000 and
should not exceed the amount of EUR 100,000.
In case of the relapse within five (5) years, a fine amounting to twice the original fine is imposed. In case of
second a relapse within five (5) years, a fine amounting to four times the original fine is imposed.
The procedure for obtaining an advance pricing agreement (APA) with the tax authorities was introduced
for the first time in 01/01/2014. Subject of an APA is the total criteria (e. g. method, comparables and
appropriate adjustments, critical assumptions for future events) used for the determination of the transfer
pricing. Its initial duration is up to (4) four years and the option of renewal, review revocation or cancellation is
provided under certain circumstances.
The tax audit is limited, verifying that whatever defined in the (APA) was adhered, the critical assumptions,
circumstances and its terms are still valid. The filling fees will be determined by virtue of a General Secretariat
Decision, to be issued by the Ministry of Finance.
If the taxpayer disputes any fine imposed on him by the Tax Authorities, he/she may appeal and demand
a review on the case (concerning administrative proceedings) at the Office of Internal Review Board of Tax
Administration. The application is submitted to the tax authority that imposed the fine and states the reasons
and documents on which the taxpayer’s request was based.
The application must be submitted by the taxpayer, within thirty (30) days from the date of the notification.
The Tax Administration sends the taxpayer’s case including all the supporting documents and opinions
thereof to the Office of Internal Review Board of Tax Administration within seven (7) days after submission. By
exercising an appeal, the payment of fifty percent (50 %) of the disputed amount is suspended, provided that
the payment of the remaining fifty percent (50 %) has been executed.
Greece has an extensive treaty network, including treaties with almost all its major trading partners. These
treaties contain provisions to relieve double taxation through the use of mutual agreement proceedings
(MAP). There are no restrictions on the commencement of the application for MAP following an audit
assessment. It is not necessary for the taxpayer to enforce his rights through the domestic appeal´s process
of the Administrative Court.
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Hungary
1. Statutory rules
Transfer pricing is regulated by the following rules in Hungary:
a. Statutory rules (law)
Article 18 Corporate Income Tax Act (CITA)
22/2009 Ministry of Finance Decree on TPD requirements
c. Important administrative circulars
There are no such guidelines in Hungary.
Hungarian tax legislation adopted the OECD-Guidelines.
The term “related party” is defined in CITA section 4 para 23. According to this provision, a ‘related party’
shall mean:
•
the taxpayer and the person in which the taxpayer has a majority control – whether directly or indirectly –
according to the provisions of the Civil Code,
•
the taxpayer and the person that has majority control in the taxpayer – whether directly or indirectly –
according to the provisions of the Civil Code,
•
the taxpayer and another person if a third party has majority control in both the taxpayer and such other
person – whether directly or indirectly – according to the provisions of the Civil Code, where any close
relative holding a majority control in the taxpayer and the other person shall be recognised as third
parties;
•
a nonresident entrepreneur and its domestic place of business and the business establishments of the
nonresident entrepreneur, furthermore, the domestic place of business of a nonresident entrepreneur
and the person who maintains the relationship defined under paragraphs a)-c) with the nonresident
entrepreneur;
•
the taxpayer and its foreign branch, and the taxpayer’s foreign branch and the person who maintains the
relationship defined under paragraphs a)-c) with the taxpayer.
According to the new Civil Code’s Book Eight, Closing Provisions, Part One section 8:2 ‘majority control’
means a relationship where a natural or legal person (holder of a participating interest) controls over fifty per
cent of the voting rights in a legal person, or in which it has a dominant influence.
65
The holder of a participating interest is deemed to have dominant influence on a legal person if it is a member
of or shareholder in that company and:
•
it has the right to appoint and recall the majority of the executive officers or supervisory board members
of the legal person; or
•
other members of or shareholder in that legal person are committed under agreement with the holder of
a participating interest to vote in concert with the holder of a participating interest, or they exercise their
voting rights through the holder of a participating interest, provided that together they control more then
half of the votes.
Dominant influence is also deemed to exist if the entitlements referred to above are ensured indirectly to the
holder of the participating interest. The indirect control by a holder of a participating interest of over fifty per
cent of the votes in a legal person or dominant influence exercised indirectly by a holder of a participating
interest shall be determined by multiplying the number of votes held by another legal person within that
legal person (intermediary company) by the number of votes held by the holder of a participating interest in
the intermediary company or companies. If the number of votes controlled by the holder of a participating
interest in the intermediary company is greater than fifty per cent, it shall be treated as a whole.
Majority control is also deemed to exist if the entitlements referred above are ensured indirectly to the holder
of a participating interest.
Indirect control on a legal person means a relationship where a person is able to exercise influence on a
legal person that has voting right in that legal person (intermediary legal person). The scope of indirect
control means the percentage of control held by the intermediary legal person that correspond to the
percentage of control the holder of a participating interest has in the intermediary legal person. If the holder
of a participating interest controls more than half of the votes in the intermediary legal person, the control the
intermediary legal person has in the legal person shall be taken into account in its entirety as indirect control
held by the holder of a participating interest.
The direct and indirect ownership interest and voting rights of close relatives shall be applied
contemporaneously.
According to Civil Code’s Book Eight, Closing Provisions, Part One section section 8:1 point 1. ‘close
relative’ means spouses, next of kin, adopted children, stepchildren, foster children, adoptive parents,
stepparents, foster parents, and siblings.
The new Civil Code came into force on 15 March 2014.
The section 18 of CITA lists the acceptable methods as follows: comparable uncontrolled price method,
resale price method, cost plus method, transactional net margin method, transactional profit split method
and any other method if the fair market price cannot be determined by neither of the earlier mentioned
methods. Taxpayers have the possibility to choose from these methods. There is no priority among the
acceptable methods as long as the result is at arm’s length. However taxpayers must declare in the transfer
pricing documentation why they have chosen the applied method, especially if they have used the other
methods instead of the five named method.
The hypothetical arm’s length test is not accepted in Hungary.
66
The Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union
(EU TPD) has been adopted.
Taxpayers are obliged to prepare transfer pricing documentation and keep it in their accounting records.
Taxpayers have the right to choose whether they use the combined documentation (master file + country
specific file) or the separate country specific documentation. Hungarian corporate income taxpayers need
to indicate in their annual tax returns whether they have chosen the country specific documentation or the
combined documentation.
The documentation itself does not need to be submitted together with the annual corporate income tax
return.
The transfer pricing documentation should describe how transfer prices have been determined and include
information which enable the tax authorities to evaluate the arm’s length nature of the transactions. Therefore
the documentation must contain a business description, an organisational structure, a functional (including
risk) analysis, an industry analysis, contractual terms and conditions of the transactions, related parties’
names, a seat and a tax number such as information on the intercompany transactions, benchmarking,
substantiation of transfer pricing methods and prices actually being charged.
Transfer pricing documentation can be written either in Hungarian or any other foreign language. If the
documentation is in a foreign language, the tax authorities have the right to ask for a Hungarian translation at
the taxpayer’s expense. If the transfer pricing documentation is prepared in English, German or French, there
is no need for a Hungarian translation. The documentation must be prepared by the day of submission of
the annual corporate income tax. In case of companies whose business year is equal with the calendar year
it means a date not later than the 31th May. For other companies, whose business year is not equal with
the calendar year it means a date not later than the last day of the fifth month following the last day of their
business year.
Small enterprises are not obliged to prepare a transfer pricing documentation, but they are also obliged to be
able to prove that the prices applied are arm’s length prices.
There is no need for preparing transfer pricing documentation on transaction which value is under 50 million
HUF in the current year. There is also no transfer pricing documentation required in case of recharging, in
unchanged amount, of the costs of services or goods supplied not within the scope of the main activity onto
the affiliated company. This exemption is subject to the condition that neither the company providing the
service nor the supplier of the goods is in affiliated company relationship with any of the related parties. There
is also no transfer pricing documentation required in case of having APA and free-of-charge transfer of funds.
Regular tax audits typically cover periods from two to five consecutive years. In case of a tax audit, the
taxpayer is obliged to cooperate with the tax auditor.
It means that the required documents, including the transfer pricing document must be given to the auditors
upon request immediately. If the documentation is not available upon request of the tax authorities in a tax
audit immediately, the taxpayer is penalised automatically.
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Transfer pricing is a high risky. The existence of the transfer pricing documentation is always checked in a tax
audit. In a tax audit not only the existence of the document and the adequateness to the required elements,
but the prices are also checked in increasing volume.
There is a special kind of tax audits, when the tax officers examine only the transfer pricing documents,
independently from other tax liabilities.
Usually the tax authorities adjust the applied transfer prices to the medium or to the upper quartile of the
market range and they calculate the income with this newly adjusted price.
•
Those taxpayers, who have no transfer pricing documents or the documents do not completely fulfil
the requirements mentioned in the law, may be sanctioned by a default penalty of 2 million HUF for
each documentation for the first time and 4 million HUF for each documentation, if the infringement of
the obligation is committed repeatedly. In case of repeated non-compliance with the requirements of
making of the same documentation, the amount of the penalty may be extended up to the four times
of the penalty amount imposed at the first time, but pursuant to the law, if the obligation is met, the
imposed penalty may be reduced unlimited. If more than two years elapse between two subsequent
non-compliances within the requirements, then such a case shall not be considered as a repeated
infringement of law. The higher penalty rate consequences will not apply.
As separate transfer pricing documentations must be prepared for each contract (for different kind of
business transactions) and the penalty is levied per documentation (contract), the penalty can reach more
than tens of millions HUF.
•
In case of a tax base adjustment the taxpayer must pay the tax difference between the tax calculated on
market level and the applied transfer price, a default penalty, which includes 50% of the tax difference
and a late interest penalty. The late interest penalty is the double of the Hungarian National Bank’s prime
rate and is levied for the period between the original due date and the date of the audit report, but for not
more than three years.
APAs are not supported actively by the tax authorities. The formal regulations for filing and the procedure
of an APA are set out in the Act on Rules of Taxation section 132/B and 132/C. Unilateral, bilateral and
multilateral APAs are available. The resolution is valid for a specific term, minimum for three and maximum
for five years. Before submitting an APA, consultation can be organised with the tax authorities. The
outcome of such negotiations shall not be binding upon the applicant or upon the competent authority in the
proceedings for determining the arm’s length price.
The fee of APA is
•
68
minimum 500 thousand HUF and maximum 5 million HUF for unilateral proceedings, where a fair market
price is established by the method of comparable prices, by the method of resale prices or by the cost
and income method;
•
minimum 2 and maximum 7 million HUF for unilateral proceedings, where fair market price is established
by any method other than mentioned in point a);
•
minimum 3 and maximum 8 million HUF for bilateral proceedings;
•
minimum 5 and maximum 10 million HUF for multilateral proceedings.
If a fair market price (price range) cannot be determined as a specific sum, the fee shall equal the fee
minimum, depending on the type of proceedings.
Safe harbour rules exist in case of low risk services if the taxpayer establishes the arm’s length price with the
cost plus method. A mark-up from the range between 3% and 10% is considered by the law to be at the
arm’s length.
Low risk services are provided by a member of the group to other member or several members or all
members of the company group outside the scope of the (provider’s) main business activity and are not
directly related to the recipient’s main business activity. The value of the services rendered or used shall
not exceed 150 million HUF, 5% of the service provider’s net income and 10% of the recipient’s operational
costs and expenditures in the given tax year. This amount limit applies to the party who is preparing the
documentation. The values of transactions included in contracts that may be consolidated, shall have to be
considered jointly, but the services of a different kind may not be consolidated. The major groups of such
services are:
•
IT services,
•
real property management,
•
legal, accounting activity, translation, interpretation, market research,
•
education,
•
administration services,
•
transportation, forwarding, cargo handling, warehousing, storage,
•
accommodation service, canteen service and safe-guarding services.
the national appeal procedure. Thereby, the taxpayer has to appeal against the revised assessments by the
tax office. If the appeal’s department denies the appeal, the taxpayer has the possibility to take court’s action
against the decision.
Secondly, the taxpayer could apply for a Mutual Agreement Procedure (MAP) according to Art. 25 of the
OECD Model Convention to prevent double taxation in case of an transfer pricing related income adjustment.
69
India
1. Statutory rules
a.Law
Income Tax Act, 1961 (ITA)
•
Chapter X – Sec. 92 to 92F;
•
Section 144C – Reference to Dispute Resolution Panel (DRP);
•
Explanation 7 to Section 271(1)(c), Sections 271AA, 271BA, 271G – Penalties
Income Tax Rules, 1962 [the ‘rules’]
•
Rules 10A to 10E – Transfer Pricing Regulations
•
Rules 10F to 10T – Advance Pricing Agreements (APA)
•
Rules 10TA to 10TF – Safe Harbor Rules (SHR)
•
Rule 10TG – Mutual Agreement Procedure (MAP)
•
Rule 44 GA – Bilateral/Multilateral Agreement Procedures (BMAP)
•
Computation of ALP – Notified tolerable limit for determination of ALP for the assessment year 2014-15
– Notification No. 45/2014/[F. No. 500/1/2014-APA-II]/SO 2478(E)], dated 23.09.2014;
•
Computation of ALP – Clarification on functional profile of development center’s engaged in contract
R&D services with insignificant risk – Circular No. 6/2013[F. No. 500/139/2012] dated 29.06.2013;
•
Clarification on provisions governing transfer price in an international transaction – Circular 12/2001,
dated 23-08-2001;
India though not a member to the OECD, is on the governing board of OECD’s Development Centre and also
participates, as an observer, in some of the OECD committee’s and working groups.
India’s transfer pricing regulations broadly adopts the OECD principles. Tax offices have also indicated their
intent of broadly following the OECD Guidelines during audits, to the extent the OECD Guidelines are not
inconsistent with the Indian Transfer Pricing Code.
70
The term “related party” or “associated enterprise” is defined in section 92A of the ITA. As per this section,
“associated enterprise”, in relation to another enterprise, means an enterprise:
•
which participates, directly or indirectly, or through one or more intermediaries, in the management or
control or capital of the other enterprise; or
•
in respect of which one or more persons who participate, directly or indirectly, or through one or more
intermediaries, in its management or control or capital, are the same persons who participate, directly
or indirectly, or through one or more intermediaries, in the management or control or capital of the other
enterprise.
Accordingly, the scope of related party definition is very wide to cover both, direct as well as indirect, control
or participation. The Act, further lists down certain conditions, satisfaction of either of which results in two
enterprises to be deemed as associated enterprises or related parties. A few of the significant conditions are
as under:
a. Ownership of shares by one enterprise in the other, directly or indirectly, carrying 26 percent or more of
voting power in the other enterprise;
b. In case of a manufacturing entity, when ninety percent or more purchase of raw materials/sale of
manufactured goods by an enterprise from/to the other enterprise at prices and conditions influenced by
the latter;
c. Authority to appoint more than 50 percent of the board of directors or one or more of the executive
directors, on the governing board of the other enterprise;
d. Dependency in relation to intellectual property rights (know-how, patents, trademarks, copyrights,
franchises, etc.) owned by either party;
e. Dependency relating to borrowings i.e. advancing of loans amounting to not less than 51 percent of total
assets;
f.
Provisions of guarantee amounting to not less than 10 percent of the total borrowings, etc.
According to Section 92C of the ITA, any of the following methods can be used to determine the arm’s length
price:
a. Comparable uncontrolled price method (CUP),
b. Resale price method (RPM),
c. Cost plus method (CPM),
d. Profit-split method (PSM),
e. Transactional net margin method (TNMM); OR
f.
Such other method as may be prescribed by the Board.
71
The Indian regulations do not prescribe any preferred methods or priority of one method over the other.
Rather, in selection of the applicable method, it prescribes for the adoption of “most appropriate method”
approach.
The “most appropriate method” approach, requires selection of a method which is best suited to the facts
and circumstances of each particular international transaction, and which provides the most reliable measure
of ALP in relation to that international transaction.
Cases, where the application of ‘most appropriate method’ results in more than one transfer pricing
valuation, the ITA provides for the adoption of ‘arithmetical mean’ of such varied prices. Further, where the
variation in the value of international transactions fall within the range of +-3% of the arithmetic mean, no
adjustments are required to be made.
In accordance with the international transfer pricing policies, vide Finance (No. 2) Act. 2014, India has
introduced the concept of interquartile range. The details rules in this regard are yet to be notified.
Sec. 92D of the ITA requires every person who has entered into an international transaction to maintain
information and documents, which shall be helpful in determining the ALP, thereof.
In cases where the aggregate value of international transactions exceeds a sum of Rs. 10 Million, every
taxpayer is mandatorily required to maintain the documents and information prescribed under Rule 10D. This
includes:
•
Enterprise wide information such as ownership structure, relationship with AE’s, group profile, business
details of AE’s, business details of taxpayer, industry view, etc.,
•
Transaction specific Information such as nature of transaction, pricing information, FAR analysis,
budgets/estimates, uncontrolled transactions, comparability, etc.
•
Computation of Arm’s length price such as selection of most appropriate method, computation of ALP,
assumption, policies and price negotiations, transfer pricing adjustments, if any.
Documentation should be contemporaneous, i.e. existing during the same period of time.
The documentation needs to be maintained for a minimum of 8 years. Tax payer must submit the transfer
pricing documents to the tax authorities, within 30 days of the receipt of notice from the department. The
said period, in deserving cases, may further be extended by 30 days, subject to the discretion of the tax
officer.
Further, Sec. 92E read with Rule 10E specifies for a report from the accountant certifying that the ALP has
been determined in accordance with the transfer pricing regulations and that the prescribed documentation
has been maintained. This is required to be furnished annually before the specified date (presently 30th
November) in a prescribed form (presently Form 3CEB).
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Generally, transfer pricing audits by the Indian tax authorities are taken for scrutiny along with the regular tax
assessments. A regular tax assessment can be initiated in India within a period of 6 months from the end of
the financial year in which the return of income has been filed. For example, for the financial year 2014-15
(corresponding tax year 2015-16), the return of income has to be filed before 30th Nov. 2015. Therefore the
regular tax assessment in this case can be initiated any time after 30th Nov. 2015 and before 30th Sept.
2016.
All cases, where the value of international transactions exceeds a sum of Rs. 150 million, are compulsorily
taken up for tax scrutiny and referred to a transfer pricing officer (TPO) for audit and verification [sec. 92CA].
The transfer pricing officer is required to verify the method adopted by the tax payer for determination of
ALP, the suitability thereof with respect to the nature of transactions, the documentation maintained by the
taxpayer to determine the ALP and ensure that the ALP determined by the taxpayer is appropriate. In case
the TPO is of the opinion that the ALP determined is not appropriate he may make adjustments to the value
of international transactions.
In case of any adjustments to the value of international transactions made by the TPO, having an impact of
increasing the income of the taxpayer, the other party to the transaction shall not be permitted to claim the
set off of expense or loss in its books of accounts.
Tax cases involving transfer pricing audits are required to be completed by the tax officers, within a period
of 36 months from the end of the assessment year to which the audit pertains. Thus, for the financial year
2014-15, having corresponding tax year as 2015-16, the time limit for completion of tax audit is 31st March
2019.
Any additions/adjustments proposed by the transfer pricing officer are to be mandatorily accepted by the tax
officer, responsible for making the final assessment.
However, before concluding the final assessments, if the taxpayers do not agree with any modification or
adjustment proposed by the tax officer/transfer pricing officer, the taxpayer is given an opportunity to file its
objection before the ‘Dispute Resolution Panel’ [DRP], for its intervention. Such objections are required to be
filed within 30 days from the date on which the draft order of the tax officer is received by the taxpayer.
The DRP shall, after listening to both the taxpayer as well as the tax officer, issue its directions which are
mandatory upon the tax officer. Such directions shall be issued by the DRP within a period of 9 months from
the end of the month in which the draft order is received by the taxpayer.
The tax officer is required to conclude the final assessment, in accordance with the directions of the DRP,
and issue the final order within one month from the end of the month in which the directions of the DRP are
received.
In case the taxpayer does not have any objections to the adjustments proposed by the tax officer, the draft
order is considered as final.
Accordingly, the entire process of tax assessments in India takes a duration of 3 to 4 years.
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In addition to the regular assessments discussed above, in cases where the tax officers are of a belief
that any part of the income of the tax payer (which amounts to Rs. 100,000/- or more) has escaped from
assessment in any tax year, the authorities have an option to issue notices for Re-assessment under section
148. Such notices are to be issued within a period of 6 years from the end of the tax year to which the
escaped income pertains. Rest of the procedure for reassessment and framing the revised income statement
remains the same, as in case of regular assessments with some differences in respect of the time frame.
Cases where the taxpayer fails to furnish an audit report in Form 3CEB in respect of any international
transactions, shall be deemed as income escaped from assessment and therefore liable for re-assessment
provisions.
Generally, the Indian tax authorities are aggressive on taking up tax scrutiny’s, involving transfer pricing audits
and are generally inclined towards making substantial additions to the income of the taxpayer.
The transfer pricing adopted by the tax payer shall be considered as inconsistent with the Arm’s Length
principle if the taxpayer:
a. fails to submit the audit report required under section 92E; or
b. fails to submit the documentation required for determining the ALP; or
c. documentation submitted by the taxpayer is considered as inadequate by the TPO; or
d. the method adopted by the taxpayer is not considered as the ‘most appropriate’ by the TPO.
In such cases the TPO would have an option to disregard the transfer pricing study of the taxpayer and
carry out an independent study, in consultation with the taxpayer regarding the functions undertaken, assets
employed and risks assumed by the transacting associated enterprises. On the basis of such independent
study the TPO shall determine a fresh transfer pricing value consistent with the Arm’s Length principle.
However, before making any such assessment, rejecting the comparables chosen by the taxpayer or
adopting new comparables, the TPO shall have to provide an opportunity to the taxpayer to justify as to why
the proposition of the TPO is not acceptable.
Any new transaction, which the taxpayer has failed to consider in his report or which has not been referred
to the TPO for scrutiny, which may come to the notice of the TPO during the course of his audit, may be
considered by the TPO for his verification.
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Penalties
Section
Default
Penalty
271(1)(C)
Adjustment pursuant to Transfer Pricing
Audit considered as deemed concealment
of income
100% to 300% of Tax on the Adjustment
made
271AA
Failure to maintain documentation
2% of the Value of transactions
271BA
Failure to furnish accountants report in Form
3CEB
Rs.100,000/-
271G
Failure to furnish documentation
2% of the Value of transactions
•
No Adjustments of Penalties if the Taxpayer applied the agreed Transfer Pricing methodology in
accordance with the APA
Finance Act, 2012 with the insertion of sections 92CC and 92CD to the Indian ITA, introduced the concept of
Advanced Pricing Agreement (APA).
An APA has been defined as an agreement between the taxpayers and the tax authorities determining the
appropriate transfer pricing methodology for a set of transactions to be carried out over a fixed period of
time, in future.
The APA’s offer better assurance of the transfer pricing methods adopted and are helpful in providing
certainty and unanimity of approach for determining the ALP of transactions.
The authority to be approached for entering into an APA in India, is the Central Board of Direct Taxes (CBDT).
Vide notification no. 36/2012 [F. No. 133/5/2012-SO(TPL)]/SO 2005(E), dated 30.08.2012, the CBDT has
notified detailed rules on APA (i.e. Rules 10F to 10T of the Income Tax Rules, 1962).
An APA once entered shall be valid for a maximum period of 5 years.
The APA filing procedure has to undergo the following steps:
Step 1: Pre-filing consultation
As is the international practice, before formally applying for the APA there will be a pre-filing consultation
between the taxpayer and the Government to enable the applicant and the APA team to assess the
possibility of entering into an APA.
An application for pre-filing consultation in Form 3CEC to be mandatorily filed by a tax payer wishing to
apply for an APA. The tax payer is required to disclose all the facts if the case, so as to enable to officer to
appropriately understand the nature of transactions and determine the transfer pricing methodology to be
applied.
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No filing fee required for undertaking a pre-filing consultation.
In case the taxpayer, does not wish to disclose the name of the transacting party, he has the option of filing
the application on an anonymous (no-name) basis.
The understanding reached at the end of the pre-filing consultation would be reduced in writing and also
communicated to the taxpayer. This will form the basis of the formal application, as and when the taxpayer
decides to enter into a formal APA. The copy of such written understanding may preferably be attached with
the formal application.
Step 2: Furnishing of APA application
If in pre-filing consultation, the suitability of entering into an APA is determined then after pre-filing
consultation, the applicant may choose to file the application for entering into APA in Form No. 3CED. Before
filing the application, the applicant is also required to pay fee which is to be computed as under:
Where the amount of international transaction is
Fee (in Rs.)
Upto Rs. 1 Billion
1 Million
From Rs. 1 Billion to Rs. 2 Billion
1.5 Million
Above Rs. 2 Billion
2 Million
In case of unilateral APA, the application is required to be furnished with the Director General of Income Tax
(International Taxation), New Delhi [DGIT] and in case of bilateral/multilateral APA, the application is required
to be furnished with the Competent Authority of India, i.e. Joint Secretary (FT&TR-I) in the Ministry of Finance.
In case of bilateral/multilateral APA, the applicant must initiate the procedure for entering into APA with the
other country as well and furnish evidence to the Competent Authority of India regarding the same.
Timing of application
•
In case of continuing/existing transactions, the application is to be filed before the first day of the relevant
previous year.
•
In case of other transactions (new or proposed transactions), any time before undertaking the
transactions.
•
Since pre-filing consultation is compulsory before filing an APA application, it is advisable for the
applicant to initiate pre-filing consultation sufficiently in advance to be able to meet the time requirement
stated above.
Step 3: Compliance
•
Taxpayer has to furnish the annual compliance report to DGIT for each year covered in the agreement.
•
Prescribed form for compliance Form 3CEF has to be filed within 30 days of due date of filing return or
within 90 days of entering agreement, among whichever is later.
•
Regular TP assessment/audit are not undertaken for the transactions covered.
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Until 31.03.2014, i.e. within the first two years of the introduction of APA scheme, India has witnessed
filing of more than 350 APA applications, a major proportion of which happens to be unilateral applications.
The primary reason for lesser no. of bi-lateral application can be attributed to the condition of correlative
adjustment clause in tax treaty (equivalent to Article 9(2) of the OECD Model Convention), imposed by India,
in the absence of which India refrains from entertaining applications for bi-lateral agreements.
Approx. 5 unilateral APAs have been agreed upon within a time frame of 12 months from the date of filing
of respective APAs. While a few other unilateral and bilateral APAs have reached an advanced stage of
discussions.
The second year of APA regime has seen a steep increase in the no. of applications as compared to the year
of its introduction, i.e. FY 2012-13.
Further, the introduction of roll-back provisions is expected to boost up the taxpayers interest in seeking
APAs as the retrospective application of APA terms may open the prospect for resolving open assessments
and litigation for the preceding years as well. A roll back may prove to be a cost-effective way of resolving the
ongoing TP litigation.
In line with the global best practices, Finance (No. 2) Act, 2014, has recently introduced the provisions for roll
back applicability of APAs upto a period of 4 preceding years, effective from 1st October, 2014.
The Indian APA rules recognises both unilateral as well as bi-lateral/multilateral APAs.
The Unilateral APAs are entered into only between the taxpayer and CBDT, without any involvement of the
treaty partner and therefore have no guarantee of being acceptable in any other country. Hence these carry a
risk of double taxation.
