Transfer pricing ebook 2013

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Transfer pricing ebook 2013

  1. 1. Global transfer pricing guideGRANT THORNTON
  2. 2. Contents01 Australia05 Canada09 China13 Czech Republic17 France21 Germany25 Guernsey29 Hungary33 India37 Ireland41 Italy45 Japan49 Jersey53 Korea57 Netherlands61 New Zealand65 Portugal69 Russia73 Slovak Republic77 Spain81 Sweden85 Taiwan89 United Kingdom93 United States97 ContactsMore and more fiscal authorities continue to develop their transfer pricing laws. Theprinciples are common, although interpretations differ from one tax authority toanother. Compliance takes time and patience, and the demands and penalties fromauthorities are increasing. There is greater emphasis on examination and audit activityto encourage compliance and ignoring this issue is not an option for any well-runbusiness.This international transfer pricing guide provides an overview of the differenttransfer pricing rules and regulations in key countries and details of how you can getfurther advice from Grant Thornton specialists who can help with:• audit support – sophisticated economic arguments, research and databases can helpdefend transfer pricing policies before the tax authorities• documentation – using expert local knowledge to prepare country-specificdocumentation to satisfy local tax regulations• planning – the growth or restructuring of a company doing business internationallyprovides an opportunity to review transfer pricing and tax planning to minimise taxburdens• supply chain re-engineering – the critical analysis of the supply chain to gainoperational efficiencies.For a more detailed discussion on any of the country specific transfer pricing rules, orfor further assistance in addressing and resolving any intercompany transfer pricingissues, please contact the relevant country contact listed at the end of each article andat the back of this guide.
  3. 3. Regulatory snapshotOverviewWhen did transfer pricing rules start?1982Level of TPLong standing and established regimeReturn disclosureYesDocumentationContemporaneous documentation is not compulsory but allows accessto reduced penalties in the event of a transfer pricing adjustmentMethodsMost appropriate method approachAudit riskHighPenaltiesHighAdvance Pricing Agreements (APAs)Available• Division 13 of part III of the Income TaxAssessment Act 1936, contains the Australiandomestic law with regards to transfer pricing,which has been in place since 1982. At the timeof writing, the government is proposing tomodernise the Australian transfer pricinglegislation. The new legislation has beenintroduced to parliament and is expected toreceive royal assent with only minormodifications. The following information isbased on the new transfer pricing legislationcontained in the Tax Laws Amendment(Countering Tax Avoidance and MultinationalProfit Shifting) Bill 2013 (new transfer pricingrules).• Taxpayers with an aggregate amount of theinternational related party transactions greaterthan $2 million need to disclose the details ofthe related party transactions in Section A of theInternational Dealing Schedule (IDS) along withtheir annual income tax returns.• The new transfer pricing rules align the transferpricing regime to the self-assessment taxationsystem operating in Australia. This places theresponsibility on the companies public officerfor determining the overall tax position arisingfrom all cross border dealings.• The taxpayer bears the burden of proof tosatisfy the Australian Tax Office (ATO) and thecourts that a company’s transfer pricingarrangements are at arm’s length.• There is no legal requirement to prepare andmaintain the transfer pricing documentation inAustralia. However, contemporaneousdocumentation is recommended to evidencecompliance with the arm’s length principle anddemonstrate reasonable efforts in the event of atransfer pricing adjustment and, in so doing,access to reduced penalties.• Australia applies the ‘most appropriate methodapproach’ for selecting the transfer pricingmethod(s).• Acceptable transfer pricing methods includecomparable uncontrolled price (CUP), resaleprice, cost plus, transactional net marginmethod (TNMM), profit split and othermethods that comply with the arm’s lengthprinciple.AustraliaGlobal transfer pricing guide – Australia 1
  4. 4. 2 Global transfer pricing guide – Australia• The main focus of transfer pricing audits by theATO are services, business restructuring, lowprofit and/or loss making entities, hybridfinancing arrangements, thin capitalisation andintellectual property shifting.• Tax penalty rates range from 10% to 50% onthe additional tax, depending on individualassessment of each circumstance.• Unilateral, bilateral and multilateral APAs areavailable to taxpayers in three different types ofprogramme, i.e. simplified, standard and complex.Does your country have transfer pricing rulesvs. ruling, laws and guidelines?The new transfer pricing rules relocate the domestictransfer pricing rules to subdivisions 815-B, 815-Cand 815-D of the Income Tax Assessment Act 1997(ITAA 97) to make sure a single set of rules applyfor both treaty and non-treaty countries. The newrules are designed to better align Australia’sdomestic rules with internationally consistenttransfer pricing approaches set out by theOrganisation for Economic Cooperation andDevelopment (OECD).Consistent with the approaches under Division13, the new rules in Subdivision 815-B apply thearm’s length principle to relevant dealings betweenboth associated and non-associated entities.Effective date of commencement of transferpricing regulationsTransfer pricing regulations are effective since 1982in Australia.Rulings, laws and guidelinesAustralia is a member of the OECD. Australiafollows OECD guidelines1in relation to transferpricing, and the principles of the OECD guidelinesare reflected in guidance that has been provided bythe ATO. The ATO has issued various taxationrulings concerning transfer pricing, which interpretthe application of the statutory rules; and provideguidance on issues not specifically covered bystatute, without a legally binding effect. Thetaxation rulings that relate to transfer pricinginclude:• TR 1994/14 – basic concepts underlyingdivision 13• TR 1997/20 – arm’s length transfer pricingmethodologies for international dealings• TR 1998/11 – documentation and practicalissues associated with setting and reviewingtransfer prices• TR 1998/16 – penalty tax guidelines• TR 1999/1 – international transfer pricing forintra-group services• TR 2001/11 – operation of Australia’spermanent establishment attribution rules• TR 2003/1 – thin capitalisation, applying thearm’s length debt test• TR 2004/1 – cost contribution arrangements• TR 2007/1 – effects of determinations madeunder division 13, including consequentialadjustments (replaces TR 1999/8)• TR 2010/7 – interaction of the thincapitalisation provisions and the transfer pricingprovisions• TR 2011/1 – application of the transfer pricingprovisions to business restructuring.Is transfer pricing documentation required? Ifso, what information should be included?There is no legal requirement to prepare andmaintain transfer pricing documentation inAustralia. While the subdivision does not mandatethe preparation or keeping of documentation, failingto do so prevents a taxpayer from establishing areasonably arguable position. Establishing areasonably arguable position allows an entity accessto lower administrative penalties. TR 1998/11recommends contemporaneous documentation toevidence compliance with the arm’s length principle;to fulfil the statutory requirements to keep records;to reduce the risk of tax audits and adjustments; andto reduce/mitigate penalties in the event of an auditadjustment. TR 1998/11 outlines the ATO’srecommended four step approach to transfer pricingdocumentation which provides a basis for reviewingand documenting transfer pricing for internationaldealings between related parties:• Step 1: accurately characterise the internationaldealings between the associated enterprises inthe context of the taxpayer’s business anddocument that characterisation• Step 2: select the most appropriate transferpricing methodology(ies) and document thechoice• Step 3: apply the most appropriate method,determine the arm’s length outcome anddocument the process• Step 4: ensure documentation is completeprocess to ensure adjustment for materialchanges.What are the deadlines for documentationpreparation?There is no specific deadline for documentationpreparation. Transfer pricing documentation isconsidered as ‘contemporaneous’ if prepared by thedue date for filing the annual income tax return.1 OECD Transfer Pricing Guidelines for Multinational Enterprises and TaxAdministrations, 1995 and subsequent updates
  5. 5. Global transfer pricing guide – Australia 3In which language should documentation befiled?Transfer pricing documentation should be preparedin English.How long is it necessary to keep transferpricing documentation?The new transfer pricing rules introduced an eightyear time limit on when the ATO can make transferpricing amendments, wth the exception on‘consequential adjustments’. This rule replaces thecurrent unlimited time period for making transferpricing amendments.Are intercompany agreements recommended?It is generally recommended that taxpayers supporttheir intercompany transactions throughintercompany agreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?Australian taxpayers need to disclose their relatedparty transactions in section A of the InternationalDealing Schedule (IDS) along with their annualincome tax returns. Taxpayers must complete theIDS in the event that the aggregate amount of theirinternational related party transactions or dealings(including the value of property transferred or thebalance outstanding on any intercompany loans) isgreater than $2 million. The IDS requires disclosureto the ATO of the following information:• types of related party transactions (e.g., tangibleproducts, services, financial transactions (loans,guarantees, derivative transactions, debtfactoring, securitisation), capital transactions,share-based employee remuneration plans, costcontribution arrangements)• magnitude of the related party transactions• related party transactions with specified (taxhaven) countries• transfer pricing methodology(ies) applied anddocumentation prepared to support the relatedparty transactions• business restructuring events• branch transactions.Which transfer pricing methods are acceptable?All transfer pricing methods are acceptable, i.e.CUP, resale price, cost plus, profit split (e.g.contribution analysis or residual analysis) andTNMM.Is there a priority among the acceptablemethods?Similar to the OECD guidelines, the mostappropriate method rule applies. However,depending on the availability of reliable comparabledata, traditional methods are preferred in thepractice to transactional profit methods.In addition the new transfer pricing rules allowfor the use of ‘a combination of methods’ toidentify the arm’s length conditions that operatebetween entities dealing cross-border.What is the statute of limitations on assessmentof transfer pricing adjustments?The new transfer pricing rules introduced an eightyear limit on when the ATO can make transferpricing amendments, with the exception on‘consequential adjustments’. This rule replaces thecurrent unlimited time period for makingadjustments.What rates and conditions apply for transferpricing penalties? And is there penalty relief?Penalty rates applying transfer pricing adjustmentsunder division 13 and DTAs are outlined in TR1998/16. Under the self-assessment regime (from1992/93 year of income and all subsequent years),the penalty rates imposed are:• 50% penalty rate on tax avoided for transferpricing arrangements entered into with the soleor dominant purpose of enabling a taxpayer topay no or less tax. The penalty rate may bereduced to 25% if the taxpayer has reasonablyarguable position• 25% of the tax avoided for other transferpricing arrangements; reducing to 10% if thetaxpayer has a reasonably arguable position.Generally, a position is considered as ‘reasonablyarguable’ if it is ‘about as likely as not’ to be correct.In order to demonstrate that a position isreasonably arguable, the taxpayer must prepare andmaintain documentation to support the arm’slength nature of its related party dealings.Tax penalties may be increased by 20% where:• a taxpayer takes steps to prevent or hinder theATO from discovering that a transfer pricingprovision should be applied• a taxpayer has been penalised under a schemesection in a prior year of income.
