Voluntary transfer pricing adjustments in Romania
27 June 2024
The obligation to respect the arm's length principle in transactions between related parties is set out in Article 19 of the Fiscal Code. Recently, the number of tax audits in the transfer pricing area has increased significantly. Companies that continue to experience losses or low profitability are still at high risk in a transfer pricing audit.
The obligation to respect the arm's length principle in transactions between related parties is set out in Article 19 of the Fiscal Code. Recently, the number of tax audits in the transfer pricing area has increased significantly. Companies that continue to experience losses or low profitability are still at high risk in a transfer pricing audit.
An important topic in recent audits has been voluntary (compensating) transfer pricing adjustments made by taxpayers. Voluntary adjustments are adjustments made by taxpayers to meet the arm's length principle in cases where the transfer prices, or the result obtained during the fiscal year, do not follow the arm’s length principle or the targeted profit level.
Profit adjustments can be made both to increase or decrease the taxpayer's profit level in justified situations through invoices, debit, or credit notes issued in connection with the intra-group transaction. Taxpayers who would theoretically be entitled to make such adjustments are manufacturers or distributors with limited functions and risks.
The practical issue is that the possibility of performing such adjustments is not provided for in Romanian tax law. As a consequence, tax authorities often consider that such adjustments have no economic purpose and are a tool through which local profits are unfairly reduced and transferred to other jurisdictions.
However, the principles for applying voluntary transfer pricing adjustments are recognised at the EU and OECD levels. The EU Transfer Pricing Directive draft from 12 September 2023 seeks to implement a consistent EU-wide approach to the recognition and treatment of voluntary adjustments.
At the same time, recent court decisions in Romania show that voluntary transfer pricing adjustments can be made, even in the absence of explicit provisions in the legislation, provided that they have an economic purpose and are adequately documented.
We recommend taxpayers who apply voluntary transfer pricing adjustments, to asses the conditions under which they are made, and prepare transfer pricing documentation that explains their necessity and how they result in compliance with the arm's length principle.