A bi-lateral/multilateral APA can be accepted by the CBDT only when a tax treaty, containing MAP article, is
found to exist between India and other countries, of which the transacting parties are tax resident. Further,
in the case of transactions leading to economic double taxation the said tax treaties must contain provisions
similar to Article 9(2) of the OECD Model Convention, on “Associated Enterprises”. Also a corresponding APA
program must exist in the other treaty countries. In the absence of either of the above conditions, CBDT shall
not be able to entertain any request for a bi-lateral/multilateral APA.
Further, since APA is a transaction specific agreement, it is possible that an entity may request for a unilateral
APA for some of the international transactions and bi-lateral/multilateral for other International transactions.
Said request can be made by way of separate applications or may be merged in one application only.
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Safe harbor rules
Further, under Sec. 92CB the Indian government has prescribed certain safe harbor rules, the satisfaction
of which shall deem the transactions to be at arm’s length. However, it is required to expressly adopt the
applicability of safe harbor rules by making an application to the CBDT, in this regard. The applicability of said
rules for some of the transactions is as under:
Nature of transaction
Quantum of international transaction
Safe harbour margin
Software development services/
ITeS*
Less than INR 5 Billion
Exceeding INR 5 Billion
20%
22%
KPO*
No range
25%
Contract R&D services*
No range
No range
30% (software)
29% (generic pharma)
Intra – Group Loan to wholly
owned subsidiaries
Less than INR 500 Million
Exceeding INR 500 Million
SBI Base rate + 1.50%
SBI Base rate + 3.00%
Corporate Guarantee to wholly
owned subsidiaries
Less than INR 1 Billion
Exceeding INR 1 Billion**
2% p.a.
1.75% p.a.
*With insignificant risk.
**Credit rating of “Adequate to highest safety” from agency registered with SEBI.
In case of a transfer pricing related income adjustment, the taxpayers in India have the following options to
prevent double taxation:
a. Appeal against the transfer pricing related income adjustment within the national appeal procedure.
b. Apply for a Mutual Agreement Procedure (MAP) according to Art. 25 of the Double Taxation Avoidance
Agreement.
The taxpayer may apply the above options, one after the other or simultaneously. However it is more feasible
and a common practice to use each of the options one after the other.
National appeal procedure
In case a taxpayer does not agree with the transfer pricing adjustment made by the tax officer, the tax payer
has an option to file appeal before the first appellate authority, namely commissioner of income tax appeals.
The Commissioner Appeals, after listening to the tax payer as well as the tax officer, may accept or reject the
tax payer’s plea.
Effective from 2010, India has rolled out a quick dispute resolution mechanism for taxpayers with disputable
income adjustment on account of transfer pricing issues. Under the said mechanism, where in case of any
taxpayer, the Indian tax officers propose to make any upward adjustment on account of transfer pricing
transactions, the taxpayer has the option to file an appeal before the Dispute Resolution Panel (DRP).
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The DRP is a collegium of three Commissioners. The Panel, after listening to the plea of the taxpayer as
well as the tax officer, shall give suitable directions on the methodology to be adopted for completion of the
assessment. The tax officers are obliged to follow the directions issued the DRP.
In a case where the taxpayer does not agree with the directions of the DRP or is not satisfied with the order
of the Commissioner Appeals, the taxpayer may exercise its right to appeal against the second appellate
authority, name the Income Tax Appellate Tribunal (ITAT).
In case the tax payer feels aggrieved with the decision of the ITAT, the taxpayer has a further possibility to call
for the court’s intervention. The proceedings, in deserving cases, shall be heard and disposed of by regional
High Court’s. Appeal against the order of the High Court, if admitted, shall lie before the Supreme Court of
India (the highest judicial authority in India).
Mutual Agreement Procedure
Secondly, the taxpayer, where applicable, could also apply for a Mutual Agreement Procedure (MAP)
provided under the double tax avoidance treaties entered into by India with various jurisdictions. Generally
Article 25 of the said treaties provide for such procedures.
transfer pricing related double taxation.
If the involved tax authorities cannot agree upon a result, the taxpayer usually can apply for arbitration
procedure.
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Indonesia
1. Statutory rules
a.Law
Income Tax Law (ITL) No. 36/2008, Article 18, was enacted 1 January 2009. It requires that intercompany
transactions are conducted at arm´s length. Indonesia´s tax authority is named Directorate General of Tax
(DGT).
b. Selection of important administrative rules and circulars
PER–43/PJ/2010 (PER–43) was established by the tax authority on 6 September 2010 and the regulation
was amended by introduction of the regulation PER 32/PJ/2011 (PER–32). PER-43 makes transfer pricing
documentation obligatory for taxpayers and specifies relevant guidelines such as the establishment of the
arm´s length principle for intercompany transactions. These guidelines prescript:
•
The utilisation of an appropriate transfer pricing method.
•
The implementation of the arm´s length principle for transactions among related parties resulting.
•
A documentation recording each step taken to determine the market price or fair profit under adherence
of relevant provisions and prevailing tax regulations.
•
A comparability analysis such as information concerning comparable transactions must be supplied.
Transactions amounting to a value under IDR 10 billion for each transaction counterpart are no longer
required to be documented and conducted by means of a comparability analysis.
PER–43, as amended by PER–32, can only be applied to domestic transactions if the related domestic
enterprises are subject to different tax rates, and the related party transaction can be categorised as one of
the following:
•
Subject to final and non final taxes within a specific sector,
•
Subject to Luxury Goods Tax,
•
Conducted with a taxpayer which is an oil and gas production sharing contractor.
In March 2009, the DGT issued letter No. S–153/PJ.4/2010, which provides guidelines for tax officers for the
application of the arm’s length principle in the context of a tax audit.
Although Indonesia has been granted an “enhanced participation” status, it is not a member of the OECD.
PER–43 reconfirms the basic transfer pricing concepts and principles of the OECD Transfer Pricing
Guidelines.
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According to ITL No. 36/2008 Article 18, the term ‘related taxpayer’ means:
•
a taxpayer who owns directly or indirectly at least 25% of equity of other taxpayers; a relationship
between taxpayer through ownership of at least 25% of equity of two or more taxpayer, as well as
relationship between two or more taxpayer concerned;
•
a taxpayer who controls other taxpayer; or two or more taxpayers are directly or indirectly under the
same control;
•
a family relationship either through blood or through marriage within one degree of direct or indirect
lineage.
From 1 January 2002, intercompany transactions which include domestic or international related parties
are required to disclose stipulated pieces of information such as the type of transaction, the value of
the transaction, the transfer price such as the means utilised to determine this price. From 2009, also a
confirmation that the transaction complies with the arm´s length nature must be included.
According to DGT Rule: PER 32/PJ/2011, the transfer pricing methods that could be applied are:
•
Transaction methods: Comparable Uncontrolled Price/CUP, Resale Price Method (Resale Price Method/
RPM) and Cost-Plus Method (Cost Plus Method),
•
Profit based method: Profit Sharing method (Profit Split Method/PSM) and Transactional Net Income
Method (Transactional Net Margin Method/TNMM),
•
“The most appropriate method” test which needs to be utilised in order to select the transfer pricing
method implies that the taxpayer can choose the apporpriate method inferring the specific nature of the
transaction and the available data. Hereby the following factors should be considered,
•
the benefits and drawbacks of each method,
•
the appropriateness of the method under consideration of the nature of related party transactions which
results from a functional analysis,
•
the availability of reliable information which can be included in the usage of the chosen method.
The degree of comparability of the transactions between related party compared with transactions on the
market, including the reliability of adjustments intendend to eliminate any discrepancy of the differences
existing
In order to prove the arm´s length nature of the the price or profit within related-party-transactions, PER-43
stipulates the obligation of transfer price documentation. 90 days after the fiscal year and simultaneously with
the filing of the corporate tax return all relevant information must be disclosed.
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The transfer price documentation must include the following pieces of information:
•
Detailed description of the party in consideration, such as structure of group’s business, ownership
structure, organisational and operational structure,
•
prospects of business activities, competitors, and business environment descriptions,
•
pricing policies and/or cost allocation policies,
•
results of comparable analysis based on products being traded, results of functional analysis and
economic conditions,
•
regulations of the contracts/agreements, and business strategies,
•
Selected comparable transactions,
•
application of the transfer pricing methods selected by the taxpayer.
Under PER–32, taxpayers are required to submit the transfer pricing documentation in reporting their
related party transactions. Related party transactions must be reported in the Annual Income Tax return.
Furthermore, in a tax audit, any document requested by tax auditor must be provided within a month from
the date of request. Further, under PER–43, all documentation to support the arm’s length nature of the
related party transactions, including a transfer pricing study, must be maintained for 10 years from the close
of the relevant fiscal year.
PER-32 regularises the transfer pricing documentation and reporting of related party transactions. The latter
must be reported in the Annual Income Tax return. In the situation of a tax audit, from the date of request,
any document must be provided within a month if requested by a tax auditor. All documentation within the
scope of PER-32 must be kept available for 10 years from the end of the relevant fiscal year.
There is no separate statute of limitations under PER–43. However, under the tax laws, the tax authority
is allowed to conduct a tax audit, which includes assessing the arm’s length nature of related party
transactions, within five years from the relevant fiscal year.
Enterprises with significant inter–company transactions generally are more often subject to transfer pricing
audits. Since 2009 an increase of transfer pricing adjustmens can be stated. This is especially the case for
Indonesian enterprises who have filed tax refunds or incurred losses.
Despite of the DGT usually rather being focused on royalties, managment fees and interests, a change in
focus towards the transfer pricing of tangible goods could be noticed.
In practice, taxpayers exhibiting the following characteristics are at a higher risk of being subject to a transfer
pricing audit:
•
Large amount of related party transactions,
•
incurred losses for more than three consecutive years,
•
an increase in gross revenue or receipts but no change in net profit,
•
erratic profit and loss histories,
82
•
associated parties in tax havens,
•
lower net profit in comparison to other similar enterprises or to the industry average. Since October
2009, the DGT has issued benchmarking ratios for various industries (provided by Circular Letters).
Under these circular letters, those taxpayers whose profits fall below the range of profit ratios, are
exposed to inceased transfer pricing audit risk.
Generally the points under examination in an audit for related party transactions can be listed as follows:
•
Existence of an exceptional relationship between the parties (since tax adjustments can be made only
with regard to related party transactions),
•
selection of comparable independent transactions,
•
selection of examined/audited party and tested transaction,
•
comparability of the circumstances of related party transactions and comparable independent
transactions,
•
selection of a profit level indicator for benchmarking,
•
selection and application of a transfer pricing method to apply the arm’s length principle.
Transfer pricing adjustments requested by PER-43 (amended by PER-32) can lead to corresponding
adjustments to the income or costs of the counterpart of the transaction.
In general, the risk of an annual tax audit is characterised as medium; however, the risk of an immediate tax
audit after a taxpayer applies for a tax refund is high. The risk that transfer pricing will be reviewed as part of
a regular tax audit is characterised as high, while the risk that tax authority will challenge the transfer pricing
methodology is medium.
Compared to an annual tax audit which is less likely to happen, an immediate tax audit resulting from a
taxpayer´s application for a tax refund is very likely to occur. Within the scope of a regular tax audit, a revision
of transfer pricing is probable. The risk for a check of the transfer pricing methods used can be classified as
medium.
There is a penalty of 2% per month up to 48% on any tax underpayment arising from adjustments of income
and costs corresponding to related party transactions as a result of the tax audit process.
In appropriate disclosure of information relating to related party transactions by a taxpayer in corporate
income tax return may be construed as an act of fraud that could lead to an administrative penalty of up to
400% of the tax underpayment.
There is currently no penalty relief regime in place.
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PER-43 regulates advance pricing agreements with the aim of reducing transfer pricing disputes. The DGT
APA regulation PER 69/PJ/2010 dated December 31, 2010 allows unilateral and bilateral APAs. Also mutual
agreement procedures (MAP) are available under the prerequisite of an applicable tax treaty. PER-48/
PJ/2010, issued by the DGT on 3 November 2010, regulates the procedures for the application of MAPs.
Credit Method
The Avoidance of Double Taxation Method (P3B) in Indonesia in accordance with the Foreign Tax Credits as
regulated in ITL Article 24 (Credit Method).
If a resident of a Contracting State (country of domicile) derives income from the other Contracting State (the
source country), the amount of income tax payable in the other Contracting State (the source country) in
accordance with the provisions of P3B Indonesian models, can be credited against the tax imposed on that
resident in a Contracting state (country of residence).
However, the amount of the tax credit shall not exceed the amount of income tax in the Contracting State
referred to the first (country of domicile), calculated in accordance with the law and its implementing
regulations.
MAP (Mutual Agreement Procedure)
The competent authorities should try to solve the matter by Mutual Agreement Procedure with the competent
authority of the other Contracting State, to avoid double taxation that is not in accordance with P3B.
Competent authorities of both Contracting States by mutual agreement should try to solve any difficulties in
the application of P3B.
They can deal directly with each other to reach an agreement.
Competent authorities, through consultations, shall develop appropriate bilateral procedures, the conditions,
methods and techniques for the implementation of the mutual agreement.
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Ireland
1. Statutory rules
a.Legislation
•
Part 35A of the Taxes Consolidation Act (TCA) 1997
•
Part 47 of the TCA 1997
•
Section 432 of the TCA 1997
•
Section 81 (2) (a) of the TCA 1997
b. Selection of important administrative circulars
•
Tax Briefing No. 7 of 2010
•
Revenue e-brief No. 41/2010
•
Revenue Operational Manual 35A-01-01
•
Revenue Code of Practice for Revenue Audit
•
Revenue Mutual Agreement Procedures (including Transfer Pricing/ Advance Pricing Agreement issues)
The EU Council has adopted a code of conduct under the title “’EU Transfer Pricing Documentation” (EU
TPD). Although not binding, this sets out good documentation practice. Chapter V of the OECD Transfer
Pricing Guidelines also contains guidance on documentation. The Irish Revenue Commissioners’ application
of the new rules will accept both EU TPD and OECD Transfer Pricing Guidelines as representing good
practice.
The transfer-pricing rule in Section 835C TCA 1997 is to be construed in such a way as to ensure, as far
as possible, consistency with the OECD Guidelines. This effectively introduces into Irish law the OECD
Transfer Pricing Guidelines so far as they relate to trading transactions. The principles for construing rules in
accordance with OECD Guidelines are outlined in Section 835D TCA 1997.
The term “related party” is defined in Section 835B of the TCA 1997 as “associated”. The term associated is
explained as follows:
a. Where the controlled person is a company:
•
two persons are associated if one controls the other; or
•
both are controlled by the same person.
85
b. Where the controlled person is an individual:
A company will be treated as controlled by an individual if the individual together with relatives of that
individual control it. For this purpose relative means husband, wife, ancestor, lineal descendant, brother or
sister.
A person controls a company if the person is able to control or to acquire control, either directly or indirectly,
of the company’s affairs. A person is regarded as having control of a company if the person has or is entitled
to acquire:
•
the majority of the issued share capital or voting power,
•
such part of that capital as would entitle the person on a total distribution of income to more than 50 per
cent of such distribution, or
•
such rights as would entitle the person on a winding up or otherwise to more than 50 per cent of the
distributable assets.
The new transfer pricing provisions apply for accounting periods:
•
commencing on or after 1 January 2011,
•
in relation to transactions based on terms agreed on or after 1 July 2010.
The new rules do not apply to small or medium sized enterprises. The key requirement in this regard is that
overall enterprise must have less than 250 employees and either turnover of less than €50m or assets of less
than €43m. These thresholds are to be applied on a global consolidated basis and the economic interests of
controlling individual shareholders must be taken into account in applying the tests.
Section 835C sets out the main transfer pricing rules. These are arrangements between associated parties
which:
•
involve the supply and acquisition of goods, services, money or intangible assets, and
•
form part of the trading activities of either party.
Where under an arrangement to which these provisions apply an amount receivable in respect of a sale is
understated or the amount payable in respect of an expense is overstated, then the arm’s length amount will
be substituted in each of the cases. 5
The term “arm’s length amount” is the amount that would have been agreed upon between independent
parties.
Transfer prices and related documentation should be reviewed at regular intervals to determine whether the
pricing remains arm’s length.
86
Section 835F of the TCA 1997 deals with documentation requirements. The Revenue Commissioners’ Tax
Briefing No. 7 of 2010 also provides guidance on transfer pricing documentation obligations.
A person involved in a transaction which is within the scope of the transfer pricing legislation is obliged to
have available such records as may reasonably be required for the purposes of determining whether the
income of that person has been computed in accordance with the transfer pricing legislation.
The general rules that apply to records apply also to transfer pricing records i.e. they must be prepared in
written form in an official language of the State or by means of any electronic, photographic or other process
as permitted for accounting records.
The provisions relating to the making available of records generally are extended to the making available of
transfer pricing records to an authorised officer.
While it is not intended to provide a prescriptive list of documentation that should be kept for transfer pricing
purposes, the relevant documentation must clearly identify:
•
associated persons for the purposes of the legislation;
•
the nature and terms of transactions within the scope of the legislation. Transactions which are clearly
in one family (e.g. regular purchases made by a distributor throughout a period of the same or similar
products for resale) may be aggregated, provided any significant changes during the period in the nature
or terms of the transactions are recorded;
•
the method or methods by which the pricing of transactions were arrived at, including any study of
comparables and any functional analysis undertaken;
•
how that method has resulted in arm’s length pricing etc. or, where it has not, what computational
adjustment was required and how this has been calculated. This will usually include an analysis of market
data or other information on third party comparables;
•
any budgets, forecasts or other papers containing information relied on in arriving at arm’s length terms
etc. or in calculating any adjustment made in order to satisfy the requirements of the new transfer pricing
legislation;
•
the terms of relevant transactions with both third parties and associates.
Compliance with the transfer pricing requirements will be subject to Revenue Commissioners’ Audit. The new
provisions reserve such auditing to officers authorised for that purpose by the Irish Revenue Commissioners.
This ensures that the Audits concerned will be undertaken by officers who appreciate, and are equipped to
deal with, the complexities involved in applying the arm’s length principle.
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Section 835F of the TCA 1997 imposes an obligation on companies to whom the section applies to have
available such records as may reasonably be required for the purposes of determining whether the trading
income of the company has been computed in accordance with the requirements of Section 835C. Transfer
pricing documentation is fundamental to validating and explaining the pricing of intra-group transactions. It
should be borne in mind that the main purpose in having transfer pricing documentation available is to enable
a company, if requested, to readily establish to Revenue’s satisfaction that its transfer prices are consistent
with the arm’s length requirements of Section 835C.
The legislative requirement is that a company has transfer pricing documentation available. There is
no requirement for documentation to be kept in a standard form. The company may have the required
documentation kept in the form of its own choosing. The legislation does not require that the company
itself must prepare the documentation or that the documentation must be in the state. If appropriate
documentation is available, for example where it has been prepared by an associated company for tax
purposes in another jurisdiction, it will be sufficient that that documentation can be made available to the Irish
Revenue Commissioners.
It is best practice that the documentation is prepared at the time the terms of the transaction are agreed. For
a company to be in a position to make a correct and complete Tax Return for an accounting period in which
there were trading transactions with associates, the documentation should exist by the time the Tax Return
falls to be made.
The Irish Revenue Commissioners issued guidance for its proposed Transfer Pricing Compliance Review
(TPCR) Program. The TPCR program allows authorised officers of the Irish Revenue to send out notifications
to selected taxpayers inviting them to self-review their transfer pricing and report back to the Irish Revenue
within three months. The review will be for a specific accounting period.
The report to be provided to the Irish Revenue based on this self-review will address:
•
The group structure;
•
Details of transactions by type and associated companies involved;
•
Pricing and transfer pricing method for each transaction or group of transactions;
•
Functions, assets, and risks of the parties involved;
•
List of documentation available or reviewed by the taxpayer; and
•
The basis for establishing if the arm’s length standard has been satisfied.
In most circumstances, an existing transfer pricing study should suffice. Under the Irish transfer pricing
regime, counterparty documentation can suffice when it contains sufficient information relating to the Irish
operations and transactions undertaken.
Once the TPCR report is submitted within the required time frame, the company will receive a letter from the
Irish Revenue outlining their review points.
Where the Revenue Commissioners are satisfied with the responses, no further action is necessary.
Otherwise the company will be required to provide further information. Even where further queries arise,
going through the TPCR ensures no formal Audit has yet commenced. On this basis, any additional tax due
will be treated as arising from an unprompted disclosure carrying only mitigated penalties.
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A case selected for TPCR may be escalated by the Revenue Commissioners to a formal Audit based on
an assessment of risk. For example, this might be considered appropriate where the company declines
to complete a self-review or where the output from the review and any follow-up queries indicates that
the transfer pricing appears not to be in accordance with the arm’s length principle and therefore not in
compliance with Part 35A TCA 1997.
7. Tax adjustment, surcharges and penalties
a. Tax adjustment
Once the TPCR report is submitted within the required time frame, the company will receive a letter from the
Irish Revenue outlining their review points.
Where the Revenue Commissioners are satisfied with the responses, no further action is necessary.
Otherwise the company will be required to provide further information.
Where the Revenue Commissioners are not satisfied with the responses and they determine that
•
an amount receivable in respect of a sale is understated or
•
the amount payable in respect of an expense is overstated,
the Revenue Commissioners will substitute the “arm’s length amount” in each of the cases and tax will be
levied on the adjusted taxable profit accordingly.
The term “arm’s length amount” is the amount that would have been agreed between independent parties.
There is no specific transfer pricing penalties included within Irish legislation. On this basis, standard interest
and penalties will apply where any adjustment to taxable profit is made. Part 47 of the TCA 1997 and the
Revenue Commissioners’ Code of Practice for Revenue Audit outline the interest and penalty rates. The
standard rate of interest is 0.0219% per day (8% per annum).
Going through the TPCR ensures no formal Audit has yet commenced. On this basis, any additional tax due
will be treated as arising from an unprompted qualifying disclosure carrying only mitigated penalties.
Once a formal Audit has commenced, the ability to mitigate penalties is reduced.
8. Advanced Pricing Agreements (APA’s)
There is no formal APA procedure for Irish companies to agree prices with the Irish Revenue Commissioners
for international related party transactions.
However, in their document Mutual Agreement Procedures (including Transfer Pricing/ Advance Pricing
Agreement issues), the Irish Revenue Commissioners invite any company that is considering making a
bilateral or multilateral APA request to contact the Director, International Tax Branch, Corporate Business and
International Division, Office of the Revenue Commissioners, Stamping Building, Dublin Castle, Dublin 2, Ireland.
This would indicate that the Irish Revenue Commissioners are willing to negotiate and conclude APA’s with
treaty partners, in particular if a case has been successfully accepted into the APA programme of the other
treaty country.
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In their document Mutual Agreement Procedures (including Transfer Pricing/ Advance Pricing Agreement
issues), the Irish Revenue Commissioners advise that any company requesting a Mutual Agreement
Procedure (MAP) should contact the Director, International Tax Branch, Corporate Business and International
Division, Office of the Revenue Commissioners, Stamping Building, Dublin Castle, Dublin 2, Ireland.
A request for a MAP must contain certain information including:
•
the legal basis for the MAP i.e. the relevant Article in Ireland’s double taxation treaties/agreements or EU
Arbitration Convention;
•
why a MAP is considered necessary;
•
an explanation of the issues involved (attaching relevant background documentation);
•
what the requester considers to be the correct outcome (attaching any documents, case law, etc,
backing up the requester’s view).
This document also addresses situations where a company wishes to claim relief from double taxation in the
case of a transfer pricing adjustment (i.e. a claim for a corresponding or correlative adjustment). Relief must
be claimed i.e. relief cannot be taken automatically.
The Revenue Commissioners require the letter claiming relief to contain certain information including:
•
the legal basis for the claim i.e. the relevant article(s) in Ireland’s double taxation treaties/agreements
(including a statement as to why the agreement quoted is the relevant agreement) or the EU Arbitration
Convention;
•
how the relevant enterprises are associated;
•
what the transfer pricing policy was prior to the audit in the other country (attaching a copy of any
documentation evidencing that policy e.g. transfer pricing study, economist report, any other expert
advice);
•
those elements of the transfer pricing policy that the other country did not agree with and why;
•
how the agreement with the other country was arrived at to include details of:
•
how the enterprise sought to rebut the assessment;
•
the process by which agreement was reached and how such an agreement is justifiable as arm’s length;
•
the quantum of the adjustment agreed and the financial years covered;
•
an account (if relevant) of the considerations leading to acceptance of a negotiated settlement as
opposed to litigation (including, where available, a copy of the legal advice the enterprise received);
•
a copy of the settlement agreement reached with the other country;
•
whether any previous or subsequent years are to be audited where there is a prospect of similar issues
arising;
•
whether there are audits being undertaken by other countries that might affect the profits of the Irish
associated enterprise.
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It is important to note that no relief will be available, inter alia, for:
•
interest and penalties imposed by the other country;
•
secondary/repatriation of profits adjustments implemented under the laws of the other country;
•
non-deductible payments of a capital nature.
If the merits of the claim are accepted, the Irish associated enterprise will be asked to submit revised tax
computations to the Revenue Commissioners for the accounting periods affected in order to compute the
quantum of the relief and normally a revised assessment will then issue.
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Italy
1. Statutory rules
a.Law
•
Article 110 – paragraph 7 – Italian Income Tax Law (Presidential Decree n. 917 dated 1986): the normal
value has to rule cross border transactions between related parties of the same multinational group.
•
Article 9 Italian Income Tax Law: definition of the “Normal Value” as the price generally made for similar
goods/services between independent parties at similar time and place of transaction.
•
Article 26 Decree Law n. 78 dated 2010: introducing a sort of allowance consisting in the cancellation
of penalties deriving from transfer pricing disputes with Tax Authorities for businesses having at their
disposal proper documentation on transfer pricing, showing the way and the method duly followed to
set-up prices in cross transactions with related parties abroad.
•
Financial Law n. 147 – paragraphs 281 and following – issued in past 2013, December 27th: Tax
Authorities’ income adjustments for Transfer Price are relevant also for the Regional Tax (IRAP) for
financial years after 31st December 2007, even if the penalty (100%-200% of the higher tax) is not due
for IRAP in the same financial years.
b. Statutory ordinances:
Tax Authorities‘ Measures dated 2010, September 29th: detailing the content and the structure of the proper
Transfer Pricing documentation to be set-up, in order to avoid penalties.
c. Selection of important administrative circulars:
•
Principles relating to Transfer Pricing in the determination of the taxable income of Italian businesses
under control of foreign mother companies, as of 1980, September 22nd.
•
Principles relating to the choice among different methods of the most suitable one to the specific case in
order to fix the proper Transfer price, as of 1981, December 12th.
•
Principles relating to the setting-up of proper Transfer Pricing Documentation to be safe from penalties in
case of issues by Italian Tax Authorities, as of 2010, December 15th.
•
Administration Circular number 21/E dated 5th June 2012, ruling Mutual Agreements and Arbitration
Procedures.
Italian Authorities adopted the OECD-Guidelines to a large extend, constituting the above listed Statutory
rules and the Italian translation of OECD’s principles. In particular:
•
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Articles 9 and 110 of Italian Income Tax Law provide the Italian version of the OECD’s Arm’s Length
Principle;
•
Article 26 Decree Law n. 78 dated 2010 is the Italian application of the OECD’s requirements of proper
Transfer Pricing Documentation.
The circulars are under revision from time to time, to follow-up the updating of the OECD standards.
There is no specific definition by Italian Law on Transfer Pricing of “related party”.
