Multinational enterprises (MNEs) are already subject to intense transfer pricing (TP) audit scrutiny all over the world, with BEPS-driven changes of transfer pricing rules, the rise of the digital economy and greater information sharing by authorities leading to growing risk and controversy in transfer pricing. Even so, levels of tax controversy related to transfer pricing are expected to intensify.
In Romania, the past few years were marked by an intensification of the number of tax audits performed by the National Agency for Fiscal Administration (NAFA) with a focus on transfer pricing matters, as well as by an increase in the number of tax controversy cases triggered by transfer pricing adjustments.
In 2019 specifically, the NAFA officially initiated a series of tax audits with regard to large and medium taxpayers through Operation Iceberg, aimed at combatting profit shifting and verifying the transfer pricing arrangements of large MNEs operating in Romania. Such an initiative was not isolated and several waves of tax audits targeting all categories of taxpayers were initiated in 2019.
The recent tax audit wave in Romania shows that although there is no clear focus on investigating specific intra-group transactions, a large number of transfer pricing adjustments relates to the transfer pricing of goods. This particular trend is in line with international patterns at this level, as one of the most critical areas of transfer pricing controversy worldwide continues to be the transfer pricing of goods. Challenges often arise with respect to the benchmarking analyses prepared by the MNEs, as well as with respect to the actual implementation of the group transfer pricing policies.
Transfer pricing adjustments in case of deviations from the arm's-length principle are performed by NAFA based on local regulations at the level of the central tendency of the market (median of a relevant interquartile range). Therefore, transfer pricing assessments result in significant amounts of additional tax being imposed on Romanian taxpayers, with high late payment charges added on top. Often challenges to a multinational company's transfer pricing arrangements are leading to double taxation, with MNEs seeking remedies in domestic courts of law or international proceedings for the elimination of double taxation.
A significant increase in scrutiny is expected to arise in Romanian tax audits in relation to intellectual property (IP) and permanent establishments. It is already noticeable that transactions involving IP are challenged in Romania in terms of benefits, value allocation and level of charges. Another subject that is increasingly on the agenda of Romanian tax auditors relates to disputes surrounding permanent establishments and VAT fixed establishments, focusing on both assertion of the establishment itself and on allocation of profits to permanent establishments.
The volume of information now available to tax authorities and the degrees to which such information is shared among tax authorities will lead in the next period to a further increase in the number and complexity of transfer pricing audits as well as in the instances of double taxation because of transfer pricing adjustments conducted in Romania.
It is, therefore, critical for businesses operating in Romania to take steps to prevent transfer pricing controversy while at the same time to be prepared to manage and resolve disputes that do inevitably arise.
Companies have options to proactively reduce audit and controversy risks through the use of advance pricing agreements (APAs). There is an increased interest among the companies in Romania to use the APA programme) and, more importantly, through ensuring that their transfer pricing practices are well documented, and in compliance with the rapidly changing rules and regulations of tax authorities. In addition, companies also need to consider reactive tools such as the mutual agreement procedure, administrative appeals and even litigations in Romanian courts.
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