  6. 6. Tax penalty may be reduced:• by 20% if the taxpayer makes a voluntarydisclosure to the ATO after it has beeninformed of an impending audit• by 80% if the taxpayer makes a voluntarydisclosure to the ATO before it has beeninformed of an impending audit.The ATO has the discretion to remit all or part ofthe penalties. In addition to the penalty, thetaxpayer is liable to pay a shortfall interest chargeon the value of any increase in the tax assessmentarising from the ATO’s transfer pricingadjustments.An important element of the new transferpricing rules is the introduction of specific rulesallowing the ATO reconstruction powers todisregard the actual transaction and arrangements,where the actual economic substance of thetransaction differs from the legal form.The new transfer pricing rules introducethresholds for administration penalties arisingfrom the arm’s length principle on satisfying certaincriteria.Are there exemptions to transfer pricing rules inyour country?There is no exemption to transfer pricing rules inAustralia. The new transfer pricing rules may applyto all cross-border transactions between thirdparties. As such, all cross-border dealings aresubject to the arm’s length principle.Are advance pricing agreement (APA) optionsavailable?The ATO released detailed guidance on Australia’sAPA programme, i.e. Practice Statement LawAdministration 2011/1 (PS LA 2011/1 ) in March2011 (which replaces TR 95/23 that has beenwithdrawn). The practice statement outlines thepolicies and procedures of the ATO’s APAprogramme, which allows unilateral, bilateral, andmultilateral APAs.In addition, PS LA 2011/1 outlinesdifferentiated APA programmes, with threedifferent types of APAs, i.e. simplified, standardand complex.Tax audit areasTransfer pricing remains a high risk area. In May2009, the ATO announced a major transfer pricingproject, referred to as the ‘strategic complianceinitiative’. The strategic compliance initiativeproject was designed to protect Australia’s tax baseand the main focus areas are:• intragroup finance and guarantee fees• business restructures and transformations• intellectual property transactions• services to the mining industry• low-profit/loss making entities.To support the strategic compliance initiative, theATO recruited a large number of experiencedtransfer pricing staff.Contact usFor further information on transfer pricing in Australia pleasecontact:Jason CasasT +61 3 8663 6433E jason.casas@au.gt.com4 Global transfer pricing guide – Australia
  7. 7. Global transfer pricing guide – Canada 5Regulatory snapshotOverviewWhen did transfer pricing rules start?1997Level of TPEstablished regime, active tax authorityReturn disclosureT106 form discloses transactions undertaken with non–arm’s lengthnon-residents during the taxation yearDocumentationRequired if certain criteria are metMethodsMost appropriate method detailed in the OECD guidelinesAudit riskHighPenaltiesHighAdvance Pricing Agreements (APAs)Available• Canada has had transfer pricing rules since 1997and the regulations were applicable to taxationyears that began after 1997. The rules can befound in Section 247 of the Canadian incometax act.• In the tax filing, taxpayers with intercompanytransactions must disclose the types oftransactions and whether the documentationrequirements have been met if all transactionand intercompany balance values exceedCAN$1 million.• Acceptable TP methods include comparableuncontrolled price (CUP), resale price, costplus, profit split and transactional net margin.• The penalty is 10% (non-deductible) of the netincome or capital adjustment if the value of thisadjustment exceeds the lesser of 10% of thetaxpayer’s gross revenues and CAN$5 million,plus interest. The penalty is applied only whereit is concluded that ‘reasonable effort’ todetermine and use arm’s length prices was notmade.Does your country have transfer pricing rulesvs. ruling, laws and guidelines?The Canadian Income Tax Act (the Act) applies tothe taxation years beginning after 1998. Section 69of the Act applies to prior taxation years. The Actrepresents Canada’s transfer pricing legislation andcovers definitions, the calculation of transfer pricingadjustments, penalties, contemporaneousdocumentation requirements and timing.Administrative guidance relating to definitions,methods, penalties, cost sharing arrangements,confidentiality of third-party information, and theadvance pricing agreement (APA) and competentauthority processes are provided in informationcircular 87-2R ‘International transfer pricing’(1999). Other guidance:• Competent Authority process – IC 71-17R5• APA programme – IC 94-4R• Small business APA programme – IC 94-4RSR• Income tax transfer pricing and customs – IC06-1• Transfer pricing memorandum (TPM) series –ongoing [http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/trns/menu-eng.html]Canada
  8. 8. Effective date of commencement of transferpricing regulationsSection 247 of the Act applies to taxation yearsbeginning after 1998. Section 69 of the Act appliesto prior taxation years.Is transfer pricing documentation required? Ifso, what information should be included?Documentation must be prepared or obtainedbefore the tax filing due date for most corporations,six months after the corporate year end.Documentation must be provided to the CanadianRevenue Agency (CRA) within three months of thewritten request to submit documentation date.Canada is a member of Pacific Asia TravelAssociation (PATA), making that documentationstandard useful as guidance.Subsection 247(4) of the Act describes thecontemporaneous documentation requirement tobe recorded or documents prepared or obtainedthat provide a complete and accurate description of:• the property or services to which thetransaction relates• the terms and conditions of the transaction andtheir relationship, if any, to the terms andconditions of each other transaction enteredinto between the participants in the transaction• the identity of the participants in the transactionand their relationship to each other at the timethe transaction was entered into• the functions performed, the property used orcontributed and the risks assumed, in respect ofthe transaction, by the participants in thetransaction• the data and methods considered and theanalysis performed to determine the transferprices or the allocations of profits or losses orcontributions to costs, as the case may be, inrespect of the transaction• the assumptions, strategies and policies, if any,that influenced the determination of the transferprices or the allocations of profits or losses orcontributions to costs, as the case may be, inrespect of the transaction.What are the deadlines for documentationpreparation?Documentation must be prepared or obtainedbefore the tax filing due date. In the case ofcorporations such documentation must be completewithin six months after the taxation year end, andfive months after the taxation year end forpartnerships.In which language should documentation befiled?Transfer pricing documentation can be provided inEnglish or French.How long is it necessary to keep transferpricing documentation?In the case of foreign-controlled entities, the CRAmay reassess tax on transfer pricing adjustmentsmade in respect of tax years seven years prior to thedate of the notice of assessment. For Canadiancontrolled entities, this period is six years. In thecase of fraud or gross negligence, no statute oflimitations exists.Are intercompany agreements recommended?Yes, but not required.6 Global transfer pricing guide – Canada
  9. 9. Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?Canadian corporations and partnerships file ‘FormT106’ annually if all transaction and intercompanybalance values exceed CAN$1 million. Branches ofnon-resident corporations only file this form inrespect of transactions with other related non-residents. Form T106 reports (by related non-resident) the value of each type of transaction andintercompany balances as well as the transferpricing method used. Question 6 on this formrequires a yes or no response to the question ‘haveyou prepared or obtained contemporaneousdocumentation as described in subsection 247(4) ofthe Income Tax Act for the tax year/fiscal periodwith respect to the non-resident?’.Which transfer pricing methods are acceptable?The CRA favours application of OECD methods(CUP, resale price, cost plus, profit split and thetransaction net margin method) to each transactionor group of transactions that may be reasonablyaggregated. Methods are not discussed or ranked insection 247 of the Act.Is there a priority among the acceptablemethods?The CRA has endorsed the revisions made to theOECD guidelines in 2010, as such it is expected theCRA will endorse a ‘most appropriate’ methodapproach.What is the statute of limitations on assessmentof transfer pricing adjustments?In the case of foreign-controlled entities, the CRAmay reassess tax on transfer pricing adjustmentsmade in respect of tax years seven years prior to thedate of the notice of assessment. For Canadiancontrolled entities, this period is six years. In thecase of fraud or gross negligence, no statute oflimitations exists.What rates and conditions apply for transferpricing penalties? And is there penalty relief?Refer to subsection 247(3) of the Act. The penalty is10% (non-deductible) of the net income or capitaladjustment if the value of this adjustment exceedsthe lesser of 10% of the taxpayer’s gross revenuesand CAN$5 million, plus interest. The penalty isapplied only where it is concluded that ‘reasonableeffort’ to determine and use arm’s length prices wasnot made.Are there exemptions to transfer pricing rules inyour country?None.Global transfer pricing guide – Canada 7
  10. 10. Are advance pricing agreement (APA) optionsavailable?Unilateral, bilateral and multilateral APAs areavailable to Canadian taxpayers to the extent thatthese programs exist with Canada’s tax treatypartners. The CRA generally prefers bilateral APAsto unilateral APAs. A small business APA programwas started in 2005, this imposes certain restrictionsthat make agreements negotiated under thisprogram quite different from any other APA.Through its treaty network, Canada’scompetent authority engages in Mutual AgreementProcedure (MAP) exchanges with foreign taxauthorities. For more details, see IC 71-17R.Tax audit areasAudits are conducted by international tax auditorsand federal tax auditors at the Tax Service’s Office(TSO) level. It is usual for a taxpayer to receive awritten request for subsection 247(4)documentation at the beginning of an audit. Booksand records located outside of Canada may berequested by law and the CRA may request totravel (at the taxpayer’s expense) to the country inwhich these books and records are kept to inspectthese books and records, and also to perform sitevisits or interview personnel.Assistance to the TSOs is provided byInternational Advisory Service Section.Reassessments of tax caused by transfer pricingadjustments may be appealed provided that a‘notice of objection’ is filed with the appeals branchwithin 90 days of the date of the notice ofassessment.Contact usFor further information on transfer pricing in Canada pleasecontact:Peter KurjanowiczT +1 416 369 7036E peter.kurjanowicz@ca.gt.comDaniel MarionT +1 514 954 4625E marion.daniel@rcgt.com8 Global transfer pricing guide – Canada