The circumstance that one party involved in the transaction is under control of the second party, or both are
controlled by a third party, leads to the need of correctly determining the normal value of the transaction,
being the price of it influenced by the control or the relation among parties. The control definition is borrowed
by article 2359 of Italian Civil Code, according to controlled companies are those:
•
in whose Shareholders’ meetings another entity can exercise the most voting rights;
•
in whose Shareholders’ meetings another entity can use a sufficient number of voting rights to exert its
dominant influence;
•
under dominant influence of another entity, in force of particular contractual ties.
•
if a company can exert its remarkable influence on another, both companies are related. A remarkable
influence is presumed when in the Shareholders’ meeting at least 20% of the voting rights can be
exercised (10% in case shares are listed at the Stock Exchange or other regulated markets).
Anyway, as clarified in the Administrative Circular n. 32/9/2267 dated 1980, the definition of related parties
cannot be limited to juridical control or link relationships between companies, but it has to be widened to the
dynamic economic context where price decisions may be the result of one party’s power to influence the
other party’s will, according to the interest of one party or of a group instead of the market mechanisms. At
all events, the leading predominant party has to be characterised by stability in order to exclude a very timelimited or an accidental control.
In Italy, CUP, R- and C+, in order of preference, are the accepted transfer pricing basic methods, if
comparable arm’s length data can be determined, which are to be qualified as fully comparable with the
transaction under review, after making appropriate adjustments with reference to functions performed, risks
assumed and assets employed.
With particular reference to CUP, even if the external CUP is impartial and, therefore, should be more reliable,
article 9 of the Italian Income Tax Law to set-up the “normal value” refers to internal CUP when it states to
firstly consider price lists or tariffs decided by the seller of goods/service providers in the market.
In the case that fully comparable arm’s length data cannot be determined, limited comparable data shall be
used after making appropriate adjustments under the application of auxiliary and/or alternative profit Transfer
Pricing methods, such as TNMM and PSM. As per the Administrative Circular n. 32/9/2267 dated 1980,
in most cases in practice, the use of profit methods leads to determine the “normal income” rather than to
verify the fair transfer price.
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A very recent rule (see article 1 of Financial Law n. 147 – paragraph 177 – issued in past December
2013) stated that from 1st January 2014, companies working in on-line advertising and auxiliary services
have to use other methods different from C+ for Transfer Pricing purposes, except when they apply to an
International ruling procedure.
Article 26 of Italian Decree Law n. 78/2010, introduced a sort of allowance consisting in the cancellation of
penalties for businesses which have proper Transfer Pricing documentation at their disposal, showing the
way and the methods duly followed to set-up prices in cross transactions with abroad parent companies.
According to the Italian Tax Authorities’ Measures dated 29th September 2010, a proper transfer pricing
documentation is articulated in a Masterfile and a Domestic file.
The Masterfile has to collect and show information about the multinational group that is: a general description
of it in terms of history, recent developments, fields of activities carried on and markets of reference; a
representation of roles, actions, strategies and juridical relationships between the different companies within
the group by ad hoc flow charts; evidence of the cross transactions, distinguishing the sale of material
from that of intangible goods, the rendering of services from that of financial services and, precisely, giving
evidence of those services rendered by a member company to be useful for the benefit of other member
companies and of agreements between member companies to share costs; details about instrumental
equipment invested and risks assumed by each member group company; a list of intangibles owned by each
member group company; evidence of the transfer pricing policy adopted within the group and the reason
why it is considered to obey to the arm’s length principle; a description of the relationships between the Tax
Authorities of other EU member States with reference to APA and to the ruling procedures.
The Domestic File, focused on the Italian company, has to: generally describe the domestic company, its
history, recent developments and markets of reference; describe the national company’s economic sector
of activity, its operative structure, its strategies and/or any changes in the previous financial year’s ones; give
evidence of the national company’s transactions within the multinational group with specific description of the
intra-group operations, of the benchmarking analysis, of the adopted method to set-up the transfer pricing
obeying to the arm’s length principle; detail parties, contents and terms involved in the list of the intra group
transactions.
The documentation is not mandatory to be filed in to Tax Authorities, yearly – together with Income Tax
Return – but its possession can be duly communicated to Italian Tax Authorities by checking the tick in an ad
hoc space in the Income Tax Return.
Generally, in case of accesses and inspections by Italian Tax Authorities, the Italian company which did not
communicate any possession of transfer pricing documentation up to the inspection, can avoid penalties if
within 10 days from the Tax Authorities’ request Transfer Pricing documentation is submitted as well as, in
case of further deepening by Tax Authorities, further transfer pricing information are added within 7 days after
the Tax Authorities’ request.
Generally, the documentation is prepared in Italian language. However, Tax Authorities may accept
exceptions hereof. In practice, taxpayers mostly prepare the Masterfile in English and provide translation
upon request of the Tax Authorities.
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Some simplifications are provided for Small and Medium Sized Enterprises (SMEs) which in the Domestic
File have the possibility to avoid updating the transfer pricing method used for intra group transactions over
the next two years further to that the set-up of the Domestic file is referred to in case: i) the benchmarking
analysis is based on information given by public data bases and ii) the determining factors have not been
significantly changed in the same period of two years.
SMEs allowed to the above simplifications are those with a business volume or an amount of revenues not
higher than 50 million Euro.
The Italian tax authorities usually examine the adequateness of intercompany transfer pricing only during
regular tax audits. The open term for Tax Authorities’ inspections is 31st December after 5 years than
the year the Income Tax Return is referred to. In case of an tax audit, the taxpayer is generally obliged to
cooperate with the tax auditors.
The final audit report, including suggestions for any tax adjustments, is presented to the local tax office where
the revised tax assessments are to be prepared. The local tax office usually follows the recommendations of
the tax auditors.
If the taxpayer does not agree with the revised assessments, within 60 days after the notified results of the
audit, has the possibility to fight against them by applying for an appeal procedure.
In case of disputes on transfer pricing, Tax Authorities are allowed:
•
to submit to the Italian taxation the higher income discovered and shifted abroad because of incorrect
transfer pricing habits (from the domestic company which does not comply with the arm’s length
principle). The difference of actual income and the income which had been declared is put under a
27.50% tax rate for IRES (the companies’ Income Tax), as well as to the IRAP’s (the Regional Tax) tax
rate of 4.82% calculated on the net value of the output;
•
furthermore, a penalty for unfaithful Income Tax Return from a minimum of 100% to a maximum of 200%
on the higher income tax is imposed on the domestic company.
According to article 8 of Decree Law n. 269 issued in 2003 September 30th, Italian companies belonging
to multinational groups with cross border transactions with related parties and Transfer Pricing matters can
apply to Tax Authorities through Advanced Pricing Agreements (APAs from now on). It is an appropriate set in
advance: method, comparables, possible prices, revenue and income adjustments and critical assumptions
to future events over a 3 years period of time. An APA is formally started by the taxpayer submitting an ad
hoc claim to the entrusted tax office. The sending of the claim is free of charge.
Italian Tax Authorities allow unilateral, bilateral or multilateral APAs.
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A unilateral APA is recommendable for non-complex situations such as – for instance – in cross business
relationships involving only the Italian company and its 1 foreign related party or with reference to royalties
granted for Intellectual Property’s use. No simplifications – in terms of information and documents to be given
– are provided for SMEs in unilateral APAs.
Bilateral and multilateral APAs are for more complex situations involving the Italian company and its 2 or
several foreign related parties. It is time spending (more than 12 months could be necessary to close the
agreement), as it requires several exchanges of information and periodical direct contacts between Tax
Authorities of the different countries involved. Moreover, methods used by the different countries’ Tax
Authorities can differ, according to different legislations.
The sole office entrusted to receive APAs’ claims is the International Ruling Office – Central Department of
Tax Assessments with one seat in Rome and another in Milan.
For both, the claiming company and for its tax consultants the APA procedure is demanding in terms of
required documentation and information given. This cannot be considered something definitive; infact, during
the 3 years it is in force, Tax Authorities can check if the company is compliant, if something has changed
in the transactions carried on or in the company’s structure; therefore, it requires periodic maintenance
and updating. When the 3 years expire, there is the possibility to renew it by always checking possible new
conditions and the basis. Before submitting an APA claim, both the taxpayer and/or its tax consultants can
have a couple of no-name and pre-filing meetings with the Tax office, in order to have a draft of the claim
unofficially examined and to receive suggestions to improve/integrate it with any further required information.
Even if there is no mathematical security, after the finalisation of an APA, it is hard to see matters arising with
Tax Authorities about Transfer Pricing.
In Italy safe harbors are expressly provided for transactions of immaterial rights, as the setting-up of the
“normal value” in this case is recognised as a particular complexity. According to the Administrative Circular
n. 32/9/2267 dated 1980, royalties granted by the licensee to the licensor for the exploitation of the latter’s
Intellectual Property/Trade Mark/Know-How, calculated according to a percentage of the licensee’s total
sales are considered fair:
a. up to the 2% of the total sales, when: (i) the transaction is ruled by a written agreement duly set-up
before the payment of the royalty; (ii) the cost’s inherence for the licensee is duly documented and
proved;
b. from 2% up to 5%, when, in addition to the respect of the conditions as per the above point 1., the
following are duly accounted for: (i) technical features (research and testing activities are required; 1
year/or faster obsolescence; technical life; originality; results got, and so on…); (ii) contractual features
(exclusivity; sub-licensing; right to exploit the invention or the immaterial goods’ development); (iii) the
licensee’s real benefit;
c. higher than 5%, only in very special situations, such as in case of high technological level acknowledged
for the economic field of activity or other circumstances;
d. any amounts of royalties, paid to licensors based in low taxation level countries can be granted as
deductible for the licensee only at the demanding conditions as per the above point c.
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In case of transfer pricing matters, the taxpayer could fight against the consequent risk of double taxation, by
setting-up lawsuits under the Tax Court.
Within 60 days after receiving the communication by Tax Authorities about income adjustments consequent
to transfer pricing issues, the taxpayer (duly represented by its Tax Lawyer) can apply to the Provincial Tax
Court (1st degree of litigation) to contest the Tax Authorities’ adjustment act.
In case of a negative result, that is the first Court decides in favor of the Tax Authorities or if the first degree
decision is in favor of the taxpayer, the parties can fight against it by applying to the Regional Tax Court
(2nd degree of litigation). The Lawsuit can go on up to the 3rd and final degree of decision under the Court
of Cassation. The final decision of the Court of Cassation is definite between the fighting parties which can
conform to it or can apply to international procedures, such as Mutual Agreement Procedures (MAP) to get
to a solution involving the different interested countries’ Tax Authorities.
In Italy the appeal to MAP is justified both by Art. 25 of OECD Model Convention against Double Taxation
in case extra EU related parties are involved in the dispute and according to the INTRA EU Convention n.
90/436 dated 23rd July 1990, in case of disputes between EU related parties.
In both cases, tax authorities of the involved countries consult one each other to resolve disputes regarding
the transfer pricing related double taxation; the taxpayer each time has the duty to cooperate giving the
necessary and required information and the right to be updated on the reached results.
MAP according to the EU Convention is prevented in case of a judicial lawsuit for the taxpayer’s fiscal fraud.
It is alternative to the 3 degrees of justice under the National appeal and has to lead to the solution of the
dispute.
On the contrary, MAP according to Double Taxation Treaties (DTT) is not alternative to the National appeal
and can be set-up even if the National Appeal is in due course. Generally, the National appeal is set-up at
first and in case it does not lead to an acceptable solution, a DTT MAP is submitted.
During the DTT MAP, it is possible and well worth to suspend the internal juridical appeal to avoid that
judgers’ decisions come into force before the finalisation of the DTT MAP procedure.
If the involved tax authorities cannot agree upon a result, the taxpayer usually can apply for an arbitration
procedure.
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Mexico
1. Statutory rules
In Mexico transfer pricing and related party transactions are regulated, only for tax purposes, in the Income
Tax Law, mainly in Chapter II (Multinational Enterprises), of Title VI (Preferred Tax Regimes and Multinational
Enterprises); under these provisions the terms related party transactions, comparable entities and/or
operations, are defined. Within the Income Tax Law and the Federal Tax Code, there are certain provisions
related to transfer pricing transactions, which are:
a.Law
•
Article 11 of the Income Tax Law (Interest considered as dividends).
•
Article 76, subsections IX, X and XII, of the Income Tax Law. (Obligations)
•
Article 90 and 110, subsections X y XI of the Income Tax Law. (Transfer pricing for individuals).
•
Articles 179, 180 and 182 of the Income Tax Law (Title VI. Chapter II. Multinational Companies).
•
Article 34-A of the Federal Tax Code (Advanced Pricing Agreements).
•
Article 83, subsection XV and article 84, subsection XIII of the Federal Tax Code (Infractions and sanctions).
•
Articles 86-XII, XIII and XV, 106, 215, 216 and 217 of the Federal Fiscal Code
Article 276 of the Regulations of the Income Tax Law (Interquartile method).
•
Miscellaneous Tax Resolution (MTR)
•
Rule I.2.12.4. Analysis with authorities prior to consultations on related party transactions.
•
Rule I.3.3.1.10. Request for authorisation to deduct interest on debts owed to related parties (thin
capitalisation).
•
Rule I.3.17.10. Withholding taxes to related parties located in tax havens.
•
Rule II.3.5.2. Deadline to submit information of transactions with related parties.
•
Criterion issued by the Tax Administration Service- (SAT, for its acronym in Spanish).
•
67/2013/ISR. Thin Capitalisation.
According to the last paragraph to article 179 of the Mexican Income Tax Law and SAT Criterion 75/2013/
ISR, the OECD-Guidelines are applicable for interpretation of the provisions of Chapter II, Title VI of the
Income Tax Law (Transfer Pricing), if they are congruent with the provisions hereof and with treaties entered
into by Mexico.
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In Mexico, the concept “related parties” is very broad. For companies, article 179 defines such term as
follows:
“Two or more persons shall be deemed related parties when one participates directly or indirectly in the
administration, control or capital stock (equity) of the other(s). Persons or entities which are part in a joint
venture shall be considered as related parties among them”.
For individuals, besides direct or indirect participation or interest in the administration, management, control
or capital stock in a certain entity or corporation, an individual is considered as a related party to another
individual or person, when he or she has a link or bond according to the Customs Law. Article 68 of the
Customs Law establishes that bonds between persons exist in the following cases:
I.
When one of them holds an office of direction or responsibility in an enterprise of the other.
II. If they are legally acknowledged as associates in business.
III. If they are related as employer and employee.
IV. If one holds direct or indirect title, control or possession of 5% or more of the shares, corporate
participations, contributions or instruments in circulation and with right of vote of both.
V. If one has direct or indirect control of the other.
VI. If both are controlled directly or indirectly by a third person.
VII. If both of them together have direct or indirect control of a third person.
VIII.If they are members of the same family.
Article 110 of the Regulations of the Customs Law establishes that link shall be deemed to exist between
members of a family if there is a kinship at law, by legitimate or natural consanguinity without limitation of
degree, in direct line to the fourth collateral or transversal degree, by affinity in direct line or in the second
transversal degree, and between spouses.
Article 216 of the Income Tax Law recognises six methods that may be used to determine arm’s length
transfer pricing among related parties, which are:
Transfer pricing methods
Traditional methods:
•
Comparable Uncontrolled Price (CUP),
•
Resale Price,
•
Cost Plus.
Transactional methods
•
Profit Split (profit distribution under certain specifications),
99
•
Residual Profit Split (profit distribution under certain specifications),
•
Transactional Net Margin.
Priority
In every case, the use of traditional methods must be privileged, starting by the CUP method. Only when
it is not the most appropriate, the rest of the methods can be applied, considering the most reliable in
accordance with the information available, with preference being given to the resale price method or cost
plus method. In that same context, the directives for adjustments to comparable prices, considerations and
samples, are set forth.
According to article 216, subsection IX, in cases of taxpayers executing operations with non-Mexican
resident related parties, they are required to obtain and conserve evidence and documents showing that the
amount of their revenues and deductions were agreed upon following the arm’s length principle, as it would
have happened in operations with independent parties. Such documentation must comprehend the following
information:
a. The name, corporate name, domicile and residence for tax purposes of the related parties with whom
such operations are executed, and documents evidencing the direct or indirect participation;
b. Information of the functions or activities, assets used and risks assumed by the taxpayers for each
operation;
c. Information and documentation of the transactions with related parties, as well as the amount thereof, by
each related party and by transaction;
d. The method applied pursuant to Article 180 hereof, including information and documents on comparable
operations and enterprises, for each type of operation.
According to article 276 of the Regulations of the Income Tax Law, range of prices, amount of compensation
or profit margins must be adjusted by application of the interquartile method. Taxpayers may use statistical
methods other than the interquartile method, only if the method used is agreed upon within the framework
of an amicable procedure provided in double taxation treaties entered into by Mexico or when the method is
authorised through general rules issued for the purpose by the Tax Administration Service
The transfer pricing analysis may be performed with the financial information of the Mexican company
or with the financial information of the related party; however, in this last scenario, the accounting and
documentation of the foreign entity should be available in Mexico.
Taxpayers engaged in business activities whose revenue in the previous fiscal year did not exceed
$13,000,000.00 pesos and those which revenue derived from the rendering of professional services did not
exceed $3,000,000.00 pesos shall not be bound to comply with the obligation established in subsection IX
of article 76.
Every year, the taxpayers should file jointly with the tax return or the audited financial statements, an
informative tax return with the information on all operations performed in the previous fiscal year with nonMexican resident related parties. The transfer pricing documentation must only be submitted upon request of
the tax authorities. The information and documentation should be in Spanish; if it is in a different language, it
should be accompanied with a legal translation.
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The Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union (EU
TPD) is not adopted in the regulations of the Mexican jurisdiction, only the documents published by the OCDE.
Operations performed amongst related parties, as well as the transfer pricing method used, are disclosed in
the annual tax return as well as in the informative tax return above mentioned. Likewise, in case of taxpayers
who decide to audit their financial statements, the independent auditors report must also disclose and verify
such operations.
The tax authorities are entitled to perform reviews on such transactions. For that matter, there is an
international audit department within the Mexican tax administration which is in charge of those assignments
as well as to program the corresponding reviews. The Mexican tax authorities usually examine the
adequateness of the intercompany transfer pricing only during a tax audit. Tax audits may cover periods of
up to five years and such a case, the taxpayer is obligated to cooperate with the tax auditors.
As of 2014, Mexican tax authorities have been very proactive in reviewing related party transactions carried
out by multinational enterprises or groups, especially those concerning interest expenses, royalties, and cost
sharing agreements.
As it was mentioned before, according to article 276 of the Regulations of the Income Tax Law, the ranges
of prices, amount of compensation or profit margins must be adjusted by application of the interquartile
method. When the taxpayer’s price, amount of compensation or profit margin is out of the adjusted range,
the price or amount of compensation should be adjusted to the median of the interquartile range.
If the adjustment on the income is made spontaneously, no penalties will be imposed to the taxpayer; only
penalty interest. However, if the assessment or price adjustment is made on the income as a consequence of
a tax audit, the authorities may impose penalty interest and a fine on the omitted tax.
In accordance to article 34-A of the Tax Code, taxpayers may request an APA. However, the procedure is
complicated and uncertain. Usually, tax authorities are reluctant to grant APA’s, yet there are no duties or
fees that should be paid to such. Role back resolutions or agreements are not foreseen in the Mexican legal
frame.
Safe harbor rules only exist when dealing with “maquiladora” ie. in bond-manufacturing entities which
production is totally exported. In such case, a 6.9% return on assets or 6.5% return on costs and operating
expenses, is allowed.
Aside from a broad network of tax treaties which Mexico has entered into, which prevent double taxation, the
Mexican Income Tax Law foresees both direct and indirect tax credits for burdens paid abroad. Regardless,
when required, mutual agreement procedures are followed to settle issues that lead to double taxation.
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Netherlands
1. Statutory rules
a. Tax law
Articles 3.8 and 3.25 of the Dutch Income Tax Act 2001
Articles 8 and 8b of the Dutch Corporate Income Tax Act 1969
As of January 1st 2002, article 8b codified the arm´s length principle and formalised transfer pricing
documentation requirements in the Netherlands.
b. Relevant regulations and rulings
•
Transfer pricing decree (November 14th 2013, no. IFZ 2013/184M);
•
APA decree (June 3rd 2014, no. DGB 2014/3098)
•
ATR decree (June 3rd 2014, no. DGB 2014/3099)
•
Decree regarding financial service entities (June 3rd 2014, no. DGB 2014/3101);
•
Questions and answers on the decree regarding financial service entities and on the ATR decree (June
3rd 2014, no. DGB 2014/3102);
•
Decree on APA’s, ATR’s, financial service entities, interposed holdings, contact point potential foreign
investors, organisation and competency rules (June 3rd 2014, DGB 2014/296M);
•
Implementation decree regarding the Coordination Group Transfer Pricing (August 11th 2004, no. DGB
2004/1339M);
•
Accelerated Mutual Agreement Procedure decree (September 29th 2008, no. IFZ 2008/248M);
•
Decree on profit allocation to permanent establishments (January 15th 2011, no. IFZ 2010/457M).
The tax authorities generally follow the OECD Guidelines. Further guidance regarding the interpretation and
application of the arm’s length principle is provided by the Dutch transfer pricing decree (as published by
the Under-Minister of Finance in the decree of November 14th 2013). According to this decree, the OECD
Guidelines leave room for interpretation or require clarification on several issues. The goal of this decree is to
provide insight into the position of the tax authorities regarding these issues.
The transfer pricing decree of November 2013 is a source for transfer pricing guidance next to the
general guidelines of the OECD and the existing case law. It provides specific guidance on intra-group
services and shareholder activities, support services, contract research, cost contribution arrangements,
intangibles, captive insurance companies, companies with a central purchasing function guarantees and
loan agreements. With respect to business restructurings, no specific guidance has been issued to date.
However, the tax authorities generally follow the OECD guidance in this respect.
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For transfer pricing purposes a related party situation is present when a corporate body directly or indirectly
takes part in the management, supervision or equity of another corporate body. A quantitative criterion has
deliberately been avoided in order to prevent parties from manipulating the qualification of their relation.
There is no “best method” rule. Taxpayers are basically free to choose any OECD transfer pricing method,
as long as the method chosen results in arm’s length pricing for the transaction. Since the 2010 revision of
the OECD Guidelines – which established the most appropriate method rule for the selection of the transfer
pricing method – there is no longer a hierarchy among the methods. Nevertheless, the OECD Guidelines do
state that where a CUP method and another transfer pricing method can be applied in an equally reliable
manner, the CUP method is to be preferred. Taxpayers are not obligated to test all the methods, though they
must substantiate the method chosen.
Taxpayers are obliged to document how the transfer prices have been established. The documentation
should provide sufficient information for the tax authorities to evaluate the arm’s length nature of the transfer
prices applied between associated enterprises. The parliamentary explanations to Article 8b do not provide
an exhaustive list of information that should be documented.
Transfer pricing documentation could include:
•
Information about the associated enterprises involved
•
Information on the intercompany transactions between these associated enterprises
•
A comparability analysis, describing the five comparability factors as set forth in Chapter I of the OECD
Guidelines
•
A substantiation of the choice of the transfer pricing method applied
•
A substantiation of the transfer price charged
•
Other documents, such as management accounts, budgets and minutes of shareholder and board
meetings.
Alternatively, documentation in accordance with the Code of Conduct on Transfer Pricing Documentation
for Associated Enterprises in the European Union (EU TPD) is accepted. To obtain certainty about the
correctness and completeness of the documentation, it is possible to ask the tax authorities for their approval
of the documentation.
Documentation is generally expected to be complete when the taxpayer enters into a transaction. However,
if the transfer pricing documentation is not available upon the request of the tax authorities, taxpayers
are granted four weeks to prepare the documentation. This period may be extended up to three months,
depending on the complexity of the intercompany transactions in which the taxpayer is engaged.
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There are no special tax audit procedure regarding transfer pricing. Transfer pricing issues mostly come up in
regular tax audits. However, when one is being audited, the risk of transfer pricing issues being scrutinised is
high and consequently, the controversy risk is high as well. In particular, there is a high risk that the transfer
pricing methodology will be assessed relative to the specific facts and circumstances.
Transfer pricing is a key issue in tax audit of international big and midsized companies. A functional analysis is
incorporated into many of these audits and forms the basis of transfer pricing risk analysis of taxpayers. The tax
authorities have, among others, shown interest in performing audits and in analysing the economic substance
of transactions, in terms of alignment of functions and risks. During these transfer pricing audits the tax
authorities appear to have a particular interest in potential internal CUPs. The tax authorities have also focused,
as a natural result of the risk analysis, on transactions with entities located in low effective tax rate countries.
Another trend is the so called “horizontal supervision” in which companies by contractual obligations are
forced to give information about potential discussion on tax issues. Transfer pricing issues are mostly the first
tax issues which leads to reporting to the tax authorities.
7. Income adjustments, surcharges and penalties
Due to transfer pricing documentation, the burden of proof regarding the arm’s length nature of the transfer
price lies with the taxpayer.
During the parliamentary discussions regarding the introduction of the arm’s length principle and transfer
pricing documentation requirements (i.e., Article 8b) into the Dutch Corporate Income Tax Act, a question
was raised regarding the Dutch policy in connection with the levy of administrative penalties in case of
a transfer price adjustment. The Dutch Under-Minister of Finance declared that in case of transfer price
adjustments, the levy of an administrative penalty under the circumstance of an incorrect income tax return
should be limited to cases in which it is plausible that the agreed transfer price is not regarded at arm’s length
as a result of a pure intentional act. Therefore, an administrative penalty will not be imposed, even in the
event of gross negligence or conditional intentional act under this policy announcement.
In case of a pure intentional act as set forth above, the tax may be increased with a maximum penalty of
100% of the (additional) tax due, plus interest. In general this penalty will be lowered to 50% in case of an
intentional act or gross negligence or conditional intentional behavior.
It is unlikely that there will be transfer pricing penalties if there is proper transfer pricing documentation
prepared by the taxpayer and the documentation at hand adequately substantiates the arm’s length nature of
the intercompany transactions undertaken by the taxpayer.
The statute of limitations for making an assessment is three years from the end of the taxpayer’s fiscal year. If
the tax inspector has granted an extension for filing the tax return, the assessment period is extended to the
end of the extension period. An additional assessment must be made within a period of five years, starting
from the end of the taxpayer’s fiscal year (this period will also be extended with the possible period of the
filing extension). With respect to foreign-source income, the period for making an additional assessment is 12
years. For the tax authorities to be able to impose such an additional assessment, there needs to be a new
fact which the tax authorities did not know or reasonably could not have known when it imposed the initial
tax assessment (unless the taxpayer did not act in good faith).
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Unilateral, bilateral and multilateral Advanced Pricing Agreements (APA) are available. The APA process
works efficiently in the Netherlands. There are a number of specific arrangements that enable an efficient
and transparent process, including the option to hold pre-filing meetings, the opportunity to develop a
case management plan with the APA team to agree upon timing and key steps, and even specific support
regarding economic analysis that is available to small taxpayers.
The Dutch tax authorities process many unilateral and bilateral APAs on annual basis. The Dutch competent
authority has bilateral APA experience across all continents.
