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Advance pricing agreements – Increasingly popular with Romanian taxpayers

The increasing interest of the tax authorities in transfer pricing, along with the increased level of costs that multinational enterprises will incur in addressing the expected changes in transfer pricing reporting and documentation requirements, means that taxpayers have to design and implement very efficient strategies in response.

The main strategy which could be contemplated consists of putting together the relevant transfer pricing documentation. This has the advantage of it being prepared in advance of a transfer pricing inspection, but the downside of this option comes in the interactions with the tax authorities during such investigations, as they can often be aggressive in their interpretation of what completeness and fairness of the transfer pricing methods involves.

 

In addition, there is no control over the outcome of transfer pricing inspections. Taxpayers have to assess the costs and the options for response in the event that the tax authorities adjust their transfer prices. Taxpayers also have to evaluate ways of eliminating the double taxation generated by such adjustments.


Another strategy that deals with future transactions and which is currently used to a lesser extent in practice is the advance pricing agreement. The advantage offered by an advance pricing agreement is the possibility of initiating a proactive dialogue with the tax authorities, but even more, it gives taxpayers certainty on their transfer pricing position for a five-year period. The downside of this option may be the effort and time invested in negotiating the agreement, though the investment is not much higher than that needed to prepare transfer pricing documentation. In addition, a fee of between EUR 15,000 – EUR 20,000 needs to be paid for the issuance of an advance pricing agreement.


This article addresses the factors which taxpayers need to consider when designing their strategy for dealing with the above issues.


Increasing numbers of advance pricing agreements being issued
The current international context includes the discussions held at the level of the Organisation for Economic Development and Cooperation (OECD) with respect to base erosion in member and non-member states. These discussions translated into several initiatives which entail a higher transfer pricing administrative burden for taxpayers, along with higher associated costs. At the Romania level, there have been discussions about the introduction of contemporaneous transfer pricing documentation as of 1 January 2016, along with the obligation of additional reporting in line with the OECD Country-by-country initiative. Besides this additional cost, the transfer pricing documentation option leaves taxpayers with uncertainty regarding the results of future transfer pricing inspections.


Under these circumstances, it is expected that advance pricing agreements will become more and more attractive to Romanian taxpayers. Besides the certainty with respect to the transfer prices used in intercompany transactions, an advance pricing agreement allows companies to plan their investments more efficiently.


Main beneficiaries of advance pricing agreements’ strategies
A first category of taxpayers that would benefit from a strategy centred on advance pricing agreements would be companies that operate centralised business models, in which several entities within the group have similar functional and risk profiles. For instance, a typical such business model would be one having at the core of the model an entrepreneur and a series of other entities with limited functions and risks. Obtaining an advance pricing agreement in more countries would definitely bring an advantage from a cost-saving perspective. Moreover, an advance pricing agreement concluded in one tax jurisdiction would facilitate the negotiation process in the other countries.

 

 


Based on the country-by-country reporting obligations proposed at OECD level, but also considering the documentation requirements under Order 222/2008, Romanian taxpayers have to provide the Romanian tax authorities with information concerning advance pricing agreements concluded in other countries. Naturally, the advance pricing agreements obtained in other jurisdictions would be visible at the Romanian tax authorities’ level and may impact on their analysis.


Another category of taxpayers for which a strategy based on advance pricing agreements would be tempting are multinational companies undergoing changes in their business models. Such business restructurings usually entail changes in the transfer pricing policies applied and transfer prices used, which in turn raise the tax authorities’ attention and, consequently, the respective companies face transfer pricing inspections. Adopting a strategy of applying for and obtaining an advance pricing agreement allow such companies to proactively approach the tax authorities, explain the business model restructuring and the changes expected to occur, as well as to bring forward arguments for supporting the proposed transfer pricing policies. This way, lengthy and difficult discussions with tax inspectors during future tax inspections can be avoided.


Unilateral, bilateral or multilateral advance pricing agreements
The Romanian legislation allows taxpayers to seek the issuance of unilateral, bilateral and multilateral advance pricing agreements. A cost-benefit analysis shows the balance in favour of bilateral or multilateral advance pricing agreements. Why? Mainly because the information and analyses that have to be prepared in the application filed in one jurisdiction serve and may be used also in applications filed in other states.


When advance pricing agreements are negotiated with national tax authorities with more highly developed practices, the process can be a very efficient one. In addition, getting an advance pricing agreement in a jurisdiction with a more developed practice would impact on the negotiation process in Romania. At the same time, in the case of bilateral or multilateral advance pricing agreements, tax authorities with less experience would benefit from the knowledge and experience brought by more experienced tax authorities during simultaneous negotiations.


In any event, when a bilateral or multilateral advance pricing agreement is contemplated, the issuing term should also be taken into account, both in Romania and in the state or states where the other party / parties to the agreement is / are tax resident. Under the Romanian legislation, the issuing term for a bilateral or multilateral advance pricing agreement is 18 months, as compared to the 12 months issuing term for a unilateral agreement. These terms are usually higher in practice, although the issuing process at the level of the tax administration has been significantly streamlined in the last two years.


Where taxpayers opt for bilateral or multilateral advance pricing agreement, it is advisable that the process be coordinated centrally within the group, in order to ensure an efficient flow of information to the tax authorities involved and, this way, advance the negotiations process.


Conclusion
Particularly when we discuss complex transactions which could potentially trigger significant transfer pricing adjustments, taxpayers should assess whether obtaining an advance pricing agreement (or more) would represent a way of preventing such adjustments. Opting for an advance pricing agreement means proactivity, an open approach towards the tax administration, which ultimately helps consolidate the relationships with the latter, especially in cases where a history of past tax disputes exists.

 

In conclusion, a coordinated and proactive approach towards transfer pricing in Romania, but also simultaneously in other countries, is advantageous for both taxpayers and tax administrations, so it is expected that such an approach be at the core of the strategy adopted by multinational enterprises. Such a strategy would bring efficiencies in the long run in terms of resources and time. At the same time, however, careful planning is necessary from the taxpayers’ side in order to benefit fully from such an approach.
 

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