Transfer pricing – all you need to know about it

transfer pricing

Transfer pricing – all you need to know about it

1. Transfer pricing basics – the definition

In managerial accounting the transfer pricing concept refers to the price at which divisions of a company transact with each other.

In tax purpose, transfer pricing broadly refers to the price at which transactions between related parties within the same group of companies (legal persons or individuals) take place.

Therefore, transfer pricing from a tax perspective refers to the prices applied for the transactions with capital, goods or services taking place between two or more entities that are under common control / within same group of companies.

The definition of a group of companies / control can take various forms, but in most cases refer to attaining a certain percentage of ownership or degree of control (de jure or de facto), as will be described later in this article.

2. Transfer pricing underlying principle – the arm’s length principle

The arm’s length principle states that the prices applied in intra-group transactions should not differ to the ones applied in transactions taking place between companies that are not part of the same group, if similar business terms apply.

In other words, this standard requires that companies part of the same group should transact one with another as if those transactions were taking place under exactly the same conditions between unrelated parties on the open market (i.e. between parties not under common control).

In practice, depending on the nature of the transactions, complex methods are applied as to benchmark the transfer prices applied against the market levels for similarly transacted goods or services.

For a more visual explanation of the transfer pricing definition and how the arm’s length principle works, please watch the video below:

3. How does transfer pricing impact your business?

With boundless attention from global tax authorities and subject-matter media, transfer pricing has become one of the most discussed areas of taxation, mostly due to the high financial and reputational impact usually triggered by a transfer pricing dispute.

With giants such as Facebook and Amazon historically brought into the spotlight for transfer pricing matters, Europe’s tax authorities are on high alert to prevent, identify and correct similar erroneous behavior arising from the pricing mechanisms of intra-group transactions.

Therefore, if you want to expand your business internationally, or your company is already part of a multinational enterprise and transactions with related (“sister”) companies are inevitable, you should be aware of the fundamental principles, legislation environment and documentation obligations of transfer pricing.

If you are responsible for a company the transfer pricing or even an external tax consultant / lawyer seeking a more comprehensive guidance on the most common transfer pricing issues that you may encounter when dealing with transfer pricing, check out our free guide / eBook below:


3.1 The obligation to prepare a transfer pricing documentation file

Related parties have to prepare and present transfer pricing documentation either contemporaneous (especially in case of large taxpayers or large groups) or upon the request of the tax authorities from the resident country.

Even though in some countries there is no specific law providing that taxpayers should prepare transfer pricing documentation (e.g. Bulgaria, United Kingdom), in practice, the tax authorities may request transfer pricing documentation in most of these countries too.

3.2 Potential consequences in case of non-compliance

In the current context of globalization, companies are more willing than ever to expand their business in other territories, but at the same time, keeping in mind that obeying each of the operating jurisdictions’ transfer pricing legislation and regulations is a must – which is no easy task.

Usually, the tax authorities address the non-compliance of a taxpayer by pressing fines, as well as adjusting the transfer prices applied as to match what they believe to be at arm’s length level. These transfer pricing adjustments most often translate to lengthy disputes and difficult resolutions, additional corporate income tax to be paid, as well as penalties and fees.

The penalties for non-compliance with documentation and reporting requirements can be categorized as follows:

a. additional corporate income tax payable;

b. fines for inexistence or incomplete documentation;

c. fines for negligence or gross negligence (generally applied as percentage applied to additional tax base or to the transfer pricing adjustments);

d. late payment interest;

e. late payment penalties;

f. double taxation resulting from not being able to perform corresponding adjustments.

In every case, the penalties can be avoided if proper documentation is prepared and the transfer prices are at arm’s length.

3.3 Overall benefits of transfer pricing

On the other hand, transfer pricing is creating a favorable context for the companies to benefit from group synergies, higher independence from external suppliers and easier access to global markets.

Therefore, it is now easier to understand why transfer pricing has become such a topic of interest for the tax authorities and multinational companies alike – authorities remain vigilant to prevent misapplication of the law, while companies try to successfully navigate through the complex requirements stemming from it.

4. Transfer pricing regulations across Europe

4.1 The OECD Transfer Pricing Guidelines

All transfer pricing regulations in Europe stem from and reflect in part or in entirety the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as set forth by the Organization for Economic Co-operation and Development (hereinafter referred as “OECD”).

The purpose of these Guidelines is to establish and explain transfer pricing principles as the OECD member states understand them but are not to be viewed as being of legislation nature, except where directly stated otherwise. One example for such a case in Europe would be Austria.

Even if the fundamental principles of transfer pricing are unified within these Guidelines, the complexity of the business world gave rise to a multitude of transfer pricing regulations and obligations to be applied in each jurisdiction, at the liberty of the statutory authorities, as described in the following.

4.2 The definition of related parties in transfer pricing

Entities that are part of the same group of companies are often described in legislation as related parties and transfer pricing principles will apply only to companies abiding to this definition.