9. Measures to prevent double taxation
On September 29th 2008, a decree (IFZ2008/248M) describing the Mutual Agreement Procedure (MAP)
process under bilateral treaties and the EU Arbitration Convention was published. The decree aligns the
MAP process in the Netherlands with the OECD Memorandum on Effective Mutual Agreement Procedures
(MEMAP), making the route to obtaining relief from double taxation more accessible and transparent for
taxpayers. Key features of the new decree are: formal introduction of an Accelerated Competent Authority
Procedure (ACAP); endorsement of arbitration to resolve MAP cases; targeting a reduction of MAP related
expenses; introducing transparency into the process by providing regular feedback and updates to the
taxpayer; encouraging use of Article 9(2) of the OECD Model Tax Convention; commitment to tackle
resolution of double taxation in cases ‘‘not provided for in the Convention’’ (Article 25(3) of the OECD Model
Tax Convention) in addition to the more traditional double taxation cases.
On January 15th 2011, a decree was published regarding the attribution of profit to permanent
establishments (PE Decree). This PE Decree provides further insights into the tax authorities’ position on
permanent establishments; following the publication of the 2010 OECD Report on the Attribution of Profits to
Permanent Establishments (PE Report) and the OECD work on article 7 of the OECD Model Tax Convention,
including commentary, in recent years. The PE Decree, effective as of January 28th 2011, provides that
the Dutch policy concurs with the conclusions established in the PE Report. Furthermore, it clarifies the tax
authorities’ position regarding the dynamic approach to interpreting tax treaties, the preference for the capital
allocation approach when allocating “free” capital to a permanent establishment, the preference for the
fungibility approach when allocating the amount of interest, certain issues regarding dealings involving group
services, intangible assets and financial assets, and certain specific topics, including advance certainty.
To conclude the policy of the Dutch Minister of Finance is to include in new tax treaties the possibility of
corresponding corrections.
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New Zealand
1. Statutory rules
a.Law
Sections YD5, GB 2 and GC 6-GC 14 of the Income Tax Act 2007 (ITA 2007); and New Zealand’s double tax
agreements (DTAs)are also relevant.
b. Regulations and rulings
Transfer Pricing Guidelines contained with in the IRD Tax Information Bulletin: Vol 12, No 10 (October 2000) –
Appendix: Transfer Pricing Guidelines. Inland Revenue also applies the latest OECD Guidelines.
Inland Revenue fully endorses the OECD Guidelines on transfer pricing and generally follows them when
administering New Zealand’s transfer pricing rules. However, they have reserved their position on Article 7
of the Model Tax Convention which relates to branches. Inland Revenue supports the single entity concept
rather than the separate legal entity concept adopted by other jurisdictions.
3. Definition of associated party
The associated party rules in New Zealand are complex. The term “associated party” is defined in sub part
YB of ITA 2007.
In summary the following applies:
•
Two companies are associated if a group of persons exists whose total voting interests in each company
is 50% or more.
•
A company and a person other than a company are associated if the person has a voting interest of
25% or more in the company.
•
There is also a tripartite test which associates two persons if they are each associated with the same
third person under a different test.
There is no set hierarchy of preferred methods in the legislation or the transfer pricing guidelines. All of the
methods outlined in Chapter II of the OECD Guidelines are acceptable. The use of a comparable uncontrolled
price (CUP) or cost plus (CP) are the preferred methods as they provide the most reliable comparables.
However, due to the lack of data available, the transactional net margin method (TNMM) is regularly used.
New Zealand is a small market with little comparable data. Therefore, data from Australia, the UK or North
America is frequently used as these markets are the most comparable to the New Zealand market.
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There is no statutory requirement for a taxpayer to maintain transfer pricing documentation. However, Inland
Revenue expects a tax payer to be able to support the prices used in its associated party cross border
transactions. Preparing transfer pricing documentation shifts the burden of proof to Inland Revenue to prove
that the prices used are not at an arm’s length rate.
Inland Revenue has issued guidance as to what should be included in the documentation which must be
relevant to the New Zealand entity.
Good documentation packages should include the following:
•
a detailed discussion of the facts (analysis of functions, risks and assets – especially intangibles);
•
industry analysis (to put the taxpayer’s facts in the context of its industry), especially identifying the key
profit drivers, performance of major competitors, and where the value added arises for the company;
•
careful consideration of associated party transactions (each category should be examined separately);
•
a discussion as to the efforts made to find internal comparables;
•
reasoning as to the selection of the best pricing method available;
•
full details as to the comparables search undertaken (database utilised, criteria employed, accept/reject
list including reasons for rejection);
•
a cross-check using at least a second profit level indicator;
•
conclusions, including sanity checks to demonstrate commercial realism; and
•
copies of all inter-company agreements as well as the local and global corporate structures.
The New Zealand tax authorities usually examine the adequateness of intercompany transfer pricing only
during risk reviews or tax audits. Tax audits are undertaken at the discretion of Inland Revenue and targets
are selected based on certain criteria such as low profitability or losses, industry performance and transaction
types (eg financing). Typically, most large companies can expect to be audited every 5 years.
Risk Assessment Review questionnaires relating to transfer pricing and thin-capitalisation are typically
issued to companies during general income tax audits or risk reviews and as part of Inland Revenue’s
specific transfer pricing review process. The questionnaires request detailed information including financial
details of the New Zealand taxpayer and consolidated group, types and values of related party transactions,
methodologies used, details of any business restructures and whether transfer pricing documentation has
been prepared.
Transfer pricing documentation for all types of transactions must only be submitted upon request of Inland
Revenue. Normally Inland Revenue specifies a due date for the documentation to be provided. This is
generally at least 28 days from receipt of the information request. Deadlines may be extended by negotiation.
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If an adjustment is proposed by Inland Revenue it can be disputed by following a prescribed process which
includes a number of steps. The process can be finalised at any stage if both parties agree:
•
Inland Revenue issuing a notice of proposed adjustment to the tax payer which has to be responded to
by the taxpayer within two months of issue. If no response is received the assessment will stand;
•
A meeting between the tax payer and Inland Revenue;
•
Disclosure notice is issued by Inland Revenue;
•
Adjudication and review; and
•
Litigation if no agreement is reached.
There are no specific transfer pricing penalties. Inland Revenue can apply the general tax penalties under
sections 141 A-K of the Tax Administration Act 1994 which range from 20% to 40% depending on the nature
of the adjustment as follows:
•
20% penalty for not taking reasonable care,
•
20% penalty for an unacceptable position,
•
40% penalty for gross carelessness,
•
100% penalty for an abusive tax position,
•
150% penalty for an evasive or similar act.
Shortfall penalties may be reduced upon voluntary disclosure to the Commissioner of the details of the
shortfall:
If the disclosure occurs before notification of an investigation, the penalty may be reduced by 100% (only for
lack of reasonable care or unacceptable tax position categories) or 75% for other shortfall penalties,
If disclosure occurs after notification of an investigation, but before the investigation commences, the penalty
may be reduced by 40%,
Shortfall penalties may be reduced by a further 50% if a taxpayer has a past record of “good behavior.”.
8. Advance Pricing Agreements
Section 91E of the Tax Administration Act 1994 allows for Inland Revenue to issue an advance pricing
agreement in the form of a binding ruling. Inland Revenue actively promotes advance pricing agreements
for multinationals with large transactions. They will negotiate unilateral, bilateral or multi lateral. However,
unilateral are the most common and are concluded in a timely manner (usually within 6 months of receipt of a
completed application). Bilaterals are usually reserved for high risk or high value transactions.
During the application process the transfer pricing principal advisors from Inland Revenue will discuss any
issues with the tax payer to facilitate the process.
The filing fee for application is NZD 322 and Inland Revenue does not charge for its time incurred dealing
with the application.
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New Zealand has a number of DTAs with both countries with which it has strong trading and investment ties
and with developing countries that New Zealand may have trading ties with in the future.
All New DTAs contain a provision that is substantially the same as Article 25 of the OECD Model Tax
Convention. The taxpayer could apply for a Mutual Agreement Procedure (MAP) according to Art. 25 of
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Poland
1. Statutory regulations
a. Substantive law
•
The Act on Corporate Income Tax of 15.02.1992, Unified text, Journal of Laws of 2011, No. 74, item
397, as amended.
•
The Act on Personal Income Tax of 26.07.1991, Unified text, Journal of Laws of 2012, item 361, as
amended.
•
The Ordinance of the Minister of Finance of 09.04.2013 on countries and territories applying harmful tax
competition for the purposes of corporate income tax, Journal of Laws of 2013, item 494.
•
The Ordinance of the Minister of Finance of 10.09.2009 on the method and procedure of determination
of income for natural persons by estimation and on the method and procedure of eliminating double
taxation for natural persons in case of related parties’ profit adjustment, Journal of Laws of 2014, item
1176 – consolidated text.
•
The Ordinance of the Minister of Finance of 10.09.2009 on the method and procedure of determination
of income for legal entities by estimation and on the method and procedure of eliminating double
taxation for legal entities in case of related parties’ profit adjustment, Journal of Laws of 2014, item 1186
– consolidated text.
•
International Agreements on the avoidance of double taxation as concluded between Poland and
particular countries.
b. Tax procedure
•
The Tax Ordinance Act of 29.08.1997 – Unified text, Journal of Laws of 2012, item 749, as amended.
•
The Ordinance of the Minister of Finance of 24.12.2002 on tax information (Journal of Laws of 2003, No.
152, item 1489, as amended).
•
The Ordinance of the Minister of Finance of 31.05.2006 on the model report regarding performance of
a recognised method of transaction price determination for corporate income tax purposes, Journal of
Laws of 2006, No. 99, item 687.
2. OECD guidelines for transfer pricing and international law
•
Transfer Pricing Guidelines for Multinational Enterprises and OECD Tax Administrations (1995/1996 +
amendments 2010).
•
Report on the Transfer Pricing Aspects of Business Restructurings – Section IX of The OECD Guidelines,
22nd July 2010.
•
Agreements on the avoidance of double taxation – Article 9 of KM-OECD.
110
•
Convention on the elimination of double taxation in connection with the adjustment of profits of
associated enterprises of 23.07.1990.
•
Code of Conduct on transfer pricing documentation for associated enterprises in the EU.
The OECD’s legislation is formally not a valid legislation in Poland, however, it is recognised and respected
by Administrative Courts and tax authorities. The OECD guidelines have a similar role as commentary to a
model agreement on the avoidance of double taxation. The OECD rules are a common and integral source
of interpretation of regulations and a reference point for tax authorities developing their approach towards
transactions between related parties.
3. Definition of a related party
A related party is defined in Article 11 of the Corporate Income Tax Act and according to the provision,
an individual or a legal entity is defined as a related party if, as a result of the capital, managerial, control,
property or family relations existing between them or an employment relationship between them, they are
able to jointly influence the business decisions made by the other party.
National relations
•
A national party is involved in managing or controlling another national party or holds a share in another
national entity’s capital.
•
The same legal entities or individuals at the same time directly or indirectly participate in managing or
controlling national parties or are holding a share (of at least 5%) in such a parties’ capital.
•
Family, property or employment relations exist between national parties or persons involved in
managerial, control or supervisory functions in those parties.
International relations
•
A national party is involved directly or indirectly in managing an enterprise located abroad or in controlling
such an enterprise or is holding a share in such an enterprise’s capital; or
•
a foreign party participates directly or indirectly in managing a national party or in controlling such a party
or is holding a share in such a national party’s capital;
•
the same legal entities or individuals at the same time directly or indirectly participate in managing a
national party or a foreign party or are holding shares in such a parties’ capital.
International relations – tax havens
A relation exists whenever a counterparty of a national party is a party with its residence, registered office
or management board at the territory or in a country listed in the Ordinance of the Minister of Finance of
09.04.2013 on countries and territories applying harmful tax competition for the purposes of corporate
income tax (Journal of Laws of 2013, item 494).
111
4. Recognised transfer pricing methods and their priority
Standard methods (article 11 section 2 of the Corporate Income Tax Act):
•
Comparable uncontrolled price method
•
Resale price method
•
Reasonable margin of profi method (cost-plus method)
Transactional profit methods (article 11 section 3 of the Corporate Income Tax Act) :
•
Profit distribution method
•
Transactional net margin method
Additional methods: listed in the Ordinance of the Minister of Finance of 10.09.2009. Specific methods
for estimating income specified in ordinances of the Minister of Finance are related to advertising services,
performance of research ordered by another party and with respect to finance services between related
parties.
Tax authorities should analyse transactions in the first place and apply the method most suitable for each
transaction.
Estimation is done solely on the basis of the methods laid down in acts on income taxes and in ordinances
of the Minister of Finance. The income estimated on the basis of such methods is considered an arm’s length
value of a subject of the transaction.
Tax authorities (tax audit authorities) are obliged to determine an arm’s length value of a subject of the
transaction between related parties based on any information available for such authorities likely to impact
the determination of such value.
5. Requirements for tax documentation
Provision 9a of the Corporate Income Tax Act provides that a documentation obligation for legal entities
comprises:
•
a transaction or transactions between related parties.
•
in which a total amount (or its equivalent) of a contract or an actually paid total amount of payments due
in a tax year exceeds the equivalent of:
•
EUR 100,000 – if the value of the transaction does not exceed 20% of the share capital determined as
per Article 16(7) of the Corporate Income Tax Act; or
•
EUR 30,000 – for the provision of services, sales or provision of intangible assets; or
•
EUR 50,000 – in other cases.
The thresholds in EUR are converted into the Polish currency at the average exchange rate published by the
National Bank of Poland valid on the last day of the tax year preceding the tax year of the transaction subject
to the the documentation obligation.
112
The following should be included in the documentation (Article 9a(1) 1 of the Corporate Income Tax Act):
1. Roles should be identified to be performed by parties to the transaction (considering the assets used
and risks incurred).
2. All anticipated transaction-related costs and the payment method and date should be stated.
3. Profit and transaction subject price calculation method and procedure should be stated.
4. A business strategy should be indicated and other measures under such a strategy provided it has
influenced the transaction value.
5. Other factors should be indicated – if such other factors are taken into account to determine transaction
subject value.
6. Expected benefits related to intangible performances should be identified.
Optional elements: non-obligatory items of documentation:
•
a written contract (the documentation may contain direct references to the contract).
•
data regarding comparable arm’s length prices/margins (provided available to the taxpayer ).
•
documentation confirming execution of performances (intangible performances in particular).
•
exemples of invoices.
Article 27 of the Polish Constitution of 02 April 1997 provides that the official language is Polish, therefore
the tax documentation should be presented to the Inland Revenue in Polish. The documentation may be
prepared in another language provided a certified translation of such document in Polish is available.
Such documentation must be mandatorily presented at each written request of tax authorities or tax audit
authorities within 7 calendar days from serving the request for the documentation by such authorities. The
regulations provide that a documentation preparation obligation is valid on an ongoing basis if reasons for
this exist.
7. Estimation of income, surcharges, penalties
a. Determination of income
When a related party determines conditions or conditions imposed are differing from those established by
independent parties and, as a result, the party does not disclose income or discloses income lower than
would be expected if such relations did not exist, then the given party’s income and due tax are determined
without considering such conditions resulting from the relations (Article 11(1)).
For related parties and those obliged to prepare and submit tax documentation.
•
If the taxpayer does not deliver tax documentation; or
•
If the documentation prepared is incomplete, tax authorities may determine the taxpayer’s income:
113
In accordance with Article 19(4), the estimated income may be taxed with a 50% tax rate. Subject to taxation is
the difference between the income declared by the taxpayer and the income determined by the tax authorities
and this amount is subject to the 50% tax rate (instead of the rates envisaged by income tax acts).
Regulations on a procedure of obtaining advance pricing agreements are included in the Tax Ordinance (from
Article 20a to Article 20r).
The Tax Ordinance provides several types of agreements. Unilateral national agreements (not binding for
other countries). Bilateral and multilateral agreements are concluded by tax administrations of multiple
countries.
An competent authority to negotiate with and issue a relevant decision is the Finance Minister. Bilateral and
multilateral agreements are binding for tax authorities from all the countries included in the agreement.
A decision on the agreement may not be valid for longer than 5 years.
The fee for a request concerning the agreement may be between PLN 5,000 to 200,000 PLN depending
on the amount of the planned transactions and the type of the agreement issued. The Corporate Income
Tax Act specifies that if a decision is issued by a competent tax authority stating that the transaction price
determination method has been chosen and applied correctly for related parties, the method is applied as
indicated in the decision within the scope determined by the decision. Tax authorities cannot question the
prices of the transaction subject to the agreement in case of any tax audit.
9. International prices adjustment – revenue and cost
First of all, if prices are adjusted and income is estimated, a taxpayer may appeal to the national tax
authorities and courts.
After the administrative and court procedure has been exhausted, the taxpayer is entitled to apply a
procedure envisaged by the agreement on the avoidance of double taxation from article 25 of the Model
Convention – a so-called mutual agreement procedure.
The tax authorities of the countries involved attempt to communicate and resolve any discrepancies related
to transaction price determination. This procedure, as well as the procedure for advance pricing agreements,
is very time consuming and well-prepared tax documentation is the best taxpayer protection in Poland.
To our knowledge, there is no confirmed information that Polish and foreign fiscal authorities have a
procedure in Poland of communicating to each other.
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Portugal
1. Statutory rules
a. Statutory rules (law)
Article 63.º of Corporate Income Tax Code
b. Important administrative circulars
• General Guidance on Transfer Pricing – Ministerial order (Portaria) nr. 1446-C/2001, dated December, 21
• Advance Pricing Agreements – Ministerial order (Portaria) nr. 620-A/2008, dated July, 16
The Portuguese transfer pricing law adopted the OECD-Guidelines. The transfer pricing methods outlined in
Chapter II of the OECD Guidelines are accepted by Portuguese Tax Authorities.
The term “related party” is defined in para. 4 of the article 63.º of the Corporate Income Tax Code.
According to this provision, any of the following conditions would define the relationship as related party:
•
one entity participates directly or indirectly in at least 20% of the share capital or voting rights of another
entity;
•
both entities are at least 20% owned, directly or indirectly, by the same legal entity;
•
an entity and the members of its corporate bodies, or any administration, direction, management or
supervising boards;
•
entities in which the majority of the board of directors are constituted by the same persons;
•
entities related under a subordination agreement or any other agreement of a similar nature;
•
Entities whose legal relationship, by its terms and conditions, may influence management decisions of
the other, depending on facts or unrelated to the business or professional relationship circumstances;
•
Transactions between a resident entity and entities resident in a clearly more favorable tax regime [as
listed in Ministerial Order (Portaria) nr. 150/2004].
115
The possible methods:
•
The comparable uncontrolled price (CUP) method, the resale price method or the cost-plus method;
•
The profit split method (contribution analysis or residual analysis), the transactional net margin method
(TNMM) or other methods appropriate to the specific facts and circumstances, when the methods
described in the previous paragraph cannot be applied, or where their use would not provide a more
reliable measure of the terms and conditions that independent entities normally agree, accept or
practice.
If possible, transaction-based methods are to be chosen over profit-based methods. A demonstration
of impossibility must be submitted for the disuse of the transaction-based method in case a profit-based
method is being utilised.
The OECD “most appropriate method” approach is applicable.
In the case that no (fully or partially comparable) arm’s length data can be determined, the taxpayer is obliged
to perform a so-called hypothetical arm`s length test. For this purpose, the taxpayer is obliged to determine
functional analysis and internal planning data. The minimum and maximum prices frame, the so-called range
of mutual consent, which is determined by the capitalised profit potentials of the transferred asset under
review. If the taxpayer cannot credibly show that another price complies with the arm’s length principle, the
mean value of the called range of mutual consent should be regarded as the relevant transfer price.
Taxpayers whose net sales and other operating incomes exceed the amount of EUR 3.000.000,00 in the
previous year must prepare and maintain an annual transfer pricing documentation file, which must be
prepared by the 15th day of the seventh month following the end of the tax year.
The transfer pricing documentation file must be submitted upon request.
According to the Portuguese legislation, the documentation must be provided in Portuguese. After
requesting prior approval, documentation in English is also accepted.
After requesting prior apporival, the Portugese tax authorities may accept the Masterfile.
This concept of the EU Code of Conduct on transfer pricing documentation for associated enterprises is not
yet adopted by the Portugese legislation. However, the Portuguese tax authorities may accept it, provided
the taxpayer seeks prior approval.
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In Portugal, tax assessment is possible for the four years after the end of the assessment year. All Portugal–
based companies have a statutory obligation to keep their transfer pricing documentation for the relevant
year for a 10–year period available (at the Portuguese establishment or premises) and in good order.
Once requested by the Portuguese Tax Authorities, the tax payer has usually 10 days to deliver its transfer
pricing documentation.
The Portuguese tax authorities examine the adequateness of intercompany transfer pricing only during a tax
audit. In case of a tax audit, the taxpayer is generally obliged to cooperate with the tax auditors.
The local tax authorities have a preference for local comparables (Portuguese and to a certain extent
Spanish), but others may be allowed whenever these are not available. If a pan-European search is used,
it is expected that the local tax authorities will screen the Portuguese comparables in the rejected list and
possibly create a subset of Portugal´s final comparables.
The local tax authorities use SABI (with Iberian companies) and Amadeus (with European companies)
databases. They prefer Portuguese (or Iberian) independent comparables, regardless of the database. Other
databases are accepted by local tax authorities for specific categories of transactions or industries.
Tax assessments may be issued only within a four-year period following the last day of the tax year
concerned, but an exception is made for undeclared income obtained from countries or territories with clearly
more favorable tax regimes, in which case the statute of limitations is twelve years.
If the taxpayer
•
•
•
transactions,
it is disputably assumed that the domestic income of the taxpayer exceeds its declared income. In such
case, tax authorities are entitled to estimate the domestic taxable income of the taxpayer.
If the taxpayer:
•
submits its transfer pricing documentation beyond the deadline established by the tax authorities, a
penalty of EUR 1.000,00 to EUR 10.000,00 shall be applicable;
•
provides incorrect or incomplete documentation, a penalty up to EUR 22.500,00 may be charged.
•
refuses to submit its transfer pricing documentation, a penalty up to EUR 75.000,00 may be charged.
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An APA program is included in the Portuguese Corporate Income Tax Code (Article 138). Ministerial Order
620-A/2008 allows taxpayers to negotiate the following types of APAs:
•
Unilateral – when the parties of the agreement are the Portuguese Tax Authorities and one or more
taxpayers of Individual Income Tax (IRS) or Corporate Income Tax (IRC) that are mentioned in Article 2 of
the Ministerial Order.
•
Bilateral or multilateral – besides entering into an agreement between Portuguese Tax Authorities, IRS
and IRC taxpayers, the taxpayer has also signed an agreement with one or several tax authorities, under
the mutual agreement procedure predicted in a convention, intended to avoid double taxation on income
taxes.
Portuguese legal timeframe foresees the following phases:
•
Pre-filing phase – initiates a preliminary evaluation of the initial taxpayer proposal and may comprise of
joint meetings with the tax authorities.
•
Submission phase – analysis and negotiation of the APA proposal, which in any case should be
presented at least 180 days before in advance to the applicable tax year. The tax authorities’ timeframe
to evaluate the content of an APA proposal amounts to 180 days, in the case of unilateral agreements,
and extends to a 360 days period in case of bilateral/multilateral agreements.
APAs may not exceed a three-year period, which may be renewable upon written request to the tax authority.
An APA is subject to a filing fee ranging from EUR 3.150,00 to EUR 35.000,00 paid to the tax authority,
depending on the taxpayer’s average turnover (fees are reduced by 50% for renewals or revisions of existing
APAs).
Portuguese tax authorities do not disclose information on APAs submitted or concluded. Despite the fact that
some information is publicly known, tax authorities are keen to increase the transparency of the APA process
in Portugal. Hence, taxpayers are encouraged to submit proposals.
Transfer pricing adjustments must be implemented in compliance with the general obligation to avoid double
taxation.
Where transfer pricing provisions apply to transactions between two entities that are both liable to Corporate
Income Tax (in Portugal), any adjustment to the taxable income of one entity should be reflected by a
corresponding adjustment to the taxable income of the other entity.
When the adjustments affects transactions between a Portuguese taxpayer and a non-resident entity,
the mechanisms provided for in the relevant double taxation treaty should be applied and corresponding
adjustments may be made by means of a competent authority procedure.
Convention on the elimination of double taxation (EC Convention 90/436/CEE) may also be applied at the
taxpayer’s request.
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Romania
1. Statutory rules
The Romanian authorities do not have statutory laws for transfer pricing rules, as they exist in other countries.
The Order no. 222/2008 with subsequent changes regarding the content of the transfer pricing files is the
document containing the regulatory framework in this respect.
The OECD-Guidelines are adopted in the Romanian jurisdiction and the tax authorities are bound to the
OECD-Guidelines.
In accordance with the Law no. 571/2003 regarding the Fiscal Code with subsequent amendments, a party
is related to another party if the relationship between them is defined by at least one of the following cases:
•
An individual is related to another individual if they are spouses or relatives up to 3rd degree (included);
•
An individual is related to a legal entity if the individual owns, directly or indirectly, including the holdings
of the related persons, a minimum of 25% of the value/number of the participation titles or voting rights
held at the legal entity or if it has effective control of the legal entity;
A legal entity is related to another legal entity if:
•
The first legal entity holds, directly or indirectly, including the holdings of the related persons, a minimum
of 25% of the value/number of the participation titles or voting rights held at the second legal entity or if
has effective control of the second legal entity;
•
The second legal entity holds, directly or indirectly, including the holdings of the related persons, a
minimum of 25% of the value/number of the participation titles or voting rights held at the first legal
entity;
•
A third legal entity holds, directly or indirectly, including the holdings of the related persons, a minimum
of 25% of the value/number of the participation titles or voting rights held at both first and second legal
entities.
OECD “most appropriate method” approach is applicable, as follows:
•
Method of prices comparison, based on which the market price is established based on the prices paid
to independent parties who sell comparable goods or services (“arm’s length transactions”);
•
Cost-plus method, based on which the market price is established based on the cost of the transacted
good or service, increased with the corresponding profit margin;
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•
Reselling price method, based on which the market price is established based on the reselling price of
the good or service sold to an independent party, diminished by the selling expenses, other expenses of
the tax payer and a profit margin;
•
Any other method recognised by the OECD-Guidelines regarding the transfer pricing.
According to the Order no. 222/2008 with subsequent changes regarding the content of the transfer pricing
files, this will contain the following:
Information about the Group
1. Organisational structure of the Group, legal and operational, including participations, history and financial
data related to these;
2. General description of Group activity, business strategy, including changes of business strategy
compared with prior fiscal year;
3. Description and implementation of applying the transfer pricing methodology inside the Group, if case;
4. General overview of the transactions with related parties, from the E.U.:
a. Transaction method;
b. Invoice method;
c. Value of transactions.
5. General description of the functions and risks assumed by the related parties, including the changes
occurred compared with the previous year;
6. Presentation of the intangible asset holders within the Group (patent, mark, know-how etc.) and the
royalties paid or received;
7. Disclosure of the pre-approved price agreements signed by the tax payer or other entities of the Group,
except of those obtained from the National Agency of Fiscal Administration.
Information about the tax payer
1. Detailed presentation of transactions with related parties:
a. Transaction method;
b. Invoice method;
c. Value of transactions;
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2. Comparative analysis presentation:
a. Characteristics of goods/services;
b. Functional analysis (functions, risks, fixed assets used etc.);
c. Contractual terms;
d. Economic circumstances;
e. Specific business strategies;
f.
Information regarding external and internal comparable transactions.
3. Presentation of related parties and their permanent establishments involved in the transactions or
agreements.
