GRANT THORNTON

Global transfer pricing guide

More and more fiscal authorities continue to develop their transfer pricing laws. The
principles are common, although interpretations differ from one tax authority to
another. Compliance takes time and patience, and the demands and penalties from
authorities are increasing. There is greater emphasis on examination and audit activity
to encourage compliance and ignoring this issue is not an option for any well-run
business.
This international transfer pricing guide provides an overview of the different
transfer pricing rules and regulations in key countries and details of how you can get
further advice from Grant Thornton specialists who can help with:
• audit support – sophisticated economic arguments, research and databases can help
defend transfer pricing policies before the tax authorities
• documentation – using expert local knowledge to prepare country-specific
documentation to satisfy local tax regulations
• planning – the growth or restructuring of a company doing business internationally
provides an opportunity to review transfer pricing and tax planning to minimise tax
burdens
• supply chain re-engineering – the critical analysis of the supply chain to gain
operational efficiencies.

For a more detailed discussion on any of the country specific transfer pricing rules, or
for further assistance in addressing and resolving any intercompany transfer pricing
issues, please contact the relevant country contact listed at the end of each article and
at the back of this guide.

Contents
01 Australia 29 Hungary 57 Korea 85 Spain
05 Canada 33 India 61 Netherlands 89 Sweden
09 China 37 Ireland 65 New Zealand 93 Taiwan
13 Czech Republic 41 Israel 69 Poland 97 United Kingdom
17 France 45 Italy 73 Portugal 101 United States
21 Germany 49 Japan 77 Russia 105 Contacts
25 Guernsey 53 Jersey 81 Slovak Republic
Australia

Regulatory snapshot • The new transfer pricing rules align the transfer
Overview pricing regime to the self-assessment taxation
When did transfer pricing rules start?
system operating in Australia. This places the
1982
Level of TP
responsibility on the companies public officer
Long standing and established regime for determining the overall tax position arising
Return disclosure from all cross border dealings.
Yes • The taxpayer bears the burden of proof to
Documentation satisfy the Australian Tax Office (ATO) and the
Contemporaneous documentation is not compulsory but allows access
courts that a company’s transfer pricing
to reduced penalties in the event of a transfer pricing adjustment
Methods
arrangements are at arm’s length.
Most appropriate method approach • There is no legal requirement to prepare and
Audit risk maintain the transfer pricing documentation in
High Australia. However, contemporaneous
Penalties
documentation is recommended to evidence
High
Advance Pricing Agreements (APAs)
compliance with the arm’s length principle and
Available demonstrate reasonable efforts in the event of a
transfer pricing adjustment and, in so doing,
• Division 13 of part III of the Income Tax access to reduced penalties.
Assessment Act 1936, contains the Australian • Australia applies the ‘most appropriate method
domestic law with regards to transfer pricing, approach’ for selecting the transfer pricing
which has been in place since 1982. At the time method(s).
of writing, the government is proposing to • Acceptable transfer pricing methods include
modernise the Australian transfer pricing comparable uncontrolled price (CUP), resale
legislation. The new legislation has been price, cost plus, transactional net margin
introduced to parliament and is expected to method (TNMM), profit split and other
receive royal assent with only minor methods that comply with the arm’s length
modifications. The following information is principle.
based on the new transfer pricing legislation
contained in the Tax Laws Amendment
(Countering Tax Avoidance and Multinational
Profit Shifting) Bill 2013 (new transfer pricing
rules).
• Taxpayers with an aggregate amount of the
international related party transactions greater
than $2 million need to disclose the details of
the related party transactions in Section A of the
International Dealing Schedule (IDS) along with
their annual income tax returns.