The nature of related parties is usually established by the domestic law by reference to a direct or indirect percent of ownership or participation of a company in another company. In Europe, this share of ownership is sitting around a minimum 5.00% (e.g. Bulgaria) to 50% (e.g. Denmark, Sweden).

In addition, some jurisdictions – like Germany, Netherlands or Sweden – added in their domestic legislation mentions about the case of control in / management of another entity, emphasizing that the decision power and stake in the profits can also be taken into account to the definition of related parties.

The various definitions of related parties in EU Member States can be categorized as follows:

a. Effective control de jure or de facto in all the EU countries – in line with the article 9 of the OECD Model Convention with respect to taxes on income and on capital – control is also deemed through individuals in most of the EU Member States;

b. minimum 50% ownership in certain countries (Denmark, Finland, Hungary, Sweden);

c. minimum 25% ownership in certain countries (Austria, Czech Republic, Lithuania, Poland, Germany, Slovakia, Slovenia, Spain);

d. other minimum percentage of ownership (Portugal – 20%, Romania – 24.99%, Greece – 33%, Bulgaria – 5%, Estonia – 10%).

4.3 Transfer pricing documentation file structure

The transfer pricing documentation structure requirements in Europe are comprised of three separate documents:

(i) Master File – providing a macro perspective, with a focus on the group as a whole, comprising information on the categories of intra-group transactions and transfer pricing policies applied;

(ii) Local file – usually focusing on one single entity of the group, providing detailed information about its activity, including proof that all intra-group transactions the entity is a counterparty are at arm’s length;

(iii) Country-by-country report – aggregated report, breaking down the financial results of the group by jurisdiction, like revenue, taxes paid, capital or employment.

This list of documents to be prepared by the companies is usually referred to as “three-tiered” documentation.

Most of European Union Member States’ tax authorities require annual preparation or even submission of all documents listed, with references to the OECD Guidelines, and European Union’s Directives on the topic and Code of Conduct on Transfer Pricing Documentation Associated Enterprises in the European Union (EUTPD), published in the Official Journal of the European Union No. C176/1 of 28th of July 2006.

4.4 Transfer pricing filing obligations

A taxpayer can be requested by domestic law:

(i) to prepare the transfer pricing documentation file on an annual basis, usually having as deadline the filing of the corporate income tax return;

(ii) to submit the transfer pricing documentation upon the specific request of the tax authorities, usually within a short time frame;

(iii) to file the transfer pricing documentation with the local tax authorities on a yearly basis (e.g. Denmark, Hungary).

Some European tax authorities have also linked the obligation to prepare or submit the transfer pricing documentation based on thresholds on the intra-group transactions amounts or group’s revenues.

Nevertheless, even if a company does not fulfill the thresholds and therefore is not obliged to annually prepare the necessary documentation, it will be found that the generally allotted time to respond to a tax audit team’s request to submit the documentation, 30 days, is insufficient and advance preparation is advised.

4.5 Language of documentation

All European tax authorities will accept the transfer pricing documentation prepared in the local language. There are some jurisdictions that also allow for submission documents prepared in English language, such as Austria, Belgium, Denmark, Finland, France, Hungary, Luxembourg, Netherlands, Spain, Sweden and Norway.

Download our country by country comparison of the transfer pricing regulations across all the European countries below:


5. Are you prepared for a transfer pricing audit?

As mentioned above, in the case of a transfer pricing audit, the local tax audit teams from each EU Member State may request the transfer pricing documentation as to check whether the pricing applied in the intra-group transactions carried out by the company is considered at arm’s length.

In case the tax audit team does not agree with the company / group approaches from the transfer pricing documentation, the tax authorities may perform transfer pricing adjustments, as well as compute additional corporate income tax, penalties or fines – all which can sum up to substantial amounts, in some cases even paired with reputational effects.

Therefore, it is essential for a company to be aware of, to prevent or to correct, if the case, the main risk factors that can make it vulnerable in dealing with the local tax authorities.

5.1 Transfer pricing exposure to adjustments may be diminished by Advance Pricing Agreements

To avoid any transfer pricing disputes over a transaction of high importance for the company, an Advance Pricing Agreement, in-short APA, can be issued with the tax authority/ties involved.

The process involves providing the tax authorities with all requested documentation on parties involved, the subject transaction, as well as proof of the alignment of the transfer pricing methodology chosen to the arm’s length principle.

Only after the authorities agree with the terms included, the APA is issued and will only have effects over the transaction between the parties as included in the documentation.

The advantages of this instrument are the elimination of potential transfer pricing audits in regards to the respective transaction, thus including the associated transfer pricing adjustments, penalties or fees. Moreover, the taxpayer also incurs cost savings with documenting the transactions covered by the APA, as well as any other proceedings that would stem from potential double taxation disputes.

6. In conclusion

Not preparing for a transfer pricing investigation that may be performed by the tax authorities is a poor strategy that may result in significant tax liabilities for the local subsidiary operating on the European territory.