4. Description of the method used for the computation of transfer prices and argumentation of the selection
criteria used:
a. In case there are no traditional methods used to determine the transfer prices, this option must be
justified;
b. In all cases where methods other than the method of price comparison are utilised, this option must
be justified.
5. Description of other conditions considered as relevant for the tax payers.
The transfer pricing file must be prepared in Romanian language. In case it contains documents in a foreign
language, these must be translated in Romanian by certified translators.
There are neither exemptions for small enterprises, nor thresholds under which the transfer pricing file is not
requested.
In order to establish the transfer prices, the tax payers who have transactions with related parties have the
obligation, by the relevant fiscal authorities written request, to prepare and to present the transfer pricing file,
in the timeframe established by the fiscal authorities.
Based on the circumstances of each particular case, the tax payers may be requested to present additional
information at the request of relevant fiscal authorities.
The deadline for the transfer pricing file presentation will be determined by taking into account the number of
parties involved in the transactions, the number of transactions and their complexity, and also the period of
time during which the transactions took place. The deadline will be of maximum 3 months, with possibility of
delay only once, for an equal period, at the written request of the tax payer.
The tax audit may be suspended until the transfer pricing file is available for review.
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In case the transfer pricing file is not available for an inspection by the fiscal authorities at the date
established, the tax payer is liable to fines between RON 12,000 – 14,000. The fiscal authorities have the
right to request the transfer pricing file for the second time, and in case it will not be available for inspection in
due time, the fine is payable again.
However, the most important issue resulting from the absence of a transfer pricing file or an incomplete
transfer pricing file after two requests, is the fact that the fiscal authorities have the right to estimate
the market value of the transfer prices used by the tax payer for the transactions inside the Group. The
procedure for transfer pricing estimation consists of the identification by the fiscal authorities of three (3)
similar transactions available at the moment of estimation and the computation of an arithmetical average of
the values of these three transactions.
This estimation procedure of transfer prices can have significant adjustments of the transfer prices used as a
result by the related parties. Consequently adjustments of income may be established by the fiscal authorities.
The comparative analysis will take into account the territorial criteria in the following order: national, E.U.,
international.
The Advanced Pricing Agreement (“APA”) represents the administrative document issued by the Ministry of
Economy and Finance as a result of a request from the tax payer to establish the terms and methods to be
used for a fixed period of time for the transfer prices used for the transactions between related parties, as
they are defined by the Law no 571/2003 regarding the Fiscal Code with subsequent amendments.
APA is opposable and compulsory in relation with the fiscal authorities only if the tax payer complied with its
terms and conditions. The validity of APA stops from the date of entering into force of changes in the legal
stipulation of fiscal law based on which it was issued.
The APA may be amended at the tax payer request.
The fees for the APA are as follows:
•
For big tax payers, the fee is EUR 20,000 payable in RON using the National Bank exchange rate issued
for the day when the payment is made;
•
For other tax payers (middle and small), the fee is EUR 10,000 payable in RON using the National Bank
exchange rate issued for the day when the payment is made.
The request for APA issuance must contain all the identification data of the tax payer and its legal
representative and a presentation of the future conditions for which the APA is requested (it is not possible to
apply for a role back within the APA request).
The request will be accompanied by the documentation related to the transactions with the related parties
for which the APA is requested. Before making the request, the tax payer should present a proposal to the
National Agency for Fiscal Administration regarding the computation method for the transfer prices. In the
APA the final method of computation to be used is established.
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In case of an income adjustment related to transfer pricing, the tax payer has two options to prevent double
taxation: national appeal procedure and mutual agreement procedure.
Firstly, the tax payer has the possibility to contest the transfer pricing related income adjustment within the
national appeal procedure. If the appeal’s department of the relevant Court denies the appeal, the tax payer
has the possibility to address to the Supreme Court.
Secondly, the tax payer could apply for a Mutual Agreement procedure (“MAP”) according to Art. 25 of
Within a MAP, tax authorities of the countries involved consult each other to solve the disputes regarding the
transfer pricing related double taxation. If the tax authorities involved cannot reach an agreement, the tax
payer can apply for arbitration procedure.
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Russia
1. Statutory rules
a.Law
Chapter 14.1-14.6 Part 1 of the Russian Tax Code (hereinafter – RFTC)
Federal Law dd. 18.07.2011 No 227-FZ «On amendments to several laws and by-laws in regard with
implementation of new rules for prices determination»
b. Decrees of the Federal Tax Service
Decree of the Federal Tax Service dd. 27.07.12 No MMB-7-13/524@ “On implementation of the notice form
for controlled transactions, formats for provision of the notice for controlled transactions in electronic form”
Decree of the Federal Tax Service dd. 26.11.2012 No / / / /-7-13/907@ “On approval of the forms of
documents used during the fulfilling and stating the results of the transfer pricing tax audits, grounds and
procedure for extending of transfer pricing tax audit terms, requirements to the transfer pricing tax audit acts”
Decree of the Federal Tax Service dd. 19.11.2013 No / / / /-7-13/512@ «On the approval of the
documentation forms, applicable for symmetrical adjustments and reverse adjustments, on the way of
issuance of the notices for possibility for application of symmetrical and reverse adjustments»
c. Selection of clarifications issued by the Russian Ministry of Finance and the Federal Tax Service
Letter of the Federal Tax Service dd. 12.01.2012 No / / /-4-13/85@ «On conclusion of the agreements for
tax purposes»
Letter of the Federal Tax Service dd. 30.08.2012 No / / /-4-13/14433@ “On elaboration and provision of
documentation for purposes of the tax control”
Letter of the Federal Tax Service dd. 26.10.2012 No / / /-4-13/18182 “On the way of filling-in of the notice
on controlled transactions, approved by Decree of the Federal Tax Service dd. 27.07.2012 No / / / /-713/524@”
Letter of the Russian Ministry of Finance dd. 26.10.2012 No 03-01-18/8-149 “On procedure of checking the
prices in the transactions between the related parties, and on tax authorities actions in case of finding the
facts of tax non-payments due to prices manipulation”
Letter of the Russian Ministry of Finance dd. 26.12.2012 No 03-02-07/1-316 “On detection of evidence of
the controlled transactions during the desk and fiels tax audits”
Letter of the Russian Ministry of Finance dd. 27.12.2012 No 03-01-18/10-198 “On the procedure of
presenting of notification on the controlled transactions”
Letter of the Russian Ministry of Finance dd. 5.02.2013 No 03-01-18/2475 “On use of counter-party
information on the prices in transaction with the unrelated parties for preparation of transfer pricing
documentation and justification of use of the transfer pricing method in a controlled transaction”
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Letter of the Russian Ministry of Finance dd. 06.02.2013 No 03-01-18/2646 “On non-provision of notification
on controlled transactions, carried out during the financial year”
Letter of the Federal Tax Service dd. 02.08.2013 No / / /-4-13/14063@ “On the way of provision notices for
the controlled transactions, which contain secret data”
Letter of the Russian Ministry of Finance dd. 01.11.2013 No 03-01-18/46748 «On the way of provision of the
notices on controlled transactions»
Letter of the Federal Tax Service dd. 21.04.2014 No / / /4-3/7582@ «On the order of posting in the tax
return of the standalone adjustment of the CPT tax base»
Letter of the Federal Tax Service dd. 15.05.2014 No / / /-4-13/9345@ “On the set-up of the receipt of the
notices on the controlled transactions”
The Russian Federation is not a member of OECD. But at the same time Russia participates in some of
the OECD Committees as an observer and the Russian tax authorities take into account regulations and
documents prepared by OECD. In particular the new Russian transfer pricing legislation implemented since
2012 is largely based on OECD Transfer Pricing Guidelines (OECD-Guidelines). The Russian tax authorities
are not formally bound to use OECD-Guidelines. Yet in practice in clarifications issued according to taxpayers
requests the Russian tax authorities refer to the OECD-Guidelines and reference to provisions of the
Guidelines can be a valid argument in the course of a tax dispute.
Clause 2 Art. 105.1 of RFTC stipulates the definition of related legal entities (individuals) for transfer pricing
purposes:
1. legal entities where one entity directly and (or) indirectly participates in another entity and this
participating interest is greater than 25%;
2. an individual and a legal entity, where an individual directly and (or) participates in this legal entity and this
participating interest is greater than 25%;
3. legal entities where the same individual directly and (or) indirectly participates in these entities and the
participating interest in each entity is greater than 25%;
4. a legal entity and an individual (including joint participation with the individuals stated in subclause 11
below) who has the authority to appoint (elect) the individual executive body or to appoint (elect) not less
than 50% of the members of the collective executive body or board of directors of the legal entity;
5. legal entities where the individual executive body or not less than 50% of the members of the collective
executive body or board of directors (supervisory board) have been appointed or elected by the decision
of the same person (an individual jointly with persons stated in subclause 11 below);
6. legal entities where the same individuals jointly with persons stated in subclause 11 (below) provide
for more than 50% of the members of the collective executive body or board of directors (supervisory
board);
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7. a legal entity and an individual who enjoys the powers of its individual executive body;
8. legal entities where the powers of the individual executive body are represented by the same person;
9. legal entities and (or) individuals where the direct interest held by each preceding person in each
successive entity is greater than 50%;
10. individuals where one individual is subordinate to another in terms of official position;
11. an individual and his (her) spouse, parents (including adoptive parents), children (including adopted
children) and full and half siblings; a guardian (custodian) and his ward.
However, this list of entities and individuals is not restrictive. As prescribed in clause 7 Art. 105.1 of RFTC,
even if none of the above-stated provisions for transfer pricing implications are met, the parties can be still
treated by the court as related based on the actual circumstances.
There are 5 (five) accepted transfer pricing methods in Russia:
•
Comparable Uncontrolled Price,
•
Resale Price,
•
Cost Plus,
•
Comparable Profits,
•
Profit Split.
The Russian Tax Code prescribes the most appropriate method, and points out the hierarchy in transfer
pricing methods’ application.
The Comparable Uncontrolled Price method is the most appropriate method to be used. The exception
for this approach is a case when a company purchases goods from a related party and resells them to an
independent party. If that is the case, the Resale Price method should be given the priority.
Provided the Comparable Uncontrolled Price and Resale Price methods are not applicable, the taxpayer can
choose between Cost Plus, Comparable Profits and Profits Split methods. At the same time the profit split
method is to be used as “the method of the last resort”.
The choice of a certain transfer pricing method should be justified after substantial consideration of:
•
the functions performed by the taxpayers in a controlled transaction,
•
the commercial risks assumed by the taxpayer in a particular controlled transaction,
•
the assets used in a particular controlled transaction.
In case the transaction carried out by the taxpayer is once-only transaction and comparable transactions
cannot be established, then it is possible to establish the transaction price/value by the use of services of an
independent appraisal expert.
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As the OECD-based transfer pricing rules in Russia are relatively new in comparison to many other countries,
the TP rules do not contain many clarifications on application of the transfer pricing methods. It is expected
that the new rules would be supplemented by clarifications of the Russian controlling authorities detailing
how the methods should be applied. As of now, there is no any case law that would clarify the approach of
controlling authorities and courts to this issue.
Please note that the Russian Tax Code does contain guidance regarding to which comparability factors are
important for a particular transfer pricing method. As a result, disputes with the Russian tax authorities arising
from the choice of transfer pricing method may take place.
The hypothetical arm’s length test is not applied in Russia for transfer pricing purposes.
TP notification and TP documentation requirements are applied in Russia to so called “controlled
transactions”.
Controlled transactions include:
•
Transactions with foreign affiliated parties regardless of their size;
•
Transactions with unaffiliated parties registered in black-listed jurisdictions (offshores, etc) with the annual
turnover exceeding RUB 60 mln;
•
Foreign trade transactions with certain commodities with the annual turnover exceeding RUB 60 mln;
•
Transactions with affiliated parties in Russia with the annual turnover exceeding RUB 1 bln (with the
exception of parties meeting certain strict criteria targeted ensure profit shifting will not result in tax base
erosion);
•
Transactions with affiliated parties in Russia, where one of the parties applies a preferential tax regime
(different minimal annual turnover thresholds are established for different preferential tax regimes).
With regards to the controlled transactions taxpayers are to:
•
Submit annually by the May 20th notifications on the controlled transactions effected within the previous
year. Notifications are to be submitted according to a special form to describe briefly the nature of a
controlled transaction and inform the tax authorities on the prices applied.
•
Prepare TP documentation files to be stored by the taxpayer and be available for inspection at
the request of the tax authorities. Tax authorities can ask the taxpayer to provide transfer pricing
documentation not earlier than June 1 of the year following the year in which controlled transactions
were committed.
TP documentation refers to a set of documents or a single document, written in a free format (although
certain recommendations were published by the tax authorities) and containing the following information:
•
Description of activities of the taxpayer(s) who carried out the controlled transaction;
•
A list of persons who have carried out a controlled transaction (with information on their tax residence);
•
Overview (description) of the controlled transaction and its terms;
•
Transfer pricing methods that taxpayer used;
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•
Payment conditions for the transaction and other information about the transaction;
•
Information about the roles (functions) of the transaction parties;
•
Information on the use of assets, associated with this controlled transaction;
•
Information on economic (commercial) risks that taxpayer has taken due to the transaction.
If the taxpayer used methods of determining the income for the tax purposes provided in the RFTC, he has
to provide the following information:
•
Explanation of the choice of the certain method;
•
Sources of the information used;
•
Details of the calculation of market price intervals for controlled transaction;
•
Information on profit and (or) the losses incurred as a result of a controlled transaction;
•
Information about the economic benefits from the controlled transaction;
•
Information on other factors that have influenced profitability;
•
Adjustments to the tax base and the amount of tax, made by the taxpayer in accordance with paragraph
6 of Article 105.3.
Transfer pricing documentation can be provided in Russian language only. Code of Conduct on Transfer
Pricing Documentation for Associated Enterprises in the European Union is not adopted in the regulations of
Russia.
Transfer pricing audit is carried out by special department of the Federal Tax Service and these transfer
pricing audits are carried out separately from ordinary tax audits carried out by the central and regional tax
authorities. Audit is conducted on the basis of notifications about the controlled transactions submitted by
taxpayers or notifications of the territorial tax authority on controlled transactions identified in the course
of their reviews. The decision about the audit has to be made not later than two years after the receipt of
notification.
A transfer pricing audit should be conducted within the period not exceeding 6 (six) months, but by the
decision of the Head of the Tax Authority, period of the audit can be extended up to 12 months.
Tax Authority inspector has the right to request all needed documents for the audit from both parties of a
controlled transaction. Documents should be provided in no more than in 30 (thirty) days after the request.
As a part of the audit, all controlled transactions might be inspected that were made within the three years
prior to the year in which the audit was started.
In principle in the course of an audit tax inspectors are required to apply the TP methods used by the
taxpayer in its transfer pricing documentation, unless they manage to prove that for each particular deal the
TP methods applied by a taxpayer are not suitable to determine arm’s length price intervals.
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If the audit revealed the fact of price deviation from arm’s length intervals, tax inspector should prepare the
tax audit report and deliver it to the audited party. If the audited party does not agree with the conclusions
set out in the report, it can provide its written objections to the Federal Tax Authority. On the basis of the
tax audit report and objections filed the decision is taken by the tax authorities, whether they put claim to a
taxpayer. This decision can be further litigated at court.
In case the tax authorities reveal underestimated amounts of tax due to application of non-arm’s-length
prices within a controlled transaction in the course of a transfer pricing tax audit as described in section
6 above, the respective tax base is subject to adjustment. The following taxes can be adjusted: CPT
(Corporate Profits Tax), PIT (Personal Income Tax), MET (Mineral Extraction Tax) and VAT (Value Added Tax).
The tax authorities will charge additional tax and late payment interest on underpaid tax. Interest should be
charged in accordance with the general rules at a rate of 1/300 of the Central Bank of Russia refinancing rate
(e.g. as at November 15th, 2014 this rate is 8.25%).
The Russian Tax Code provides for penalties of up to 40% for underpayment of tax liability as a result of
applying prices which do not comply with the arm’s-length which lead to the transfer pricing adjustment.
The above mentioned penalty does not apply if a taxpayer submitted duly prepared transfer pricing
documentation to justify the prices applied. Besides with regards to this penalty the RFTC also provides for
a transition period during the first years after the law takes effect. According to the transition provisions the
penalty of 20% will apply to the 2014-2016 tax periods.
The untimely submission of a transfer pricing notification form, or its inaccurate completion, may result in a
penalty of RUB 5,000 (approximately USD 167).
Advanced Pricing Agreements (APA) are possible under the Russian law, however only “largest” taxpayers
(eg. with the turnover or assets exceeding RUB 20 billion) are allowed to conclude an APA. Therefore till
present APAs are uncommon, although a number of such agreement were signed.
In Russian Federation for concluding an APA agreement taxpayer should provide to the tax authorities the
following documents:
•
Project of an APA agreement;
•
Documents on the activities related to controlled transaction;
•
Accounting (financial) statements for the last recording period;
•
Documents with regards to company registration details.
Besides other documents can be requested for APA by the tax authorities. The taxpayer is also to pay a
state duty of 1.5 million Russian Rubles for each APA request.
Both unilateral and multilateral APAs are allowed, while roll-back agreements are not envisaged by the law
(except the roll-backs to start from 1st of January of the year in which an APA is signed). APAs are concluded
for 3 years and can be prolonged for 2 more years.
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There are no safe harbor rules in Russia for majority of transactions (the examples of rare exceptions are
transactions made through a stock exchange or according to prices prescribed by the antimonopoly
government bodies).
In general, the taxpayer can take two possible approaches to prevent double taxation occurred out from
transfer pricing adjustments.
Firstly, the Russian Tax Code provides for symmetrical or correlative adjustment mechanism. Correlative
adjustment toolkit is designed with purpose to avoid double taxation for domestic transactions only. Thus,
such adjustments are possible for Russian taxpayers only.
If the tax authorities adjust the tax base of a Russian taxpayer and such a taxpayer actually pays the tax,
the other party to the controlled transaction – a Russian company – will be entitled to claim a corresponding
adjustment to its tax base.
It should be noted that the symmetrical adjustment can be performed only if the tax authorities issues special
notice for the possibility of such adjustment.
Secondly, in respect to cross-border transactions, the taxpayer can employ the respective double tax treaty.
Russia is a party to around 80 double tax treaties (DTT), based on the OECD model convention and
therefore many DTTs contain the “Associated Enterprises” article (Article 9 of the Model Convention). This
article provides for symmetrical adjustments. However, it should be noted that in the majority of DTTs
which have not been recently revised, this article or similar paragraphs included in other articles provides
for an adjustment that increases the profit of a treaty resident only due to the use of nonmarket prices.
The taxpayer, when possible, can employ this article directly. If it is not feasible, the taxpayer may apply for
application of the mutual agreement procedure (MAP), provided in Article 25 of the OECD Model Convention.
Unfortunately, information on the practice of invoking MAP is very limited, however, the opportunity should
exist, as according to informal interviews with Russian Ministry of Finance representatives, there are some
cases when MAP has been initiated (e.g. cases related to withholding tax application).
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Serbia
1. Statutory rules
a.Law
Articles 59, 60, 61 and 61a of Corporate Income Tax Law (Official Gazette RS No. br. 25/01, 80/02, 80/02other law, 43/03, 84/04, 18/10, 101/11, 119/12 i 47/13).
•
The Protocol on transfer prices and methods applied in accordance with the ‘arm’s length’ principle
when assessing the prices of transactions between related parties (Official Gazette RS No. 61/2013,
8/2014);
•
Rulebook on Informative Tax Return (Official Gazette RS No. 117/2012, 118/2012- correction, 16/2013);
•
Rulebook with respect to arm’s length interest rates (Official Gazette RS No. 17/2014).
Serbian authorities adopted the published Protocol on transfer prices and methods applied in accordance
with the ‘arm’s length’ principle when assessing the prices of transactions between related parties. When a
transfer pricing documentation is prepared in accordance with the Protocol, its content should follow Chapter
V of OECD Guidelines.
The term “related party” is defined in article 59 of Corporate Income Tax Law. According to this provision:
•
an entity is deemed a related party if it has the possibility of control or considerable influence on
the business decisions made, while ownership of at least 25 percent of the shares in the capital is
considered as the possibility of control and possessing at least 25 percent of the voting rights is
considered as having an influence on business decisions;
•
members of the immediate family of shareholders who own at least 25 percent of shares or hold at least
25 percent of voting rights are also deemed as related parties.
These examinations are applied to both direct and indirect ownership. Furthermore, companies are deemed
to be related if the same persons directly or indirectly participate in the management, ownership or control of
both companies in the manner described above.
Regardless of the percentage of direct or indirect ownership or voting rights in a Serbian enterprise, any
company which is residential at a jurisdiction with a preferential tax system, is considered to be a related
party.
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A jurisdiction with a preferential tax system exists if the relevant regulations allow for a significant reduction
in income and dividend taxation when compared to Serbian regulations. A territory also qualifies as a
jurisdiction with a preferential tax system if its regulations do not allow or impede obtaining information on
ownership or other data relevant for resolving taxation issues.
One of the following methods can be used in determining transfer prices according to the “arm’s length”
principle:
•
Comparable Uncontrolled Price (CUP) method;
•
Resale price method;
•
Cost plus method;
•
Transactional Net Margin Method (TNMM);
•
Profit split method; and
•
any other method if above mentioned methods are not possible
There is no priority among the acceptable methods and the new transfer pricing regulations prescribe the
use of the most appropriate method. This implies that taxpayers are allowed to choose methods to be used
in determination of “arm’s length” prices and preparation of transfer pricing study.
The method is chosen on the level of each type of transaction. Combining two or more methods is also
allowed. However, the one that has been chosen must be practically applicable and should eventually result
in a reasonable estimate of effects in accordance with the “arm’s length” principle.
Interest rates can also be assessed using an interest rate prescribed as “arm’s length” by the Ministry of
Finance of the Republic of Serbia. Serbia’s Minister of Finance adopted a “rulebook“ on 14 February 2014
with respect to “arm’s length” interest rates. The rulebook provides the prescribed interest rates applicable
to related-party financing arrangements, and is applicable for taxpayers with related-party financing during
2013. The rulebook was published in the Official Gazette RS No. 17/2014 on 14 February 2014.
A taxpayer hast he obligation to prepare and submit documentation which presents related party
transactions at both transfer prices and arm’s length prices along with their annual tax return (i.e. within 180
days from the last date of a tax period).
A proper disclosure of the corporate income tax return requires the separate disclosure of income and
expenses generated from related party transactions during the year.
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The following mandatory elements of each transfer pricing study are prescribed by the protocol on transfer
prices and methods applied in accordance with the ‘arm’s length’ principle when assessing the prices of
transactions between related parties:
•
analysis of the group of related entities whose member is the taxpayer;
•
business activity analysis;
•
functional analysis;
•
selection of transfer pricing method used in determination of transfer pricing;
•
conclusion – is it required to amend taxable base for related party transactions;
•
appendices – review of data used by the taxpayer in determination of “arm’s length” prices.
The taxpayer is not obliged to submit separate documentation pertinent to particular transactions
and relations between parties within a group, however the Tax Administration may also require such
additional documentation. In addition, the Protocol permits the Tax Administration to require the additional
documentation from the taxpayer, if it determines that the taxpayer’s documentation is insufficient for the
assessment of whether the transfer prices are in line with the ‘arm’s length’ prices. In the latter case, the Tax
Administration is obliged to take into the consideration expenses imposed to the taxpayer with the request
for the additional documentation, as well as on the overall possibility of the taxpayer to provide the additional
documentation. When additional documentation is requested, the Tax Administration allows to the taxpayer
an appropriate deadline.
The transfer pricing study should be either prepared in Serbian language or translated in Serbian.
Serbian tax authorities usually examine the adequateness of intercompany transfer pricing only during the
regular tax field audits. Tax audits typically cover periods from three to five consecutive fiscal years. In case of
a tax audit, the taxpayer is generally obliged to cooperate with the tax auditors.
When the tax authority requests a taxpayer’s transfer pricing documentation the documentation should
be available on request. However, an additional 30 to 90 day deadline can be provided for submitting and
amending the documentation.
Currently, outcomes from audits are revealing that the tax authorities prefer the CUP method, but this
method is applied in a very simplified way. There are also strong indications that the tax authorities will place
the firm´s focus on transfer pricing during the tax audits starting from 2013.
Statute of the limitation period for the tax audit is five years, starting from the first day of a year following a
year in which the tax liability became due (e.g. statute of limitation for tax liability due in 2012 is 31 December
2017). A ten years absolute statute of limitation period is also applicable under certain circumstances.
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It is permitted to make the income adjustment to the most unfavorable point of the arm’s length range. When
adjustments are assessed by the tax authorities they must be applied and then the taxpayer has an option
to appeal to the second instance degree procedure with the tax authorities, or finally to the Administrative
Court.
If an adjustment is sustained penalties may range from RSD 100,000 to RSD 2,000,000 for non-disclosing
of transfer prices at arm’s length in the tax balance. In addition, there is a potential penalty depending on the
additional tax liability assessed by the tax authorities. This penalty varies from 1 percent to 25 percent of the
assessed additional tax liability but not less than RSD 100,000.
Transfer pricing penalties are rarely enforced, although a significant shift is expected in this respect during
the year 2014. Preparing documentation should mitigate the risk of penalties. Other defense strategies may
include negotiation and reasonable cause but such strategies are less likely to have the desired positive
effects.
No APAs, advance rulings of any kind or similar are available in Serbia at the moment. The Serbian tax
authority does not publish APA data either in the form of an annual report or through the disclosure of data in
public forums.
The extent of the double tax treaty network is minimal in Serbia at the moment. There is no experience in
Serbia that the competent authority is effective in obtaining double tax relief.
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Slovakia
1. Transfer pricing
Tax authorities in Slovak Republic as well as in other countries are increasingly focused on more effective tax
audits. Their attention is considerably paid to transfer pricing, know-how and awareness are considerably
developing, still there are some significant issues.
The problem when preparing the transfer pricing documentation is not only in the formal aspect of the
preparation, but mainly in the correct determination of the transfer pricing policy. Our team will gladly help
you with the analysis of transfer pricing policies, their adaptation and also with preparation of transfer pricing
documentation in order to meet all the Slovak transfer pricing requisites. 2
Regulatory Snapshot When did the TP Rules start
2009
Level of TP Developing regime
Return Disclosure No
Documentation Compulsory
Methods OECD
Tax Audit Risk High
Penalties High
APA Available
•
The core Transfer Pricing (further referred as “TP”) rules were laid down in the Act No. 595/2003 Coll. on
Income Tax (hereinafter “Income Tax Act”) with effective date as of 1 January 2009. Required content of
TP documentation is stipulated in Guidance No. MF/8288/2009-72 of the Slovak Ministry of Finance. TP
rules generally conform with the OECD guidelines.
•
There is no obligation to enclose the Transfer Pricing documentation (hereinafter “TPD”) to the tax return.
However, the transactions between the Slovak entity and foreign related parties must be disclosed in the
Notes to the financial statements.
•
TP documentation is compulsory for transactions between the Slovak entity and foreign related parties.
Tax payers should submit TP documentation within 15 days after requested by Slovak Tax Authorities.
•
Acceptable TP methods according to the Income Tax Act include fair market price method, subsequent
sale method, increase costs method (methods based on a comparison of prices), profit split method and
net margin method (methods based on a comparison of profits). Preferred methods are methods based
on a comparison of prices.