Global transfer pricing guide – Australia 1

• The main focus of transfer pricing audits by the • TR 1998/16 – penalty tax guidelines
ATO are services, business restructuring, low • TR 1999/1 – international transfer pricing for
profit and/or loss making entities, hybrid intra-group services
financing arrangements, thin capitalisation and • TR 2001/11 – operation of Australia’s
intellectual property shifting. permanent establishment attribution rules
• Tax penalty rates range from 10% to 50% on • TR 2003/1 – thin capitalisation, applying the
the additional tax, depending on individual arm’s length debt test
assessment of each circumstance. • TR 2004/1 – cost contribution arrangements
• Unilateral, bilateral and multilateral APAs are • TR 2007/1 – effects of determinations made
available to taxpayers in three different types of under division 13, including consequential
programme, i.e. simplified, standard and complex. adjustments (replaces TR 1999/8)
• TR 2010/7 – interaction of the thin
Does your country have transfer pricing rules capitalisation provisions and the transfer pricing
vs. ruling, laws and guidelines? provisions
The new transfer pricing rules relocate the domestic • TR 2011/1 – application of the transfer pricing
transfer pricing rules to subdivisions 815-B, 815-C provisions to business restructuring.
and 815-D of the Income Tax Assessment Act 1997
(ITAA 97) to make sure a single set of rules apply Is transfer pricing documentation required? If
for both treaty and non-treaty countries. The new so, what information should be included?
rules are designed to better align Australia’s There is no legal requirement to prepare and
domestic rules with internationally consistent maintain transfer pricing documentation in
transfer pricing approaches set out by the Australia. While the subdivision does not mandate
Organisation for Economic Cooperation and the preparation or keeping of documentation, failing
Development (OECD). to do so prevents a taxpayer from establishing a
Consistent with the approaches under Division reasonably arguable position. Establishing a
13, the new rules in Subdivision 815-B apply the reasonably arguable position allows an entity access
arm’s length principle to relevant dealings between to lower administrative penalties. TR 1998/11
both associated and non-associated entities. recommends contemporaneous documentation to
evidence compliance with the arm’s length principle;
Effective date of commencement of transfer to fulfil the statutory requirements to keep records;
pricing regulations to reduce the risk of tax audits and adjustments; and
Transfer pricing regulations are effective since 1982 to reduce/mitigate penalties in the event of an audit
in Australia. adjustment. TR 1998/11 outlines the ATO’s
recommended four step approach to transfer pricing
Rulings, laws and guidelines documentation which provides a basis for reviewing
Australia is a member of the OECD. Australia and documenting transfer pricing for international
follows OECD guidelines1 in relation to transfer dealings between related parties:
pricing, and the principles of the OECD guidelines • Step 1: accurately characterise the international
are reflected in guidance that has been provided by dealings between the associated enterprises in
the ATO. The ATO has issued various taxation the context of the taxpayer’s business and
rulings concerning transfer pricing, which interpret document that characterisation
the application of the statutory rules; and provide • Step 2: select the most appropriate transfer
guidance on issues not specifically covered by pricing methodology(ies) and document the
statute, without a legally binding effect. The choice
taxation rulings that relate to transfer pricing • Step 3: apply the most appropriate method,
include: determine the arm’s length outcome and
• TR 1994/14 – basic concepts underlying document the process
division 13 • Step 4: ensure documentation is complete
• TR 1997/20 – arm’s length transfer pricing process to ensure adjustment for material
methodologies for international dealings changes.
• TR 1998/11 – documentation and practical
issues associated with setting and reviewing What are the deadlines for documentation
transfer prices preparation?
There is no specific deadline for documentation
preparation. Transfer pricing documentation is
1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax
considered as ‘contemporaneous’ if prepared by the
Administrations, 1995 and subsequent updates
due date for filing the annual income tax return.

