1. Who is legally bound to prepare a transfer pricing documentation file?

(I) Large taxpayers performing annual transactions with all affiliates related parties in amounts greater than or equal to any of the following thresholds:  200,000 EUR, excluding VAT, for interest received / paid for financial services;  250,000 EUR, excluding VAT, for services received / rendered;  350,000 EUR, excluding VAT, for purchases / sales of tangible or intangible goods should prepare the transfer pricing documentation file Annually (starting with the transactions carried out in 2016), within the legal deadline for submitting annual tax returns (currently March 25th for the taxpayers reporting on a fiscal year coinciding with the calendar year)

(II) Large taxpayers which do not fulfill the criteria (I), as well as small and medium taxpayers performing annual transactions with all related parties in amounts greater than or equal to any of the following thresholds:  50,000 EUR, excluding VAT, for interest received / paid for financial services;  50,000 EUR, excluding VAT for services received / rendered;  100,000 EUR, excluding VAT, for purchases / sales of tangible or intangible goods have to prepare the TP file only at the request of the tax authorities in the case of a tax audit.

(III) For the Taxpayers which do not fall into any of the categories above, the TP file is not required. However, during a tax audit, this category of taxpayers should be able to provide documents that attest to the compliance with the arm's length principle. The documentation should be prepared according to the provisions of the general accounting and tax regulations.

More details, here. 

2. When must a transfer pricing documentation file be submitted?

Taxpayers type (I): No later than 10 calendar days from the request of the authorities, but not earlier than 10 days after the legal deadline for preparing the file. The request can occur not only in case of a tax audit but also in other situations (e.g. during an unannounced tax audit).

Taxpayers (II): Within 30-60 calendar days from the date of the request. The deadline can be extended once, at the written request of the taxpayer, for a period of maximum 30 calendar days.

3. What are the steps to be taken in preparing a transfer pricing documentation file?

Four major steps must be taken in preparing a transfer pricing documentation file as follows:

  • prepare the descriptive sections of the transfer pricing documentation file. Such sections must include background information on the group and the relevant local company (e.g. financial information, key customers and competitors, business strategy, legal organization etc.);
  • prepare the industrial analysis that should include descriptive analysis of all activities the taxpayer is involved in, regardless of the principal activity. Industrial analysis should emphasize definition and classification of the each activity, market conditions, description of the factors affecting the price determination and definition of the business risks related to the each activity;
  • carry on the functional analysis aimed at identifying the functional and risk profiles of the company for which the transfer pricing documentation file is prepared, i.e. identifying the functions performed, the risks assumed and the assets used by the company as part of its business;
  • describe the transactions between the company and its related parties involving an identification of all types of transactions conducted between the company and its related parties (including the values thereof), an analysis of the economic context surrounding such transactions, the analysis of the contractual terms and conditions agreed by parties etc.;
  • economic analysis – this is the specific section of a transfer pricing documentation file that involves an analysis of the transfer pricing methodology used for each category of inter-company transaction, the selection of the most suitable transfer pricing method given the specific nature of each transaction and the application of such method in order to test the arm's length nature of the prices charged in the relevant transaction. This step may also involve preparation of comparability / benchmarking studies using specialized databases (e.g. Amadeus, RoyaltyStat etc.).

4. How long does is usually take to prepare a transfer pricing documentation file?

In practice, it would takes anywhere between two weeks and three months to prepare a transfer pricing documentation file.

The key factors that may affect the period required to prepare a transfer pricing documentation file are as follows:

  • number of transactions to be documented;
  • number of financial years for which the intended transfer pricing documentation file is prepared;
  • number of benchmarking studies to be performed;
  • availability of group-wide documentation that could be used as a starting point for the preparation of the local documentation.

Therefore, the reparation of a transfer pricing documentation file involves the determination of a working strategy that may proceed from a review of the related party transactions and the materiality thereof during a given financial year, followed by a most effective capitalization of the group-wide available information (as included in the master file).

5. What is more appropriate - prepare one transfer pricing documentation file for the whole period subject to inspection or prepare one stand-alone file for each such financial year?

In the absence of any clarifying legislative provisions, the decision to prepare one transfer pricing documentation file for the whole period subject to inspection or one stand-alone file for each such financial year lies with the taxpayer. In practice, we have chosen both ways and both choices were acceptable to the tax authorities.

A single transfer pricing documentation file should be advisedly prepared where taxpayer carried on the same identifiable types of inter-company transactions during the inspected period, and where both the functional and risk profiles of the audited related entity and the transfer pricing methodology remained unchanged during the audit’s period. Moreover, such approach is also recommendable where the taxpayer has no transfer price documentation file already available for a given financial year.

Where types of inter-company transactions and transfer pricing methodologies are different from one financial year to the next one, stand-alone transfer pricing documentation files should be prepared for each audited financial year. Such approach is also recommendable where the taxpayer has already prepared a transfer pricing documentation file for a given financial year, with such file to be used as basis for the transfer pricing documentation file dealing with the other financial years subject to tax inspection.

4. What are the most frequent mistakes in preparing a transfer pricing documentation file?

Our experience shows us that errors in preparing a transfer pricing documentation file occur as a result of either a failure to be aware of/understand the existing legislation, of an insignificant experience on the part of the study prepare in transfer pricing matters.

The most frequent of such errors include:

  • failure to include in the transfer pricing documentation file all information required by law (Order 442/2016);
  • failure to understand the differences between various transfer pricing methods, which further results in erroneously selecting and applying a transfer pricing method for a specific transaction;
  • failure to properly comprehend a company’s functional and risk profiles;
  • erroneous preparation of comparability / benchmarking studies (e.g. inclusion in the final sample of comparable companies of entities who are members of the same group themselves);
  • failure to understand the specifics of the industry where the company under review is active;
  • failure to include in the transfer pricing documentation file of all inter-company transactions entities; or
  • providing insufficient or irrelevant data, which may result in requests of further information from tax authorities.