•
Penalty up to EUR 3,000 may be imposed if the TP documentation is not submitted to the tax authorities
within 15 days of the request. Penalty may be imposed repeatedly.
•
The taxpayer may request approval of the Slovak tax authorities for the selected TP method.
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2.Regulations
The arm’s length principle and the obligation to keep a TP documentation is enacted in article 18 of
the Slovak Income Tax Act. Requirements relating to the content and the rules for preparing the TP
documentation are stipulated in Guidance of the Slovak Ministry of Finance No. MF/8288/2009-72. Currently
a very limited number of rulings exist.
Besides legally binding articles of the Slovak tax law, the Ministry of Finance published in the Financial
Newsletter the OECD Transfer Pricing guidelines. These are not legally binding; however, the tax authorities
should follow them practically.
3. Documentation structure
Entities which are obliged to prepare financial statements under IFRS must maintain full scope TP
documentation, which consist of master file and country file. Master file is supposed to include information
relating to the whole group and country file provides information about the Slovak entity. Country file should
include transfer pricing study.
Taxpayers which are not obliged to prepare financial statements under IFRS are allowed to keep simplified
TP documentation which proves compliance with arm’s length principle for significant controlled transaction
with foreign entities. Entities which do not perform any controlled transactions with foreign related parties are
currently not obliged to prepare TP documentation.
4. Administrative viewpoint
Due date
TP documentation must be submitted to the Slovak tax authorities within 15 days after requested.
Language
TP documentation should be filed in Slovak language.
Disclosures about transfer pricing in the tax return
There is no obligation in Slovak Republic to enclose the TP documentation to the annual tax return. However,
notes to the financial statements and as well as corporate income tax return must disclose transactions
between the Slovak entity and foreign related parties in EUR without any further details.
Acceptable transfer pricing methods
Taxpayers may use OECD TP methods – fair market price method, subsequent sale method, increase costs
method (methods based on a comparison of prices); profit split method, net margin method (methods based
on a comparison of profits).
Taxpayers may use preferably methods based on the comparison of prices. If such methods are practically
not possible they may use methods based on the comparison of profit.
From 01.01.2014 the taxpayers have an option of the most optimal transfer pricing method.
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Statute of limitations on assessment of transfer pricing adjustments
Generally five years from the year for which the tax return was filed, in case double taxation agreements have
been applied, 10 years.
Penalties
Penalty up to EUR 3,000 can be imposed by the tax authorities in case of not submitting the TP
documentation within 15 days of the tax authority’s request. Penalty may be imposed repeatedly if the TP
documentation is not filed within the agreed period. Other penalties may be imposed in case of unpaid or
understated tax liability. The penalty in this case is three times the current basic interest rate of the European
Central Bank but not less than 10%.
Advance pricing agreement (APA)
According to the Slovak Income Tax Act the taxpayer can request approval of the Slovak tax authorities for
selected TP method.
Tax audit areas
Tax authorities are currently developing a special task force for transfer price issues.
As of 31.12.2013 tax authorities had a possibility to ask the transfer pricing documentation from the tax
payer only during tax audit. From 01.01.2014 tax authorities have a possibility to claim the transfer pricing
documentation from the taxpayer in justification cases at any time, not only during the tax audit.
The likelihood that taxpayers with transactions to foreign related parties will be subject to tax audit is
increasing.
Changes valid from 01.09.2014
Issue of the binding decision on approval of the used transfer pricing method will be charged by the Slovak
tax authorities.
Charges will be as follows:
•
Issue of the decision on unilateral approval of the method (due to Slovak tax legislation) = 1 % of the
amount of an expected business case; minimum EUR 4,000 and maximum EUR 30,000;
•
Issue of the decision on approval based on the international treaties = 2 % of the amount of an expected
business case; minimum EUR 5,000 and maximum EUR 30,000.
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5.Recomendation
It is recommended that taxpayers document their intercompany transactions through intercompany
agreements (which are usually also the appendixes to TP documentation);
Proper transfer pricing documentation is based on the proper transfer pricing policy and therefore the
emphasis should be given also to analysing the transfer pricing policy and their adoption.
In order to avoid penalties, it is recommended to prepare TP documentation beforehand, not only after
requested by the Tax authorities.
Our team can assist you with all TP-related issues.
We have extensive experience in advising client facing assessments and disputes.
We are at your side to help you with tax planning, TP restructuring, review of current TP policy and
procedures, APAs.
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Slovenia
1. Statutory rules
a.Law
•
Corporate Income Tax Act (CITA) – Art. 16 – 19;
•
Tax Procedure Act (TPA) – Art. 382.
•
Rules on the recognised rate of interest;
•
Rules on transfer prices
•
Explanation of the Tax Authority No. 061-51/2006 about the Definition of the Related Parties and the
Interests between Related Parties as of March 3, 2006;
•
Explanation of the Tax Authority No. 42100-19/2007 about the Interests between related parties as of
January 1, 2008;
•
Explanation of the Tax Authority No. 4200-36/2008 about the Related Parties at the Transactions
between the Permanent Establishments of the foreign entity and other subjects as of February 26, 2008;
•
Explanation of the Tax Authority No. 4200-92/2008-3 about the Thin Capitalisation Rules as of July 22,
2008;
•
Explanation of the Tax Authority No. 4200-116/2011 about the Correction of the Tax Base in case of the
Related Parties Residents as of November 29, 2011.
Slovenian authorities adopted the OECD-Guidelines within the published administrative circulars as well in
the legislation.
Article 16 of the CITA provides the definition of related parties in cross-border dealings. According to this
article, a taxpayer – resident or non-resident – and a foreign legal entity or a foreign person without a legal
entity who is not a taxpayer are considered associated enterprises, when:
•
the taxpayer directly or indirectly holds at least 25% of the value or number of shares or equity holdings,
shares in managing or control and/or voting rights of a foreign person, or controls the foreign person on
the basis of a contract, or the transaction conditions differ from the conditions that have been or would
have been agreed between non-associated enterprises under equal or comparable circumstances; or
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•
The foreign person directly or indirectly holds at least 25% of the value or number of shares or equity
holdings, shares in managing or control and/or voting rights of the taxpayer, or controls the taxpayer on
the basis of a contract, or the transaction conditions differ from the conditions that have been or would
have been agreed between non-associated enterprises under equal or comparable circumstances; or
•
the same person at the same time directly or indirectly holds at least 25% of the value or number of
shares or equity holdings, shares in managing or control and/or voting rights of the taxpayer and foreign
person or of two taxpayers, or controls this persons on the basis of a contract, or the transaction
conditions differ from the conditions that have been or would have been agreed between non-associated
enterprises under equal or comparable circumstances; or
•
the same individuals or their family members directly or indirectly hold at least 25% of the value or
number of shares or equity holdings, shares in managing or control and/or voting rights of the taxpayer
and foreign person or of two residents or control them on the basis of a contract, or the transaction
conditions differ from the conditions that have been or would have been agreed between non-associated
enterprises under equal or comparable circumstances. As the family member, following persons are
considered: spouse or person with whom the individual lives in a long term relationship that equals
marriage, children, adopted children, step-children or children of the person with whom the individual
lives in a long term relationship, parents or adoptive parents of a individual.
According to the Article 16 of the CITA and Rules on the transfer prices, the comparable market price shall
be fixed by using one of the following methods or any combination of the following methods:
1. Comparable uncontrolled price method
2. Resale price method
3. Cost plus method
4. Profit split method and/or
5. Transactional net margin method.
Preferable transfer pricing methods are the traditional transactions methods (1-3), whereby the Comparable
uncontrolled price (CUP) method is recommended, if there is enough arm’s length data.
If such fully comparable arm’s length data cannot be determined, limited comparable data shall be used
after making appropriate adjustments under the application of an appropriate transfer pricing method also
including both methods of transactional profit (method 4 and 5).
In case that no (fully or limited comparable) arm’s length data can be determined, the taxpayer is obliged to
perform the so-called hypothetical arm`s length test. For this purpose, the taxpayer is obliged to determine
functional analysis and internal planning data. The minimum and maximum pricees frame the so-called range
of mutual consent, which is determined by the capitalised profit potentials of the transferred asset under
review. If the taxpayer cannot credibly show that another price complies with the arm’s length principle, the
mean value of the called range of mutual consent should be regarded as the relevant transfer price.
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In practice, the hypothetical arm’s length test often applies for intercompany transfers of intangible assets or
in case of the cross-border transfers of functions. The determination of the transfer price for the transfer of a
function has to consider the transfer package as a whole (including all tangible and intangible assets as well
as all other advantages related to the transferred function).
The associated taxpayer shall ensure and keep the data related to the associated enterprises such as the
scope and type of transactions conducted with them, as well as the data on established comparable market
prices for ten years after finishing the year to which the documentation refers.
According to the Art. 382 of the TPA, the documentation shall be comprised of a “master file” of standardised
information and a “country-specific” file for all the transactions. The documentation has to describe the type,
contents and scope of cross-border transaction with related parties, including the economic and legal basis
for an arm´s-length determination of prices and other business conditions.
The documentation is not submitted to the tax authority together with the tax return, but the taxpayer
must have the requiered information available upon request by the tax authority at the initiation of the audit
procedure. With the tax return the taxpayer only has to report the total yearly turnover of the transactions
with the related parties (not separately by the type of the transactions, only the total amounts).
The taxpayer may keep documentation in electronic form.
In case that the documentation is not prepared in Slovenian, the tax authority can require the translation on
request. The taxpayer has 60 days time to provide the translation of the documentation in Slovenian.
The Slovenian tax authorities have recently been intensively examining the adequateness of intercompany
cross-border transfer pricing, although the audit procedure is similar to normal tax examination. Tax audits
typically cover periods from three to five consecutive fiscal years. In case of a tax audit, the taxpayer is
obliged to cooperate with the tax auditors.
In case the tax payer has not prepared the documentation on transfer pricing and can’t provide it
towards the tax authority on request in the context of a tax audit, it has 30 to 90 days time to prepare the
documentation (depending on the pretentiousness of the documentation).
If the tax authorities do not accept the arguments in spite of the used transfer pricing methods and the tax
base needs to be corrected, they first issue the protocol of the tax examination and the required corrections.
The taxpayer can prepare the remarks on the protocol. If the tax authorities do not accept the remarks, they
issue the decision on the tax examination and determine the additional tax payment with the interests for late
payment.
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7. Surcharges and penalties
If the taxpayer does not submit its transfer pricing documentation on request of the tax authority within the
designated period (30 to 90 days), the penalty (fine) of EUR 3,200 to EUR 30,000 will be imposed on a legal
entity and the penalty (fine) of EUR 600 to EUR 4,000 on the responsible person (EUR 800 to 4,000 in case
of a medium-sized or big company).
If the additional tax payment which is defined in the tax examination exceeds the amount of EUR 5,000 a
penalty of 30% of the additional tax payment can be imposed, this additional tax payment can´t be lower
then EUR 1,500 and not exceed EUR 150,000 (45% of the additional tax payment if the company is middle
or big company – but not less than EUR 2,000 and not more than EUR 300,000). At the same time, also the
penalty for the responsible person of the company amounting from EUR 700 to EUR 5,000 can be imposed
(EUR 900 to EUR 5,000 in case of the middle or big company).
At the moment, the Slovenian legislation does not allow Advanced Pricing Agreements, but the tax authority
is already thinking about this possibility and is working on the pilot project with the bigger holding companies
(if they are prepared to get involved in the project).
the national appeal procedure. Thereby, the taxpayer has to appeal against the revised assessments by
the regional tax office. If the appeal’s department denies the appeal, the taxpayer has the possibility to take
court’s action against the decision. The proceeding would be heard first by regional tax court; if admitted,
followed by the Federal Tax Court.
Secondly, the taxpayer could apply for a Mutual Agreement Procedure (MAP) according to the Art. 25 of
usually can apply for arbitration procedure.
However, there is no such practice that any of the MAP would be started for the Slovene taxpayer.
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South Africa
1. Statutory rules
a.Law
Sections 20C, 31, 89bis and 89quat of Income Tax Act no 58 of 1962
International Tax Treaties
Tax Administration Act
General Agreement on Tariffs and Trade
Customs External Directive Valuation of Imports
c. Important Administrative Circulars
Practice Note No 7 of 1999
Although South Africa is not a member country of the OECD, the OECD Guidelines are acknowledged and
accepted as standard. South Africa has reserved the right to use the version 7 of the OECD Model Tax
Convention, immediately prior to the July 2010 update.
The Income Tax Act introduced the definition of a “connected person” which regulates the tax consequences
of transactions entered into between related party transactions. “Connected person” means in relation to a
natural person –
i.
any relative; and
ii.
any trust (other than a portfolio of a collective investment scheme in securities or a portfolio of a
collective investment scheme in property) of which such natural person or such relative is a beneficiary;
A relative of a natural person therefore includes:
• that person’s spouse;
• anybody related to that person within the third degree of consanguinity;
• anybody related to that person’s spouse within the third degree of consanguinity; and
• the spouse of anybody related within the third degree of consanguinity to that person or his or her
spouse.
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In relation to a company:
•
any other company that would be part of the same group of companies as that company if the
expression “at least 70 per cent of the equity shares in” in paragraphs (a) and (b) of the definition of
“group of companies” in this section were replaced by the expression “more than 50 per cent of the
equity shares or voting rights in”;
•
any person, other than a company as defined in section 1 of the Companies Act that individually or jointly
with any connected person in relation to that person, holds, directly or indirectly, at least 20 per cent of –
a. the equity shares in the company; or
b. the voting rights in the company;
•
any other company if at least 20 per cent of the equity shares or voting rights in the company are held by
that other company, and no holder of shares holds the majority voting rights in the company;
•
any other company if such other company is managed or controlled by –
•
any person who or which is a connected person in relation to such company; or
•
any person who or which is a connected person in relation to a person contemplated in item (a).
Neither the Income Tax Act nor the tax treaties entered into by South Africa prescribe any particular
methodology for the purpose of ascertaining an arm’s length consideration.
Given that there is no prescribed legislative preference, the Commissioner for the South African Revenue
Service would generally seek to use the methods that have been set out below.
The most appropriate method in a given case will depend on the facts and circumstances of the case and
the extent and reliability of data on which to base a comparability analysis. It should always be the intention
to select the method that produces the highest degree of comparability.
The choice of the most appropriate method should therefore be based on a practical weighting of the
evidence, having regard to:
•
the nature of the activities being examined,
•
the availability, quality and reliability of the data,
•
the nature and extent of any assumptions, and
•
the degree of comparability that exists between the controlled and uncontrolled transactions where the
difference would affect conditions in the arm’s length dealings being examined.
In cases where there are no comparables or there is insufficient information to determine an arm’s length
outcome, the method to be used should be a method that produces a reasonable estimate of an arm’s
length outcome. Such estimate must be based on the facts in hand.
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The tax authorities may require the taxpayer or any other person to produce for examination by the
Commissioner, or by any person appointed by him, at such time and place as may be determined by the
Commissioner, any “documents” or “information” which the Commissioner may require. If any document
is not in one of the South African official languages, the Commissioner may, by written notice, require the
taxpayer to, at his own expense, produce a translation in one of the official languages, prepared and certified
by a sworn translator or another person approved by the Commissioner.
All records (namely ledgers, cash-books, journals, cheque books, bank statements, deposit slips, paid
cheques, invoices, stock lists, all other books of account and data created by means of a computer relating
to any trade carried on by the taxpayer), as well as recorded details from which the taxpayer’s returns were
prepared, for assessment of taxes, must be retained for a period of four years from the date on which the
return relevant to the last entry in any of the above-mentioned records was received by the Commissioner.
Taxpayers should also retain the following documentation on their capitalisation position:
•
A description of the funding structure which has been or is in the process of being put in place, including
the dates of transactions, a clear statement of the source of the funds (immediate and ultimate), reasons
for obtaining the funds, how the funds were or will be applied (the purpose of the funding) and the
repayment terms.
•
A description of the business (including the type of business, details of the specific business, details
regarding the management team and external market conditions) and the plans of the principal trading
operations (including the business strategy).
•
Copies of relevant funding agreements and other relevant documents, for example, board minutes
relevant to the funding, South African Reserve Bank applications and approvals, copies of related
funding applications (for example, where part of the funding is received from an offshore bank).
•
An analysis of the financial strategy of the business, including how capital is allocated and the
relationship between capital and cash flows from operations and any changes relating to the funding
transactions; and details regarding principal cash flows and the sources of repayment of debt.
•
A group structure covering all relevant companies and clearly setting out any changes to the structure
taking place over the course of the funding transactions.
•
Copies of the financial statements or management accounts just before the point in time the funding is
obtained and after the funding transactions.
•
A summary of financial forecasts which are contemporaneous with the funding transactions in question,
projected as far as is meaningful in relation to the period of the funding transactions, including a clear
picture of the expected levels of interest cover, gearing or other relevant measures over the forecast
period.
•
An analysis supporting the borrower’s view of the extent to which the connected party (or supported)
debt is considered to be arm’s length.
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Companies have to declare adjustments in their annual tax returns and report them separately as transferpricing adjustments. Taxpayers must further disclose the value of cross-border international related party and
third party transactions as well as the value of domestic related party transactions. A transactional approach
was taken to managing all related party transactions as the most common related party transactions e.g.
sale of goods, interest received/receivable, royalties/license fees received/receivable, admin fees received/
receivable etc. have to be accounted for in separate fields. A risk-based audit approach was adopted in
selecting potential non-compliant cases for audit.
In selecting cases transactions in which the Debt: EBITDA ratio of the South African taxpayer exceeds 3:1
is also scrutinised. The ratio is not a safe harbour and does not preclude a taxpayer who is within the range
of the abovementioned ratio from being audited. It is accepted that the ratio may vary in different industries
and according to the creditworthiness of the particular taxpayer. Accordingly, the ratio may not be indicative
of what constitutes an arm’s length position for a particular taxpayer or industry; the ratio is merely used as a
potential risk identifier.
Where an arm’s length relationship cannot be demonstrated, the transfer pricing adjustments will give rise to
an additional assessment.
The penalty, additional tax and offence provisions applicable in the event of default or comission in the completion
of the tax return or evasion of taxation are contained in the Tax Administration Act and also apply to default,
evasion or omission relating to transfer pricing. The Act does not impose specific penalties in respect of non-arm’s
length pricing practices. Up to 200% of unpaid tax for material non-disclosure and tax evasion may be imposed.
Sections 89bis and 89quat of the Income Tax Act provides for interest on the underpayment of tax and will
also apply if the underpayment of tax results from non-compliance with section 31 of the Act. Interest is
charged on any amount of underpaid tax at the prescribed rate (currently 9%).
An advance agreement process is not currently available in South Africa.
The “business profits” and “associated enterprises” articles in the tax treaties South Africa concluded with
other countries do not indicate priorities as to the methods to be used to determine the attribution of profits
or an arm’s length price. Therefore, the Commissioner holds the view that the treaties do not restrict or limit
the application of Section 31 of the Act, regardless of the method selected to determine an arm’s length
consideration. The view is taken that no inconsistency exists between domestic law and the tax treaties, as
both embody the arm’s length principle.
Although South Africa’s treaties generally incorporate mechanisms for adjustments, the wording of the
relevant article in the treaties may not oblige South Africa to make a corresponding adjustment in all cases.
Decisions of the South African Revenue Services are subject to objection and appeal.
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South Korea
1. Statutory rules
•
ADJUSTMENT OF INTERNATIONAL TAXES ACT(Amended by Act No.9914, Jan. 1, 2010)
•
ENFORCEMENT DECREE OF THE ADJUSTMENT OF INTERNATIONAL TAXES ACT (Amended by
Presidential Decree No. 22040, Feb. 18, 2010)
Korea is a member of the OECD. The Korean transfer pricing regulations are largely based on the OECD
Guidelines.
The term “foreign related party” means a nonresident, foreign corporation or his/her or its foreign business
place, which has a ‘special relationship’ with a resident, domestic corporation or domestic business place.
The term “special relationship” means a relationship falling under any of the following items, and the detailed
criteria there on shall be prescribed:
1. A relationship in which either party to a transaction owns directly or indirectly 50 percent or more of the
voting shares of the other party;
2. A relationship between both parties to a transaction, in cases where a third party owns directly or
indirectly 50 percent or more of the irrespective voting share;
3. A relationship in which parties to a transaction have common interests through an investment in capital,
a transaction of goods or service, a grant of loan, etc. and either party to a transaction has a power to
actually make a decision on the business policy of the other party;
4. A relationship between both parties to a transaction, in cases where the parties to the transaction have
common interests through an investment in capital, a transaction of goods or service, a grant of loan,
etc. and a third party has a power to actually make a decision on the business policies of both parties.
The arm’s length price shall be calculated by the most reasonable method from among those falling under
any of the following subparagraphs: Provided, That the method under subparagraphs (4) through (6) shall be
limited to the case where the arm’s length price may not be computed by the methods under subparagraphs
(1) through (3):
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1. Method with a comparable third party’s price: A method with regard to a trade price between the
independent unrelated parties in a trade situation similar to the relevant trade, as the arm’s length price in
the international trade between a resident and a foreign related party.
2. Method with a resale price: Where a resident and a foreign related party trade the asset, and then the
purchaser of the relevant asset, who is one party to such trade, resells it to the unrelated parties, a
method with regard to the amount computed by deducting the amount viewable as normal profits of the
purchaser from such is the sale price, as the arm’s length price.
3. Cost plus method: A method with regard to the price computed by adding the amount viewable as
normal profits of the seller of the asset or the service provider to the cost incurred in the course of
production or sale of the assets or provision of service, as the arm’s length price in the international trade
between a resident and a foreign related party.
4. Profit sharing method: Within international trade between a resident and a foreign related party, the net
trade profits realised by both parties are allocated according to the level of relative contribution between
the parties to trades, which has been measured by the allocation criteria provided in each of the
following items, and then the trade price, which has been computed on the basis of the profits allocated
in such away, shall be deemed the arm’s length price.
a.
Expenses paid or payable for the acquisition of assets, manufacturing, sales, or the provision of
services;
b. Capital expenditures required to develop assets or to provide services, total amount of assets used,
or the level of risks assumed;
c.
Level of importance of skills performed at each phase of transaction;
d. Other measurable rational allocation criteria;
5. Net trade profit ratio method: Method of regarding a trade price calculated on the basis of net trade
profit ratio prescribed in the following items, which has been realised in a trade similar to the trade
concerned between a resident and an unrelated party, as the arm’s length price in the cases of
international trades between a resident and a foreign related party:
a.
Net trade profit ratio to the sales;
b. Net trade profit ratio to the assets;
c.
Net trade profit ratio to sales cost and sales expense;
d. Ratio of gross sales profit to sales expenses;
e.
Other net trade profit ratio deemed to be reasonable;
6. Other methods deemed rational in view of the substance and practice of trades.
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1. A taxpayer engaged in international trades with a foreign related party shall submit a specification of
such international trades as provided by the Ordinance of the Ministry of Strategy and Finance by the
time limit for filing a tax return to the head of the tax office, having jurisdiction over the tax payment place.
2. The tax authorities may request the taxpayer to submit the related data, such as the computing method
of trade prices, etc.
3. Any person in receipt of a request for data submission shall submit the relevant data within 60 days from
the date of receiving the request for data submission.
4. Documents should be prepared and submitted in Korean. English translations may be used only under
permission of the tax authority.
5. There is no specific provision governing Small and Medium sized Enterprises (SMEs).
In general, the National Tax Service (NTS) reviews corporate income tax returns, including transfer-pricing
related documentation, to identify taxpayers who display signs of noncompliance with transfer pricing
regulations. The NTS then requests additional information from suspected taxpayers for review. Taxpayers
who fail to submit transfer-pricing related data required are more likely to be selected for an audit.
1. When a resident makes an agreement with a foreign related party on the allotment of cost, expense, risk
for the joint development or securing of an intangible asset and carries on such joint development, the
tax authorities may adjust the cost, etc. allotted to the resident based on the allotted arm’s length cost
to determine or rectify the taxable base and tax amount of the resident, if the cost, etc. allotted to the
resident is less or more than the allotted amount of the arm’s length cost.
2. When a resident determined shares of participants after reasonably allotting the cost, etc. for an
intangible asset jointly developed with a foreign related party, but the benefits expected from the
jointly developed intangible asset are subsequently changed at a rate equivalent to or more than that
prescribed by Presidential Decree, the tax authorities may determine or rectify the tax base and tax
amount of the resident by adjusting the shares of the participants based on the expected benefits as
changed.
3. Penalties include a underreporting penalty (10% of Corporate Income Tax assessed) and a nonreporting penalty (10.95% per annum). On top of these penalties and taxes assessed, a residential surtax
(10%) is also imposed.
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1. A resident may, when he/she intends to apply the arm’s length price computation method to the taxable
years for a specific period, file an application for approval to the Commissioner of the NTS not later than
the end of the first taxable year for a specific period in which he/she intends to apply the arm’s length
price computation method.
2. The Commissioner of the NTS may, when a resident applies for approval for the arm’s length price
computation method, grant approval for such method, if agreed with the competent authority of the
Contracting State through mutual agreement procedures.
3. A resident can file an application for approval for the retroactive application of the arm´s length
price computation method for the taxable year before the period is subject to the application.The
Commissioner of the NTS may grant approval for such a retroactive application unless the period for
exclusion from the assessment of national taxes has expired.
4. Where the arm’s length price computation method is approved, a resident shall submit a report
containing the arm’s length price computed according to it, procedures of computation, etc. to the
Commissioner of the NTS.
The ADJUSTMENT OF INTERNATIONAL TAXES ACT and the accompanying PRESIDENTIAL
ENFORCEMENT DECREE contain detailed information about mutual agreement procedures, which
taxpayers may use to seek relief from double taxation.
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Spain
1.Introduction
The purpose of Law 36/2006 of 29 November, on measures for the prevention of tax fraud, was to adapt
Spanish legislation on transfer pricing, establishing a new framework in relation to related transactions. The
legislation establishes the obligation of the taxpayer to assess transactions between related persons or
entities at market price.
RD 1794/2008 of 3 November issued an amendment on corporate income tax, with the intention of
approximating tax rules to accounting after the divergences generated by the publication of RD 1514/2007,
through which the General Accounting Plan that regulates transactions between companies in the same
group was approved, and in which the obligation to assess them at fair value is established.
As a result of the obligation described in the previous paragraph, we believe it is imperative that the
entities analyse and, if necessary, modify the transfer prices established for related transactions as well as
proceeding to document them, as required by the regulations.
January 2014
2. Internal applicable law
1.1 Law 36/2006, of 29 November, on measures for the prevention of tax fraud
1.2 Royal Legislative Decree 4/2004, of 5 March, approving the revised text of the law on corporate income
tax (Article 16)
1.3 Royal Decree 1777/2004, of 30 July, approving the Corporate Income Tax Regulation
2.1 Other legislation to consider
Article 42 of the Commercial Code
3. The OECD criteria
The arm’s length principle of transfer pricing or, what amounts to the same, the open market value is the
element that governs and guides Spanish legislation, and therefore contains the same approaches and
recommendations as the OECD.
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4. Definition of group and/or related companies
•
An entity and its participating shareholders (if this linkage is defined in terms of the partner and
shareholder relationship, participation should be equal to 5%, while fixed at 1% in the case of securities
admitted for trading on a regulated market).
•
An entity or its Board of Directors.
•
An entity and the spouses or persons related by kinship in direct or collateral line to the third degree of
consanguinity.