2 Global transfer pricing guide – Australia

In which language should documentation be Is there a priority among the acceptable
filed? methods?
Transfer pricing documentation should be prepared Similar to the OECD guidelines, the most
in English. appropriate method rule applies. However,
depending on the availability of reliable comparable
How long is it necessary to keep transfer data, traditional methods are preferred in the
pricing documentation? practice to transactional profit methods.
The new transfer pricing rules introduced an eight In addition the new transfer pricing rules allow
year time limit on when the ATO can make transfer for the use of ‘a combination of methods’ to
pricing amendments, wth the exception on identify the arm’s length conditions that operate
‘consequential adjustments’. This rule replaces the between entities dealing cross-border.
current unlimited time period for making transfer
pricing amendments. What is the statute of limitations on assessment
of transfer pricing adjustments?
Are intercompany agreements recommended? The new transfer pricing rules introduced an eight
It is generally recommended that taxpayers support year limit on when the ATO can make transfer
their intercompany transactions through pricing amendments, with the exception on
intercompany agreements. ‘consequential adjustments’. This rule replaces the
current unlimited time period for making
Do you have to make disclosures about transfer adjustments.
pricing in the tax return? What statements or
certifications are required? What rates and conditions apply for transfer
Australian taxpayers need to disclose their related pricing penalties? And is there penalty relief?
party transactions in section A of the International Penalty rates applying transfer pricing adjustments
Dealing Schedule (IDS) along with their annual under division 13 and DTAs are outlined in TR
income tax returns. Taxpayers must complete the 1998/16. Under the self-assessment regime (from
IDS in the event that the aggregate amount of their 1992/93 year of income and all subsequent years),
international related party transactions or dealings the penalty rates imposed are:
(including the value of property transferred or the • 50% penalty rate on tax avoided for transfer
balance outstanding on any intercompany loans) is pricing arrangements entered into with the sole
greater than $2 million. The IDS requires disclosure or dominant purpose of enabling a taxpayer to
to the ATO of the following information: pay no or less tax. The penalty rate may be
• types of related party transactions (e.g., tangible reduced to 25% if the taxpayer has reasonably
products, services, financial transactions (loans, arguable position
guarantees, derivative transactions, debt • 25% of the tax avoided for other transfer
factoring, securitisation), capital transactions, pricing arrangements; reducing to 10% if the
share-based employee remuneration plans, cost taxpayer has a reasonably arguable position.
contribution arrangements)
• magnitude of the related party transactions Generally, a position is considered as ‘reasonably
• related party transactions with specified (tax arguable’ if it is ‘about as likely as not’ to be correct.
haven) countries In order to demonstrate that a position is
• transfer pricing methodology(ies) applied and reasonably arguable, the taxpayer must prepare and
documentation prepared to support the related maintain documentation to support the arm’s
party transactions length nature of its related party dealings.
• business restructuring events Tax penalties may be increased by 20% where:
• branch transactions. • a taxpayer takes steps to prevent or hinder the
ATO from discovering that a transfer pricing
Which transfer pricing methods are acceptable? provision should be applied
All transfer pricing methods are acceptable, i.e. • a taxpayer has been penalised under a scheme
CUP, resale price, cost plus, profit split (e.g. section in a prior year of income.
contribution analysis or residual analysis) and
TNMM.

Global transfer pricing guide – Australia 3

Tax penalty may be reduced: Tax audit areas
• by 20% if the taxpayer makes a voluntary Transfer pricing remains a high risk area. In May
disclosure to the ATO after it has been 2009, the ATO announced a major transfer pricing
informed of an impending audit project, referred to as the ‘strategic compliance
• by 80% if the taxpayer makes a voluntary initiative’. The strategic compliance initiative
disclosure to the ATO before it has been project was designed to protect Australia’s tax base
informed of an impending audit. and the main focus areas are:
• intragroup finance and guarantee fees
The ATO has the discretion to remit all or part of • business restructures and transformations
the penalties. In addition to the penalty, the • intellectual property transactions
taxpayer is liable to pay a shortfall interest charge • services to the mining industry
on the value of any increase in the tax assessment • low-profit/loss making entities.
arising from the ATO’s transfer pricing
adjustments. To support the strategic compliance initiative, the
An important element of the new transfer ATO recruited a large number of experienced
pricing rules is the introduction of specific rules transfer pricing staff.
allowing the ATO reconstruction powers to
disregard the actual transaction and arrangements, Contact us
For further information on transfer pricing in Australia please
where the actual economic substance of the contact:
transaction differs from the legal form. Jason Casas
The new transfer pricing rules introduce T +61 3 8663 6433
E [Link]@[Link]
thresholds for administration penalties arising
from the arm’s length principle on satisfying certain
criteria.

Are there exemptions to transfer pricing rules in

your country?
There is no exemption to transfer pricing rules in
Australia. The new transfer pricing rules may apply
to all cross-border transactions between third
parties. As such, all cross-border dealings are
subject to the arm’s length principle.

Are advance pricing agreement (APA) options

available?
The ATO released detailed guidance on Australia’s
APA programme, i.e. Practice Statement Law
Administration 2011/1 (PS LA 2011/1 ) in March
2011 (which replaces TR 95/23 that has been
withdrawn). The practice statement outlines the
policies and procedures of the ATO’s APA
programme, which allows unilateral, bilateral, and
multilateral APAs.
In addition, PS LA 2011/1 outlines
differentiated APA programmes, with three
different types of APAs, i.e. simplified, standard
and complex.