  11. 11. Global transfer pricing guide – China 9Regulatory snapshotOverviewWhen did transfer pricing rules start?1998 (yet the most comprehensive legislative update so far occurredin 2009)Return disclosureYesDocumentationCompulsory with de minimis providedMethodsBest method approachAudit riskHighPenaltiesHighAdvance Pricing Agreements (APAs)Available• The core Transfer Pricing (TP) rules werepromulgated under circular 2 in January 2009with an effective date from 1 January 2008.• Taxpayers with intercompany transactions mustdisclose the transactions details through asmany as nine forms during the annual incometax filing process.• Contemporaneous TP documentation iscompulsory with de minimis threshold.China applies the ‘best method approach’ forconducting TP analysis.• Acceptable TP methods include comparableuncontrolled price (CUP), resale price, costplus, transactional net margin, profit split andother methods that comply with the arm’slength principle.• TP audit can be targeted at any transaction if itresults in the reduction of China’s tax revenue,and is more prone to intellectual property,equity and service provision transactions.• Other than administrative cash fines, deemedprofit adjustment is applied for not complyingwith the TP documentation obligation. TPAudit adjustment is subject to an interestsurcharge plus a 5% surcharge.• Advance Pricing Agreements (APA) areavailable to taxpayers with annual intercompanytransaction amount exceeding RMB40 million.An effective APA can cover three to five years.Does your country have transfer pricing rulesvs. ruling, laws and guidelines?The State Administration of Taxation (SAT) issuedGuoshuifa [2009] No. 2 ‘Implementation measuresof special tax adjustments (trial version)’ (circular 2)which contains 13 chapters and 121 articles. Itcovers related party transactions disclosure,contemporaneous documentation, transfer pricingaudits, thin capitalisation, cost contributionarrangement (CCA), APA, general anti-avoidance,controlled foreign corporation (CFC), and etc.Effective date of commencement of transferpricing regulationsCircular 2 is effective as of 1 January 2008.China
  12. 12. Rulings, laws and guidelinesIn addition to circular 2, there are several effectiverulings related to transfer pricing as following:• Guoshuifa [2008] no. 86: additional guidanceon service charges between parent andsubsidiary entities.• Guoshuifa [2008] no. 114: requiring taxpayersto disclose detailed related-party transactioninformation in the annual tax return process.• Caishui [2008] no. 121: additional guidance onthe application of thin capitalisation ratiosbetween related parties.• Guoshuihan [2009] no. 363: requiring loss-making single-functioned manufacturer/distributor/contract R&D service provider toprovide, prepare and submit transfer pricingdocumentation, regardless of its intercompanytransaction amount.Is transfer pricing documentation required? Ifso, what information should be included?Taxpayers are obliged to prepare transfer pricingdocumentation if they trigger the de minimsthresholds. As required by circular 2, transferpricing documentation should containorganisational structure, business and operation,related party transactions, selection and applicationof the transfer pricing method, comparable analysis,copies of intercompany agreements, functional andrisk analysis form and financial analysis form.What are the deadlines for documentationpreparation?The transfer pricing documentation should be inplace by 31 May of the year following the yearduring which the related-party transactions occur,and be submitted within 20 days upon request fromthe tax authorities. Where the enterprise cannotsubmit the documentation due to force majeure, itshall submit the documentation within 20 days afterthe elimination of the force majeure.In which language should documentation befiled?Transfer pricing documentation shall be filed andsubmitted in Chinese.How long is it necessary to keep transferpricing documentation?Enterprises are responsible for keepingcontemporaneous documentation for ten yearsstarting from 1 June of the year following the yearin which the documented related-party transactionsoccur.Are intercompany agreements recommended?It is recommended that taxpayers document theirintercompany transactions through intercompanyagreements.10 Global transfer pricing guide – China
  13. 13. Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?All taxpayers in China are required to prepare‘annual reporting forms of related partytransactions for PRC enterprises’ (annual TP filingforms) and submit them along with the annual taxfiling forms. The annual TP filing forms include: relationship between related parties related party transaction summary purchase and sales form service form intangible asset transaction form fixed asset transaction form financing form overseas investment form overseas payment form.Which transfer pricing methods are acceptable?CUP, resale price, cost plus, transactional netmargin, profit split and other methods that complywith the arm’s length principle.Is there a priority among the acceptablemethods?No, the best method approach applies.What is the statute of limitations on assessmentof transfer pricing adjustments?A maximum of ten years.What rates and conditions apply for transferpricing penalties? And is there penalty relief?Cash penaltyFailure to submit the annual TP filing forms or TPdocumentation is subject to a fine of RMB 2,000-10,000. For any entity which refuses to providetransfer pricing documentation and other relevantinformation on related party transactions, a fine ofRMB 10,000 to 50,000 should apply.Deemed profit adjustmentThe tax authority can use the deemed profit methodto conduct TP adjustment on an entity if the entityrefuses to prepare the transfer pricingdocumentation or discloses false information.Additional interest on transfer pricingadjustmentsStarting from 1 January 2008, the transfer pricingadjustment is subject to additional interest. Theinterest will be levied on a daily basis, counting thenumber of days in the period starting 1 June of thenext taxable year and ending the day when theunder-paid income tax is collected by The SAT. Theinterest rate equals to the People’s Bank of Chinalending rate plus an additional 5%. The additional5% can be waived if the enterprises fulfil thedocumentation obligation.Global transfer pricing guide – China 11
  14. 14. Are advance pricing agreement (APA) optionsavailable?Unilateral, bilateral and multilateral APAs areavailable. The negotiation and implementation of anAPA generally includes six phases: pre-filingmeeting, formal application, review and evaluation,negotiation, signing, execution and monitoring.Tax audit areasTransfer pricing is a high risk area. Transfer pricingis a key issue in any tax audit. The following casesmay easily draw the attention of the tax authorityand trigger a transfer pricing audit: loss makingcompanies with a single function, substantialdifference between related and non-related salesmargins, profit lower than its group enterprises orindustry standard, significant invoicing profit in taxhaven, recurring loss, marginal profit or fluctuatingprofit. The tax authorities focus especially on thefollowing industries/transactions: real estate,automobile, pharmaceutical, retail industries,transfer of intangible, services, financing, and equitytransfer.Contact usFor further information on transfer pricing in China please contact:Rose ZhouT +86 21 2322 0298E rose.zhou@cn.gt.com12 Global transfer pricing guide – China
  15. 15. Global transfer pricing guide – Czech Republic 13Regulatory snapshotOverviewWhen did transfer pricing rules start?1993Level of TPDeveloping regimeReturn disclosureNoDocumentationNot compulsoryMethodsBest method approachAudit riskLowPenaltiesLowAdvance Pricing Agreements (APAs)Available• The arm’s length principle was introduced in theCzech income taxes act as of 1 January 1993;however, until 2004 no guidelines wereavailable.• The core Transfer Pricing (TP) rules werepromulgated under Guideline D-258 in January2004.• Taxpayers with related-party transactions mustdisclose the transaction details upon request ofthe tax authorities during a tax audit.TP documentation is not compulsory butrecommended.• The Czech Republic applies the ‘best methodapproach’ for conducting TP analysis.Recommendable TP methods includecomparable uncontrolled price (CUP), resaleprice, cost plus, transactional net margin andprofit split.• TP audit can be targeted at any transactionbetween related parties; related parties aredefined as economically (direct or indirect shareof a minimum 25% of the share capital orvoting rights) or personally related (the sameperson participating in management or controlof both companies).• Regular penalties apply on TP auditadjustments: late payment interest and penaltypayment; on the other hand, TP auditadjustments shall be considered tax-deductibleby the recipient tax subject (Czech Republicsigned the Arbitration Convention90/436/EEC).• Advance Pricing Agreement (APA) in the formof binding ruling is available to all taxpayers andcan cover a maximimum of three years.Czech Republic
  16. 16. Does your country have transfer pricing rulesvs. ruling, laws and guidelines?The arm’s length principle is enacted in article 23 (7)of the Czech income taxes act as of its outset in1993. TP documentation requirements are specifiedin the Czech Ministry of Finance guidelines D-332and D-333 (accompanied by D-334 on the bindingruling), which however are not binding but serve asa recommendation. In general, the Czech Republicfollows the OECD guidelines1. TP regulationsapply to all related party transactions in which anentity subject to Czech income tax is involved.Related parties are defined as economically (director indirect participation of a mininimum 25% ofthe share capital or voting rights) or personallyrelated (the same person participating inmanagement or control of both companies); theCzech income taxes act also includes an anti-abuseclause when considering related parties, also entitiesthat established a legal relationship mainly toreduce the tax base or increase the tax loss; howeverthis concept applies to domestic taxpayers andentities from countries that did not conclude adouble tax treaty with the Czech Republic;otherwise, the definition of the double tax treatyshall prevail.Effective date of commencement of transferpricing regulationsTP regulations (arm’s length principle for relatedparties) in the Czech Republic have been effectivesince 1993.Rulings, laws and guidelinesBesides legally binding articles of the Czech tax law(as of 2004), several guidelines provide insight intothe position of the tax authorities without a legallybinding effect. These guidelines refer to the generalguidance on the application of the OECDguidelines (currently, as of 2011: D-332 and D-333);binding ruling for TP issues (D-334).Is transfer pricing documentation required? Ifso, what information should be included?Taxpayers are not obliged to prepare TPdocumentation, however they are obliged to provethat the arm’s length principles were observed; theform of the proof is not prescribed, but the TPdocumentation prepared according to OECDguidelines is recommended.What are the deadlines for documentationpreparation?The documentation (or any other evidence) shouldbe available when the company is asked during a taxaudit. Absent or non-sufficient documentation willshift the burden of proof from the Czech taxauthorities to the taxpayer to demonstrate that thetransfer prices are at an arm’s length basis.However, if the documentation is not availableupon request of the tax authorities, the taxpayermay agree on a deadline to prepare thedocumentation.14 Global transfer pricing guide – Czech Republic1 OECD Transfer Pricing Guidelines for Multinational Enterprises and TaxAdministrations, 1995 and subsequent updates.