•
Two entities belonging to a group.
•
An entity and the partners and shareholders of another entity, where both entities belong to a group.
•
An entity and the directors or managers of another, where both belong to a group.
•
An entity and the spouses or persons related by kinship in a direct or collateral line by blood or affinity to
the third degree of the participating members of another entity (excluding its directors and managers), if
both belong to a group.
•
An entity and another entity in which the first has an indirect interest in at least 25% of the share capital
or own funds
•
Two entities in which the same members, shareholders or their spouses, or persons related by kinship
in direct or collateral line by consanguinity or affinity to the third degree, have an interest, directly or
indirectly, in at least 25% of the share capital or own funds.
•
An entity in Spanish territory and its permanent establishments abroad.
•
A non-resident entity in Spanish territory and its permanent establishments in that territory.
•
Two entities that are part of a group who pay taxes as groups of cooperative societies.
5. Valuation method
To determine the fair market value, one of the methods referred to in Article 16.4 of the law on corporate
income tax (TRLIS, its acronym in Spanish) shall be applied.
Fair market value shall be understood as the value which would have been agreed between independent
persons or entities under conditions of free competition.
a. Comparable uncontrolled price method, which consists in comparing the price of the good or service
in a transaction between persons or related entities to the price of an identical good or service or one
with similar characteristics in a transaction between independent persons or entities in comparable
circumstances, making, if necessary, the required adjustments to obtain the equivalence and consider
the particularities of the transaction.
b. Cost Plus method, which is obtained by adding to the purchase price or production cost of the good
or service the usual margin in identical or similar transactions with independent persons or entities, or
failing that, the margin that independent persons or entities apply to comparable transactions, making
the required adjustment (if necessary) to obtain the equivalence and consider the particularities of the
transaction.
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c. Resale price minus method, which is the result of subtracting from the sales price of a good or service,
the margin that the reseller applies in identical or similar transactions with independent persons or
entities or, failing that, the margin that independent persons or entities apply to comparable transactions,
making, if necessary, the required adjustments to obtain the equivalence and consider the particularities
of the transaction.
If, due to complexity or to the information relating to the transactions, the above methods cannot be
appropriately implemented, the following methods may be applied to determine the market value of the
transaction:
a. Profit split method: Each person or related entity that carries out one or several transactions jointly is
allocated part of the common profit derived from such transaction or transactions, based on criteria
that adequately reflect the conditions that independent persons or entities would sign under similar
circumstances.
b. Transactional net margin method: The net profit, calculated on the basis of costs, sales or most
appropriate profit in accordance with the characteristics of the transactions, that the taxpayer or, where
appropriate, third parties would have obtained in identical or similar transactions between unrelated
parties is attributed to the transactions carried out with a person or related entity, making the required
adjustments (if necessary) to obtain the equivalence and consider the particularities of the transactions.
To determine the valuation method to be used, the TRLIS intends to carry out a comparability analysis, that
is to compare the circumstances that exist between transactions and related entities to the circumstances
between independent persons or entities.
6. Required documentation
Determination of fair market value (COMPARABILITY ANALYSIS).
•
Whether the transfer prices between related transactions are comparable to prices between independent
persons or entities shall be determined. To check if they are comparable, the following shall be taken into
account:
•
The specific characteristics of the good or services.
•
Any other circumstance relevant to each case, such as trade strategies.
•
An analysis of the functions undertaken by the parties in connection with the analysed transactions shall
be conducted, identifying the risks assumed and considering, if any, assets used.
•
The contractual terms from which, where appropriate, the transactions derive, taking into account the
RESPONSIBILITIES, RISKS AND BENEFITS assumed by each contracting party.
•
The characteristics of the markets in which the goods are delivered or services are rendered or other
factors that may affect related transactions.
A correct comparability analysis and having enough information on comparable transactions constitute the
appropriate tools for determining the optimal valuation method.
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6.1. Documentation obligation of the GROUP to which the taxpayer belongs. Art.19 RIS
a. General description of the organisational, legal and operational structure of the group, as well as any
relevant change in this structure.
b. Identification of different entities which, as part of the group, carry out linked transactions as they affect,
directly or indirectly, the transactions carried out by the tax obligor.
c. General description of the nature, amounts and flows of related transactions between entities of the
group as they affect, directly or indirectly, the transactions carried out by the tax obligor.
d. General description of the functions performed and risks assumed by the different entities of the group
as they affect, directly or indirectly, the transactions carried out by the tax obligor, including changes from
the previous tax period or liquidation.
e. An account of the ownership of patents, trademarks, trade names and other intangible assets as
they affect, directly or indirectly, the transactions carried out by the tax obligor and the amount of the
considerations arising from their use.
f.
A description of the group’s policy on transfer pricing that includes the price fixing method or methods
adopted by the group, justifying its compliance with the arm’s length principle.
g. The list of cost-sharing agreements and contracts for services between entities of the group, as they
directly or indirectly affect the transactions carried out by the tax obligor.
h. The list of previous price agreements or mutual agreement procedures concluded or under way relating
to the entities of the group when they directly or indirectly affect, the transactions carried out by the tax
obligor.
i.
The statement of the group or, if failing to file this, an equivalent annual report.
However, these documentation requirements shall not be required for groups whose immediately preceding
tax period has not exceeded 8 million euros.
6.2. Documentation requirements for taxpayers are
a. Name and surnames or full trade name or company name, legal address and tax identification number
of the taxpayer and persons or entities with which the transaction is conducted, as well as detailed
description of its nature, characteristics and amount. If the transaction is carried out with residents in
tax havens, the persons and, when appropriate, administrators of the entities involved in the transaction
must be identified.
b. Comparability analysis under the terms described in Article 16.2 of the Corporate Income Tax Regulation
(RIS, its acronym in Spanish).
c. An explanation regarding the selection of the valuation method chosen, including a description of the
rationale behind the choice of the method, as well as its manner of application, and the explanation of
the value or range of values derived from it.
d. Criteria for allocating expenses for services provided jointly in favour of several persons or related entities,
as well as the relevant agreements and cost-sharing agreements referred to in Article 17 of the RIS.
e. Any other information the taxpayer has available to determine the valuation of related transactions, as
well as shareholder agreements signed with other partners.
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Documentation requirements relating to the tax obligor shall be payable in full unless one of the parties
involved is an entity of small size or an individual and in both cases does not involve transactions
with persons or entities resident in countries or territories considered tax havens. In such cases, the
documentation requirements are not as extensive and are established depending on the specific type of
transaction carried out.
7. Sanctioning regime
The following constitutes a tax violation:
•
Not providing or providing incomplete or inaccurate documentation or false information (even if there is
value adjustment).
•
The market value resulting from the documentation is not the declared value.
Sanction
If valuation adjustment does not apply, a fine of 1,500 euros for each item and 15,000 euros per set of
missing, inaccurate or false data will be imposed.
If valuation adjustment applies, a proportionate fine of 15% of the adjusted amount will be impsed (even if
there is no economic damage).
8. Advance Pricing Arrangements
Advanced Pricing arrangements are prior arrangements defined by the OECD, which in advance of
controlled transactions determines, an appropriate set of criteria for determining transfer pricing for those
transactions over a fixed period of time. A prior agreement on transfer pricing can be unilateral, involving
a single administration and a single or multilateral taxpayer, involving the agreement of two or more tax
administrations.
Therefore, Advance Pricing Arrangements are a model for international termination of the verification
procedure of the market value in transactions. In other words, this is a prior agreement, reached between
the tax authorities and taxpayers, which determines in advance, and for a longer or shorter term, the market
price applicable to each transaction.
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Sweden
1. Statutory rules
a.Law
•
Inkomstskattelagen (Income Tax Act) Chapter 14, Section 19, regarding the arm´s length principle.
•
Skatteförfarandelagen (Tax Procedure Act) Chapter 39, Sections 15-16, regarding the documentation
requirements.
•
Lag (2009:1289) om prissättningsbesked vid internationella transaktioner (Advance Pricing Agreements
Act).
b. Statutory ordinances/regulations
•
Swedish Tax Agency´s regulations on documentation of transfer pricing between associated enterprises
(SKVFS 2007:1 or the English translation SKVFS 2007:01B), Sections 1-15.
•
Swedish Tax Agency´s Guidelines (SKV M 2007:25).
•
Förordning (2009:1295) om prissättningsbesked vid internationella transaktioner (Advanced Pricing
Agreements Regarding International Transactions Regulation).
c. Important administrative circulars
•
Various information on the Swedish Tax Agency´s website.
The current guidelines are those adopted by OECD in 1995, with subsequent amendments, published in the
report Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
3. Defintion of related party
Companies with cross-border transactions with related companies are affected by these rules and
regulations.
•
Companies with ownership of more than 50 percent in a foreign related company must be able to have
documentation regarding their international transactions.
•
Foreign companies with ownership of more than 50 percent in a Swedish company also must be able to
have documentation regarding their international transactions.
•
The same rules are valid in situations such as transactions within non real company groups or
transactions between sister companies. However, permanent establishments are not included by the
rules regarding their contacts with its own main office.
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4. Defintion of related party
The arm´s length principle is the fundamental principle. The principle means that commercial and financial
transactions shall be based on the same terms and conditions that would have been applied between
independent enterprises. It is the conditions of the markets that shall affect the pricing methods. This requires
that different transactions are comparable with each other. There is no real priority among different methods.
The arm´s length principle is also a near comparable to the OECD Transfer Pricing Guidelines.
The comparability analysis shall (according to Section 9 in Swedish Tax Agency´s regulations on
documentation of transfer pricing between associated enterprises, SKVFS 2007:01B) “include a description
of the internal and the external comparable transactions that have been used and that have been the basis
for their selection. The analysis shall be made considering the comparability factors and any adjustments
which have been made to improve the comparability. In cases where comparable transactions have not been
identified, the documentation shall contain a description of how the enterprise has arrived at the conclusion
that the transfer pricing method is in accordance with the arm´s length principle.”
Special transfer pricing documentation requirements exist in the Swedish rules and regulations. These
requirements according to Sections 3-6 in SKVFS 2007:01B are as follows.
“The documentation shall contain a description of the legal structure of the enterprise group, showing the
ownership structure and the manner in which the enterprise controls, or is controlled by, other enterprises
in the enterprise group. The business structure and the business from an operational perspective of the
enterprise and the enterprise group shall be presented. Major changes in the enterprise and the enterprise
group during the financial year shall be described.” (Section 3)
“The description shall contain financial information that is relevant to the application of the chosen transfer
pricing method for the financial year with regard to the enterprise and the other enterprises within the
enterprise group with which the enterprise has had transactions during the financial year. The description
shall also include information on industry-specific conditions and the business model which has affected the
enterprise´s pricing of intra-group transactions.” (Section 4)
“The documentation shall include a description of the enterprise´s intra-group transactions in relation to
each of the enterprises with which the transactions have occurred, either transaction by transaction or in an
aggregated form. The transactions shall be described based on the comparability factors and the description
shall, inter alia, include information on:
•
type of transaction,
•
value,
•
volume,
•
other contractual terms and conditions,
•
any connection with other transactions which is significant to the pricing, and
•
costs incurred, allocation key and mark-up attributable to cost-based, indirect charging for intra-group
services provided.” (Section 5)
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“The documentation shall also include the agreements which are important for the pricing or a compilation
of such agreements. Enterprises with a large number of agreements may instead present a description of
the various main categories of agreements which the enterprise has entered into and the transfer pricing
methodology applied in those agreements.
Agreements and other arrangement governing matters related to transfer pricing which the enterprise
or another enterprise within the enterprise group has entered into with any authority and which affect
the enterprise shall be reported. The documentation shall also contain advance rulings and other similar
notifications from abroad regarding matters of transfer pricing which affect the enterprise.” (Section 6)
Internal documents and information which are part of the documentation shall exist for each financial year.
The enterprise shall have implemented routines to make it possible, following a request by the Swedish
Tax Agency, to put together a documentation for each financial year in accordance with these regulations.”
(Section 11)
For intra-group transactions of minor value the documentation may contain a simplified report compared
to the information required in the Tax Procedures Act Chapter 39, Sections 15-16. ““Transactions of minor
value” refers to transactions with goods where the total market value does not exceed 630 “base amounts”
per enterprise within the enterprise group as well as other transactions where the total market value does not
exceed 125 “base amounts” per enterprise within the enterprise group.” (Section 10) One “base amount” in
2014 = SEK 44 400.
The simplified report documentation shall according to the annex in SKVFS 2007:01B contain the following
information:
•
the legal structure of the enterprise group as well as the business structure and the business of the
enterprise and the enterprise group,
•
the counterparty in the intra-group transaction and information about its business,
•
the transactions in question, stating the type, scope and value,
•
the method used to establish that the transfer pricing of the intra-group transactions is on an arm´s
length basis, and
•
any comparable transactions that may have been used.
There are no special thresholds for small and middlesised enterprises. It is the actual transactions that
determine if a simplified report can be made or not. The possibility of submitting a simplified report does not
apply to transactions which involve sale and purchase of intangible property.
“The documentation shall be in Swedish, Danish, Norwegian or English.” (Section 13)
“The documentation shall be filed for 10 years after the end of the calendar year in which the financial year
came to an end.” (Section 14)
“Documentation prepared according to EU TPD, and which satisfies all the terms and conditions stated
therein, shall be regarded as having been prepared in accordance with these regulations.” (Section 15) [EU
TPD = the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European
Union]
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An audit means that the Swedish Tax Agency has decided to examine the information that has been
provided as the basis for e.g. a tax return. The purpose of an audit is to ensure that the taxpayer will pay
exactly the amount of tax that the taxpayer is obliged to pay by law. It is solely the Swedish Tax Agency that
may decide on an audit on the basis of the Swedish Tax Procedure Act. The audit may include one or more
items of information covering a period ranging from one month to several years.
The documentation shall be submitted to the Swedish Tax Agency at the request of the Agency. The
documentation shall normally not be attached with the annual income tax return. Such a request from
the Agency “may be made after the date on which the tax return for the financial year concerned shall be
submitted. The enterprise shall be given the opportunity to comply with such a request within a reasonable
period of time. The documentation may be submitted as a hard copy or electronically.” (Section 12)
The Swedish Tax Agency ends the audit procedure by drawing up an audit memorandum that the taxpayer
is served with afterwards. This details the time period that was examined and what this examination revealed.
If the Agency proposes changing the tax as a result of the audit, the taxpayer will be permitted to leave
comments on the audit memorandum. Normally requested documentation shall be provided to the Agency
within 30 days.
The Swedish Tax Agency is continuing to work with a big focus and a high priority on transfer pricing
cases. Special focus areas are financial transactions, acquisition transactions, goods and services trading,
restructurings and profit/loss allocations and arrangements between enterprises and between group
enterprises. The Swedish Tax Agency has experts working preferably with transfer pricing cases based at the
offices in Stockholm, Gothenburg and Malmö.
If transfer pricing is not conform with the general tax rules or if incorrect information results in an incorrect tax
base, the Swedish tax Agency can decide on adjustments.
If an adjustment, also due to transfer pricing cases, is sustained, general tax penalties result, i.e. as most
as 40 percent of the additional tax depending on the adjustment. Penalties might be avoided if complete
required documentation could be delivered together with the annual income tax return. The penalty also
depends on what kind of adjustment that has been made and regarding what kind of tax the adjustment
refers to. Final tax has a higher penalty than other taxes. Additional tax and penalties become relevant if
incorrect information have resulted in withholding tax.
Since 1st January 2010, the Swedish Tax Agency is the competent authority when applying for Advanced
Pricing Agreements (APA). An APA is based on an agreement between two or several countries and is
about how different international transactions shall be made and comprises normally three to five fiscal
years. For this agreement to be announced it is necessary that Sweden has tax treaties with the country or
those countries it relates. The agreement shall also include provisions that enable interchange of information
between the countries. The APA is used when deciding the base for state and local income tax.
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An APA may not concern a non-complicated question, it may not relate to transactions minor and the
transaction must be independently evaluated. An APA is normally binding for the Agency under comparable
conditions.
All traders, now taxable or in the future expected taxable, both Swedish and foreign with permanent
establishment in Sweden according to the Income Tax Act, can apply for an APA.
The fee for applying is per country SEK 150 000 for a new APA, SEK 125 000 for a renewal with
amendments and SEK 100 000 for a renewal without amendments.
Only bilateral or multilateral APAs are possible, not unilateral APAs.
In Section 5 in the Advanced Pricing Agreements Regarding International Transactions Regulation all
data requirements for the application are listed. Those requirements are parallel to the transfer pricing
methodology.
The Swedish Tax Agency is also the competent authority regarding negotiations with other countries to
prevent double taxation or taxation contrary to current tax treaties.
When a Swedish taxpayer feels that the taxation has resulted in double taxation or is against current tax
treaties the taxpayer can ask for help at the Swedish Tax Agency. The taxpayer also can reply for respite with
paying the suspected double tax during the case processing time.
During the process the Swedish Tax Agency, together with the corresponding Agency in the other country,
tries to find a solution by a mutual agreement. The taxpayer is not a part of these negotiations, but still has
an opportunity to comment the disguised details. During the process the taxpayer also can be prompted for
incoming with completed information.
This help from the Swedish Tax Agency is free of charge.
It is to advantage to apply and ask for this help as early as possible, to avoid a prescription in the other
country. According to several of Sweden´s tax treaties (normally based on the OECD model treaties) an
application must be made within three years from the time when the taxpayer was informed about the action
resulting in taxation in conflict with the tax treaties. It is always important to do a careful study of the tax
treaties in every special situation.
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Switzerland
1. Statutory rule
a.Law
Specific transfer pricing legislations are not available within the Swiss legislation. According to Article 58 of
the Federal Direct Tax Act as well as Article 24 of the Harmonisation of the Cantonal Tax Laws Act expenses
are required to be commercially justified to be tax deductible. Based on these Articles, tax authorities are
allowed to make profit adjustments in case of deviations from the arm’s length principle.
b. Circular Letters
•
Circular Letter No. 6 of 6 June 1997:
•
Safe-harbor regulations regarding intercompany loans and thin capitalisation.
•
Circular Letter No. 4 of 19 March 2004:
•
Taxation of intra-group service companies at cost plus.
Switzerland as a OECD founding member has accepted the initial as well as all the updated OECD
Guidelines on transfer pricing without reservation.
No specific definition of related party and there are no formal related party disclosure requirements.This
results in Switzerland incuring the OECD´s defintion of „associated enterprises.
The OECD Transfer Pricing Guidelines are generally accepted in Switzerland.
For intra-group service companies the cost plus method is preferable (Circular Letter No. 4 of 19 March
2004).
There are no documentation requirements.
However, if tax authorities question applied transfer prices, the taxpayer has to demonstrate that the transfer
prices were based on sound economic and commercial reasoning on an arm’s length basis. Therefore it is
advisable to prepare supporting documents.
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Transfer prices may be audited during an ordinary assessment of the tax payer by the tax authorities. The tax
authorities may ask for additional information within 30 days (extension of deadline is usually granted).
There are no specific penalties regarding transfer pricing and general penalties are applicable:
•
Tax on profit adjustment has to be paid with interest charge for late payment. Adjustments may qualify as
a deemed profit distribution subject to Swiss withholding tax (up to 53.8%).
•
Penalty rules generally only apply in case of fraud or negligence. Penalties are usually in the range of
100% to 300% of the tax payable on the profit adjustment. Penalties are not tax deductible.
There are no formal APA procedures. However, transfer prices could be agreed based on a tax ruling. Tax
rulings are very common in Switzerland and may be granted within 2 to 6 weeks. The tax authorities do not
levy a charge for granting tax rulings.
In case of a transfer pricing related income adjustment, the taxpayer has the possibility to appeal against the
transfer pricing related income adjustment within the national appeal procedure.
Once the adjustment is final, the taxpayer could apply for a Mutual Agreement Procedure (MAP) according
to Art. 25 of OECD Model Convention to prevent double taxation in case of transfer pricing related income
adjustment.
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Turkey
1. Statutory rules
Legislation relating to transfer pricing in Turkey is included in Article 13 of the Corporate Tax Law numbered
5520 and published in the Official Gazette No. 26205 dated June 21, 2006. The effective date of the
provisions relating to transfer pricing is 01.01.2007.
In addition, parallel regulations were introduced to the regulations in the Corporate Tax Law for transfer
pricing with the amendment by Law No. 5615 published in the Official Gazette No. 26483 dated April 4,
2007 in paragraph 5 of Article 45 of Income Tax Law No. 193.
Statutory Ordinances and Notification About the Distribution of Concealed Gain through Serial No. 1 Transfer
Pricing (Published on 18/11/2007).
Notification About the Distribution of Concealed Gain Through Serial No. 2 Transfer Pricing (Published on
22/04/2008).
Decree of the Council of Ministers About the Distribution of Concealed Gain Through Transfer Pricing
(Published on 06/12/2007).
Decree of the Council of Ministers About the Distribution of Concealed Gain Through Transfer Pricing
(Published on 13/04/2008).
Circular No. 1 About the Distribution of Concealed Gain Through Transfer Pricing (Published on 24/04/2008).
“Guide on “Mutual Agreement Procedure” and “Guide on Transfer Pricing” Included in the Agreements to
Avoid Double Taxation” were published respectively on August 1, 2009 and November 23, 2010 by the
Revenue Administration.
Turkey has not adapted OECD regulations to its domestic legislation.
Related person has been arranged in paragraph 2 of Article 13 of Corporate Tax Law No. 5520. Accordingly:
Related person may be
Own partners of the Institutions
•
Real or legal persons. The capital and dividend rate is not important.
Real person or entity to which institutions or partners are related
•
Real person to which an institution is related: real person in private companies to which institutions are
partners.
•
The institution to which the institution is related is defined as: associated.
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•
Real person to whom the institution partner is related are: real persons who have social and economic
relations with the institution partner. And other persons in private companies to which the partner is a
partner.
•
Institutions of which the partner is directly or indirectly a partner.
•
Real person or institutions to which they are affiliated directly or indirectly with respect to the
administration of the institution or partners, control or capital.
•
In terms of administration: general managers, senior managers who are not affiliated to the partnership.
These people may have a effect on the institution’s decisions.
•
In terms of audit: the institution’s auditors.
•
Real person or entities that are under dominance.
•
Real person or entity with continuous commercial relations, buying and/or selling continuously from/to
the same person.
•
Constantly borrowing from the same person, etc.
Spouses of partners
•
They must have legal bonds of matrimony. This refers to the kinship of the partners or spouses in the
direct line, kinship in the collateral line and affinity by marriage including third degree, mother, father,
grandmother, grandfather, children and grandchildren.
All transactions made with partners in countries or regions declared by the Council of Ministers are
considered to be made with related people under the condition that considering the fact whether the tax
system of the country where the income earned provides a taxation possibility at the same level with the
taxing capacity created by the Turkish tax system and the exchange of information.
Accepted transfer pricing methods and priority
Taxpayers shall determine the prices or costs which they will apply in their transactions with related parties by
using the most appropriate method to the nature of the process.
Unless it is possible to use either the comparable price method, cost plus method, or resale price method
(called the traditional transaction method to equivalent price), the taxpayer can use other methods in
accordance with the nature of the processes. Other methods are the profit split method and the transactional
net margin method which are transactional profit methods. These methods are based on profits arising from
transactions between the related parties.
However, in case it is not possible to determine the price or costs within the framework of the equivalence
principle of the transactional profit method, the taxpayer can use a method which the taxpayer can determine
on his own from which he believes to get the most accurate results.
The most commonly used methods are the comparable price method and the cost plus method.
The comparability analysis is performed for comparing the conditions of purchase of goods, service purchase
or sales between the related parties under the conditions of transactions of a similar nature between the
parties who do not have any relationship. However, because of the difficulties in finding external precedent
data in Turkey, the comparability analysis cannot be used in an efficient manner.
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According to Turkish transfer pricing legislation, two types of certification are required for this issue. Firstly,
the corporate income tax payers are required to complete the “Form for Transfer Pricing, Controlled Foreign
Corporation and Concealed Capital” regarding goods or service purchases or sale transactions made with
related parties within an accounting period, and they are required to submit this form to the registered tax
office in the annex of the corporate tax return.
Secondly, the annual transfer pricing report has to be made available from the date of the tax declaration.
All corporate taxpayers who have transactions with related parties are required to prepare a annual transfer
pricing report. Accordingly, they are required to prepare reports for:
•
Taxpayers registered to the Large Taxpayer Office for domestic and overseas transactions with the
related parties and for the transactions with the related parties in free zones.
•
Other corporate taxpayers for overseas transactions with related parties, and for the transactions with
related parties in the free zones
•
Corporate taxpayers operating in the free zones for domestic transactions with related parties.
All purchases and sales of goods, services and intangible rights that took place with related parties are
covered in the report. Records, tables and documents of accounting for prices or costs determined in
accordance with the equivalence principle are required to be stored as evidencing documents. Thus, as
these accountancies and documents are the most important factors explaining the selection reasons of
the method, the documents of all accountancies and transactions for the selected method and for the
implementation of this method should be kept and stored in detail.
The submission of reports and attachments must be in Turkish.
Revenue Administration primarily audits the taxpayers of the Large Taxpayer Office, the taxpayers operating
in the free zones and the taxpayers who have overseas operations. After giving corporate tax returns, the
administration requests the annual transfer pricing report and its annexes prepared by the taxpayers in this
context with a formal petition. The relevant documents are required to be submitted within 15 to 30 days
from the date of notification and additional time may be provided if necessary. Generally, examination is
performed considering the limitation period of 5 years.
Revenue Administration checks the transfer pricing transactions by means of making a cross examination
of the Form For Transfer Pricing, Controlled Foreign Corporation and Concealed Capital completed by the
Corporate Taxpayers and attached to the Corporate Tax returns.
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In case enterprise owners and institutions perform concealed profit distribution through complete or partly
transfer pricing by selling or purchasing goods or services in price or costs determined to be contrary to
the equivalence principle with the related parties, the penalty provisions of Tax Procedural Law No. 213 are
applied.
•
Only corporate taxpayers can apply for APA (Advance Pricing Agreement). Taxpayers are required to
apply for APA to the Transfer Pricing and Evaluation Department under the Head of Department of
Revenue Management of the Administration. Taxpayers can apply for APA to the Administration for three
years at most.
•
Basic information and documents to be submitted to the Administration by the taxpayers applying for
advance pricing agreement are as follows:
Written application
•
All information including undertaken functions, risks owned, and assets used,
•
Information and justifications for critical assumptions (explanations, analyses and other studies for
conditions and assumptions constituting the basis for proposed transfer pricing method and for the
selection and implementation of this method),
•
Information for ownership of intangible assets, and received or paid royalty,
•
If different accounting standards and methods are used by the related parties, information about them,
•
Product price lists for the accounting period in which the application date is included,
•
Production costs for the accounting period in which the application date is included,
•
Inter-company pricing policy applied to the transactions between related parties,
•
Invoice, receipts and similar documents as well as the amount of the transactions performed with the
related and unrelated parties during the accounting period in which the application date is included,
•
Financial statements, samples of income or corporate tax returns, samples of contracts related to foreign
operation for the last three years of related parties,
•
Financial data and related documents of the last three years supporting the proposed transfer pricing
method,
•
In the case if there are two or more comparable transactions, specified equivalent price range and the
method used for determining this range,
•
Other documents necessary for determining the equivalent price.
•
Administration may request for additional information and documents from the taxpayer, if deemed
necessary. In case of the relevant information and documents are written in foreign languages, it is
required to submit Turkish translation of these documents.
