Transfer pricing in Romania
Transfer pricing in Romania
Currently transfer pricing is one of the hottest topics on the agenda of the Romanian Tax Authorities, multinational groups of companies but also local groups of companies operating in Romania.
The Romanian Tax Authorities already have a standard procedure whereby they request and analyse the taxpayer’s transfer pricing documentation during general tax audits or VAT reimbursement tax audits.
In cases where the transfer prices are found not to be at arm’s length, the Romanian Tax Authorities have the right to adjust the taxpayers’ revenue and expenses so as to reflect the market value (limited to the statute of limitation period i.e. five years).
The Romanian transfer pricing legislation at a glance
OECD Guidelines treatment from the perspective of Romanian tax and transfer pricing legislation
Although Romania is not a member of the OECD, the Romanian transfer pricing legislation follows the OECD principles and requires that transactions between related parties be carried out at market value.
Moreover, the Romanian transfer pricing legislation includes a direct reference to the OECD Guidelines for Multinational Enterprises whereby in situations not covered by the local transfer pricing legislation, the OECD Guidelines are actually considered to be the legislation.
In addition, the legislation on transfer pricing documentation requirements in Romania also refers to the European Union Code of Conduct on Transfer Pricing Documentation (C176/1 of 28 July 2006) as regards the content of the transfer pricing documentation file.
What is deemed to be a related party and implicitly subject to transfer pricing regime in Romania
According to Law 227 / 2015 regarding the Romanian Tax Code the status of “related party” is conditioned by the existence of at least 25% direct or indirect ownership, existence of a blood relationship up to the third degree, or by the existence of effective control (e.g. through common administrators).
The obligation to prepare a transfer pricing documentation in Romania
Taxpayers undertaking related party transactions (both resident and non-resident) are required to prepare a transfer pricing documentation file.
Large taxpayers undertaking transactions exceeding EUR 200.000 for interest, EUR 250.000 for services and / or EUR 350.000 for goods have to prepare the transfer pricing documentation file on an annual basis for all the intra-group transactions at latest on the date set for submission of the annual corporate income tax return.
Small and medium taxpayers undertaking transactions exceeding EUR 50.000 for interest, EUR 50.000 for services and / or EUR 100.000 for goods have to prepare the transfer pricing documentation file only at the formal request of the Romanian Tax Authorities.
Taxpayers that obtained an Advance Pricing Agreement for specific related party transactions are not required to prepare and submit a transfer pricing documentation file for the periods and transactions covered by the Advance Pricing Agreement.
Penalties for not complying with the transfer pricing documentation requirements in Romania
Not preparing a transfer pricing documentation file or presenting an incomplete file trigger fines which may amount up to RON 27.000 (EUR 6.000) for large taxpayers, up to RON 14.000 (EUR 3.000) for medium taxpayers or up to RON 3.500 (EUR 750) for small taxpayers .
More important, the lack of a transfer pricing documentation file grants to the Romanian Tax Authorities the right to perform transfer pricing adjustments if they consider that the prices applied in related-party transactions do not meet the arm’s length standard.
Deadline for submitting the transfer pricing documentation file to the Romanian Tax Authorities
The deadline to prepare a transfer pricing documentation file is to be set at maximum 60 calendar days from the date of receipt of the formal written request, with the possibility of a single extension with a period of maximum 30 calendar days.
Large taxpayers undertaking transactions exceeding EUR 200.000 for interest, EUR 250.000 for services and / or EUR 350.000 for goods should present the transfer pricing documentation file in maximum 10 calendar days from the request of the Romanian Tax Authorities.
Materiality of the intra-group transactions to be documented
No formal threshold exists. All related-party transactions have to be documented, irrespective of their value, once it has been determined that the taxpayer exceed the transactions thresholds used to evaluate whether it has any obligation to prepare a transfer pricing documentation.
Content of the transfer pricing documentation file
The required content of the transfer pricing documentation file is presented within Romanian Tax Authorities Presidents’ Order 442 / 2016 regarding the content of the transfer pricing documentation file.
The content of the transfer pricing documentation file should largely be in line with the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union (EU TPD) with some differences.
As per Order 442 / 2016, the transfer pricing documentation file in Romania should comprise two main sections, i.e. information on the group section and information on the local company section (including a functional analysis and the economic analysis – i.e. the application of the most appropriate transfer pricing method given the circumstances of each case in order to determine if the transfer prices applied as part of a certain intra-group transaction are consistent with the arm’s length standard).
Language for preparation of the transfer pricing documentation file
The transfer pricing documentation file should be presented to the Romanian Tax Authorities in the Romanian language. If a transfer pricing documentation file exists in any other language (including English), an official translation is required.
Applicable transfer pricing methods
The transfer pricing methods that can be applied as part of the economic analysis are the same with the ones set out by the OECD Guidelines, i.e. the comparable uncontrolled price method, the resale price method, the cost plus method, the profit split method and the transactional net margin method.
Other methods are also accepted by the Romanian Tax Authorities as long as they are properly documented and the taxpayer can prove that none of the conventional transfer pricing method could be applied for that specific transaction.