  17. 17. In which language should documentation befiled?TP documentation can be submitted to the Czechtax authorities in the Czech language only.How long is it necessary to keep transferpricing documentation?TP documentation should be kept for the periodfor which the right of the tax authorities to assesstax, does not become statute-barred, i.e. usuallythree years. In cases of tax losses, the deadline maybe prolonged to five years, in cases of tax audits thedeadline may be prolonged to a maximum tenyears.Are intercompany agreements recommended?It is recommended (and usually required) by the taxauthorities that during tax audits, taxpayersdocument their intercompany transactions throughwritten intercompany agreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?No.Which transfer pricing methods are acceptable?Taxpayers are free to choose any OECD recognisedTP method, as long as the method results in anarm’s length pricing for the transaction.Is there a priority among the acceptablemethods?There is no priority among the acceptable methodsas long as the result is at arm’s length. Taxpayers arenot obliged to test all OECD recognised methods,though they should substantiate why the methodchosen is considered as the best method.What is the statute of limitations on assessmentof transfer pricing adjustments?TP adjustments can be assessed three years from thefiling deadline (usually three month after the end ofthe calendar or economic year) plus any extensionsprovided by the Czech income taxes act (e.g. taxloss, additional tax return, investment incentives).In certain cases (e.g. tax audit), this period can beextended up to ten years.What rates and conditions apply for transferpricing penalties? And is there penalty relief?No specific penalties exist; should the taxpayer failto bear the burden of proof, then additional tax isassessed or the assessed tax loss is decreased, the latepayment interest (Czech National Bank repo rate+14%) and penalty payment (20% of theadditionally assessed tax or 1% of the additionallyassessed tax loss reduction) apply. No penalty relief.Are there exemptions to transfer pricing rules inyour country?No.Global transfer pricing guide – Czech Republic 15
  18. 18. Are advance pricing agreement (APA) optionsavailable?Binding rulings based on the submitted TPdocumentation are possible. A fee of CZK 10,000(approx. EUR 400) must be paid in advance; onebinding ruling may involve one or moretransactions. Issued binding ruling is valid onlyceteris paribus, by the same tax authority that hasissued it for a maximum of three years.Tax audit areasTP is still a relatively low risk area. TP audits arerare and TP is not an issue in every tax audit.However, as of 2012 a new specialised tax office wasintroduced that should be equipped with TPspecialists; this tax authority shall administer largetaxpayers (including banks and insurancecompanies) and shall perform specialised tax audits,including TP audits.Contact usFor further information on transfer pricing in the Czech Republicplease contact:Helmut HetlingerT +420 296 152 229E helmut.hetlinger@cz.gt.com16 Global transfer pricing guide – Czech Republic
  19. 19. Global transfer pricing guide – France 17Regulatory snapshotOverviewWhen did transfer pricing rules start?The first tax guideline with respect to transfer pricing entered intoforce in 1973. The first tax rule with respect to transfer pricingdocumentation requirements was issued in 1996.Level of TPLong standingReturn disclosureNoDocumentationAccording to sections L13 AA, L13 AB and L13 B of the taxprocedures code, transfer pricing documentation must be availableupon request for the French tax authorities.MethodsThe French tax legislation is based on the comparable uncontrolledprice method (CUP). However, all methods approved in the OECDguidelines can be applied in France as long as they are supported byan appropriate transfer pricing study.Audit riskLowPenaltiesThere are no specific tax penalties in the event of reassessmentsrelating to the application of transfer pricing legislation. Standardpenalties indeed apply under such circumstances.For insufficient or non-existent documentation, the French taxauthorities apply a minimum penalty of €10,000 which can beincreased up to 5% of the tax, reassessed per fiscal year.Advance Pricing Agreements (APAs)APA’s are available to companies. Unilateral APAs can also apply but inlimited situations. A specific APA procedure exists for SMEs within thedefinition of European Union law.Does your country have transfer pricing rulesvs. ruling, laws and guidelines?Article 57 of the French tax code contains the mainFrench legal provisions on transfer pricing (TP). Itstates that in assessing the income tax due fromFrench taxable entities that are controlled by or thatcontrol entities established outside France, anyprofits indirectly transferred to the latter, whetherby an increase or reduction in purchase or saleprices or by any other means, shall be added backto taxable income.Articles L13 AA, L13 AB and L13 B of theFrench tax procedures code set out the formaldocumentation requirements in France.French regulations and guidelines are broadlybased on and refer to the OECD guidelines1.Effective date of commencement of transferpricing regulationsTP regulations have been effective in France since1973.France1 OECD transfer pricing guidelines for multinational enterprises and taxadministrations, 1995 and subsequent updates.
  20. 20. Rulings, laws and guidelinesBesides articles of the French tax law, several taxguidelines exist which provide insight into theposition of the tax authorities. They concernapplication of article 57 of the French tax code (4A-2-73; 4 A-1211; 4 A-5-83); advance pricingagreements (4 A-8-99; 4 A-11-05); documentationrequirements (13 L-7-98; 4 A-10-10) and SME (4A-13-06).Is transfer pricing documentation required? Ifso, what information should be included?According to sections L13 AA and L13 AB, TPdocumentation must be available for the French taxauthorities at the opening of a tax audit.Companies in the scope of these documentationrequirements are:• French companies with annual sales or grossassets totaling €400 million• French subsidiaries with more than 50% oftheir capital or voting rights owned, directly orindirectly, by French or foreign entities meetingthe €400 million criterion above• French parent companies that directly orindirectly own at least 50% of companiesmeeting the €400 million criterion.When the annual sales or gross assets do not meetthe €400 million threshold, taxpayers must stillcomply with the ‘de facto’ documentationrequirement in the event of a tax audit in order toavoid penalties.The TP documentation includes two reports:• a general report that provides an overview of thewhole group and entities• a specific report focused on the French entity.A specific additional documentation must beprovided in case of transactions entered into withaffiliate entities located in ‘non cooperative states’(Botswana, Brunei, Guatemala, Marshall Islands,Montserrat, Nauru, Niue and the Philippines).What are the deadlines for documentationpreparation?According to sections L13 AA and L13 AB, thedocumentation should be available at the beginningof the tax audit i.e. as from the date of the firstmeeting with the tax inspector. For companies thatare not in the scope of sections L13 AA and L13AB, the documentation has to be available uponrequest of the tax authorities during a tax audit. Theminimum deadline to reply is two months.In which language should documentation befiled?In principle, all documents provided to the Frenchtax authorities must be in French. In practice, if thedocuments are in English, a translation has to beprovided upon request of the tax inspector. It isrecommended to provide the tax inspector with asummary in French of the TP policy as soon as thetax inspector raises TP questions.How long is it necessary to keep transferpricing documentation?The minimum required retention period for TPdocumentation is the time allotted by the generalstatute of limitation relating to corporate incometax return filings i.e. during the years open to taxaudit (see below statute of limitations).18 Global transfer pricing guide – France
  21. 21. Are intercompany agreements recommended?It is strongly recommended that taxpayersdocument their intercompany transactions throughintercompany agreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?No.Which transfer pricing methods are acceptable?Taxpayers are free to choose any OECD recognisedTP method as long as the method results in an arm’slength pricing for the transaction. Taxpayers are notobliged to test all OECD recognised methods,although they must substantiate the methodchosen.Is there a priority among the acceptablemethods?There is no priority among the acceptable methods,as long as, the result is at arm’s length. The Frenchtax authorities nevertheless usually prefer thecomparable uncontrolled price (CUP) method,since article 57 of the French tax code is based onthat method.What is the statute of limitations on assessmentof transfer pricing adjustments?There is no specific TP statute of limitations. Theusual statute of limitation regarding corporateincome tax applies i.e. 31 December of the thirdyear, following the year during which a fiscal year isclosed. Fiscal years which were in a tax loss positioncan still be audited after the three year period, if thesaid tax losses have been offset against the taxprofits of a fiscal year still open to tax audit.What rates and conditions apply for transferpricing penalties? And is there penalty relief?There is no specific penalty due to the violation ofTP regulations (except documentation rules – seebelow). All penalties relating to a tax audit are basedon the amounts reassessed. The most usual penaltiesare late payment penalties i.e. late payment interest(0.40% per month) or/and late payment fine (5%or 10%). In the event of tax fraud, penalties canreach 40% or 80% of the tax that has been avoided.Companies that are required to have TPdocumentation can be subject to penalties if they donot comply with their requirements (minimumpenalty of €10K, and up to 5% of the taxreassessed per fiscal year).Are there exemptions to transfer pricing rules inyour country?No.Global transfer pricing guide – France 19
  22. 22. Are advance pricing agreement (APA) optionsavailable?Unilateral, bilateral and multilateral APAs areavailable. Pre-filing meetings are organised with theFrench tax authorities to discuss the case, before aformal APA request is made. The APA, whichcannot be less than three years or more than fiveyears, makes sure that the concerned companiescannot be reassessed by the tax authorities on thebasis of their TP policies, for the financial yearsconcerned by the agreement and assuming the factpattern given (when the corresponding applicationwas filed) correctly reflects the reality.A streamlined procedure exists for SMEs withinthe definition of European Union law. Thedocumentation required by the French taxauthorities is lightened, and the French taxauthorities assist the companies in the preparationof their request.Tax audit areasWhen a French company belongs to aninternational group of companies, the tax inspectorfrequently checks whether TP rules are correctlyapplied. This situation also concerns SMEs andgroups of two companies i.e. a French companywhich is a subsidiary of a non French company orwhich has a subsidiary outside France. TP rules arevery often a key issue in tax audits. The French taxauthorities especially focus on the following areas:loss making routine functions, intellectual property(IP) transactions (transfer of IP, royalties) andbusiness reorganisations.Contact usFor further information on transfer pricing in France pleasecontact:Alexis MartinT +33 (0)1 53 42 61 76E amartin@avocats-gt.comElvre Tardivon-LorizonT +33 (0)1 53 42 61 60E etardivonlorizon@avocats-gt.comPatricia MaloccoT +33 (0)1 53 42 61 43E pmalocco@avocats-gt.com20 Global transfer pricing guide – France
