Practical Approach of Romanian Transfer Pricing Issues

Octombrie 2009

EMILIAN DUCA - Tax Partner BDO CONTI AUDIT S.R.L.

At present, an increasing number of jurisdictions require taxpayers to prepare adequate transfer pricing policies and, consequently, companies have become more experienced in preparation of transfer pricing documentation for potential tax audits. In these circumstances, transfer pricing risk management is becoming an indispensable element of tax strategy of companies operating internationally.

In the last 20 years there was a long period of uncertainty on taxation of transfer pricing when chances for this issue to be fully and unchallenged taken into consideration by Romanian tax authorities were reduced. As a matter of fact, companies with international operations and transactions started to be exposed to transfer pricing audits in Romania during the last year (2008).

 

Romanian transfer pricing legislation

Transfer pricing is already a hot topic for both Romanian tax authorities and taxpayers. The issue of profits' transfer has been and remains actual, although the modern regulations have been recently enforced (2004) by the issuance of Romanian Fiscal Code (Codul fiscal al României) and Fiscal Procedure Code. Indeed, provisions regarding the transfer of profits (transfer pricing restrictions) were included in the initial corporate income tax regulations (Law no. 12/1991 and Government Ordinance no. 70/1994).

At present, national transfer pricing regulations make reference on the application of the "arm's length principle", respectively to the market prices. It should be mentioned that transfer pricing provisions are included mainly in the Romanian Fiscal Code, but Fiscal Procedure Code contains also relevant provisions. These provisions are detailed within secondary legislation - methodological norms and orders of the tax administration.

The specific of transfer pricing consists of the impact of international tax legislation including bilateral conventions for double tax avoidance and prevention of tax evasion, the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration and, of course, the European Union legislation.

Romanian transfer pricing provisions are focused on the observance of the market prices (arm's length principle) in case of transactions taking place between affiliated (non-independent) parties. Although they were rarely used in practice, concepts like "substance over form" and "tax avoidance prevention" are also recognised by the legislation in force.

Relevant provisions for investors

Relevant provisions on transfer pricing are concentrated within the first title of Romanian Fiscal Code. From a practical perspective, the main provisions, relevant when structuring a business in Romania like definition of affiliated parties and deductibility conditions for corporate income tax purposes, should be highlighted.

Affiliated persons

According to the Romanian Fiscal Code, a person is affiliated to another person if their relationship is defined by any of the following situations:

a) a natural person is affiliated to another natural person if they are wife/husband or relatives to the third degree of kinship inclusive. According to the Romanian law, the first degree of kinship includes parents and children and the second one includes grandparents, brothers/sisters and nephews.

b) a natural person is affiliated to a legal person if the natural person holds directly or indirectly (including holdings of affiliated persons), at least 25% of the value/number of shares or voting rights to that legal person or the natural person is effectively controlling the legal person.

c) a legal person is affiliated to another legal person if at least one of the following conditions are met:

• the first legal person holds directly or indirectly (including holdings of affiliated persons), at least 25% of the value/number of shares or voting rights to the other legal person or is effectively controlling the second legal person;
• the second legal person holds directly or indirectly (including holdings of affiliated persons), at least 25% of the value/number of shares or voting rights in the first legal person or is effectively controlling the first legal person;
• a third legal person holds directly or indirectly (including holdings of affiliated persons), at least 25% of the value/number of shares or voting rights in both legal persons.

Although the definition of affiliated persons is not in line with the definition of associated enterprises from the OECD Model Convention, it is reasonable to expect tax authorities to apply the transfer pricing provisions in all cases when transaction conditions would not qualify as transaction between independent parties.

As an additional information, we would like to mention the actual discrepancy between tax, customs and accounting regulations with respect to the minimal holdings which defines affiliated persons (also named related parties) - 25% for tax purposes, 20% for accounting consolidation and 5% in case of customs regulations (WTO - Customs Valuation Code).

Deductibility conditions

The Romanian tax legislation provides for "substance over form" principle which is applicable for any transactions suspected to depart from arm's length principle. The application of this principle by tax authorities has not been consistent in the past, but careful attention shall be paid due to the potential retroactive application (5 years backward).

It is not a secret that the main tax risk area consists of the provision of services between affiliated parties. Thus, the Romanian Fiscal Code provides for specific and cumulative conditions to be met by any supply of services in order to be deductible for corporate tax purpose:

• services shall be actually provided and their supply to be supported by adequate documentation; and
• services shall be needed for the business purpose; and
• services shall be supplied upon written agreements or similar documents.

1

2

3

The tricky lag LUCIAN CROITORU Adviser to the Governor - BANCA NAŢIONALĂ A ROMÂNIEI Lucian Croitoru, Adviser on monetary policy issues to the National Bank of Romania Governor, talks about the NBR’s next moves and explains why the decrease ofthe policy rate hasn’t been reflected into lower interest rates on bank loans. mai mult... The turnaround CRISTIAN SPORIS Secretar de Stat - MINISTERUL ECONOMIEI ŞI FINANŢELOR Cristian Sporis, Secretary of State at the Ministry of Public Finance, in charge with the national treasury and public debt, explains how the state managed to borrow money at the lowest costs in the last seven years and how it turned from a clear market taker into a player with a strong position on the market. mai mult...