Advance pricing agreements – Increasingly popular with Romanian taxpayers

The increasing interest of the tax authorities in transfer pricing, along with the increased level of costs that multinational enterprises will incur in addressing the expected changes in transfer pricing reporting and documentation requirements, means that taxpayers have to design and implement very efficient strategies in response.

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PRICEWATERHOUSECOOPERS SERVICII SRL




DANIELA DINU

DANIELA DINU

TAX SENIOR MANAGER at PRICEWATERHOUSECOOPERS SERVICII SRL


IONUT SIMION

IONUT SIMION

TAX PARTNER at PRICEWATERHOUSECOOPERS SERVICII SRL

The main strategy which could be contemplated consists of putting together the relevant transfer pricing documentation. This has the advantage of it being prepared in advance of a transfer pricing inspection, but the downside of this option comes in the interactions with the tax authorities during such investigations, as they can often be aggressive in their interpretation of what completeness and fairness of the transfer pricing methods involves.

 

In addition, there is no control over the outcome of transfer pricing inspections. Taxpayers have to assess the costs and the options for response in the event that the tax authorities adjust their transfer prices. Taxpayers also have to evaluate ways of eliminating the double taxation generated by such adjustments.


Another strategy that deals with future transactions and which is currently used to a lesser extent in practice is the advance pricing agreement. The advantage offered by an advance pricing agreement is the possibility of initiating a proactive dialogue with the tax authorities, but even more, it gives taxpayers certainty on their transfer pricing position for a five-year period. The downside of this option may be the effort and time invested in negotiating the agreement, though the investment is not much higher than that needed to prepare transfer pricing documentation. In addition, a fee of between EUR 15,000 – EUR 20,000 needs to be paid for the issuance of an advance pricing agreement.


This article addresses the factors which taxpayers need to consider when designing their strategy for dealing with the above issues.


Increasing numbers of advance pricing agreements being issued
The current international context includes the discussions held at the level of the Organisation for Economic Development and Cooperation (OECD) with respect to base erosion in member and non-member states. These discussions translated into several initiatives which entail a higher transfer pricing administrative burden for taxpayers, along with higher associated costs. At the Romania level, there have been discussions about the introduction of contemporaneous transfer pricing documentation as of 1 January 2016, along with the obligation of additional reporting in line with the OECD Country-by-country initiative. Besides this additional cost, the transfer pricing documentation option leaves taxpayers with uncertainty regarding the results of future transfer pricing inspections.


Under these circumstances, it is expected that advance pricing agreements will become more and more attractive to Romanian taxpayers. Besides the certainty with respect to the transfer prices used in intercompany transactions, an advance pricing agreement allows companies to plan their investments more efficiently.


Main beneficiaries of advance pricing agreements’ strategies
A first category of taxpayers that would benefit from a strategy centred on advance pricing agreements would be companies that operate centralised business models, in which several entities within the group have similar functional and risk profiles. For instance, a typical such business model would be one having at the core of the model an entrepreneur and a series of other entities with limited functions and risks. Obtaining an advance pricing agreement in more countries would definitely bring an advantage from a cost-saving perspective. Moreover, an advance pricing agreement concluded in one tax jurisdiction would facilitate the negotiation process in the other countries.

 

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