4 Global transfer pricing guide – Australia

Canada

Regulatory snapshot Does your country have transfer pricing rules

Overview vs. ruling, laws and guidelines?
When did transfer pricing rules start?
The Canadian Income Tax Act (the Act) applies to
1997
the taxation years beginning after 1998. Section 69
Level of TP
Established regime, active tax authority of the Act applies to prior taxation years. The Act
Return disclosure represents Canada’s transfer pricing legislation and
T106 form discloses transactions undertaken with non–arm’s length covers definitions, the calculation of transfer pricing
non-residents during the taxation year adjustments, penalties, contemporaneous
Documentation
documentation requirements and timing.
Required if certain criteria are met
Methods
Administrative guidance relating to definitions,
Most appropriate method detailed in the OECD guidelines methods, penalties, cost sharing arrangements,
Audit risk confidentiality of third-party information, and the
High advance pricing agreement (APA) and competent
Penalties
authority processes are provided in information
High
circular 87-2R ‘International transfer pricing’
Advance Pricing Agreements (APAs)
Available (1999). Other guidance:
• Competent Authority process – IC 71-17R5
• Canada has had transfer pricing rules since 1997 • APA programme – IC 94-4R
and the regulations were applicable to taxation • Small business APA programme – IC 94-4RSR
years that began after 1997. The rules can be • Income tax transfer pricing and customs – IC
found in Section 247 of the Canadian income 06-1
tax act. • Transfer pricing memorandum (TPM) series –
• In the tax filing, taxpayers with intercompany ongoing [[Link]
transactions must disclose the types of cmmn/trns/[Link]]
transactions and whether the documentation
requirements have been met if all transaction
and intercompany balance values exceed
CAN$1 million.
• Acceptable TP methods include comparable
uncontrolled price (CUP), resale price, cost
plus, profit split and transactional net margin.
• The penalty is 10% (non-deductible) of the net
income or capital adjustment if the value of this
adjustment exceeds the lesser of 10% of the
taxpayer’s gross revenues and CAN$5 million,
plus interest. The penalty is applied only where
it is concluded that ‘reasonable effort’ to
determine and use arm’s length prices was not
made.

Global transfer pricing guide – Canada 5

Effective date of commencement of transfer • the assumptions, strategies and policies, if any,
pricing regulations that influenced the determination of the transfer
Section 247 of the Act applies to taxation years prices or the allocations of profits or losses or
beginning after 1998. Section 69 of the Act applies contributions to costs, as the case may be, in
to prior taxation years. respect of the transaction.

Is transfer pricing documentation required? If What are the deadlines for documentation
so, what information should be included? preparation?
Documentation must be prepared or obtained Documentation must be prepared or obtained
before the tax filing due date for most corporations, before the tax filing due date. In the case of
six months after the corporate year end. corporations such documentation must be complete
Documentation must be provided to the Canadian within six months after the taxation year end, and
Revenue Agency (CRA) within three months of the five months after the taxation year end for
written request to submit documentation date. partnerships.
Canada is a member of Pacific Asia Travel
Association (PATA), making that documentation In which language should documentation be
standard useful as guidance. filed?
Subsection 247(4) of the Act describes the Transfer pricing documentation can be provided in
contemporaneous documentation requirement to English or French.
be recorded or documents prepared or obtained
that provide a complete and accurate description of: How long is it necessary to keep transfer
• the property or services to which the pricing documentation?
transaction relates In the case of foreign-controlled entities, the CRA
• the terms and conditions of the transaction and may reassess tax on transfer pricing adjustments
their relationship, if any, to the terms and made in respect of tax years seven years prior to the
conditions of each other transaction entered date of the notice of assessment. For Canadian
into between the participants in the transaction controlled entities, this period is six years. In the
• the identity of the participants in the transaction case of fraud or gross negligence, no statute of
and their relationship to each other at the time limitations exists.
the transaction was entered into
• the functions performed, the property used or Are intercompany agreements recommended?
contributed and the risks assumed, in respect of Yes, but not required.
the transaction, by the participants in the
transaction
• the data and methods considered and the
analysis performed to determine the transfer
prices or the allocations of profits or losses or
contributions to costs, as the case may be, in
respect of the transaction

