Transfer Pricing Report, Between Necessity and Utility

Mihaela Avram

The preparation of the transfer pricing report should not be seen only as a legal requirement imposed on companies which if omitted or containing incomplete information generates fines from the tax inspection team. The file has also an impact on the company’s KPIs, investing and operational decisions, cash flow and tax on profit as it is a management tool often use by top professionals.
 
The transfer pricing report is an instrument of protection to argue that related party transactions have economic substance and were conducted at the market price.
 
The rationale and justification prices in commercial and financial transactions with related parties protects us against transfer pricing adjustments.
 
These transfer pricing adjustment are usually established after the so-called "background checks" performed by tax inspectors, which can be performed on a large number of years, generating besides income tax, additional interest and penalties.
Also we cannot ignore the usefulness of the exception report for managers that are most interested in knowing where to position the prices used in party transactions. Such information is found in the price comparability section which is a fundamental requirement of the preparation of the transfer pricing report.

Legal requirements
 
Along with the entry into force earlier this year of the Fiscal Code and the Fiscal Procedure Code, the preparation of the transfer pricing report becomes mandatory for companies that enter into commercial and financial relations with affiliate entities.
 
The current tax code regulated by Law no.227 / 2015 defines affiliate entities presenting the following cases:
 
  1. A natural person is affiliated with another natural person if they are husband / wife or relatives up to third degree;
  2. A natural person is affiliated with a legal person if the natural person owns, directly or indirectly, including holdings of affiliated persons, a minimum of 25% of the value / number of shares or voting rights of a legal person or if effectively controls the legal person;
  3. A legal person is affiliated with another legal person if at least one of them holds (directly or indirectly, including holdings of affiliates) a minimum of 25% of the value / number of shares or voting rights over the other legal person or if it actually controls that person;
  4. A legal person is affiliated with another legal person if a third party holds (directly or indirectly, including holdings of affiliated persons) a minimum of 25% of the value / number of shares or voting rights overt the other legal entity or if effectively controls that legal entity.
With regards to the transactions that can be done between affiliated parties, these have examples as follows:
·          Inter-group loans
·     Inter-group services (management, consultancy, finance, elaboration etc.)
·          Product delivery
·          Royalties
·          Intangible or tangible assets
 
A. Information about the group:
  1. The organizational structure of the group, legal and operational, including shares, history and financial data relating thereto;
  2. General description of the group's activity, business strategy, including changes in the business strategy compared to the previous fiscal year;
  3. Description and implementation of the application of the transfer pricing methodology in the group, if any;
  4. Overview of transactions between related parties from the European Union:
  1. trading mode;
  2. billing;
  3. the equivalent value of transactions;
  1. General description of the functions and risks taken on by affiliates, including changes in this regard compared with previous year;
  2. Presentation of shareholders of intangible assets within the Group (patent, name, know-how etc.) and royalties paid or received;
  3. Presentation of advance pricing agreements entered into by the taxpayer or by other companies within the group, in relation to it, except those issued by ANAF.
 
B.Information about the tax payer:
  1. Detailed presentation of transactions with related parties:
  • Trading mode;
  • Billing;
  • The equivalent value of the transactions;
        2. Presentation of comparative analysis:
  • The characteristics of goods or services;
  • Functional analysis (functions, risks, assets used, etc.);
  • Contractual terms;
  • Economic circumstances;
  • Specific business strategies;
  • Information on foreign or domestic comparable transactions;
     3. Presentation of affiliates and their permanent establishments involved in these transactions or arrangements;
        4. Description of the method of computing transfer prices and arguments for its selection criteria:
  • If not using traditional methods for determining transfer prices this option will be justified;
  • In all the cases where the method of price comparison is not applied this option will be justified;
        5. Description of other information relevant for the taxpayer.

If in the previous years, according to the regulations contained in the Fiscal Procedure Code, the transfer pricing report was submitted only at the request of the competent fiscal body that normally granted a period of up to three months, however starting this year companies are obliged to submit it at the express request of the tax inspection team.
 
Under current law provided by the Fiscal Procedure Code, the amount of transactions for which the taxpayer is obliged to prepare the transfer pricing folder like the preparation terms, the content and the conditions when it is requested, are approved by order of the President of ANAF.
 
Lacking to prepare and present the transfer pricing report at the request of the competent fiscal body constitutes an offense and is punishable by a fine between 12,000 lei and 14,000 lei for medium and large taxpayers and between 2,000 lei and 3,000 lei for other legal entities.
 
The transfer pricing report, according to the provisions of ANAF Instruction No. 222/2008 must include: