Global Transfer Pricing Review - Romania insights
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11 Martie 2011 |
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KPMG ROMÂNIA S.R.L. |
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The long term growth in international trade, combined with the challenging global economic environment and growing fiscal deficits has many governments extremely focused on tax base protection. This has heightened government scrutiny of transfer pricing matters, including issues such as attribution of losses, business restructuring, intellectual property migration, financing transactions and others. Given this focus, transfer pricing rules and regulations are rapidly evolving.
Notably, the Organisation for Economic Co-operation and Development (OECD) Council approved on 22 July 2010 the 2010 version of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The 2010 version is the first substantial revision of the OECD Guidelines since they were first issued in 1995. Notable changes include:
- Adoption of a “most appropriate method” standard for choice of transfer pricing method, replacing the previous hierarchy that preferred “traditional transactional methods” such as the Comparable Uncontrollable Price method over “transaction profit methods” such as the Transactional Net Margin Method;
- Substantial additional guidance on comparability, now appearing in Chapter III; and
- Addition of Chapter IX, containing a detailed discussion of the transfer pricing treatment of business restructurings.
KPMG member firms anticipate significant variations in the pace at which the revised Guidelines will affect local transfer pricing rules and tax authority practices. While some countries may quickly adopt the revisions either formally or in practice, others will study the new text carefully before deciding whether, and to what extent, to adopt the changes made. KPMG member firms will monitor these developments and include them in our updates to the Global Transfer Pricing Review.
Keeping track of current and future reforms will be a challenge. From detailed transfer pricing regulations to strict documentation requirements, sophisticated audit practices to significant penalties for noncompliance, global companies face an increasingly complex environment and are looking for transfer pricing advice in planning, implementation, risk management, documentation and dispute management.
Some of the key elements for companies confidently managing their transfer pricing issues include:
- Planning: developing economically supportable transfer pricing policies and executing forward-looking tax planning with long-term tax benefits.
- Implementation: developing and implementing effective policies, procedures, controls and systems for setting, monitoring, and testing intercompany transactions.
- Compliance and documentation: managing risk within the current environment of detailed transfer pricing regulations, strict documentation requirements, sophisticated audit practices, and significant penalties for noncompliance.
- Controversy: resolving transfer pricing disputes through advance pricing agreements, competent authority negotiations, arbitration, and litigation support.
By bringing together our resources and aligning our knowledge of global developments, KPMG’s Global Transfer Pricing Review is designed to help multi-national companies stay current with transfer pricing rules world-wide.Compiled from information supplied by various KPMG member firms professionals who provide transfer pricing services, the review offers a broad-ranging look at transfer pricing compliance requirements in 64 countries.
Transfer Pricing
A quick introduction to transfer pricing
Transfer pricing refers to the amounts charged in cross-border transactions between affiliated legal entities. These transactions may involve the transfer of tangible goods, intangible property such as technology or brand names, services or financing.
Why transfer pricing is important to tax authorities
Tax authorities are interested in the methods companies use to set their transfer prices since the prices directly impact the taxable profits of each entity involved.
The OECD guidelines and the arm’s-length principle
The OECD
The Organisation for Economic Co-operation and Development (OECD) originally published its report: Transfer Pricing and Multinational Enterprises in 1979 (OECD Guidelines). Since its release in 1979, the OECD Guidelines have been under constant discussion among tax practitioners, and were updated in the 1995 release of the Transfer Pricing Guidelines for Tax Administrations and Multinational Enterprises. However, on 22 July 2010 the OECD made its first substantial revisions to the Guidelines, as published in 1995, by revising Chapters I–III. In addition, the update also added Chapter IX, Report on the Transfer Pricing Aspects of Business Restructurings.
The purpose of the OECD Guidelines is to alleviate double taxation issues by establishing the arm’s-length principle as well as a hierarchy of transfer pricing methodologies for establishing or testing the application of the arm’s-length standard on intercompany pricing. While many tax regimes are aligned with the OECD Guidelines, local characteristics of compliance are not universal.
The arm’s-length principle
As explained by the OECD Guidelines, the arm’s-length principle is an international standard used to determine the appropriate price for a transaction between related parties. This principle requires that related parties price transactions with one another as if those transactions were taking place under exactly the same conditions between unrelated parties on the open market.
Comparability
Tests of compliance with the arm’s-length principle generally involve comparison of related-party transactions to comparable transactions between unrelated parties. The OECD Guidelines state that two transactions are comparable if none of the differences between them materially affect factors under consideration (usually price or profit margin). The OECD Guidelines go on to explain that if there are minor differences between the circumstances surrounding the transactions, it may be possible to use adjustments to eliminate these differences. Features which should be considered when selecting comparable transactions include the characteristics of the goods/services, the functions performed, any contractual terms, economic circumstances surrounding the transactions, and business purpose of the transaction.
Tax authorities and compliance
Monitoring transfer pricing compliance
Many tax authorities require taxpayers to complete contemporaneous documentation containing detailed information about their transactions with related parties. Although specific requirements vary by jurisdiction, most contemporaneous documentation includes:
- A description of related-party transactions;
- An analysis of the functions performed by each party to the transactions;
- An evaluation of the possible transfer pricing methods which could have been used;
- Why the selected transfer pricing method was chosen, an economic review of the arm’s-length nature of intercompany transactions; and
- An assessment of conditions and assumptions which could have affected the pricing analysis.
Different tax authorities require the submission of this documentation at various times. Some may have a mandatory submission date for all taxpayers with related-party transaction magnitude over a certain threshold, while others request submission along with taxpayer’s annual tax fillings. Other tax authorities may only require submission of contemporaneous documentation when specially requested by the authorities, while others may not require contemporaneous documentation at all.
Enforcement mechanisms
Taxpayers that disregard documentation requirements or fail to price transactions with related parties at arm's-length face the possibility of a transfer pricing investigation and/or audit. Audit practices vary by jurisdiction; however, most involve the taxpayer presenting the tax authority with additional documentation and records to support the arm's-length nature of their related-party transactions. If the tax authority determines that a taxpayer's pricing scheme is unsuitable, additional tax interest and/or penalties may be levied on the adjustments.
Alternative resolution solutions to transfer pricing disputes
The best way to deal with a transfer pricing dispute is to avoid it in the first place. However, depending on the tax authorities involved, the following methods of "Alternative Dispute Resolution" may be used to reduce the risk of a transfer pricing dispute if and when it occurs.
Advance pricing agreements
An advance pricing agreement (APA) is a formal ruling between one or more tax authorities and the taxpayer. APAs address the selected transfer pricing methodology to be used in pricing specified related-party transactions over a defined period of time. Taxpayers benefit from APAs because they reduce An advance pricing agreement (APA) is a formal ruling between one or more tax authorities and the taxpayer. APAs address the selected transfer pricing methodology to be used in pricing specified related-party transactions over a defined period of time. Taxpayers benefit from APAs because they reduce
Mutual agreement procedures
If an adjustment controversy cannot be avoided, a mutual agreement procedure (MAP) can be helpful in resolving international tax disputes between multiple jurisdictions and in particular, helping to deal with double taxation issues. As provided in the OECD Guidelines, tax authorities may follow a MAP to resolve double taxation issues. These procedures, however, are only performed between tax authorities who are signatories to a tax treaty with each other. Additionally, undergoing a MAP does not guarantee an agreement will be reached, since many of these treaties only require each party to make a reasonable effort towards reaching an agreement.