6 Global transfer pricing guide – Canada

Do you have to make disclosures about transfer What is the statute of limitations on assessment
pricing in the tax return? What statements or of transfer pricing adjustments?
certifications are required? In the case of foreign-controlled entities, the CRA
Canadian corporations and partnerships file ‘Form may reassess tax on transfer pricing adjustments
T106’ annually if all transaction and intercompany made in respect of tax years seven years prior to the
balance values exceed CAN$1 million. Branches of date of the notice of assessment. For Canadian
non-resident corporations only file this form in controlled entities, this period is six years. In the
respect of transactions with other related non- case of fraud or gross negligence, no statute of
residents. Form T106 reports (by related non- limitations exists.
resident) the value of each type of transaction and
intercompany balances as well as the transfer What rates and conditions apply for transfer
pricing method used. Question 6 on this form pricing penalties? And is there penalty relief?
requires a yes or no response to the question ‘have Refer to subsection 247(3) of the Act. The penalty is
you prepared or obtained contemporaneous 10% (non-deductible) of the net income or capital
documentation as described in subsection 247(4) of adjustment if the value of this adjustment exceeds
the Income Tax Act for the tax year/fiscal period the lesser of 10% of the taxpayer’s gross revenues
with respect to the non-resident?’. and CAN$5 million, plus interest. The penalty is
applied only where it is concluded that ‘reasonable
Which transfer pricing methods are acceptable? effort’ to determine and use arm’s length prices was
The CRA favours application of OECD methods not made.
(CUP, resale price, cost plus, profit split and the
transaction net margin method) to each transaction Are there exemptions to transfer pricing rules in
or group of transactions that may be reasonably your country?
aggregated. Methods are not discussed or ranked in None.
section 247 of the Act.

Is there a priority among the acceptable

methods?
The CRA has endorsed the revisions made to the
OECD guidelines in 2010, as such it is expected the
CRA will endorse a ‘most appropriate’ method
approach.

Global transfer pricing guide – Canada 7

Are advance pricing agreement (APA) options Tax audit areas
available? Audits are conducted by international tax auditors
Unilateral, bilateral and multilateral APAs are and federal tax auditors at the Tax Service’s Office
available to Canadian taxpayers to the extent that (TSO) level. It is usual for a taxpayer to receive a
these programs exist with Canada’s tax treaty written request for subsection 247(4)
partners. The CRA generally prefers bilateral APAs documentation at the beginning of an audit. Books
to unilateral APAs. A small business APA program and records located outside of Canada may be
was started in 2005, this imposes certain restrictions requested by law and the CRA may request to
that make agreements negotiated under this travel (at the taxpayer’s expense) to the country in
program quite different from any other APA. which these books and records are kept to inspect
Through its treaty network, Canada’s these books and records, and also to perform site
competent authority engages in Mutual Agreement visits or interview personnel.
Procedure (MAP) exchanges with foreign tax Assistance to the TSOs is provided by
authorities. For more details, see IC 71-17R. International Advisory Service Section.
Reassessments of tax caused by transfer pricing
adjustments may be appealed provided that a
‘notice of objection’ is filed with the appeals branch
within 90 days of the date of the notice of
assessment.

Contact us
For further information on transfer pricing in Canada please
contact:
Peter Kurjanowicz
T +1 416 369 7036
E [Link]@[Link]

Daniel Marion
T +1 514 954 4625
E [Link]@[Link]

