Walking through the Transfer Pricing Era
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24 Iunie 2009 |
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BAKER TILLY KLITOU AND PARTNERS SRL |
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Splaiul Independentei, Nr. 52
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As most of the readers are probably aware of, Transfer Pricing is a methodology for determining the market price for transactions between related parties, within a group of companies. Transfer pricing occurs when there are transactions of goods, from raw materials to finished products, or services (e.g. consulting services, technical support, IT, HR, management and not least financing services) among related parties.
The definition of a relationship between two entities that would trigger the application of Article 11 of the Fiscal Code is broad and encompasses legal as well as "de facto" control. The arm’s length principle will be applied where an entity holds, directly or indirectly, at least 25% of the Romanian company's shares or of voting rights in shareholders' meeting. Also be applied where, directly or through intermediary persons, the entity exercises decision-making authority in the Romanian company. If the tax authority is not in a position to prove that one of the entities involved is controlled by the other in the legal sense, it may nevertheless demonstrate the existence of that control by reference to all facts.
Introduced in 1994, Article 11 of the Romanian Tax Code contains the legal basis for applying the arm’s length principle. Under this, the Romanian National Agency for Tax Administration has the right to adjust transactions of an enterprise to an arm’s length price.
The Romanian transfer pricing rules are generally in accordance with the OECD Transfer Pricing Guidelines but it should be noted that the Romanian tax authority has started to formulate its own position on areas where the OECD has not provided any (precise) guidance, such as business restructuring.
Transfer pricing documentation requirements were introduced in gradually since, in February 2008 the Romanian tax authority provided a detailed list of information on the content of transfer pricing documentation.
The Ministry of Finance Order 222/2008 on the content of the transfer pricing documentation file specifies the item needed to be included in a transfer pricing file.
In order to prepare the Transfer Pricing file as requested by the Romanian legislation, the following steps would be followed when preparing this file:
Step 1: Company and functional analysis
The objectives of this step generally would be to:
- Understand the business structure used ;
- Conduct a functional analysis in order to assess the functionality profile of the subject company and its related parties. This will imply interviews with the company management in order to identify the functions performed, risks assumed, assets employed by each related party in relation to the tested transactions;
During this phase it would be analyzed and assessed the level of completeness of any transfer pricing documentation available at the group level that could be used as starting point for drafting the local transfer pricing documentation file.
Step 2: Develop
The objectives of this step would be to:
- Develop a statement of facts to support the functions undertaken, risks borne and assets employed;
- Perform an economic analysis to evaluate the tested transactions undertaken in order to derive the reliable measures of arm’s length results;
- Perform benchmarking studies for the selected transactions by identifying comparable transactions.
The benchmarking study for selected transactions should be performed either on internal comparable transactions,orif no local comparables are found or the set of local comparables is insufficient to allow a reliable determination of the arm's length range, foreign comparables should be taken into account.
Step 3: Deliver
The objective of this step would be to develop transfer pricing documentation for the tested transactions designed to satisfy the local transfer pricing requirements, based on the information established within the first two steps.
As presented above, one of the most import parts of the Transfer Pricing documentation file is the benchmarking study. Basically this is the comparability study made in order to assess the range of other similar transaction and if the documented transaction fall within that range.
We present below such how a benchmarking study should be structured, in order that the reader has an idea on the complexity of the work to be performed when preparing such a document. Each benchmarking study would be different; however this is only a model for this type of document.
