Transfer pricing in Romania: What are the local compliance obligations?

Bucharest, 15 June 2023 − In the current economic context, when countries around the world are striving to combat tax base erosion and profit shifting, more than ever, transfer prices need to be properly substantiated and documented to avoid the negative consequences of noncompliance.

If you are representing a multinational or local company that is involved in transactions with affiliates, you must follow the transfer pricing rules and comply with the specific documentation requirements. One of the key documents that needs to be prepared and kept up to date is the local transfer pricing file, which contains information regarding transactions conducted with affiliated companies. 

The need for transfer pricing compliance arises from the Fiscal Code, which states that transactions between affiliates must be conducted at market value. There are also formal transfer pricing documentation requirements, according to Order 442/2016, i.e. the transfer pricing file must include information regarding the group that the analysed company belongs to, company information, the methodology used for conducting transactions with affiliates and analyses demonstrating the market value of transactions, such as comparability studies or specific price analyses.

Compliance deadlines are an important aspect that should be considered by all companies looking to prepare the transfer pricing file. Large taxpayers have a 10-day period for submission from the date of the request during a tax inspection, while other types of taxpayers have a 30−60 day period, which can be extended in certain situations.

It is worth mentioning that there are some materiality thresholds for the preparation of the transfer pricing file. These are set depending on the contributor’s size, i.e. large, medium, or small.

Why is the transfer pricing file preparation important?

The local legislation states that in the event of a company not complying with the formal documentation requests, the tax authorities can impose fines or even adjust the value of intra-group transactions to the median value of the comparability study conducted by inspectors. Any transfer pricing adjustment results in an increased tax base in Romania, interest and related fines. Moreover, in the context of a transfer pricing conflict with the tax authorities, one should not neglect the damage to the company’s reputation and its clients’ and suppliers’ trust.

We emphasise that preparing the transfer pricing file according to the legal requirements needs attention and is more complicated than it might seem at first glance. We would like to bring to your attention a series of practical elements requiring your attention to ensure that your transfer pricing file is complete, well compiled and can minimise the fiscal risks which may appear due to noncompliant transactions. We have structured these elements in a series of steps that will help you to respect the local requirements for transfer pricing documentation in accordance with the principle of market value: planning, monitoring and the documentation itself.

Planning

Establishing or adjusting the transfer pricing policy for intra-group transactions − the first step is to review your intra-group transactions for the relevant tax years and identify any changes or new transactions that may affect your transfer pricing policies or your company’s results. For example, you may have concluded new contracts, changed existing terms or changed the parties’ functions, assets or risks. All these aspects need to be substantiated and documented. You may also need to update your functional analysis, comparability analysis and economic analysis to reflect the current situation and market conditions.

A company that carries out intra-group transactions must appropriately determine the cost base of the profitability indicator, how to segregate the cost categories included in the cost base, the applied profitability margin and several other elements to make sure that the results of these transactions are well planned and calculated.

Monitoring

Permanent monitoring of operational activity and the impact of changes in the functional profile require careful analysis of the operational model and of the way the activities are carried out in practice, in conjunction with constant monitoring of the risks that may arise. We therefore note the need to analyse the “health” of the business model and the importance of risk analysis as a means of prevention in transfer pricing.

The voluntary profitability adjustments, the differences between budgeted versus actual costs, the re-invoiced versus mark-up invoiced activities are also elements that any company must constantly monitor to ensure that there are no distortions in the market value of intra-group transactions.

Documentation

Complying with the formal requirements for transfer pricing file preparation − the final step is the company preparing the local transfer pricing file, thus ensuring that this file is complete and sufficiently solid to resist potential challenges or threats from the tax authorities. Companies should check that the transfer pricing file does not have any errors, inconsistencies or gaps that could raise questions or doubts regarding the compliance of results with the market value. Moreover, companies should ensure that the local transfer pricing file is supported by relevant and sufficient evidence such as contracts, invoices, reports and studies. In addition, an important aspect that companies need to consider in the transfer pricing documentation process is the availability of information from the non-resident affiliated company with whom transactions are conducted, such as information about the cost base and the profit margin applied. Moreover, companies should be prepared to provide supplemental information or clarifications if requested by the tax authorities.

An advance pricing agreement (APA) is an alternative to the classic transfer pricing documentation process. Thus, while the transfer pricing file is reactive in nature, documenting post-factum that intra-group transactions have been carried out at market value, an APA proactively addresses this situation and is intended to provide certainty of market value for transactions, in specific circumstances, for the future − usually the next five years. Obtaining an APA is subject to the payment of a fee to ANAF (the maximum amount would be €20,000), but the benefits certainly outweigh the costs involved in this process.

Regarding the development at an international level, we have noticed that the last few years that attention has shifted towards the BEPS (Base Erosion and Profit Shifting) action plan and the implementation and surveillance of set actions in the area of transfer pricing, specifically in the area of transfer pricing alignment and standardisation, transparency and efficacy of information exchange, prevention and settlement of tax disputes that can occur in the area of transfer pricing, and Pillar 1 and Pillar 2 initiatives broadly aimed at revolutionising current tax rules.

Taking into consideration the numerous initiatives of “rewriting” tax rules at a global level, the need for transparency and compliance, and non-financial reporting requests, we can expect to see new compliance tendencies at an international level, including in transfer pricing.

In conclusion, considering the complexity of the rules and compliance process in transfer pricing, we recommend that companies conduct rigorous planning so that the transfer pricing file is solidly substantiated and documented to minimise the risk of certain adjustments and additional payments in the event of a tax inspection.