8 Global transfer pricing guide – Canada

China

Regulatory snapshot • Advance Pricing Agreements (APA) are

Overview available to taxpayers with annual intercompany
When did transfer pricing rules start?
transaction amount exceeding RMB40 million.
1998 (yet the most comprehensive legislative update so far occurred
in 2009)
An effective APA can cover three to five years.
Return disclosure
Yes Does your country have transfer pricing rules
Documentation vs. ruling, laws and guidelines?
Compulsory with de minimis provided The State Administration of Taxation (SAT) issued
Methods
Guoshuifa [2009] No. 2 ‘Implementation measures
Best method approach
Audit risk
of special tax adjustments (trial version)’ (circular 2)
High which contains 13 chapters and 121 articles. It
Penalties covers related party transactions disclosure,
High contemporaneous documentation, transfer pricing
Advance Pricing Agreements (APAs)
audits, thin capitalisation, cost contribution
Available
arrangement (CCA), APA, general anti-avoidance,
controlled foreign corporation (CFC), and etc.
• The core Transfer Pricing (TP) rules were
promulgated under circular 2 in January 2009
Effective date of commencement of transfer
with an effective date from 1 January 2008.
pricing regulations
• Taxpayers with intercompany transactions must
Circular 2 is effective as of 1 January 2008.
disclose the transactions details through as
many as nine forms during the annual income
tax filing process.
• Contemporaneous TP documentation is
compulsory with de minimis threshold.
China applies the ‘best method approach’ for
conducting TP analysis.
• Acceptable TP methods include comparable
uncontrolled price (CUP), resale price, cost
plus, transactional net margin, profit split and
other methods that comply with the arm’s
length principle.
• TP audit can be targeted at any transaction if it
results 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, deemed
profit adjustment is applied for not complying
with the TP documentation obligation. TP
Audit adjustment is subject to an interest
surcharge plus a 5% surcharge.

Global transfer pricing guide – China 9

Rulings, laws and guidelines What are the deadlines for documentation
In addition to circular 2, there are several effective preparation?
rulings related to transfer pricing as following: The transfer pricing documentation should be in
• Guoshuifa [2008] no. 86: additional guidance place by 31 May of the year following the year
on service charges between parent and during which the related-party transactions occur,
subsidiary entities. and be submitted within 20 days upon request from
• Guoshuifa [2008] no. 114: requiring taxpayers the tax authorities. Where the enterprise cannot
to disclose detailed related-party transaction submit the documentation due to force majeure, it
information in the annual tax return process. shall submit the documentation within 20 days after
• Caishui [2008] no. 121: additional guidance on the elimination of the force majeure.
the application of thin capitalisation ratios
between related parties. In which language should documentation be
• Guoshuihan [2009] no. 363: requiring loss- filed?
making single-functioned manufacturer/ Transfer pricing documentation shall be filed and
distributor/contract R&D service provider to submitted in Chinese.
provide, prepare and submit transfer pricing
documentation, regardless of its intercompany How long is it necessary to keep transfer
transaction amount. pricing documentation?
Enterprises are responsible for keeping
Is transfer pricing documentation required? If contemporaneous documentation for ten years
so, what information should be included? starting from 1 June of the year following the year
Taxpayers are obliged to prepare transfer pricing in which the documented related-party transactions
documentation if they trigger the de minims occur.
thresholds. As required by circular 2, transfer
pricing documentation should contain Are intercompany agreements recommended?
organisational structure, business and operation, It is recommended that taxpayers document their
related party transactions, selection and application intercompany transactions through intercompany
of the transfer pricing method, comparable analysis, agreements.
copies of intercompany agreements, functional and
risk analysis form and financial analysis form.

10 Global transfer pricing guide – China

Do you have to make disclosures about transfer What is the statute of limitations on assessment
pricing in the tax return? What statements or of transfer pricing adjustments?
certifications are required? A maximum of ten years.
All taxpayers in China are required to prepare
‘annual reporting forms of related party What rates and conditions apply for transfer
transactions for PRC enterprises’ (annual TP filing pricing penalties? And is there penalty relief?
forms) and submit them along with the annual tax Cash penalty
filing forms. The annual TP filing forms include: Failure to submit the annual TP filing forms or TP
 relationship between related parties documentation is subject to a fine of RMB 2,000-
 related party transaction summary 10,000. For any entity which refuses to provide
 purchase and sales form transfer pricing documentation and other relevant
 service form information on related party transactions, a fine of
 intangible asset transaction form RMB 10,000 to 50,000 should apply.
 fixed asset transaction form
 financing form Deemed profit adjustment
 overseas investment form The tax authority can use the deemed profit method
 overseas payment form. to conduct TP adjustment on an entity if the entity
refuses to prepare the transfer pricing
Which transfer pricing methods are acceptable? documentation or discloses false information.
CUP, resale price, cost plus, transactional net
margin, profit split and other methods that comply Additional interest on transfer pricing
with the arm’s length principle. adjustments
Starting from 1 January 2008, the transfer pricing
Is there a priority among the acceptable adjustment is subject to additional interest. The
methods? interest will be levied on a daily basis, counting the
No, the best method approach applies. number of days in the period starting 1 June of the
next taxable year and ending the day when the
under-paid income tax is collected by The SAT. The
interest rate equals to the People’s Bank of China
lending rate plus an additional 5%. The additional
5% can be waived if the enterprises fulfil the
documentation obligation.