Preparation in advance can bring a strategic advantage and it would allow for the identification and mitigation of the main risk areas – before the tax authorities show up at the doorstep.

In case you need to start right now to prepare yourself, contact us to show you how we can use our innovative TRUE Master File concept in helping you achieve not only compliance across all the countries in Europe but also simplification of the entire transfer pricing documentation process.

Now that you’re here

ATIPIC Solutions is a transfer pricing specialized company with a culture highly centered around using of the automation in transfer pricing, innovation and efficiency. We work with companies having as ERP of choice SAP, Oracle, Microsoft Dynamics or Scala and we are recognised providers in the World TP rankings.

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Viorel specializes in Transfer Pricing & DAC6 compliance projects. Viorel is a Certified Tax Advisor and has earned his ADIT Diploma in the transfer pricing area. Previously he has managed the BDO Romania transfer pricing team.

Viorel drafted the first practical manual for the management of groups of companies on compliance with the provisions of the new EU directive on administrative cooperation DAC6.

Viorel is actively involved in the working groups that contribute to amending the transfer pricing and DAC6 legislation in Romania.



Mihaela has over three years of experience in delivering transfer pricing and DAC6 projects. She is studying to obtain her master degree in Accounting, Controlling and Expertise from University of Economic Studies and to obtain the qualification of chartered accountant.



Stefania joined the ATIPIC Solutions transfer pricing team as a consultant, specialized in particular on providing assistance during transfer pricing audits. Stefania graduated the Faculty of Law and a Master's degree in Tax Law organized by the University of Bucharest.



Our rich experience and knowledge in international projects from various industries allow us to bring real value to our clients in helping to minimize transfer pricing and DAC6 risks and to improve the burdensome compliance process. 

Among our personal combined experiences in various specialty areas we can emphasize:

  • preparation of the transfer pricing documentation files for two of the ten largest companies in Romania;
  • defending our transfer pricing files with a success rate greated than 97%;
  • preparation of 250 transfer pricing files and over 350 benchmarking studies in the Amadeus and Orbis databases;
  • drafting one of the first practical manuals on succesfully complying with DAC6 legislation.

Book a private discussion with Viorel, Mihaela or Ștefania


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”Although the legislative text specifically mentions that strict transfer pricing adjustments can not be made based on the simplistic information presented in the CbCR country reports, we expect a significant increase in the aggressiveness of the tax authorities towards the subsidiaries of the multinational groups that register in Romania losses, or fluctuating results. All these inspection or risk analysis actions will now be launched due the extensive use of country-specific CbCR reporting information” ... Read more
”Transfer pricing legislation is a highly interpretable one, often more important than how the law is read by a transfer pricing consultant is how well does a consultant know how tax inspectors interpret the law”... Read more
”With the outbreak of the Panama Papers, LuxLeaks and Paradise Papers scandals and the rush to implement all these new legislative changes, it is becoming clearer the movement to the next level of fiscal transparency, namely requiring multinational groups to make public these reports each country CbCR. However, it should not be overlooked that these measures can generate fierce disputes between governments of countries with low tax rates and those with high tax rates.” ... Read more


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"In search of a consultant to help us prepare the transfer pricing file, ATIPIC Solutions team was recommended to us. As we have been told, this team manages to ease the process simply by requiring and providing information in a very clear and structured way. We will certainly recommend their services further. "

Ana Mihaela Ionescu

Chief Financial Officer, Butan Gas Romania
"ATIPIC Solutions has shown us at the tender stage that we will be able to rely on their promptness and especially that they are flexible enough and creative enough to find solutions to the price problems we face."


CFO, Ascendum Machinery

What transfer pricing solutions can you expect from us?


ATIPIC Solutions have extensive experience in the areas of transfer pricing software, including SAP add-ons, implementation and adjustment.

We can help you align your transfer pricing according to your business model, transform supply chain, structure your business in a tax efficient way and attribute appropriate profit to a permanent establishment, according to transfer pricing Romania rules.


ATIPIC Solutions transfer pricing professionals apply in-depth knowledge and experience to help you prepare / localize / update transfer pricing documentation for all types of controlled transactions.

ATIPIC Solutions can also help you adapt existing benchmark studies or prepare locally compliant benchmarking studies for prices, profitability margins, interest rates, royalty rates.


During transfer pricing Romania audits, ATIPIC Solutions can offer support, develop defense strategies and argumentation, as well as coordinate with the tax authorities on your behalf.

As a consequence of a closed tax audit, you may ask us to draft appeals and resolve disputes in the Ministry of Finance system and court. If the case, ATIPIC Solutions can assist with APAs or mutual agreement procedures.

Transfer pricing regulations in Europe [eBook]

In case you wish to learn more on the transfer pricing Europe topic, with a focus on the legislative environment and highlights on the local practice, you can access the transfer pricing Europe rules eBook below.

Common issues a business may face when doing transfer pricing in Europe [eBook]

Our eBook summarizes many common issues tackled within the local transfer pricing practice, in the area of tax audits, documentation requirements and entity management.

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