Transfer pricing risk analysis for Romanian companies

25 May 2022

In recent years, the number of tax audits focused on direct taxes and transfer pricing has become significant and 2022 brings a surge in this regard.

The Romanian authorities carried out tax audits on transfer pricing for companies operating in the financial industry, as well as in transport, agriculture, production (e.g. spare parts, car components, detergents, lighting products, clothing), distribution, or services.

The annual update of the transfer pricing file is a first-hand advantage for all taxpayers, regardless of the category they belong to, as they can reduce potential adjustment risks, review or substantiate the TP policy at the local level, or perform internal adjustments to reduce the impact of a tax audit.

Taxpayers required to prepare the transfer pricing file during the current period

Taxpayers and thresholds

The deadline for the preparation of the transfer pricing file

According to the provisions of NAFA’ Order No. 442/2016, the companies that fall under the category of large taxpayers, and that are having transactions with affiliated parties in annual amounts greater than or equal to any of the following thresholds must prepare the annual TP report:

  • €350,000 for purchases/sales of tangible or intangible goods;
  • €250,000 for services received/rendered;

€200,000 for interest received/paid for financial services.

In the event of a transfer pricing audit, the deadline for presenting the transfer pricing file is no later than 10 days from the date of the request of the authorities, but not earlier than 10 days after the legal deadline for submitting the annual corporate income tax return.

Large taxpayers need to prepare their transfer pricing file on an annual basis, although the obligation to submit the file is only in case of an audit because the above deadline for presentation is very short.

Large taxpayers who do not exceed the aforementioned annual materiality thresholds, as well as small and medium-sized taxpayers who perform transactions with affiliated parties in annual amounts greater than or equal to any of the minimum thresholds below, are required to prepare the transfer pricing report only upon request of the tax authorities, in case of a tax audit:

  • €100,000 for purchases/sales of tangible or intangible goods;
  • €50,000 for services received/rendered;

€50,000 for interest received/paid for financial services.

The deadline to present the file shall be established between 30 and 60 calendar days, with the possibility of extending the deadline with a maximum of 30 calendar days to be applied only once, upon the written request of the taxpayer.

However, it is advisable to prepare the transfer pricing file on an annual basis to evaluate the observance of the arm's length principle and update the benchmark studies.

Preparation of comparability studies

The Romanian transfer pricing legislation stipulates that comparability studies must be prepared in the first instance on the Romanian market. If local comparable companies cannot be identified, the geographical criterion should be extended in the following order: European Union, pan-European, international.

In general, the comparability study should be updated yearly to reassess the impact of prevailing market conditions on the tested transaction.

What happens if a company does not prepare and present the transfer pricing file in case of a tax audit?

Companies may be subject to a fine between RON 12,000 – RON 14,000 for large and medium taxpayers, or between RON 2,000 – RON 3,500 for small taxpayers. More importantly, in the event of a transfer pricing audit, the tax authorities will prepare their own assessment based on a simplified procedure which might result in transfer pricing adjustments, together with additional corporate income tax and late payment penalties.

The authorities’ decision to begin a transfer pricing audit is based on a risk analysis. Companies that register profit margins outside the range obtained for independent companies operating in the same industry and especially companies which registered operating losses over several tax years are prone to be the subject of a transfer pricing audit.

Risk analysis

To estimate the transfer pricing risks, we have developed a risk assessment procedure that can offer a clear image of the actions to be taken to mitigate risks and can evaluate the potential tax exposure. The assessment is based on the following steps:

  • Identification of intra-group flows;
  • Reviewing the transfer pricing report prepared at the local or group level;
  • Reviewing the intra-group agreements (if the case);
  • Preparing or reviewing the benchmark studies or comparability analysis;
  • Estimation of adjustment risks in case of a tax audit;
  • Conclusions and recommendations.

The main advantages of performing a risk assessment are:

  • Evaluation of information and documents available at the local level;
  • Identification of risks before the start of a transfer pricing inspection;
  • Risk limitation recommendations;
  • A clear image for the group on the documentation obligations in Romania, and on the level of risk incurred by the local entities.