EY Study: Transfer Pricing Becomes a Top Concern for Companies in Romania and the Fiscal Control Authority – ANAF

Global attention on transfer pricing continues due to the initial BEPS project and the BEPS 2.0 project. Tax administrations are also focusing on cross-border transactions with affiliated parties, and combined with company

In this year’s EY Global Tax Risk and Controversy Survey, the area of transfer pricing once again ranks first among respondents, with 63% of global tax directors considering transfer pricing as the most important source of tax risk, surpassing tax incentives by 28 percentage points.

The result demonstrates that transfer pricing is the greatest concern among tax and finance directors regarding sources of tax risk, in the context of unprecedented changes in the business environment over the past 4-5 years.

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While in the 2022 study conducted by EY Romania on transfer pricing, the majority of companies believed that transfer pricing was not a tax issue (50%) or did not consider it necessary to analyze this issue from a tax strategy perspective (12%), over half (59.1%) of respondents in the 2023 EY Romania study consider transfer pricing as an area of tax risk in Romania, in line with global trends.

“Transfer pricing risks have increased, especially in a context of cooperation between tax authorities to enforce existing tax laws and prepare for upcoming changes. Managing transfer pricing obligations and risks requires connection to business operations, deep technical expertise, predictability, and foresight, and companies need to prepare if they want to avoid costly transfer pricing disputes,” says Adrian Rus, Partner and Transfer Pricing Leader at EY Romania.

The concern for transfer pricing aspects and compliance with documentation regulations in this area are also supported by the fact that the majority of respondents in this year’s study in Romania (87.8%) indicated that they have conducted analyses to verify whether the transfer prices with affiliated parties are in line with market prices.

On the other hand, 42.8% of respondent companies stated that there have been cases where transaction results fell outside the market range obtained through transfer pricing analyses. In this context, if the result of a transaction between affiliated parties is not within the “market range,” it is considered that the profits obtained by the parties involved in the transaction are not accurately reflected and should be adjusted through transfer pricing adjustments.

However, 60% of respondents have not made such transfer pricing adjustments to correct their transaction results with affiliated parties, thus exposing themselves to the risk of ANAF (National Agency for Fiscal Administration) making transfer pricing adjustments that directly impact their corporate tax.

Moreover, 20.6% of respondents consider that making periodic transfer pricing adjustments represents one of the main risk factors in the event of a tax inspection regarding transfer pricing issues, along with the revision of transfer pricing calculation principles (32.3%), lack of transfer pricing documentation (23.5%), decrease in profitability (14.7%), and failure to document decisions and/or difficult circumstances (8.8%).

Services (both management-type and other types, such as IT, legal, tax) are considered by 52.8% of respondents as the most likely to be questioned by tax authorities in terms of transfer pricing, followed by intra-group financing (17.1%), distribution of goods (11.4%), and raw material procurement (10%), according to the respondents’ opinions.

The trends in Romania reflect global trends, as 58% of respondents in the EY Global Tax Risk and Controversy Survey consider that transactions involving high-value-added services, management services, and corporate services represent the areas that can lead to significant tax risks for their organization, along with the application of alternative transfer pricing methods by tax authorities (41%), cost contribution arrangements (27%), and remuneration for distribution activities (26%).

In the context of increasing attention from authorities on transfer pricing aspects, the 2023 study indicates that over half of the respondent companies in Romania (52.9%) have been subject to tax inspections specifically related to transfer pricing, compared to the previous year when over half of the respondent companies (59.5%) had not yet undergone a transfer pricing-related inspection.

For companies that have undergone such inspections, 33.3% of respondents reported transfer pricing adjustments as a result. The study also shows that for most respondents (66.7%) who faced transfer pricing adjustments, the adjustments were valued at up to EUR 1 million.

Despite the growing concerns about transfer pricing aspects, the majority of companies (97.2%) in Romania have not submitted, nor do they intend to submit in the next two years, requests for obtaining an advance pricing agreement (APA). An APA is an agreement between the taxpayer and the tax authority in the jurisdiction of residence, regulating important aspects regarding transfer pricing for transactions conducted between affiliated parties.

By establishing a set of criteria in advance, applicable for a certain period, to ensure compliance with the arm’s length principle, an APA aims to avoid disputes in the field of transfer pricing. In other words, entering into an APA helps the company have certainty for the transactions considered in the agreement and eliminates potential transfer pricing adjustments (as long as the terms of the APA are complied with) and, consequently, situations of double taxation related to transfer pricing adjustments carried out by tax authorities, which are increasingly common in practice.

While 39% of respondents in the global EY survey indicated that they are preparing and implementing a well-defined strategy to obtain APAs, in Romania, the majority of participants in the study (58.9%) consider the documentation of transfer pricing sufficient to defend transactions with affiliated parties of the company. On the other hand, Romanian companies mentioned the costs associated with the APA process (26.5%) or a lack of trust in the benefits of APAs (5.9%) as factors that currently deter taxpayers from utilizing APAs to a greater extent as a means of preventing disputes.

It is worth noting that globally, companies opt for periodic review of high-risk transactions as a strategy to protect the company from financial fluctuations and ensure overall stability. As such, 43% of respondents indicated this method of protecting the company, providing a certain level of business predictability.

In contrast, the study’s respondents in 2023 overwhelmingly mentioned (66.7%) that they have challenged transfer pricing adjustments administratively, and if the administrative challenge was unsuccessful, 75% of respondents mentioned that they appealed to the court.