  23. 23. Global transfer pricing guide – Germany 21Regulatory snapshotOverviewWhen did transfer pricing rules start?2003Level of TPEstablished regimeReturn disclosureNoDocumentationCompulsory with thresholdMethodsBest method approachAudit riskHighPenaltiesHighAdvance Pricing Agreements (APAs)Available• The basic rules for Transfer Pricing (TP) inGermany were announced in the early 1980s.These rules were expanded by several importantsupplemented rules, which were promulgated inMay 2003 (documentation requirements) andAugust 2008 (transfer of business) with aneffective date from 1 January 2003 and 1January 2008 respectively.• TP documentation is compulsory within deminims threshold.• Germany applies the ‘best method approach’for conducting TP analysis.• Acceptable TP methods include comparableuncontrolled price (CUP), resale-minus, costplus, transactional net margin (TNM), profitsplit and other methods that comply with thearm’s length principle.• TP documentation has to be provided during anon-going tax field audit and only on request ofthe tax inspector in charge. There is no need tosubmit the TP documentation together with theannual tax returns.• If the taxpayer does not submit the requireddocumentation in a timely manner, there will besevere consequences. In case of a violation ofthe obligation to cooperate, the tax authoritiesare entitled to increase the tax basis based ontheir own estimations. In addition to this, thetax authority provides for a penalty of 5% to10% of the additional estimated income. If thereis a delay in submitting usable documentation, apenalty of at least €100 for each day beyond theday of the deadline becomes due with amaximum penalty of €1,000,000.• Advance pricing agreements (APAs) areavailable to every taxpayer. An effective APAcan cover three to five years.Germany
  24. 24. Does your country have transfer pricing rulesvs. ruling, laws and guidelines?The arm’s length principle and transfer pricingdocumentation requirements are enacted in ‘article1’ of the foreign tax act and ‘section 90 paragraphthree’ of the German general tax code. Specific non-statutory guidance was provided by the FederalMinistry of Finance in February 1983 and October2010. The German transfer pricing legislation is notnecessarily committed to following the OECD’s TPguidelines exactly. However, it refers to and isbroadly consistent with them. TP regulations applyto all related party transactions without a thresholdin which an entity subject to German taxation isinvolved.Effective date of commencement of transferpricing regulationsTP regulations regarding the obligation to providewritten TP documentation have been effective inGermany since 2003.Rulings, laws and guidelinesBesides legally binding articles of the German taxlaw, several decrees provide insight into the positionof the tax authorities without a legally bindingeffect. These decrees refer to general guidance onthe profit allocation to related companies (BMF IVC 5 – S 1341 – 4/83), the attribution of profits topermanent establishments (FM Baden-WürtembergS 1300 – 20); intercompany services (BMF IV B 4 –S 1341 – 14/99), business restructuring (BMF IV B4 – S 1341 – 08/10003); APAs (BMF IV B 4 – S 1341– 38/06) and guidance with respect to theadministrative principle procedures (BMF IV B 4 –S 1341 – 1/05).Is transfer pricing documentation required? Ifso, what information should be included?Taxpayers are obliged to prepare TP documentationand to keep it in their accounting records. Inprinciple the documentation of the taxpayer shouldsubstantiate the serious effort to comply with thearm’s length principle. The taxpayer needs toexplain from his point of view the appropriatenessof the transfer prices using objective criteria.According to German regulations regarding thedocumentation of profit allocation (GAufzV), thenature, scope and processing of the relevant facts, aswell as, the direct economic and legal aspectsthereof need to be exposed. In addition, theorganisational and operational company structureneeds to be displayed. Essentially, the followingparts of the documentation of facts are important:business description, organisational structure,functional (including risk) analysis, industryanalysis, contractual terms and conditions of thetransactions, financial performance, information onthe intercompany transactions, substantiation oftransfer pricing method and prices actually charged.22 Global transfer pricing guide – Germany
  25. 25. Is there a threshold for preparing transferpricing documentation?Small companies are exempt from the requirementof the detailed TP documentation. Small companiesare where neither the total revenue from thedelivery of goods (from transactions with relatedparties) exceeds €5,000,000 nor the total revenuefrom services other than the delivery of goods(from transactions with related parties) exceeds€500,000. Nevertheless, small companies need toprovide evidence of the compliance with the arm’slength principle.What are the deadlines for documentationpreparation?The deadline for the submission of the documentsis 60 days after the documentation has beenrequested by the Fiscal Authority. If thedocumentation contains extraordinary transactions,the deadline is shortened to 30 days. Absent(sufficient) documentation will shift the burden ofproof from the German tax authorities to thetaxpayer, to prove that the transfer prices are atarm’s-length.In which language should documentation befiled?Transfer pricing documentation should be filedwith the German tax authorities in German.How long is it necessary to keep transferpricing documentation?Transfer pricing documentation should be kept forat least ten years.Are intercompany agreements recommended?It is recommended that taxpayers document theirintercompany transactions through intercompanyagreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?In Germany taxpayers are not obliged to discloseany information concerning related partytransactions in their (corporate income) tax returns.Which transfer pricing methods are acceptable?German tax authorities accept the use of thetraditional transaction methods (CUP, resale-minus,cost plus) as well as the use of TNM method andprofit share methods, if applicable.Is there a priority among the acceptablemethods?German tax authorities prefer to use the traditionaltransaction methods. Nevertheless, taxpayers arefree to choose any other TP methods if thetraditional methods are not applicable and as longas the chosen method results in an arm’s lengthpricing for the transaction. Taxpayers are notobliged to test all recognised methods, althoughthey must substantiate the method chosen.What is the statute of limitations on assessmentof transfer pricing adjustments?Basically TP adjustments can be assessed five yearsfrom the tax year-end, plus any extensions providedby the German tax authorities for filing tax returns.Global transfer pricing guide – Germany 23
  26. 26. What rates and conditions apply for transferpricing penalties? And is there penalty relief?A violation of the obligation to co-operate will leadto penalties in addition to the tax. The minimumpenalty is €5,000 and the tax authority provides fora penalty of 5% to 10% of the additional estimatedincome. If there is a delay in submitting usable data,a penalty of at least €100 for each day, beyond theday of the deadline becomes due with a maximumpenalty of €1,000,000.Are advance pricing agreement (APA) optionsavailable?Since 2006 the taxpayer has the opportunity toobtain an advance pricing agreement (APA) fromthe fiscal authorities. Bilateral and multilateralAPAs are available but unilateral APAs are nolonger supported by the German tax authorities.Pre-filing meetings are mandatory in the course ofan APA request in order to discuss the case before aformal APA process is initiated.Tax audit areasTransfer pricing is a high risk area since it is a keyissue in any tax audit. The German tax authoritiesespecially focus on the following areas: loss makingroutine functions, IP transactions (transfer of IP,royalties), transactions with permanentestablishments, head office activities, principalstructures (including centralised functions andpurchase offices), business reorganisations andfinancial transactions.Contact usFor further information on transfer pricing in Germany pleasecontact:Harald MüllerT +49 211 9524 8139E harald.mueller@wkgt.com24 Global transfer pricing guide – Germany
  27. 27. Global transfer pricing guide – Guernsey 25Regulatory snapshotOverviewWhen did transfer pricing rules start?No current transfer pricing rulesLevel of TPDeveloping regimeReturn disclosureNoDocumentationNot compulsoryMethodsBest method approachAudit riskLowPenaltiesLowAdvance Pricing Agreements (APAs)Available• Guernsey has not introduced formal transferpricing rules into its domestic tax legislationhowever under certain double tax treaties thereis provision to apply generally accepted transferpricing principles.• There is no formal requirement to discloseintercompany transactions separately.• Guernsey uses domestic law in that all expensesmust have been incurred wholly and exclusivelyfor the purposes of trade to apply transferpricing methodology.• Although there is no formal requirement fortransfer pricing documentation, in realityevidence will be required to justify that theexpense has been incurred wholly andexclusively for the purposes of the trade. Theoption on how to accurately calculate thisexpense would fall with the claimant and anymethod that complies with the arms lengthprinciple would be acceptable.• No additional charges are levied should there bea dispute concerning whether a transaction isproperly calculated within the tax computationsof the entity on the understanding that thedisclosure was made originally in good faith.Does your country have transfer pricing rulesvs. ruling, laws and guidelines?Although there is no specific legislation, it isexpected that the arm’s length principle and transferpricing guidelines laid down by the OECD arefollowed.Effective date of commencement of transferpricing regulationsThe arms length principle is enshrined in Guernseydomestic law and has been in existence since theoriginal law was enacted.Rulings, laws and guidelinesGuernsey uses an arm’s length principle and appliesthe domestic law provisions surrounding expenseswhich require them to be incurred wholly andexclusively for the trade in order to apply a transferpricing methodology. No formal guidelines havebeen published.Guernsey
