Q. In your opinion, do companies pay enough attention to the challenges and complexities of maintaining compliant transfer pricing polices?
Gheorghiu: Although Romanian transfer pricing legislation was introduced more than 10 years ago, there are still a large number of companies that have not achieved compliance. One reason may be that, without the obligation to submit a transfer pricing report to the Romanian tax authorities (RTA), companies only tend to focus on transfer pricing when they are faced with a potential tax audit. Recent debates about the level of Romanian taxable results registered by multinationals have brought transfer pricing to the attention of the public and the topic is now higher on the priority list of decision makers. Consequently, the current market has seen a shift toward ex-ante documentation, such as implementing new transfer pricing policies, revising pricing mechanisms and applying for advance pricing agreements (APAs), in contrast to the more conventional ex-post documentation, as companies strive to identify potential risks and explore mitigation options.
Q. To what extent have the tax authorities in your region placed greater importance on the issue of transfer pricing in recent years, and increased their monitoring and enforcement activities?
Gheorghiu: Romania is predominantly an inbound investment country, so historically authorities have focused on offering tax facilities to attract foreign companies. However, in recent years, the authorities have taken several steps to streamline and elevate the efficiency of the tax audit process, envisaging a more purposeful focusing of tax audits on legitimate risk areas. In this respect, there are procedures in place for an initial assessment of the potential transfer pricing risk of a taxpayer and distinct structures within the tax administration that oversee aspects of transfer pricing, in conjunction with the continuous training of tax inspectors.
Q. What steps should companies take if they become the subject of a tax audit or investigation?
Gheorghiu: The outcome of a tax audit can be improved through a series of continuous preventative actions and conscious revisions. Definite actions include archiving supporting documents, reconciling and aligning written agreements with the actual conduct of the parties in a given transaction, implementing procedures to correctly determine transaction values and compute appropriate profit level indicators, and ensuring conformity with annual documentation requirements.
Q. What kinds of challenges arise in calculating appropriate transfer prices, both for tangible and intangible assets? How crucial is it to have consistent supporting documentation?
Gheorghiu: One particularity of Romanian legislation is that local comparables should be used when calculating or documenting transfer prices. However, many companies find it difficult to identify such local comparables and have to use the group comparables from the EU market. In practice this approach can lead to disputes with the RTA. The challenge is greater when it comes to analysing intangible assets or financial transactions, because there are even fewer reliable local comparables. At the same time, the RTA is very much focused on requesting supporting documents, especially with respect to intra-group services. Therefore, it is crucial for the local company to have available documents to demonstrate the actual provision of services, and such documents should be detailed and reflect the actual conduct of the parties to the transaction.
Q. Have you seen an increase in transfer pricing disputes between companies and tax authorities in your region?
Gheorghiu: As a result of the intense audit activity carried out by the RTA, there are a significant number of ongoing tax disputes. One practical issue that companies face in their legal disputes with the RTA is the level of experience and understanding of local courts concerning transfer pricing issues. In order reduce the risk of lengthy and cumbersome tax disputes, companies should seek guidance prior to entering a transaction or business restructuring.
Q. Could you outline the role and influence of the Organisation for Economic Co-operation and Development (OECD) on transfer pricing regulation in your region of focus, including the latest developments on base erosion and profit shifting (BEPS)?
Gheorghiu: Romania is not an OECD member state currently, but the OECD’s principles and guidance are the basis of the country’s transfer pricing legislation. Increasingly, more large companies are focusing on crystallising the components of the value chain of the business model to emphasise the fundamental value drivers. This exercise is ultimately aimed at aligning pricing to value creation, as opposed to standalone pricing analyses. The approach of the RTA does not always align with the OECD’s recommendations and we have seen cases in practice where tax inspectors did not take into consideration the functional profile and the value added for the group of a local company, before assessing the level of profit that the company should obtain. There are strong signals that this will improve in the near future.
Q. In general, what advice would you give to companies on reviewing and amending their transfer pricing policies and structures?
Gheorghiu: One option available to multinational companies to ensure compliance with Romanian transfer pricing requirements is to obtain an advance pricing agreement (APA), due to the increased risk profile as well as global and Romanian transfer pricing developments. A good moment to start the process is when the group is amending its transfer pricing policy. In recent years the RTA has been more open to bilateral or multilateral APAs rather than unilateral agreements.