Global transfer pricing guide – China 11

Are advance pricing agreement (APA) options
available?
Unilateral, bilateral and multilateral APAs are
available. The negotiation and implementation of an
APA generally includes six phases: pre-filing
meeting, formal application, review and evaluation,
negotiation, signing, execution and monitoring.

Tax audit areas

Transfer pricing is a high risk area. Transfer pricing
is a key issue in any tax audit. The following cases
may easily draw the attention of the tax authority
and trigger a transfer pricing audit: loss making
companies with a single function, substantial
difference between related and non-related sales
margins, profit lower than its group enterprises or
industry standard, significant invoicing profit in tax
haven, recurring loss, marginal profit or fluctuating
profit. The tax authorities focus especially on the
following industries/transactions: real estate,
automobile, pharmaceutical, retail industries,
transfer of intangible, services, financing, and equity
transfer.

Contact us
For further information on transfer pricing in China please contact:
Rose Zhou
T +86 21 2322 0298
E [Link]@[Link]

12 Global transfer pricing guide – China

Czech Republic

Regulatory snapshot • TP audit can be targeted at any transaction

Overview between related parties; related parties are
When did transfer pricing rules start?
defined as economically (direct or indirect share
1993
Level of TP
of a minimum 25% of the share capital or
Developing regime voting rights) or personally related (the same
Return disclosure person participating in management or control
No of both companies).
Documentation • Regular penalties apply on TP audit
Not compulsory
adjustments: late payment interest and penalty
Methods
Best method approach
payment; on the other hand, TP audit
Audit risk adjustments shall be considered tax-deductible
Low by the recipient tax subject (Czech Republic
Penalties signed the Arbitration Convention
Low
90/436/EEC).
Advance Pricing Agreements (APAs)
Available
• Advance Pricing Agreement (APA) in the form
of binding ruling is available to all taxpayers and
• The arm’s length principle was introduced in the can cover a maximimum of three years.
Czech income taxes act as of 1 January 1993;
however, until 2004 no guidelines were
available.
• The core Transfer Pricing (TP) rules were
promulgated under Guideline D-258 in January
2004.
• Taxpayers with related-party transactions must
disclose the transaction details upon request of
the tax authorities during a tax audit.
TP documentation is not compulsory but
recommended.
• The Czech Republic applies the ‘best method
approach’ for conducting TP analysis.
Recommendable TP methods include
comparable uncontrolled price (CUP), resale
price, cost plus, transactional net margin and
profit split.

Global transfer pricing guide – Czech Republic 13

Does your country have transfer pricing rules Rulings, laws and guidelines
vs. ruling, laws and guidelines? Besides legally binding articles of the Czech tax law
The arm’s length principle is enacted in article 23 (7) (as of 2004), several guidelines provide insight into
of the Czech income taxes act as of its outset in the position of the tax authorities without a legally
1993. TP documentation requirements are specified binding effect. These guidelines refer to the general
in the Czech Ministry of Finance guidelines D-332 guidance on the application of the OECD
and D-333 (accompanied by D-334 on the binding guidelines (currently, as of 2011: D-332 and D-333);
ruling), which however are not binding but serve as binding ruling for TP issues (D-334).
a recommendation. In general, the Czech Republic
follows the OECD guidelines1. TP regulations Is transfer pricing documentation required? If
apply to all related party transactions in which an so, what information should be included?
entity subject to Czech income tax is involved. Taxpayers are not obliged to prepare TP
Related parties are defined as economically (direct documentation, however they are obliged to prove
or indirect participation of a mininimum 25% of that the arm’s length principles were observed; the
the share capital or voting rights) or personally form of the proof is not prescribed, but the TP
related (the same person participating in documentation prepared according to OECD
management or control of both companies); the guidelines is recommended.
Czech income taxes act also includes an anti-abuse
clause when considering related parties, also entities What are the deadlines for documentation
that established a legal relationship mainly to preparation?
reduce the tax base or increase the tax loss; however The documentation (or any other evidence) should
this concept applies to domestic taxpayers and be available when the company is asked during a tax
entities from countries that did not conclude a audit. Absent or non-sufficient documentation will
double tax treaty with the Czech Republic; shift the burden of proof from the Czech tax
otherwise, the definition of the double tax treaty authorities to the taxpayer to demonstrate that the
shall prevail. transfer prices are at an arm’s length basis.
However, if the documentation is not available
Effective date of commencement of transfer upon request of the tax authorities, the taxpayer
pricing regulations may agree on a deadline to prepare the
TP regulations (arm’s length principle for related documentation.
parties) in the Czech Republic have been effective
since 1993.

