Risk management in the field of transfer pricing in the context of fiscal controls

Risk management in the field of transfer pricing in the context of fiscal controls

Risk management in transfer pricing has become a critical issue for Romanian taxpayers in the context of controls by tax authorities in this area.

Thus, a strategic approach to monitoring and mitigating possible controversies in the matter, for example by concluding a Price Advancement Agreement with tax authorities, is essential.

In recent years, the number of controls performed by the Romanian tax authorities in the field of transfer prices has increased significantly.

Romanian taxpayers face intensive examinations of transactions with group companies and the remuneration applied under these arrangements in order to determine by the tax authorities the conformity of these transactions with the market value principle.

Under a transfer pricing control, Romanian taxpayers have to provide comprehensive information on intra-group transactions as well as specific analyzes and price justifications applied in these transactions.

In the context of increased interest from the Romanian tax authorities regarding the transfer prices practiced by multinational companies, as well as the legal differences in transfer pricing between different jurisdictions, Romanian taxpayers have at their disposal an instrument by which they can proactively ensures compliance with the market level of the prices applied in transactions with affiliated companies.

Taxpayers have the option to conclude an Advance Price Agreement ("APA") with the Romanian tax authorities, which requires the prior approval of a transfer pricing methodology for an intra-group arrangement for an initial at 5 years (with possible further extensions).

Validity of the APA in the agreed period is conditional on the compliance of APA terms by the taxpayer, attested by preparing an annual compliance report.

Being an opposed and binding agreement in the relationship with tax authorities, by obtaining an APA, taxpayers can eliminate exposure to potential adjustments in relation to the transfer prices applied in transactions with affiliated companies covered by the APA.

In addition, this tool allows for increased flexibility in determining the remuneration for intra-group transactions, such as production, distribution, service provision and financing agreements.

Taxpayers may choose to obtain a unilateral APA - concluded with the Romanian tax authority or bi / multilateral - involving two or more tax authorities.

It is important to note that a bi / multilateral agreement eliminates the risk that the same item of income / expense will be charged / deducted in two or more tax jurisdictions.

As a matter of fact, the process of obtaining an APA is generally lower (12 months for unilateral APA / 18 months for bi / multilateral APAs) compared to a tax assessment exercise by the tax authorities, accompanied by a dispute settlement subsequent.

At the same time, given the fact that for the transactions covered by APA it is no longer necessary to prepare a transfer pricing file, in the long run, the efforts to document and support the compliance of the transfer prices with the market value principle at the level of the taxpayer are considerably reduced.

Last but not least, the conclusion of an APA has the advantage of improving the efficiency and effectiveness of a company's operations by correctly determining its tax obligations while at the same time reducing the costs and internal or external resources to be allocated to the examination of its tax position under a fiscal control with regard to transfer prices.