Taxpayers' guide for 2023: preparing for a tax audit is about identifying and monitoring risks early on

24 November 2022
  • The enterprises that may be subject to a tax inspection are those with profitability below the average profitability of companies with the same NACE code or companies with operating losses over a sustained period of time.
  • The risk sub-criteria, which were created from the four main criteria listed in the Tax Procedure Code, was recently published by NAFA.
  • Large taxpayers must submit the transfer pricing file within 10 days of receiving a request from the tax authorities.
  • As a result of taxpayer appeals, between 45% and 60% of the amounts included in the tax assessment decisions are subsequently rejected or cancelled.

In the context of the pressing need to increase budget revenues to offset exceptional expenses generated by the current economic situation, as well as to identify any potential situations of profit shifting from one jurisdiction to another, tax administrations have launched a significant number of tax audits worldwide. Thus, in recent years, tax inspections carried out in Romania, which have targeted direct taxes and, in particular, transfer pricing, have also become increasingly numerous, and 2022 has brought an increase in this regard, but also a shorter timeframe for their conduct.

The National Agency for Fiscal Administration (NAFA) published a press release earlier this year, in which they announced that 555 tax inspection and unannounced control actions are being carried out on large taxpayers, out of which 128 are being carried out on taxpayers with recurrent losses. Moreover, according to another NAFA communication in June, anti-fraud inspectors estimated tax implications of about RON 77 million  (representing VAT, taxes, social and health contributions, and other taxes), estimated in 292 control reports.

The selection of the taxpayers to be subjected to the tax audit is made according to the conducted risk analysis

In the case of a company, the decision to start a tax inspection is based on a risk analysis, which starts from the information provided to NAFA (e.g. financial statements, declarations, etc.) by the company. The risk analysis can be defined as an assessment carried out by the tax administration, which cannot be contested by the taxpayer, to identify situations of tax non-compliance.

For example, companies that are part of a multinational group, whose profitability margin is outside the range obtained for independent companies operating in the same industry, are likely to be subject to a tax inspection on the transfer pricing side. Moreover, in this situation, there are also companies that register operating losses in consecutive periods.

Alina Ghiță Manager, Tax

According to the activity report of the General Directorate for the Administration of Large Taxpayers, a specific risk management system has been created, which should help make tax inspections more efficient, by classifying taxpayers into tax risk classes. Thus, we have the following categories:

  • High tax risk - companies will be subject to tax inspection;
  • Medium tax risk - companies will be subject to unannounced inspections;
  • Low tax risk - companies will be subject to notifications and document reviews.

Moreover, in view of the most recent order published by NAFA, the risk sub-criteria have been approved, which were developed from the four main criteria established in the Tax Procedure Code, namely:

  • the criteria on tax registration: e.g. sub-criteria on non-registration for VAT purposes or as a payer of corporate tax/specific tax/microenterprise income tax/excise duties/income tax and social contributions;
  • the criteria on the filing of tax returns: the sub-criteria on the non-filing, erroneous filing or late filing of tax returns or the sub-criterion on the risks associated with partners/shareholders/directors or other persons from the perspective of filing tax returns;
  • the criteria on the level of declaration: e.g. sub-criteria on the incorrect declaration of tax rate and amount, on inconsistency or incoherence of data in tax returns with data in other forms required by law, on reduced profitability.
  • the criteria on the fulfilment of payment obligations towards the general consolidated budget and other creditors: e.g. sub-criteria on late payment or non-payment of tax obligations, sub-criterion on insolvency.

The implementation of the risk analysis has led to a significant increase in additional tax liabilities imposed as a result of the investigations carried out, and according to the activity report, in 2021, the percentage of tax inspection reports completed on taxpayers with high tax risk was 33% of the total reports completed, while the percentage of additional liabilities imposed as a result of these investigations was 61%.

The tax risks identified in the analysis can also be validated by means of unannounced inspection, which is carried out without prior notice to the taxpayer. The unannounced inspection may consist of checking documents, checking certain transactions (as part of cross-inspections), or assessing a specific tax risk.

In respect of the above issues, as well as the verification of the risk category by each taxpayer, companies need to prepare documents and identify and monitor the risks that may arise to avoid an adjustment as a result of a tax inspection that would target transfer pricing.

Gabriela Roman Assistant Manager, Tax

The transfer pricing file must be made available to the tax authority within a maximum of 10 days from the date of the request in the case of large taxpayers

Taxpayers who carry out transactions with related companies with a total annual value greater than or equal to any of the materiality thresholds detailed below are required to prepare and submit a transfer pricing file at the request of tax inspectors.

Taxpayer category

Deadline for providing the transfer pricing file

Large taxpayers are required to prepare an annual transfer pricing file. The file is submitted at the request of the tax inspection body and may also be requested outside a tax inspection.

