The obligation to prepare the transfer pricing file in the context of an increasing occurrence of tax audits during FY2021

Following the update of the classification criteria based on which a company is considered to be a large taxpayer, the number of companies to be administered by the General Directorate for the Administration of Large Taxpayers has reached 3,364 companies. The updated list can be consulted here: List of large taxpayers. We set out below the categories of taxpayers that need to consider the preparation of the transfer pricing file, according to the legislation.

Increasing occurrence of tax audits on transfer pricing during FY2021

In recent years, the number of tax audits that focused on direct taxes and, in particular, on transfer pricing issues, has become significant and the year 2021 brings a surge in this regard, but also a shorter time frame for the performance and finalization of a tax audit.

The decision to begin a tax audit for a given company is based on a risk analysis. In particular, companies that register profit margins outside the range obtained for independent companies operating in the same industry and more specifically companies which registered operating losses over several tax years are prone to be the subject of a tax audit.

Companies which fall in the category of large taxpayers and carry out transactions with affiliated companies which exceed certain annual materiality thresholds are obliged to prepare the transfer pricing file. The other categories of taxpayers which carry out material transactions with affiliated companies have the obligation to prepare the transfer pricing file upon request of the tax authorities.

Thus, companies that are large taxpayers should have already prepared the transfer pricing file for FY2020, considering the deadline (i.e. end of March), by considering at the same time the recommendations published on 18 December 2020 by the Organization for Economic Co-operation and Development (OECD) on the impact of the COVID-19 pandemic on the prices applied in transactions between affiliated parties.

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

Who is subject to the obligation of preparing the transfer pricing file?

• Companies which fall under the category of large taxpayers and which perform transactions with affiliated parties that exceed certain annual materiality thresholds;
• Companies which fall under the category of large taxpayers (but which do not exceed the aforementioned annual materiality thresholds), as well as medium-sized taxpayers which exceed certain materiality thresholds.

Why is the preparation of the transfer pricing file on an annual basis so important?

The preparation of the transfer pricing file on an annual basis represents a first-hand advantage for all taxpayers, regardless of the category they belong to, as they have the possibility to reduce the potential upcoming price adjustments, to review or substantiate the transfer pricing policy at the local level, or to ascertain potential issues on the basis of which corrections can be made in order to diminish the impact of a tax audit, should it be the case.

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

First of all, companies that do not prepare the transfer pricing file may be subject to a fine in accordance with the category of taxpayers to which they belong to. Furthermore, in the event of a tax audit on transfer pricing, the tax authorities will prepare their own assessment and draw their own conclusions which might result in transfer pricing adjustments, together with additional corporate income tax and late payment penalties.

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