The handbook aims to provide guidance to tax authorities, in both developed and developing countries, to evaluate the transfer pricing risk generated by intra-group operations carried out by taxpayers.
The Draft Handbook makes suggestions as to how tax authorities should carry out their risk assessment process to select those taxpayers which will be subjected to transfer pricing audits, based on a red-flag approach. We present below some general information in relation to the provisions of the Draft Handbook on Transfer Pricing Risk Assessment.
“Although Romania is not a member of the OECD, the OECD Transfer Pricing Guideline is the cornerstone for local transfer pricing legislation. Therefore, it can be assumed, that the Romanian tax authorities will take into consideration the Draft Handbook on Transfer Pricing Risk Assessment, as with any technical paper issued by the OECD” says Teodora Alecu, Director in KPMG in Romania, Transfer Pricing Services.
Tax administrations need to identify taxpayers and their intra-group transactions which present a high transfer pricing risk, in an accurate manner and with a high degree of confidence, to reduce expenditure and the allocation of resources.
Signs which tax authorities might look for in deciding whether to audit a company for transfer pricing purposes could include:
· Failure to obtain the profitability that would be expected of similar companies.
· Marketing or procurement companies located outside market countries or countries where manufacturing takes place.
· Transfer or use of intangibles to/for related parties.
· Recording losses for several years in a row.
Large payments of royalties, rental or management fees, or of deductible interest can also have a significant impact on the corporate income reported by a taxpayer and, as such, are usually a red-flag during the assessment process.
On the other hand, the tax authorities can also look for certain signs that a company is likely to have set correct transfer prices, and so decide that carrying out an audit will be less worthwhile. For example, these signs include having significant unrelated minority shareholders, carrying out similar transactions with independent parties or the maintenance of consistent transfer pricing policies within the group across all jurisdictions.
Feedback on the Draft Handbook may be sent to the OECD until 13 September 2013, and the document could then be further amended. “We expect that the Romanian tax authorities will take into account the methodology recommended by the OECD in its local risk assessment process for transfer pricing audits” says Ramona Jurubita, Deputy Head of Tax, KPMG in Romania.
