KPMG OnScreen Basic

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Transfer Pricing future developments for Romania
Raymond A Breden Director, Taxation Services
2005 Tax Conference
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Content

• Present legislation and proposed changes for 2006
• EU developments
• Issues for Romanian companies

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Present legislation and proposed changes for 2006
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Very little guidance in Fiscal Code . . . .

• Only one reference to transfer pricing
  methodology (Article 11)
• Related party transactions may be adjusted to
  reflect market price
• Market price to be determined by most
  appropriate of following methods
• - comparable uncontrolled price
• - cost plus
• - resale price minus
• - any other OECD recognised method

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And no changes proposed for 2006 . . . .

• No changes to the Fiscal Code have been proposed
  for 2006 in relation to transfer pricing

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EU Developments
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EU adopts Code of Conduct regarding Transfer
Pricing documentation. . . .

• Code of Conduct regarding Transfer Pricing
  Documentation (EU TPD) adopted 10 November 2005
  (IP/05/1403)
• Follows on from 1990 Arbitration Convention
  (90/436/EEC) dealing with double taxation
  disputes arising from transfer pricing
  adjustments
• EU Member States to decide how to implement EU
  TPD

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Content of the EU TPD

• Masterfile standardised information relevant
  to all EU group members
• Country-specific file details relevant to
  local country company
• Masterfile and Country-specific file between them
  document methodology and rationale for pricing of
  all cross border transactions with local country

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Issues for Romanian companies
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Little legislation and absence of documentation
requirements produces uncertainty and
inconsistency of treatment by tax authorities . .
. . . .

• Article 11 is a starting point only
• Not enough explanation regarding the application
  of the three identified methods in Article 11
• References to any other OECD methodology too
  vague
• No norms regarding Advance Pricing Agreements

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Little legislation and absence of documentation
requirements produces uncertainty and
inconsistency of treatment by tax authorities . .
. . . .

• Legislation not clear whether Romanian companies
  need to establish their own methodology or
  whether group-wide methodology as applied to
  Romania is acceptable
• Sometimes difficult to establish comparable
  prices within Romania

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And the tax authorities frequently have a lack of
understanding of transfer pricing principles . .
. . .

• Not surprising because of limited guidance in the
  Fiscal Code
• The role of risk, ownership of intellectual
  property and economic function in relation to
  determination of transfer price usually not
  understood
• Inconsistency of treatment of companies related
  party transactions due to lack of training

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And the absence of documentation requirements is
a hidden trap . . . . . .

• The tax authorities can challenge a transfer
  price (and rightly so) BUT
• It is unfair to penalise a company on the basis
  that its documentation is non-existent or
  inadequate if there are no clear guidelines for
  companies as to what they need to do

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Transfer pricing problems on tax audit a real and
not a theoretical problem . . . . . .

• Inbound service charges traditionally a target of
  the tax authorities
• Basic housekeeping essential
• - Intragroup agreement with clear terms
• - Invoices in accordance with agreement
• - Certificate of Fiscal Residence from supplying
  company

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Transfer pricing problems on tax audit a real and
not a theoretical problem . . . . . .

• Transactions involving inbound and outbound goods
  increasingly scrutinised
• Again, basic housekeeping essential
• - intragroup agreement with clear terms
• - make sure risk and ownership of intellectual
  property clearly defined

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And have some documentation of how transfer price
is determined . . . . .

• There should be some documentation somewhere
  within the group to show how transfer price is
  determined
• Documentation should be consistent with OECD
  guidelines
• Need not necessarily be maintained in Romania,
  but Romanian company should have access to it to
  produce to tax authorities if required

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EU documentation requirements a likely indication
of things to come . . . . .

• Assuming Romania joins the EU on 1 January 2007,
  it will be required to follow the EU guidelines
  on transfer pricing and its documentation
• Romanian companies should discuss this issue with
  Head Office tax departments to see what the group
  is going to do regarding implementation of EU TPD
  in relation to Romania

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Do nothing is not a realistic option . . . . .

• If companies are not prepared for a tax audit on
  transfer pricing, it will be difficult for them
  to argue successfully against proposed
  adjustments
• Make sure that not only are basic essentials in
  place, but think now about EU TPD

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Raymond A BredenDirector, Taxation ServicesKPMG
RomaniaTel 40 741 800 753 (direct)Mobile
40 744 655 833Email rbreden_at_kpmg.com