  28. 28. Is transfer pricing documentation required? Ifso, what information should be included?In order to justify that an intercompany expensehas been incurred wholly and exclusively for thetrade, the claimant would need to provide (if asked)transfer pricing documentation. The transferpricing documentation should describe howtransfer prices have been determined and includeinformation which enables the tax authorities toevaluate the arm’s length nature of the transactions.What are the deadlines for documentationpreparation?The burden of proof will rest with the taxpayer todemonstrate that the transfer prices have beencalculated at arm’s length. Although at the time ofthe transaction it is not mandatory to produce anyformal documentation the taxpayer should be able,within a reasonable time, to provide suchinformation as to justify the charge made.In which language should documentation befiled?EnglishHow long is it necessary to keep transferpricing documentation?Transfer pricing documentation should be kept forat least seven years.Are intercompany agreements recommended?It is recommended that taxpayers document theirintercompany transactions through intercompanyagreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?No separate or formal disclosures are required.Which transfer pricing methods are acceptable?Taxpayers are free to choose any OECD recognisedtransfer pricing method as long as the methodresults in an arm’s length pricing for the transaction.Taxpayers are not obliged to test all OECDrecognised methods, though they must substantiatethe method chosen.Is there a priority among the acceptablemethods?There is no priority among the acceptable methodsas long as the result is at arm’s length.What is the statute of limitations on assessmentof transfer pricing adjustments?Transfer pricing adjustments can be assessed sixyears from the tax year-end plus any extensionsprovided by the Guernsey tax authorities forregistering appeals. Should negligence or fraud beproved then there is no time limitation.26 Global transfer pricing guide – Guernsey
  29. 29. What rates and conditions apply for transferpricing penalties? And is there penalty relief?There are no specific transfer pricing penalties orrates.Are there exemptions to Transfer Pricing rulesin your country?All tax returns are required to comply with theprinciple that all expenses claimed for tax purposeshave been incurred wholly and exclusively for thetrade.Are advance pricing agreement (APA) optionsavailable?Should it be required for a transaction then it ispossible to obtain an APA. Pre-filing meetings canbe organised with the Guernsey tax authorities inorder to discuss the case before a formal APArequest is made.Tax audit areasConnected party transactions are a high risk area inany tax audit. The Guernsey tax authorities wouldfocus on the following areas: loss making routinefunctions, transfer of intellectual property/royalties,transactions with permanent establishments, headoffice activities, principal structures (includingcentralised functions and purchase offices), businessreorganisations, captives and financial transactions.Contact usFor further information on transfer pricing in Guernsey pleasecontact:Mark ColverT +44 (0)1481 753 400E mark.colver@gt-ci.comGlobal transfer pricing guide – Guernsey 27
  30. 30. 28 Global transfer pricing guide – Guernsey
  31. 31. Global transfer pricing guide – Hungary 29Regulatory snapshotOverviewWhen did transfer pricing rules start?1992Level of TPDeveloping regimeReturn disclosureYesDocumentationCompulsoryMethodsBest method approachAudit riskHighPenaltiesHighAdvance Pricing Agreements (APAs)AvailableDoes your country have transfer pricing rulesvs. ruling, laws and guidelines?The arm’s length principle and transfer pricingdocumentation requirements are enacted in article18 of the Hungarian corporate income tax act andthe 22/2009 ministry of finance decree. In general,Hungary follows OECD guidelines.Effective date of commencement of transferpricing regulationsTransfer pricing regulations are effective since 1992in Hungary. Transfer pricing documentationrequirements are effective since 2003.Rulings, laws and guidelinesThe 22/2009 ministry of finance’s decree providesdetailed information on the requirements of theHungarian tax authorities referring to transferpricing documentation.Is transfer pricing documentation required? Ifso, what information should be included?Taxpayers are obliged to prepare transfer pricingdocumentation and to keep it in their accountingrecords. Taxpayers have the right to choose whetherthey use the combined documentation (master fileand country specific file) or the separate countryspecific documentation. The transfer pricingdocumentation should describe how transfer priceshave been determined and include informationwhich enable the tax authorities to evaluate thearm’s length nature of the transactions. Thereforethe documentation must contain businessdescription, organisational structure, functionalanalysis (including risk), industry analysis,contractual terms and conditions of thetransactions, information on the intercompanytransactions, benchmarking, substantiation oftransfer pricing method and prices actually charged.Hungary
  32. 32. What are the deadlines for documentationpreparation?The documentation must be prepared by the day ofsubmission of the annual corporate income tax. Ifthe documentation is not available upon request ofthe tax authorities in a tax audit, the taxpayer ispenalised immediately.In which language should documentation befiled?Transfer pricing documentation can be filed eitherin Hungarian or any other foreign language. If thedocumentation is in a foreign language, the taxauthorities have the right to ask for a Hungariantranslation at the taxpayer’s expense.How long is it necessary to keep transferpricing documentation?Transfer pricing documentation should be kept forfive years from the last day of the year when theCIT return was submitted, which is the limitationperiod for taxes.Are intercompany agreements recommended?It is highly recommended that taxpayers documenttheir intercompany transactions in writtenintercompany agreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?Hungarian corporate income taxpayers need tomark in their annual tax returns whether they havechosen the country specific documentation or thecombined documentation. The documentation itselfdoes not need to be submitted together with theannual corporate income tax return.The taxpayer must report related partycompanies to the tax authority having executedtheir first contract with that party within 15 days.Which transfer pricing methods are acceptable?The corporate income tax act lists the acceptablemethods as follows: comparative price, resale price,cost and income, transactional net margin,transactional profit split and any other method ifthe fair market price cannot be determined byeither of the before mentioned methods. Taxpayershave the possibility to choose from each thesemethods.Is there a priority among the acceptablemethods?There is no priority among the acceptable methodsas long as the result is at arm’s length. Howevertaxpayers must declare in the transfer pricingdocumentation, why they have chosen othermethods instead of the five named methods.What is the statute of limitations on assessmentof transfer pricing adjustments?Transfer pricing adjustments can be assessed fiveyears from the end of the year when the annual taxreturn should have been submitted.30 Global transfer pricing guide – Hungary
  33. 33. What rates and conditions apply for transferpricing penalties? And is there penalty relief?Those taxpayers, who fail to comply with theobligation of keeping records related to thedetermination of the arm’s length price, may besanctioned by a default penalty of two millionHUF per each documentation for the first time andfour million HUF per each documentation, if theinfringement of the obligation is committedrepeatedly. If the taxpayer further on does not meetthe obligation, the maximum amount of the penaltyis eight times the amount of default penaltyimposed on the taxpayer in the first case. The taxauthorities also adjust the tax base of the taxpayerwith the difference of the market level and thetransfer price and also levy a default penalty, whichis the 50% of the tax lack and late penalty interest isalso charged.Are there exemptions to Transfer Pricing rulesin your country?Small enterprises are not obliged to prepare transferpricing documentation, but they are obliged to beable to prove that the prices applied are arm’s lengthprices. No transfer pricing documentation isrequired on transactions where the value is under50 million HUF in the current year from thestarting date of transaction. There is also no transferpricing documentation required in case ofrecharging, in unchanged amounts, or the costs ofservices or goods supplied is not within the scope ofthe main activity of the affiliated company. Thisexemption is subject to the condition that neitherthe company providing the service nor the supplierof the goods is in affiliated company relationshipwith any of the related parties.Are advance pricing agreement (APA) optionsavailable?Unilateral, bilateral and multilateral APAs areavailable. The resolution is valid for a specific term,minimum of three and maximum of five years.Before submitting APA consultation can beorganised with the tax authorities. The outcome ofsuch prior negotiations shall not be binding uponthe applicant or upon the competent authority inthe proceedings for determining arm’s length price.The fee of APA is:• minimum 500 thousand HUF and maximumfive million HUF for unilateral proceedings,where fair market price is established by themethod of comparative prices, by the method ofresale prices or by the cost and income method• minimum two and maximum seven millionHUF for unilateral proceedings, where fairmarket price is established by any method otherthan mentioned in point a)• minimum three and maximum eight millionHUF for bilateral proceedings• minimum five and maximum ten million HUFfor multilateral proceedings.If fair market price (price range) cannot bedetermined as a specific sum, the fee shall equal thefee minimum, depending on the type ofproceedings.Global transfer pricing guide – Hungary 31
  34. 34. Tax audit areasTransfer pricing is a high risk area. Existence oftransfer pricing documentation is always checked ina tax audit. In a tax audit not only the existence ofthe document, but the prices are also checked inincreasing volume.Contact usFor further information on transfer pricing in Hungary pleasecontact:Waltraud KörblerT +36 1 4552000E w.koerbler@ib-gtbudapest.co.hu32 Global transfer pricing guide – Hungary
  35. 35. Global transfer pricing guide – India 33IndiaRegulatory snapshotOverviewWhen did transfer pricing rules start?1 April 2001Level of TPDeveloping regimeReturn disclosureYesDocumentationCompulsory with thresholdMethodsBest method approachAudit riskHighPenaltiesHighAdvance Pricing Agreements (APAs)AvailableDoes your country have transfer pricing rulesvs. ruling, laws and guidelines?The 2001 finance act, introduced transfer pricinglaw in India through sections 92A to 92F of theIndian income tax Act, 1961) and rules 10A to 10Eof the 1962 Indian income tax rules (the rules),which guides computation of the transfer price andsuggests detailed documentation procedures.Transfer Pricing Regulations (TPRs) are applicableto all enterprises that enter into an ‘internationaltransaction’ with an ‘associated enterprise’.Therefore, generally it applies to all cross bordertransactions entered into between related parties.‘Related parties’ is exhaustively defined and doesnot only includes shareholdings of more than 26%,but also other criteria resulting in control andmanagement, which are explicitly defined.The 2012 finance act expanded the scope ofTPRs by insertion of a new section 92BA in the1961 Indian income tax act, to include specifieddomestic transactions (SDTs). SDTs would include,transactions entered into by domestic relatedparties, or by an undertaking with anotherundertaking of the same tax payer. However, thethreshold for this to trigger is INR 50 million(approximately USD 1 million).When examining transfer pricing issues, Indiafollows the arm’s length principle in determiningthe price of transactions between related parties.OECD guidelines are used for guidance purposesonly.Effective date of commencement of transferpricing regulationsIn India, TPRs are effective for all accountingperiods ending on or after 31 March 2002.