Arm’s length range
The arm’s length range is considered to be the interquartile range. The transfer pricing adjustments are performed at the median of the interquartile range.
Databases used by the Romanian Tax Authorities
Orbis database for commercial transactions, LoanConnector database for financial transactions and RoyaltyStat for intangibles transactions.
Acceptance of group transfer pricing documentation
Yes, but only if includes all elements specified by the Romanian transfer pricing legislation.
Acceptance of European Union level benchmarking studies
The Romanian Tax Authorities could accept pan-European benchmarking studies, but only provided that a local search is first performed and no local comparables are found.
The Romanian transfer pricing legislation specifically provides that all benchmarking studies must be first prepared at a local level. In case no local comparables are found the geographic criteria can be extended to the European Union level, pan-European level or worldwide level.
Burden of proof
The burden of proof initially stays with the taxpayer. If the taxpayer decides not to prepare a transfer pricing documentation file or the file is incomplete, the burden of proof switches to the local tax authorities, together with the right to perform transfer pricing adjustments (if the case).
Transfer pricing adjustments mechanism
If an incomplete transfer pricing documentation file is presented by the taxpayer or no transfer pricing documentation file is presented, the Romanian Tax Authorities are granted the right to perform transfer pricing adjustments.
The adjustments are made based on the arithmetic mean of the prices charged in 3 similar transactions concluded between related-parties.
In case where the taxpayer presents a benchmarking study, if the results of the taxpayer / profitability achieved by the taxpayer fall outside the inter-quartile range, the adjustment is made to the median derived as part of the benchmarking study.
As regards the adjustments performed in transactions concluded between resident related-parties, a corresponding adjustment mechanism is also available for these specific cases.
Statute of limitations
No specific statute of limitations exists for transfer pricing assessments.
However, general rules for statute of limitations are applicable i.e. the Romanian Tax Authorities may normally review tax-related matters retroactively for five years (or 10 years in the case of fiscal evasion or fraud).
Advance Pricing Agreements legislation
Based on the provisions of Romanian Tax Authority Order 3735/2015 regarding the procedure for issuing advanced individual tax rulings and advance pricing agreements, the Romanian taxpayers have the option to obtain both bilateral as well as unilateral Advance Pricing Agreements as to assure their transfer pricing position for future tax years.
However, such an approach can prove to be a long and expensive one (e.g. the tax for applying for an Advance Pricing Agreement amounts to EUR 20,000 for large taxpayers and EUR 10,000 for small and medium sized taxpayers).
The average period a taxpayer obtains an Advance Pricing Agreement in Romania is 18 – 30 months.
Country by Country Reporting requirements
More details about the Country by Country Reporting requirements you will find in our article Country by Country Reporting (CbCR) in Romania, notification template and calendar.
Reporting of cross border transactions as per EU Directive 2018/822 DAC6
More details about the Reporting of cross border transactions as per EU Directive 2018/822 DAC6 you will find in our article DAC6 – New EU tax mandatory disclosure rules with regard to cross-border transactions.
Relevant transfer pricing regulations
Romanian Tax Authority Order 3737/2015, for the approval of the content of the decision issued by the tax authority in application of the procedure for elimination of double taxation between Romanian related parties
Practical developments regarding transfer pricing in Romania
Transfer pricing has become one of the main subjects on the agenda of the Romanian Tax Authorities in the last years.
In these last years, the Romanian Tax Authorities created specialized teams at the level of each regional tax administration, as a way to share knowledge and expand the practice of performing transfer pricing audits in the entire territory.
Currently the focus of the Romanian Tax Authorities is on local subsidiaries incurring consistent losses for the last financial years.
As the number of transfer pricing audits increased, so did the knowledge and experience of the Romanian Tax Authorities. As such, the type of intra-group transactions subject to transfer pricing audits extended from acquisition / sale of goods and provision of intra-group services to loans and other financial transactions or transfer of intellectual property rights.
Although the experience and knowledge of the Romanian Tax Authorities has significantly increased during the last years there are still some specific areas where misunderstandings may appear, such as:
(i) the selection of the most appropriate transfer pricing method taking into account the particularities of the case (e.g. the difference between gross margin indicators used as part of applying the cost plus method and net margin indicators use in applying the transactional net margin method);
(ii) the use of specific criteria as part of performing benchmarking studies (e.g. using a specific turnover threshold, eliminating companies incurring consistent losses, etc.).
The above mentioned issues are generated by the fact most of the transfer pricing audits rely on the knowledge and experience accumulated by its team members and not on specific / standard steps and approaches.
Looking into the future of transfer pricing in Romania
From 2011 onward, the performance of the Romanian Tax Authorities continuously increased as regards transfer pricing audits. Therefore, we expect that the Romanian Tax Authorities will keep their focus on the transfer pricing area.
Therefore, for all the companies engaged in related party transactions, we would like to emphasize the importance of analyzing the transfer pricing mechanisms applied locally.
Not preparing for a transfer pricing investigation is a poor strategy that may result in significant tax liabilities for the local subsidiary operating in Romania.
Performing a transfer pricing risk assessment of the related-party transactions (both domestic and cross-border) in advance becomes an important strategic advantage and it would allow the identification of the main risk areas.