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In Romania, taxpayers should document compliance with arm’s length principle surrounding transfer prices charged in inter-company transactions. Therefore, they must prepare a transfer pricing documentation file subject to the terms and conditions (find here). Failure to present the transfer pricing documentation file means fines: from 12,000 RON to 14,000 RON for companies falling within the category of medium and large taxpayers; and from 2,000 RON to 3,500 RON for the other companies and for the individuals.

But, more than fines and penalties, the real issue is the THE ADJUSTMENT: if tax authorities consider that the prices applied in related-party transactions differ from prices that would be agreed between unrelated entities (do not meet the arm’s length standard), then they may adjust tax base, with important implications on your business:

Cashflow / Predictability: the company uses the money they have today to pay contingent spending from the past (retrospective payments, penalties, income tax). If the company does not have profit, reduction of losses (reduction resulting from the adjustments) translates into smaller amounts of earnings to be deducted during the next years.
There are also situations when transfer prices for goods subject to customs duties were not determined using a method that is accepted by the customs authorities. This being the case, the importer will have to pay additional customs duties as well as any interest or resulting penalties.

Development plans: with fewer resources available the company must postpone or rethink their investment plans.

Performance indicators: adjustments of performance indicators (especially regarding profitability) will affect the image of the company on the stock market (for listed companies) and increae the cost of financing costs required by banks / investors.

Business of the entire group: these transfer pricing adjustments can trigger double taxation (taxation of the same profits on both sides of the transaction). The group should seek an amicable settlement in order to avoid double taxation (on long term, additional costs) and / or an arbitration agreement. At the same time, the group (parent company) must review the transfer pricing policy in relation to all subsidiaries.

Rewards for those who have a good understanding of transfer pricing implications...

Taking a proactive attitude towards transfer pricing (i.e. analyze the intercompany transactions, setting a transfer pricing policy and prepare a solid transfer pricing documentation) could bring major benefits to a business in terms of fiscal protection by ensuring a defendable position in case of a tax audit. Your rule of action should be a consistent transfer pricing policy!

 

Nowadays transfer pricing has become a hot topic for both multinational companies and tax authorities.

Since “the greatest crisis in the last 80 years” the most powerful economies from the world are the first to seek solutions to avoid “base erosion and profit shifting”. Through global exchange of information, new regulations and guidelines give the authorities freedom to “hunt down” intra-group transactions and by default the transfer prices.

Transfer pricing affects the amounts paid as corporate tax – the current economic conditions and the stringent need for resources at the state budget have determined the tax authorities to be more concerned about the topic of transfer pricing. This is also strengthened by the work of OECD regarding the base erosion and profit shifting (referred to as BEPS). Transfer pricing is not an exact science, therefore it is much easier for tax authorities to impose transfer pricing adjustment and recalculation of taxes to be paid from the budget. This is why companies which are part of a group must have strong arguments (organized in the transfer prices file) that intra-group transaction prices are arm’s length and not used for an “artificial” increase of spendings or “artificial” cut of incomes.

Transfer pricing affects cash flow, investment decisions and performance indicators – from a multinational company point of view, transfer pricing can influence cash flow streams (e.g. additional corporate tax imposed by the tax authorities will reduce the resources at hand), investment decisions (e.g. a jurisdiction with frequent changes of the transfer pricing legislation will bring uncertainty for multinational companies that could favor the decision to exit a certain country) and key performance indicators (e.g. additional corporate tax imposed by the tax authorities reduces the profitability a company could offer to its shareholders).

Transfer pricing affects custom value – for example, the customs authorities may not accept the transfer prices declared by a company for goods in customs transit and therefore will impose different price levels for custom valuation purposes. This raises issues as for the same property / goods two different values are allocated for tax purposes.

Transfer pricing can involve revenue or expense adjustments which trigger double taxation – since transactions between two related parties are not subject to the same market forces as transactions between independents, over or under-pricing can affect the allocation of tax bases among the various jurisdictions in which the group operates. By shifting profits from one jurisdiction to another, distorted transfer pricing can expose multinational companies to double taxation if two jurisdictions involved in a cross-border transaction claim taxing rights on the same profit.

Transfer pricing can help an organisation to identify opportunities for business optimisation – transfer pricing analysis involve a deep understanding of how the group’s business works, its key value drivers, and hence could indicate ways of improvement and / or optimization.

Transfer pricing is subject to legal requirements – more and more countries have included transfer pricing in their local legislation imposing fines, penalties, additional tax or other forms of constraint for not complying with the regulations.

Transfer price is the price at which transactions are carried out between companies part of the same group (i.e. related companies or related parties; see Frequently asked questions for the definition of "related companies").

The transactions carried out between related companies must comply with the arm’s length principle, which is at the heart of any transfer pricing analysis. This means that the prices applied in transactions between companies from the same group must be the same with the prices charged by independent companies in comparable economic conditions. Otherwise, profits will not be correctly reflected in the jurisdiction of each related company involved in the transaction.

Transfer pricing is a system of laws and practices used by countries to ensure that goods, services, intellectual property and resources transferred or shared between affiliated companies are appropriately priced based on market conditions. This is important as transfer pricing may inflate profits in low tax jurisdictions and decrease profits in high tax countries – the so called “base erosion and profit shifting” concept.

Transfer pricing and… "arm’s length"

In order to tackle the issues that arise in the transfer pricing area, the OECD has issued guidelines which contain recommendations for multinational companies and tax authorities; OECD international guidelines are based on the arm’s length principle. What is the connection between arm’s length and the requirement that a transfer price between affiliated parties should be similar with the market price for similar transactions?

There’s a simple explanation – when two people are close (affiliates) they tend to hug each other. The TP theory states that these two individuals should act as if they did not know each other (independents) and during a transaction just shake hands and keep each other…at arm’s length.

Video: What transfer pricing is all about?

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Case Studies

Transfer pricing is not an exactly science, as OECD recognized. Many times it could be better understood through the study cases, practical examples to illustrate how the companies can use the legislation and circumstances to protect their tax position and save money. You can find in this section a library of such examples, based on real experience or adapted from the documentation prepared by the official institution (as OECD, EU - joint transfer pricing forum).