  36. 36. Rulings, laws and guidelinesThe transfer pricing legislation contained in the2001 finance act is found in section 92 of the Indianincome tax act and rules 10A to 10E of the Indianincome tax rules.Is transfer pricing documentation required? Ifso, what information should be included?The burden of demonstrating the arm’s lengthnature of the international transactions rests withthe taxpayer. Rule 10D of the 1962 Indian incometax act, prescribes thirteen mandatory documents inthis regard and requires the taxpayer to maintaindocumentation contemporaneously. Some of therequirements are general in nature while others aremore specific to the relevant internationaltransactions. This includes:Principal documentation• business and group’s overview (description ofthe ownership structure, business of the groupetc.)• description of international transactions• functional asset and risk analysis• selection and application of the mostappropriate method• benchmarking and identification of comparables• other supporting details/documents which helpin demonstrating the arm’s length nature oftransaction.Supporting documentation – the informationwould need to be supported by authenticdocumentation• official publications and databases from thegovernment of the country of residence of theassociated enterprise or any other country• market research studies brought out byinstitutions of national and international repute• price publications, including stock exchange andcommodity market quotations• published accounts and financial statements,agreements and contracts between theassociated enterprises.Information is required to be maintained bytaxpayers who enter into international related partytransactions that are valued at more than INR 10million.What are the deadlines for documentationpreparation?The information and documentation specifiedshould, as far as possible, be contemporaneous andexist by the specified date of the filing of the incometax return, which is 30 November following the endof the financial year.In which language should documentation befiled?Transfer pricing documentation needs to be filed inEnglish.How long is it necessary to keep transferpricing documentation?Transfer pricing documentation should be kept andmaintained for at least eight years from the end ofthe relevant assessment year.34 Global transfer pricing guide – India
  37. 37. Are intercompany agreements recommended?It is recommended that taxpayers document theirintercompany transactions through intercompanyagreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?The taxpayer is required to file an accountantsreport in ‘form 3CEB’ with the income taxdepartment within the due date of filing the returnof income which, presently, is 30 Novemberfollowing the end of the financial year, for taxpayerssubject to transfer pricing. The report providesdetails on the international related partytransactions and provides a confirmation of theaccountant on whether the required documentationhas been maintained by the taxpayer.Which transfer pricing methods are acceptable?The arm’s length price in relation to an internationaltransaction is required to be determined by any ofthe following methods: comparable uncontrolledprice (CUP), resale price, cost plus, profit split,transactional net margin and the other specifiedmethod.Recently, the Central Board of Direct Taxes(CBDT) clarified the other method by saying “fordetermination of the arms’ length price in relationto an international transaction shall be any methodwhich takes into account the price which has beencharged or paid, or would have been charged orpaid, for the same or similar uncontrolledtransaction, with or between non-associatedenterprises, under similar circumstances,considering all the relevant facts”. The othermethod or the sixth method is effective from 1April 2012 i.e. from FY 11-12 onwards.Is there a priority among the acceptablemethods?There is no priority among the acceptable methodsas long as the result is at arm’s length. The mostappropriate method will be the method which isbest suited to the facts and circumstances of eachparticular international transaction, and whichprovides the most reliable measure of an arm’slength price in relation to an internationaltransaction.What is the statute of limitations on assessmentof transfer pricing adjustments?As per the 2012 finance act, effective 1 July 2012,the transfer pricing audit order is to be passedwithin three years from the end of the year inwhich the return is filed.An appeal against the order of the transferpricing audit lies with the appeals commissionerand further appeals lie with tribunal, high court andsupreme court respectively. Effective from 1October 2009, a dispute resolution panel (DRP) isconstituted for speedy resolutions of disputesinvolving foreign companies or companies withtransfer pricing dispute. The DRP is an alternate tothe appeals commissioner and a direct route toreach the tribunal should the disputes continue.Global transfer pricing guide – India 35
  38. 38. What rates and conditions apply for transferpricing penalties? And is there penalty relief?Indian TPRs prescribes onerous penalconsequences in the event of non-compliance withdocumentation and other obligations set out thereunder. The penal provisions are summarised below.Are there exemptions to Transfer Pricing rulesin your country?No there are no exemptions to transfer pricingrules.Are advance pricing agreement (APA) optionsavailable?APA provisions are recently introduced by way ofsections 92CC and 92CD in the 1962 income taxact. Following are the key highlights of the APAprovisions:• available to all taxpayers falling within the ambitof Indian TP legislation, no threshold limit isprescribed• APAs to be entered by the CBDT with theapproval of the central government• the APA can be applied for a consecutive periodof five previous years• the APA has a binding force only on thetaxpayer with whom it is signed and, withrespect to the relevant international transaction,vis-à-vis the jurisdictional commissioner ofincome tax.The detailed rules for APA are awaited which mayclarify on various procedural aspects like theapplication, fees, threshold etc.Tax audit areasTransfer pricing is a high risk area. Transfer pricingis a key issue in any tax audit. The income taxauthorities especially focus on the following areas:captive service providers earning low margins,intellectual property (IP) transactions (transfer ofIP, royalties), management fees, loss makingentities, share transfers, corporate guarantees andfinancing and reimbursements. The scrutiny ismandatory for all companies on a yearly basis withthe special transfer pricing cell, wherein transactionvalue exceeds INR 150 million. Lower than thisvalue is scrutinised by the regular assessing officeron a case by case basis.Contact usFor further information on transfer pricing in India please contact:Karishma R. PhatarphekarT +91 22 5695 4861E karishma.rp@in.gt.com36 Global transfer pricing guide – IndiaDefault Penalty Section of TPRsFailure in maintaining documentation 2% of the value of each international transaction 271AAFailure to report any international transaction 2% of the value of each international transaction 271AAMaintains or furnishes any incorrect information 2% of the value of each international transaction 271AAor documentsFailure in producing the relevant documents to the 2% of the value of each transaction for which documents 271Gtransfer pricing officer cannot be furnishedFailure to file accountant’s report within the due INR 100,000 271BAdate (form 3CEB)Concealment of income in the event of wilful 100% – 300% of amount of tax sought to be evaded 271(1)(c)(iii) readmanipulation of price along with explanation 7
  39. 39. Global transfer pricing guide – Ireland 37IrelandRegulatory snapshotOverviewWhen did transfer pricing rules start?2011Level of TPDeveloping regimeReturn disclosureNo – but upon filing corporation tax returns, the company must besatisfied that all transfer pricing legislation is complied withDocumentationCompulsory where a company cannot avail of the SME exemptionMethodsBest method approachAudit riskMediumPenaltiesHigh to mediumAdvance Pricing Agreements (APAs)Not available• As part of 2010 Finance Act, Ireland introducedtransfer pricing legislation in respect of tradingtransactions, which endorses the OECDguidelines for multinational enterprises and taxadministrations and adopts the arm’s lengthprinciple.• The rules regarding transfer pricing in Irelandare outlined in Sections 835A to 835H of theTaxes Consolidation Act 1997 (TCA) (the newrules apply to accounting periods beginning onor after 1 January 2011). Only newarrangements entered into on, or after 1 July2010 are affected. Contracts or arrangements inplace before that time are not affected where theterms of the agreement are ‘grandfathered’, i.e.agreed before 1 July 2010.• The legislation obliges a person/companyinvolved in a transaction, which is within thescope of the transfer pricing legislation, to haverecords/documentation available that mayreasonably be required for the purposes ofdetermining whether the income of thatperson/company has been computed at arm’slength.• There are exemptions from these rules for smalland medium entities (SMEs) where a companyhas fewer than 250 employees and eitherturnover of less than €50million or assets of lessthan €43million on a group basis.• There is no separate statutory regime fortransfer pricing penalties. However, normalpenalties which apply to the Irish self–assessment regime may apply.• There is no priority among the acceptablemethods as long as the result is at arm’s length.To establish an arm’s length price, the OECDguidelines will be referenced.• Ireland does not have a formal APA procedurefor Irish companies to agree prices with theIrish tax authorities for international relatedparty transactions.