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•
Taxpayers are requested to pay an application fee during the APA process. Taxpayers can forward a
written application after paying the application fee (43.869,35 TL for the year 2013).
•
Taxpayers may request the renewal of an existing agreement. In this case, the taxpayer must apply to
the administration at least 9 months before the expiry of the agreement. As a result of the examination of
the application, if the administration decides that the conditions and assumptions specified in the current
agreement are on-going, and the detected method meets the equivalence principle, the administration
may accept the current agreement to continue during one more period including the same conditions,
assumptions and method of the current agreement.
•
The taxpayer applying for agreement may request for unilateral, bilateral or multilateral APA. Unilateral
APA refers to the agreement signed only between the taxpayer and the administration; bilateral APA
refers to the agreement signed between the taxpayer, the Administration and the Tax Administration
of another country; and multilateral APA refers to the agreement signed between the taxpayer, the
Administration and the Tax Administration of multiple foreign countries. The administration may evaluate
the request for bilateral or multilateral APA within the scope of the agreements provided that there is an
agreement on avoidance of double taxation with the relevant country or countries.
It can be evaluated within the framework of this agreement, provided that there is an agreement on
avoidance of double taxation.
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United Kingdom
1. Statutory rules
a.Law
Ss146 – 217 (Part 4) Taxation (International and Other Provisions) Act 2010 (hereafter TIOPA)
b. Detailed Regulations
•
Statement of Practice 2/10 on Advance Pricing Agreements
•
Statement of Practice 1/11 on Transfer Pricing, Mutual Agreement and Arbitration
•
Statement of Practice 1/12 on Thin Capitalisation
Extensive guidance on transfer pricing generally is available from HM Revenue and Customs’ (HMRC)
operational manual the International Manual at paragraphs INTM410000 – INTM489000 http://www.hmrc.
gov.uk/manuals/intmanual/INTM410000.htm
Extensive guidance on thin capitalisation is also available from HMRC’s operational manual the International
Manual at paragraphs INTM510000 – INTM524080 http://www.hmrc.gov.uk/manuals/intmanual/
INTM510000.htm
d.Scope
UK transfer pricing rules apply to all “persons” so individuals and partnerships are within their scope as well
as companies. They do not though apply to entities that, together with their associates qualify as small or
medium-sized, as defined in the Annex to the European Commission Recommendation 2003/361/EC of 6
May 2003 as slightly modified. Broadly,
•
a small enterprise is a business with fewer than 50 employees and either turnover or assets of less than
€10 million, and
•
a medium-sized enterprise is a business with fewer than 250 employees and either turnover of less than
€50 million or assets of less than €43 million.
There are four main exceptions to this SME relief; the transfer pricing rules will be applied to small and
medium sized enterprises where:
a. a business has transactions with or provisions which include a related business in a territory with which
the UK does not have a double tax treaty with a non-discrimination article, often referred to as a “tax
haven”, or
b. the enterprise elects for the exemption not to apply, such election being irrevocable, or
c.
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some or all of the entity’s transactions are dealt with under the patent box rules and HMRC gives notice
requiring that company to increase profits or reduce losses on an arm’s length basis, or
d. in respect of a medium-sized enterprise only, HMRC gives notice requiring the company to increase
profits or reduce losses on an arm’s length basis. HMRC have made clear this power will only be used in
exceptional circumstances.
S164 TIOPA provides that UK legislation is to be construed in a manner that best secures consistency with:
•
the expression of the arm’s length principle in Article 9 of the OECD Model Tax Convention on Income
and on Capital (`Article 9`) and
•
the guidance in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations approved on 22 July 2010 [or such subsequent material as is approved by HM Treasury]
(the `OECD Guidelines`).
In HMRC’s view, this provides a principle for interpreting UK law, but does not permit the OECD Guidelines to
override the legislation.
The OECD guidelines are thus adopted, though there are limited exceptions for oil and gas trades and for the
treatment of exchange differences on debt instruments and derivative contracts.
The European Commission has adopted a Code of Conduct on transfer pricing documentation to standardise
the documentation that multinational companies of different member states must provide to their respective tax
authorities (see the European Commission Press Release IP/06/850 of 28 June 2006). Businesses who intend
to follow the EU Code of Conduct for documentation are invited to inform HMRC of this.
S148 TIOPA requires that the question of who is a related person be evaluated at the time of the relevant
transaction and throughout the period of six months prior.
A related person is then:
a.
one of the affected persons who was directly or indirectly participating in the management, control or
capital of the other, or
b. the same person or persons was or were directly or indirectly participating in the management, control
or capital of each of the affected persons.
A person directly participates in the management, control or capital of another person at a particular time if
and only if the other person is a body corporate or partnership which that person controls.
A person indirectly participates in the management, control or capital of another person at a particular time
if either:
•
The person either would be taken to be participating directly if rights and powers held by others
connected to him (including future rights and powers) were attributed to him, or
•
He is one of a number of ‘major participants’ in the other person’s enterprise (being a body corporate or
partnership). He will be a major participant if he is one of two persons who control that other enterprise,
each of whom has at least 40% of the holdings, giving that control (again after attribution of connected
rights and powers as above).
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This provision is aimed at joint venture arrangements where the owners aim to divert profit overseas for
their mutual benefit. The rule applies only to transactions involving the joint venture entity, not transactions
between the owners, unless they themselves are under common control.
Where however the transaction being examined relates to financing arrangements, the definition of related
person is extended to include situations where a number of parties could act together to control the
enterprise.
4. Acceptable transfer pricing methods and priority
HMRC’s operational manual states:
“Interpretation of transfer pricing legislation must be consistent with Article 9 (the ‘Associated Enterprises
Article’) of the OECD Model Tax Convention and in accordance with the Transfer Pricing Guidelines.”
Despite the reference to Article 9, HMRC will apply the same principles to any transaction, regardless
whether the counterparty belongs in a country with which the UK has a double tax treaty, or not.
The overarching premise is that profits for tax purposes should be based on the principle that the price
between connected parties should be the same as would have been charged between unconnected parties.
Reliance is placed on the paragraphs in the OECD Guidelines on methodology to determine how to arrive at
the arm’s length price. The five methods for reaching the arm’s length price there identified can be divided
into traditional transactional methods and transactional profit methods:
Traditional transaction methods
•
Comparable uncontrolled price (CUP)
•
Resale minus
•
Cost plus
Transactional profit methods
•
Profit split
•
Transactional net margin method (TNMM)
Paragraph 2.9 of the Guidelines does though countenance the use of ‘other methods’ that are not described
in the Guidelines provided that they establish prices which satisfy the arm’s length principle. Such ‘other
methods’ could therefore be acceptable to HMRC.
The most appropriate method will vary. The 1995 Guidelines expressed a strict hierarchy of methods with
the Comparable Uncontrolled Profits method being the preferred method and transactional profit methods
being termed methods of ‘last resort’. The 2010 Guidelines retain a so-called ‘natural hierarchy’ – expressing
a preference for traditional transaction methods over transactional profit methods where both can be applied
in an equally reliable manner and, similarly, a preference for the Comparable Uncontrolled Price method over
others – but place emphasis on use of the most appropriate method for a particular case (paragraphs 2.2
and 2.3).
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HMRC’s operational manual continues:
“Although no absolute hierarchy exists within the OECD guidance, it is generally accepted that a comparable
uncontrolled price (CUP) is the most effective way of assessing the arm’s length price. When reviewing a
transfer pricing report it is worth considering whether sufficient efforts have been made to identify a CUP.
“In particular a CUP may be available from transactions that a group has with third parties, such as
distributors in territories where the group does not have an affiliate. Whether a true CUP exists will be
dependent upon a full understanding of the affiliated business and an equal understanding of the CUP, which
is often difficult to establish from available information.”
UK law does not prescribe the detailed form of documentation that is required. HMRC’s operational
guidance refers its officials to Chapter V of the OECD Guidelines for recommendations about transfer pricing
documentation.
HMRC has made clear it does not want businesses to suffer disproportionate compliance costs so
enterprises should prepare and retain such documentation as is reasonable given the nature, size and
complexity (or otherwise) of their business or of the relevant transaction (or series of transactions) but which
adequately demonstrates that their transfer pricing meets the arm’s length standard. Taxpayers are required
to self-assess accurately and may be called upon by HMRC to justify their transfer prices and the amount of
income, profits or losses returned for tax purposes in the event of an enquiry. What is regarded as adequate
documentation is determined on an individual basis.
HMRC’s operational guidance continues:
“Evidence to demonstrate an “arm’s length” result would need to be made available to HMRC in response
to a legitimate and reasonable request in relation to a tax return that had been made. Although the business
would need to base relevant figures in its tax return on appropriate evidence, the material recording that
evidence would not necessarily exist at the time the return was made in a form that could be made available
to HMRC. Indeed, if HMRC never made a request, the evidence might never exist in such a form.”
HMRC will also accept documents prepared in accordance with the EU’s Code of Conduct on transfer
pricing documentation, which was issued in 2006. Businesses who intend to follow the EU Code of Conduct
are invited to inform HMRC of this.
HMRC’s taxpayer-facing staff are organised into teams tasked with handling different categories of taxpayer.
As the transfer pricing rules mainly apply to “large” enterprises, it is only in HMRC’s “Large Compliance” units
that transfer pricing enquiries are initiated.
Transfer pricing risk assessments are normally undertaken by case teams headed by their respective
Customer Relationship Managers. In order to promote consistency in this area however, HMRC also maintain
a Transfer Pricing Group whose involvement is mandatory. HMRC have also adopted a strict governance
protocol comprising three stages:
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i.
Making sure the selection of a case is appropriate,
ii. Ensuring there is effective progress in a case, and
iii. Reaching the appropriate conclusion in a case
As soon as an HMRC case team identifies a transfer pricing issue that may necessitate an enquiry, a Transfer
Pricing Specialist is assigned to the case. HMRC then carry out more detailed risk assessment work to
determine whether an enquiry is justified. If the conclusion of that exercise is that an enquiry is justified, then
a business case is prepared for submission to the appropriate Transfer Pricing Panel. The business case is a
narrative document which sets out the case background, the risk assessment work undertaken, the reasons
for and against enquiry and any special features. Critically, it also includes the recommendation of the
Customer Relationship Manager which may be for opening, not opening or deferring an enquiry.
HMRC’s operational guidance prevents a transfer pricing enquiry being opened (or any approach made
to a taxpayer that might be construed as the opening of a transfer pricing enquiry) without the approval of
HMRC’s Transfer Pricing Panel or Board.
In cases where no enquiry is opened, whether because the risk assessment concludes one is not justified,
or for any other reason, HMRC’s guidance records it is good practice to record the results of the research
carried out and the conclusion reached to inform future risk assessment. It is therefore recommended that a
pro forma business case be prepared and left on file.
Once HMRC’s Transfer Pricing Panel has given its approval, the formal enquiry notice is issued. HMRC
endeavour to reach a conclusion to such enquiries no later than 18 months after opening the enquiry for
simple cases or no later than 36 months in particularly complex and high risk cases. HMRC acknowledges
this timeframe is tight and can only be achieved by active management with an action plan. There is no
template for such plans but, as a minimum, an action plan should set out the expected timelines for:a. Detailed fact-finding, during which information and supporting documentation is obtained and interim
analysis carried out
b. The period of time within which findings will be reviewed, arguments developed and views exchanged
with the business
c. The date by which HMRC expects to be in a position to prepare a Resolution Review and the planned
date of settlement of the transfer pricing enquiry (which should normally be no later than 18 months after
opening the enquiry for simple cases or no later than 36 months in particularly complex and high risk
cases).
HMRC protocols require a formal review of action plan and progress at regular intervals of a minimum of
every six months.
On completion of the second phase of the enquiry, the case is referred to HMRC’s Transfer Pricing Group to
decide how the case should be settled. The referral is by means of a written review of the case comprising:
•
a narrative summary of the case setting out the positions of the parties
•
a recommendation by the Customer Relationship Manager as to how the case should be settled to
include the tax effect of the proposal
•
a statement about culpability
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HMRC’s Transfer Pricing Group then decide whether the case team should
•
close the case without adjustment
•
settle by negotiation or
•
proceed to litigation
Where the decision is to negotiate, the review body will authorise the case team/Transfer Pricing Specialist to
settle according to clearly defined parameters.
If settlement proves elusive, the case must be referred back to the appropriate review body with further
recommendations.
7. Income estimation, surcharges and penalties
The same rules apply to transfer pricing matters in the UK as to other direct tax matters. The UK’s system for
dealing with delinquent taxpayers is largely behaviourally based
If HMRC receive a tax return which they believe contains errors or omissions, the procedure requires that an
enquiry be opened. If HMRC do not receive a return, or the time period allowed for opening an enquiry has
passed and HMRC obtain information that suggests further amounts are taxable, they can raise a “discovery”
assessment –
•
within four years of the accounting date, for ordinary errors
•
within six years of the accounting date, for careless errors
•
within twenty years of the accounting date, for deliberate errors
The amount assessed must be the tax officer’s best estimate of the discovered items.
In addition to interest on late paid tax, HMRC have a wide range of penalty sanctions available. In practice,
only two are likely to be relevant in transfer pricing cases:
•
fixed penalty of £3,000 for failure to provide HMRC with information when required to do so; this penalty
will be charged where a taxpayer cannot provide adequate transfer pricing documentation when
requested to do so by HMRC
•
proportionate penalty depending on the degree of culpability
•
non-culpable adjustment – 10% (minimum)
•
careless – 30%
•
deliberate but not concealed – 70%
•
deliberate and concealed – 100%
In the case of a transfer pricing adjustment, these penalties are applied to the adjustment, not to the tax. So
that if the adjustment agreed is £100,000 but no actual tax becomes payable because the company has
sufficient brought forward losses to cover the adjustment, there is still a penalty of the minimum £10,000.
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8. Advance pricing agreements
Where HMRC receive applications for treaty relief, these are approved where the criteria are met (these differ
from treaty to treaty) but HMRC will not consider the transfer pricing implications at that time. The detail of
the application will only be considered as part of the assessment of the applicant’s tax return.
Where certainty is required and the matter relates to financing, the taxpayer has the option of entering into
a thin capitalisation agreement. For other transfer pricing issues, a taxpayer may apply to HMRC for an
advance pricing agreement (‘APA’) for the resolution of any one or more of the following matters
i.
attribution of income to a branch, agency or permanent establishment through which the taxpayer has
been or will be carrying on a trade in the UK
ii. attribution of income to any permanent establishment through which the taxpayer has been or will be
carrying on a business wherever situated
iii. Whether income is to be taken for any purpose to be income arising outside the UK
iv. The treatment for tax purposes of any provision operating between the taxpayer and any ‘associate’ of his;
that is a person who directly or indirectly participates in the management, control or capital of the other
v. The relationship between hydrocarbon and other trade(s) carried on by the same enterprise
An APA may relate to some or all the transfer pricing issues of the business in question but thin capitalisation
issues will generally be dealt with via a separate Advance Thin Capitalisation Agreement.
An APA may be unilateral, bilateral or multilateral, involving multiple jurisdictions. HMRC recommends that
applicants first make informal contact to discuss the taxpayer’s plans before they present a formal application
– the ‘expression of interest process’. This ensures unsuitable applications are taken no further and also
allows HMRC to outline a realistic timetable for agreeing the APA.
Where HMRC and the taxpayer have entered into an APA in relation to a period, then any questions relating to
the matters covered are determined in accordance with the APA rather than by reference to the legislation that
might otherwise have applied. This of course is subject to the taxpayer’s strict compliance with the terms of the
APA and HMRC’s right to revoke it where it can be shown it was granted based on incorrect information.
Whilst the process of obtaining an APA in the UK can be lengthy and expensive, HMRC acknowledge it is the
only way to obtain legal certainty that HMRC will accept the arm’s length price of a transaction.
Whilst there is machinery to allow appeals against transfer pricing decisions, the whole of HMRC’s approach
in the field has historically been angled towards only opening cases where the prospects of a successful
outcome are good and for those cases to be taken forward by negotiation and agreement, rather than by
confrontational litigation.
In practice therefore, taxpayers affected by a transfer pricing adjustment will seek relief under the Mutual
Agreement Procedure provided for in the OECD Model Tax Treaty and included in most bilateral treaties.
Where the authorities of the two affected States cannot reach a satisfactory agreement, it will usually be open
to the taxpayer to invoke the Arbitration Convention where both are EU members.
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United States
1. Statutory rules
a.Law
•
U.S. Internal Revenue Code (“IRC”) Section 482
•
IRC Section 6662)
b. Regulations, Rulings and Guidelines
•
United States Treasury Regulations Sections 1.482 and 1.6662
•
The United States Treasury Regulations provide the IRS interpretation of the IRC
•
Revenue Procedure 99-32
•
Election to make self-initiated transfer pricing adjustment after year-end
•
Rev. Proc. 2006-9
•
Procedure for Advance Pricing Agreement (“APA”) requests
•
Rev. Proc. 2006-54
•
Procedure for requesting competent authority assistance under U.S. tax treaties
•
Rev. Proc. 2007-13
•
Identifies services eligible for treatment as specified covered services for the Services Cost Method
(“SCM”)
The Internal Revenue Service (“IRS”) considers U.S. transfer pricing legislation to be consistent with the
OECD Transfer Pricing Guidelines. However, the OECD Guidelines should not be relied on to support transfer
pricing positions in domestic applications. The OECD Guidelines may be used to demonstrate compliance
with international principles to support a bilateral APA or to seek relief from double taxation through
competent authority proceedings.
For transfer pricing purposes, taxpayers are considered related parties when they are “owned or controlled
directly or indirectly by the same interests.” Control may include voting power, the right to appoint the
majority of members of management, and the basis of contractual arrangements, but the language used is
very broad and subject to interpretation. If the IRS judges that two parties are cooperating to shift income for
tax purposes, they will be considered related parties regardless of common ownership.
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The U.S. transfer pricing regulations specify transfer pricing methods for evaluating tangible goods, intangible
property, cost sharing and services transactions. Taxpayers may also apply unspecified methods to evaluate
intercompany transactions in the event that an unspecified method provides the most reliable measure
of the arm’s length price. Consistent with the specified methods, an unspecified method should take into
account the general principle that uncontrolled taxpayers evaluate the terms of a transaction by considering
the realistic alternatives to that transaction, and only enter into a transaction if no alternative is preferable
to it. The U.S. transfer pricing regulations do not specify specific methods to evaluate financial transactions
such as loans or guarantees. According to U.S. Treas. Reg. Sec. 1.482-1(c)(1), the “best method rule” must
be employed to determine the appropriate method to apply to each intercompany transaction. There is no
priority of methods in the U.S. transfer pricing regulations; the best method will be the method that provides
the most reliable measure of an arm’s length result. The best method rule is analogous to the OECD’s “most
appropriate method” approach.
Specified methods for tangible goods transactions
For transactions involving tangible goods, the IRS specifies the Comparable Uncontrolled Price (“CUP”)
method, the Resale Price Method (“RPM”), the Cost Plus Method, the Comparable Profits Method (“CPM”),
and the Profit Split Method (“PSM”). These methods are similar to the CUP, the RPM, the cost plus method,
the Transactional Net Margin Method (“TNMM”), and the PSM in the OECD Guidelines.
Specified methods for intangible property transactions
For transactions involving intangible goods, the IRS specifies the Comparable Uncontrolled Transaction
(“CUT”) method, the CPM, and the PSM. These methods are similar to the CUP, the TNMM, and the PSM in
the OECD Guidelines.
Specified methods for cost sharing transactions
For transactions involving transfers to a cost sharing agreement (“CSA”), or platform contributions, the IRS
specifies the CUT method; the income method, which looks at the difference in profits the non-developing
party expects to realise from the CSA and the profits that it would expect to earn from a ‘‘realistic alternative”;
the acquisition price method, which references the acquisition price of a contemporaneous acquisition of the
same intangible property from an uncontrolled party; the market capitalisation method, which references to
stock market value of that property; and the PSM.
For the ongoing sharing of costs in a CSA, costs should be shared in proportion to each party’s reasonably
anticipated benefits. The selection of the measurement of reasonably anticipated benefits should consider
the unique facts and circumstances of the transaction under analysis. Common methods for measuring
reasonably anticipated benefits include sales, units sold, operating profit, and non-routine profits.
Specified methods for services transactions
For transactions involving services, the IRS specifies the SCM, the Comparable Uncontrolled Services
Price Method (“CUSP”), the Gross Services Margin Method (“GSMM”), the Cost of Services Plus Method
(“CSPM”), the CPM, and the PSM. The CUSP is similar to the CUP, the CSPM to the cost plus method, the
CPM to the TNMM, and the PSM to the PSM in the OECD Guidelines.
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The SCM is an elective method specified in the U.S. transfer pricing regulations that allows the taxpayer to
charge for services at-cost if the services are on the list of “covered services” provided in Rev. Proc. 200713 or if they have a median comparable markup of seven percent or less (“low-margin services”). As an
additional requirement, the covered or low-margin services must not constitute significant contributions to
key competitive advantages, core capabilities, or fundamental business risks.
U.S. taxpayers are required to conduct all transactions in accordance with the arm’s length principle.
Preparing and maintaining contemporaneous documentation that satisfies the requirements of IRC Section
6662-6(d) is the only method other than obtaining an APA to avoid adjustment penalties, and is required for
all taxpayers involved in a CSA per IRC Section 1.482-7(k). Documentation is considered contemporaneous
if it is in existence at the time the tax return is filed.
According to IRC Section 1.6662-6(d), transfer pricing documentation must include the following items in
order to satisfy penalty avoidance requirements:
•
An overview of the business and legal or economic factors that affect pricing;
•
The organisational structure of the business;
•
All documents explicitly required by regulations, such as CSA documents;
•
Description of the pricing method and a best method analysis;
•
Description of alternative methods and why they were not selected;
•
Description of controlled transactions and any internal data used in analysis;
•
Description of comparables used, how comparability was evaluated, and any adjustments made;
•
The economic analysis and projections used to develop pricing;
•
Material data discovered after the close of the tax year but before filing the tax return; and
•
A general index of principal and background documents and a description of the recordkeeping system.
Throughout the course of a tax audit, a taxpayer with cross-border intercompany transactions (which must
be reported on Forms 5471, 5472, and 8865) should expect to undergo some sort of transfer pricing
scrutiny.
A “Transfer Pricing Audit Roadmap” (the “Roadmap”) developed by the IRS is used by IRS transfer pricing
specialists as a general guide through the transfer pricing audit process.
The Roadmap can be viewed at http://www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf.
In the first stage of the audit process laid out in the Roadmap, the “Planning Phase,” the IRS will gather initial
information, such as contemporaneous transfer pricing documentation. If such documentation exists, it must
be supplied by the taxpayer within 30 days of request. In many cases the existence of thorough, logical
documentation that complies with IRC Section 1.6662-6(d) may eliminate the need for further examination.
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In the event that the IRS chooses to proceed with a transfer pricing audit, the next step, the “Execution
Phase,” will begin. The Execution Phase includes further fact finding and gathering by the IRS, and interviews
and discussions will be held for the IRS to better understand the relevant facts and transactions. Follow-up
information likely to be requested includes:
•
Written copies of interview notes;
•
Financial statements;
•
Documents provided to advisors preparing memos;
•
Third-party contracts and agreements;
•
Intercompany agreements with support for terms;
•
Copy of customers ordered by name;
•
Financial forecasts;
•
All marketing and sales activities; and
•
Major competitors.
Throughout the Execution Phase the IRS will decide their position on the controlled transactions under audit.
If they decide to propose an adjustment, they will provide a draft “Notice of Proposed Adjustment” (“NOPA”)
for the taxpayer’s review.
The final stage of the audit, the “Resolution Phase,” will include a presentation of their findings to the
taxpayer, during which they will attempt to resolve any disagreements regarding the way they have presented
the facts, and an issuing of the final NOPA. At this point the taxpayer may agree or disagree with the findings
in the NOPA, and resolution or appeals processes will begin.
According to U.S. Treas. Reg. Section 1.482-1(e)(3), the IRS may adjust the financial results of a controlled
taxpayer if they determine that a controlled transaction does not meet the arm’s length standard. This
adjustment may be any point within the IRS-determined arm’s length range, however the IRS will generally
adjust the taxpayers results to the median.
In the event that a taxpayer does not have proper contemporaneous transfer pricing documentation and the
IRS imposes a transfer pricing adjustment that increases U.S. taxable income, the IRS may impose a penalty
of 20 percent of the underpayment of tax if (i) the initial price charged was 200 percent greater or 50 percent
less than the arm’s length price; or (ii) the net adjustment exceeds the lesser of US$5 million or 10 percent of
gross receipts. If the initial price charged was (i) 400 percent greater or 25 percent less than the arm’s length
price; or (ii) the net adjustment exceeds the lesser of US$20 million or 20 percent of gross receipts, the IRS
may impose a penalty of 40 percent of the underpayment of tax.
178
The IRS, since July 2011, has had an Advance Pricing and Mutual Agreement (“APMA”) office in which APAs
and mutual agreement procedures (“MAPs”) are analysed and negotiated. As a result of this new office, APAs
have been processed with increased efficiency.
Rev. Proc. 2006-9 permits taxpayers to apply for unilateral, bilateral, and multilateral APAs. The standard
term for an APA is five years, though longer terms may be considered.
The fee for filing an APA is $50,000; a routine renewal request is $35,000. For smaller taxpayers, the filing fee
may be reduced to $22,500, for both the original application and subsequent renewals. Smaller taxpayers
may include those with a gross worldwide income of less than $200 million, those with transactions of less
than $50 million annually, or with intangible transactions of less than $10 million annually. To amend either an
APA request or a completed APA, the fee is $10,000.
U.S. taxpayers are generally in a good position to receive relief from double taxation, as the U.S. has
approximately 60 income tax treaties with other nations.
In the event that a taxpayer is informed about adjustments to their taxes owed to the IRS or to a foreign
government that result in double taxation, they may file a request for a MAP. For U.S.-initiated adjustments,
requests for assistance from competent authority may be made as soon as the IRS Notice of Proposed
Adjustment is received. For foreign-initiated adjustments, requests for assistance from competent authority
may be made when the taxpayer believes the request is warranted based on the actions of the tax authority
proposing the adjustment.
Other non-MAP options available to taxpayers include appeals processes, rolling back an APA to include all
years under audit, or simultaneous appeals and competent authority processes.
179
Find out more!
For more information on DFK´s Global Transfer Pricing Services, please visit:
http://www.dfk.com/committees/international-tax-committee/
For a listing of DFK´s members around the world, please visit:
http://www.dfk.com/find-a-member/
For more information about a listing of DFK International´s services, please visit:
http://www.dfk.com/our-services/
180
Disclaimer
The information in this handbook is for general guidance only. It is essential to take professional advice on specific issues and
their impact on any individual or entity. No liability can be accepted for any errors or omission or for any person acting or refraining
from acting on the information provided on this site. DFK International is an association of independent accounting firms and
business advisers. DFK International and its member firms are separate and independent legal entities and operate under local
laws and regulations. DFK International does not provide audit or any professional services to clients. These services are provided
by its member firms. The site includes links to external sites. DFK International is not responsible for the content of these sites.
See more at: http://www.dfk.com/privacy-policy/#sthash.Lg9nseLV.dpuf
www.dfk.com

EU and G20 TRANSFER PRICING HANDBOOK

Transcription

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