Advance pricing agreements – A solution for avoiding transfer pricing disputes; developments in Romania and other tax jurisdictions
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Noiembrie 2011 |
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NADIA OANEA - Tax Manager – Head of Tax Department
BAKER TILLY KLITOU AND PARTNERS SRL |
Adresa
Splaiul Independentei, Nr. 52
Bucuresti, Sector 5
Telefon
+40-21-315.61.00
Fax
+40-21-315.61.02
Website
www.bakertillyklitou.ro
NADIA OANEA
Tax Manager – Head of Tax Department
BAKER TILLY
A solution for avoiding transfer pricing disputes; developments in Romania and other tax jurisdictions.
Transfer pricing, the price at which goods and services are sold between affiliatedenterprises, is one of the most important international tax issues facing multinationalenterprises. The current global business environment has created issues for groups such as restricted cashflow, decreased earnings and reduced credit availability. However, the recession has triggered certain events (such as significant operational losses being incurred or the shutting down of plants), being taken into consideration by the tax authorities in their risk analysis of the taxpayers. The number of tax audits is therefore likely to increase, in order to collect supplementary revenues for the state budgets.
In order to avoid disputes on transfer pricing with the tax authorities, the multinational companies could apply for obtaining advance pricing agreements (APA) for the envisaged future transactions. Such instrument could prove particularly useful for large volume of future transactions, or for complicated structures that can face the risk of extreme interpretation from the part of tax authorities.
According to OECD, an APA determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparable 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 may be unilateral involving one tax administration and a taxpayer or multilateral involving the agreement of two or more tax administrations.
The APA is designed to alleviate potential transfer pricing disputes regarding whether transfer pricing method used meets the arm’s length standard. The APA process consists of 5 phases: application; due diligence; analysis; discussion and agreement;drafting, reviewing and execution.
The above concept of APA was adopted also in the Romanian tax legislation since 2007.
As such, as per the Romanian Tax Procedure Code, the APA is the administrative act issued by the National Agency for Tax Administration (NAFTA) in view of solving the taxpayer’s request for establishing the conditions and determine the methods to beused during a fixed period of time for the dimensioning of transfer prices, in the case of transactions between related parties.
Although the legislative framework is already implemented, there are not many APAs issued by the Romanian tax authorities. The main issue in applying the APA procedure in Romania, as well as in other tax jurisdictions, is inter-alia the term forobtaining the agreement. The term stipulated by the domestic law for issuing the respective agreement is of 12 months in the case of a unilateral agreement,respectively 18 months in case of a multilateral one. However, the practice from Romania, as well as from countries with more experience in implementing transfer pricing rules and APAs, is of longer periods for obtaining an APA. The tax authorities usually request additional information to clarify the conditions of the envisaged transactions, and such communication takes time and effort from the part of the taxpayers and of the tax authorities as well. The slow communication is one of the main issues claimed by the authorities in motivating the long periods for issuing APAs.
However, the multinational companies would like to speed up the process, as they want to ensure that their transfer prices are not challenged by a future tax inspection. Furthermore, the issuance of an APA for the current transactions, for which the market conditions dramatically changed in the last years, is also desired by the multinational companies. The practice comes in view of sustaining such allegation, given the difficult market conditions despite which some groups of companies still decide to operate just for maintaining their position in their field of activity. As an international organization, Baker Tilly Klitou has taken an interest in pursuing the actions taken by the authorities in various countries, for enhancingtheir efficiency when it comes to dealing with the taxpayer’s queries and demands for carrying out their activities on various markets.
From our knowledge, the period of time for obtaining an APA is the main issue worldwide. For example, in USA, the average time to complete the APA process for any new application in 2010 was 40.7 months. The average time to complete thebilateral process for a bilateral APA renewal was 33.1 months. A new unilateral APA took an average of 26 months for process completion, while the average unilateral renewal required 23.3 months for completion.
A recent initiative in the field of transfer pricing was announced in the USA where, with efforts to improve international operations of the agency and given the fact that transfer pricing continues as one of the largest issues identified by the InternationalRevenue Service (IRS) in audits of multinational corporations, the existing APA Program will shift to a specialized office under the Transfer Pricing Director in the Large Business and International division’s international operation. Also the US Secretary of the Treasury released on March 29th 2011, its annual report regarding the performance of APA Program.
Actions regarding transfer pricing are taken all around the world, for example the Japanese National Tax Agency released an amendment to Japanese taxation regulations on transfer pricing in accordance with the revised OECD Transfer Pricing Guidelines.
All of these actions worldwide come as an understanding of the fact that adopting a common transfer pricing standard serves the dual objective of securing the appropriate tax base in each jurisdiction and avoids double taxation, thereby minimizing conflicts arising between tax administrations and promoting international trade and investment.
Nevertheless, it is still room for improvement in this respect and, thus, it would be advisable for taxpayers wishing to enter APA programs in Romania to be aware of the time spans required in this respect and plan accordingly. Also, if necessary, professional tax assistance from tax consultants with related expertise should be sought.