  40. 40. Does your country have transfer pricing rulesvs. ruling, laws and guidelines?Section 835C of the TCA sets out the main transferpricing rules. The legislation endorses the OECDguidelines for multinational enterprises and taxadministrations and adopts the arm’s lengthprinciple. The tax authority’s application of therules in relation to documentation will accept boththe ‘EU transfer pricing documentation’ guidanceand Chapter V of the OECD guidelines (theOECD rules only apply insofar as they relate totrading transactions). There are also certain revenueguideline issues in respect of Irish transfer pricingand in particular, a number of e-briefs and revenuenotes.Effective date of commencement of transferpricing regulationsTransfer pricing regulations apply to accountingperiods of companies beginning on or after 1January 2011. Only new arrangements entered intoon, or after 1 July 2010 are affected. Contracts orarrangements in place before that time are notaffected.Rulings, laws and guidelinesThe rules regarding transfer pricing in Ireland areoutlined in Sections 835A to 835H of the TCA.The principles in the OECD guidelines formultinational enterprises and tax administrationsmust be followed when analysing whether atransaction has been entered into at arm’s length.Is transfer pricing documentation required? Ifso, what information should be included?The legislation obliges a person involved in atransaction, which is within the scope of thetransfer pricing legislation, to have records availablethat may reasonably be required for the purposes ofdetermining whether the income of that person hasbeen computed at arm’s length. The documentationmust be sufficient to demonstrate a company’scompliance with the transfer pricing rules. Thedocumentation is required to contain the following:• the associated persons that are party to thetransaction• the nature and terms of the transaction• the terms of relevant transactions with boththird-parties and associates• the method or methods by which the pricing ofthe transactions were derived• the application of the transfer pricing methodand any budgets• forecasts or other relevant papers relied on inarriving at an arm’s length result.Revenue have indicated that the compliancemonitoring programme will begin with transferpricing compliance reviews. These reviews may, at alater date, progress to full transfer pricing audits. Aspart of this self-review process, the following willgenerally be requested/reviewed:• the group structure• details of categories and types of related partytransactions• pricing structure and transfer pricingmethodology used• summary of functions, assets and risks ofrelevant parties• summary list of relevant documentationavailable and reviewed• details of the basis on which the arm’s lengthprinciple is satisfied.38 Global transfer pricing guide – Ireland
  41. 41. What are the deadlines for documentationpreparation?Documentation must be available for transactionsthat take place in accounting periods beginning onor after 1 January 2011. It is best practice that thedocumentation is prepared at the time the terms ofthe transaction are agreed. It is also considered bestpractice that the documentation exists at the time offiling the tax return, so that the company is in aposition to make a correct and complete return.The documentation requirements do not applyto a transaction, the terms of which were agreedbefore 1 July 2010, if:• the terms of the agreement clearly envisage thetransaction• application of these terms delivers the price ofthe transaction• an agreement to enter into a further agreementwould not meet these conditions.However, intercompany arrangements that wereagreed prior to 1 July 2010, and that are re-negotiated and re-signed after 1 July 2010, arewithin the scope of the rules, i.e. they would nolonger continue to be grandfathered.In which language should documentation befiled?Transfer pricing documentation must be filed eitherin English or Irish, with the Irish tax authorities.The documentation does not need to be prepared orkept in Ireland, but must be in a language of thestate, i.e. English or Irish.How long is it necessary to keep transferpricing documentation?The legislation does not provide a specific timeperiod. However, guidance notes indicate that acompany is required to have transfer pricingdocumentation available for inspection if requestedby the Irish tax authorities. At a minimum, itshould be retained for six years but it would berecommend to be retained for a longer period.Are intercompany agreements recommended?It is recommended that taxpayers document theirintercompany transactions through intercompanyagreements.Do you have to make disclosures about transferpricing in the tax return? What statements orcertifications are required?There are currently no requirements on returndisclosures or related party disclosures.Which transfer pricing methods are acceptable?Section 835D(2) provides that the basic transferpricing rules are to be interpreted in accordancewith the OECD guidelines and the guidancecontained within on the determination of the mostappropriate method (which includes the transactionmethods (comparable uncontrolled price, resaleprice, and cost plus) and the profit-based methods(profit split, transactional net margin method)).Is there a priority among the acceptablemethods?There is no priority among the acceptable methodsas long as the result is at arm’s length. To establishan arm’s length price, the OECD guidelines will bereferenced. Transfer prices should be reviewed atregular intervals to determine that pricing remainsat arm’s length.Global transfer pricing guide – Ireland 39
  42. 42. What is the statute of limitations on assessmentof transfer pricing adjustments?The statute of limitations is currently four yearsafter the end of the tax year or the accountingperiod in which the return is made.What rates and conditions apply for transferpricing penalties? And is there penalty relief?Part 35A of the TCA does not contain any specificpenalty provisions with respect to a transfer pricingadjustment. In the absence of specific penaltyprovisions being included, the Irish tax authoritieshave indicated that the general corporate taxpenalty provisions and the ‘Code of Practice’ willapply to assessments raised due to transfer pricingadjustments under the new transfer pricing rules.Under the general corporate tax penalty provisions,interest arises on underpaid tax at a daily rate of0.0219%, which is circa 8% per annum.Are there exemptions to Transfer Pricing rulesin your country?The law provides for an exemption from applyingthe transfer pricing rules where a company is aSME. Section 835E(2) defines a SME, a companywith fewer than 250 employees; and either aturnover of €50 million or less, or a balance sheettotal of €43 million or less, on a group basis. Thebalance sheet total means total assets and should notbe taken as net of any liabilities.Are advance pricing agreement (APA) optionsavailable?Ireland does not have a formal APA procedure forIrish companies to agree prices with the Irish taxauthorities for international related partytransactions. However, the Irish tax authorities havebeen willing to negotiate and conclude bilateralAPAs with treaty partners, and they are generallywilling to consider entering such negotiations oncea case has been successfully accepted into the APAprogramme of the other jurisdiction.Tax audit areasTransfer pricing is a medium risk area and is a keyissue in any tax audit. However there are notconsidered to be particular related partytransactions or industry sectors that could beregarded as facing a higher-than-normal risk of atransfer pricing enquiry from the Irish taxauthorities. To the extent profits are being shiftedfrom Ireland to a haven or lower tax countries,transfer pricing may be a risk area. It should benoted that under Irish legislation, revenue will onlyadjust profits upwards, i.e. it is a one wayadjustment process.Contact usFor further information on transfer pricing in Ireland pleasecontact:Peter ValeT +353 (0)1 680 5952E peter.vale@ie.gt.com40 Global transfer pricing guide – Ireland
  43. 43. Global transfer pricing guide – Italy 41ItalyRegulatory snapshotOverviewWhen did transfer pricing rules start?1973 – arm’s length principle2003 – advance pricing agreements (APAs)2010 – documentationLevel of TPUnder developmentReturn disclosureYesDocumentationNot compulsoryMethodsBest method approachAudit riskHighPenaltiesHighAdvance Pricing Agreements (APAs)Available• The transfer pricing (TP) rules in force in Italyare the following:– article 110, paragraph 7 of the Italian taxcode (Presidential decree no. 917/1986)– article 9, paragraph 3 of the Italian tax code(Presidential decree no. 917/1986)– article 1, paragraph 2 of legislative decree no.471/1997– article 8 of law decree no. 269/2003– measure of the Italian revenue office directordated 29 September 2010. The measuremakes reference both to EU code of conductand to OECD guidelines 2010 on TPdocumentation for associated enterprises inthe EU, approved by resolution2006/c176/01 of 27 June 2006 from the EUcouncil and government representatives ofmember states– 58/E. The letter makes direct reference tothe OECD Transfer Pricing Guidelines forMultinational Enterprises and TaxAdministrations, approved by the OECDCouncil on 22 July 2010.• TP documentation is not mandatory fortaxpayers. The measure adopted by the Italiantax authorities’ director provides informationabout the type of documentation requested (i.e.master file or country file) and about itsstructure.• TP documentation is drawn up to provideevidence of the arm’s length nature of ataxpayer’s TP policy. Furthermore, by draftingthe TP documentation, taxpayers can takeadvantage of penalty protections in case of taxassessment.• TP documentation must be filed electronicallywith the tax authorities, in Italian, within tendays after the tax authorities’ request.• TP documentation must be drafted on a yearlybasis but for SMEs , which are entitled not toupdate the benchmark analysis for the twotaxable periods following the one thedocumentation relates to, in case thecomparability analysis do not incur substantialchanges during the above taxable periods.1 SME is defined according to quantitative limits provided for the Italian TaxAuthorities Director’s measure adopted on 29 September 2010. Pleasenote that holding and sub-holding companies may not qualify as SME’s.
  44. 44. • TP documentation must disclose all theintercompany transactions, without anythreshold.• Italy applies the ‘best method approach’ forconducting TP analysis. Taxpayers are free tochoose any OECD recognised TP method, aslong as the method results in an arm’s lengthpricing of the transaction.• TP is a high risk area, since it is a key issue inany tax audit. According to article 1 oflegislative decree no. 471/1997, the applicableadministrative penalties range from 100% to200% of the higher tax or credit differenceassessed. As said above, an appropriate TPdocumentation could lead to the non-applicability of penalties.• Unilateral and bilateral APAs are available.Does your country have transfer pricing rulesvs. ruling, laws and guidelines?The arm’s length principle is contained in article110, of the Italian tax code, while TPdocumentation requirements about its structureand contents are contained in the measure of theItalian revenue office. In general, Italy follows theOECD guidelines for the other TP methods.Effective date of commencement of transferpricing regulationsThe TP regulations are effective in Italy since 1973(presidential decree no. 597/1973) with regard tothe arm’s length principle. In 2003 the APAregulation was enacted, while it was not until 2010that regulation concerning the TP documentationwas introduced.Taxpayers that prepared the TP documentationrelating to taxable years prior to 2010 couldcommunicate the possession of such documentationto the Italian tax authorities to take advantage ofpenalty protection in case of tax assessment.Rulings, laws and guidelines• article 110, paragraph 7 of the Italian tax code(presidential decree no. 917/1986)• article 9, paragraph 3 of the Italian tax code(presidential decree no. 917/1986)• article 1, paragraph 2-ter of legislative decree no.471/1997• article 8 of law decree no. 269/2003• measure of the Italian revenue office directordated 29 September 2010. The measure makesreference both to EU code of conduct and toOECD guidelines 2010 on TP documentationfor associated enterprises in the EuropeanUnion (EU), approved by resolution2006/c176/01 of 27 June 2006 from the EUcouncil and government representatives ofmember states• Circular letter dated 5 December 2010 n. 58/E.The letter makes direct reference to the OECDTP guidelines for multinational enterprises andtax administrations, approved by the OECDcouncil on 22 July 2010.Is transfer pricing documentation required? Ifso, what information should be included?The TP documentation is not mandatory. Iftaxpayers decide to prepare the documentation,they are obliged to keep it in their records and showit to the tax authorities if requested by the taxauthority. The TP documentation should describehow transfer prices were/are determined andinclude information that enable the tax authoritiesto evaluate the arm’s length nature of thetransactions.The measure of the Italian tax authoritiesdirector provides for two different kinds ofdocumentation:• a masterfile, for holding and sub-holdingcompanies• country-specific documentation, for holdingand sub-holding companies and for those Italiansubsidiaries that are part of a foreignmultinational group.42 Global transfer pricing guide – Italy

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