The annual materiality thresholds for the analysis of intra-group transactions are: 

  • €350,000 excluding VAT for transactions involving purchases or sales of tangible or intangible goods;
  • €250,000 excluding VAT for transactions involving services received or rendered;
  • €200,000 excluding VAT for interest received or paid for financial services.

In the case of a tax inspection regarding transfer pricing, the deadline for making the report available is a maximum of 10 calendar days from the date of the request, but no earlier than 10 days after the deadline for its preparation (i.e. the legal deadline for submitting annual corporate tax returns for each tax year).

(!) Companies included in the large taxpayer category must prepare the transfer pricing file annually before receiving a formal request to do so because, given the number and complexities of the transactions carried out by this category of taxpayers with their affiliated companies, the 10-day deadline for providing the report is not sufficient for its preparation in the event of a tax inspection in the transfer pricing area.

Taxpayers included in the category of large taxpayers and taxpayers/payers included in the categories of small and medium sized taxpayers who are required to prepare and submit the transfer pricing file only at the request of the tax authority in the course of a tax inspection.

The annual materiality thresholds for the analysis of intra-group transactions are: 

  • €100,000 for transactions involving purchase or sale of tangible or intangible assets;
  • €50,000 for transactions involving services received or provided;
  • €50,000 for interest received or paid on financial services.

In the case of a tax inspection, the deadline for making the report available will be set by the tax authorities in the transfer pricing report request form. Thus, the deadline will be between 30 and 60 calendar days, with the possibility of a one-time extension, at the written request of the taxpayer, of a maximum of 30 calendar days.

(!) However, it is recommended that companies in this category prepare an annual transfer pricing report to document whether transactions with related parties comply with the arm's length principle and to be able to take corrective action if necessary.

The transfer pricing file must be prepared by any taxpayer, regardless if a tax inspection is announced or not

Firstly, the annual preparation of the transfer pricing report is an advantage for any category of taxpayer, as the risks can be identified before an inspection begins and possible deficiencies can be identified and corrections made to mitigate the negative impact of a tax inspection.

Another important aspect can be to review and substantiate the transfer pricing policy at the local level, as well as to present a clear picture for the group on the documentation obligations in Romania, i.e. the level of risk.

We would also like to reiterate that the deadline given by the authorities for the preparation and submission of the transfer pricing file may be insufficient in view of the number and complexity of the intra-group transactions to be analysed, especially in the context of time pressure and other requests from the tax authorities in the context of the tax inspection. Thus, regardless of whether a tax inspection is expected or not, we recommend having the transfer pricing file ready.

Liviu Gheorghiu Director, Tax

As a result of taxpayer appeals, between 45% and 60% of the amounts included in tax assessment decisions are subsequently rejected or cancelled

Taxpayers should consider appealing against tax assessment decisions issued by NAFA following tax audits when they disagree with the conclusions included in tax inspection reports, especially given the significant number of cases where the outcome of the appeal was positive for the taxpayer.

From the analysis of the statistics published by NAFA, in 2021, a total of 604 tax inspection actions were carried out and additional amounts of RON 1,000,250,544 were established. Following the completion of 263 tax inspection reports, 166 tax decisions were issued, of which 43 were appealed. Based on the data published by NAFA, it can be concluded that a significant percentage (between 45% - 60%) of the amounts included in the tax assessment decisions following tax inspections are rejected or subsequently cancelled as a result of appeals filed by taxpayers.

In Romania, the mutual agreement procedure has not been applied in a significant number of cases so far, but it can be an effective alternative to court actions

Considering the cross-border operations of multinational groups, and the fact that in recent years they have even managed concurrent tax audits in several jurisdictions, transfer pricing adjustments at the level of the entity in Romania and/or its contractual partners in other jurisdictions may lead to double taxation situations, one possibility for their resolution being the mutual agreement procedure. In Romania, this procedure has not been applied in a significant number of cases so far, but it can be an effective alternative to litigation.

The effects of the war in Ukraine and rising inflation and energy prices are just some of the challenges for the coming year from a transfer pricing perspective

While some industries or taxpayers, in particular, are still impacted by the COVID-19 pandemic, FY2022 brings additional topics to consider from a tax perspective. These economic conditions have generated several discussions or even disputes from a transfer pricing analysis perspective for 2020 and 2021, either within multinational groups or between them and tax authorities in different jurisdictions.

Thus, the effects of the war in Ukraine, rising inflation, rising energy prices coupled with end-customer caps or exemptions, rising interest rates, the prospect of a general fall in consumption, and rising unemployment are all elements that add to the problems that multinational groups were already facing from 2020 onwards, i.e. delays or disruptions in the supply chain, rising logistics costs, rising fixed costs, etc.

Therefore, more attention should be paid to the analysis of transfer prices in 2022 within multinational groups from the perspective of establishing the functional profile of the parties to the transaction, the allocation of exceptional expenses and losses, the financing policy, documentation of cross-border business restructuring or transfer of staff or the impossibility to allocate staff to certain locations.

 

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