1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax

Administrations, 1995 and subsequent updates.

14 Global transfer pricing guide – Czech Republic

In which language should documentation be Is there a priority among the acceptable
filed? methods?
TP documentation can be submitted to the Czech There is no priority among the acceptable methods
tax authorities in the Czech language only. as long as the result is at arm’s length. Taxpayers are
not obliged to test all OECD recognised methods,
How long is it necessary to keep transfer though they should substantiate why the method
pricing documentation? chosen is considered as the best method.
TP documentation should be kept for the period
for which the right of the tax authorities to assess What is the statute of limitations on assessment
tax, does not become statute-barred, i.e. usually of transfer pricing adjustments?
three years. In cases of tax losses, the deadline may TP adjustments can be assessed three years from the
be prolonged to five years, in cases of tax audits the filing deadline (usually three month after the end of
deadline may be prolonged to a maximum ten the calendar or economic year) plus any extensions
years. provided by the Czech income taxes act (e.g. tax
loss, additional tax return, investment incentives).
Are intercompany agreements recommended? In certain cases (e.g. tax audit), this period can be
It is recommended (and usually required) by the tax extended up to ten years.
authorities that during tax audits, taxpayers
document their intercompany transactions through What rates and conditions apply for transfer
written intercompany agreements. pricing penalties? And is there penalty relief?
No specific penalties exist; should the taxpayer fail
Do you have to make disclosures about transfer to bear the burden of proof, then additional tax is
pricing in the tax return? What statements or assessed or the assessed tax loss is decreased, the late
certifications are required? payment interest (Czech National Bank repo rate
No. +14%) and penalty payment (20% of the
additionally assessed tax or 1% of the additionally
Which transfer pricing methods are acceptable? assessed tax loss reduction) apply. No penalty relief.
Taxpayers are free to choose any OECD recognised
TP method, as long as the method results in an Are there exemptions to transfer pricing rules in
arm’s length pricing for the transaction. your country?
No.

Global transfer pricing guide – Czech Republic 15

Are advance pricing agreement (APA) options
available?
Binding rulings based on the submitted TP
documentation are possible. A fee of CZK 10,000
(approx. EUR 400) must be paid in advance; one
binding ruling may involve one or more
transactions. Issued binding ruling is valid only
ceteris paribus, by the same tax authority that has
issued it for a maximum of three years.

Tax audit areas

TP is still a relatively low risk area. TP audits are
rare and TP is not an issue in every tax audit.
However, as of 2012 a new specialised tax office was
introduced that should be equipped with TP
specialists; this tax authority shall administer large
taxpayers (including banks and insurance
companies) and shall perform specialised tax audits,
including TP audits.

Contact us
For further information on transfer pricing in the Czech Republic
please contact:
Helmut Hetlinger
T +420 296 152 229
E [Link]@[Link]

16 Global transfer pricing guide – Czech Republic

France

Regulatory snapshot Does your country have transfer pricing rules

Overview vs. ruling, laws and guidelines?
When did transfer pricing rules start?
Article 57 of the French tax code contains the main
The first tax guideline with respect to transfer pricing entered into
French legal provisions on transfer pricing (TP). It
force in 1973. The first tax rule with respect to transfer pricing
documentation requirements was issued in 1996. states that in assessing the income tax due from
Level of TP French taxable entities that are controlled by or that
Long standing control entities established outside France, any
Return disclosure profits indirectly transferred to the latter, whether
No
by an increase or reduction in purchase or sale
Documentation
According to sections L13 AA, L13 AB and L13 B of the tax
prices or by any other means, shall be added back
procedures code, transfer pricing documentation must be available to taxable income.
upon request for the French tax authorities. Articles L13 AA, L13 AB and L13 B of the
Methods French tax procedures code set out the formal
The French tax legislation is based on the comparable uncontrolled
documentation requirements in France.
price method (CUP). However, all methods approved in the OECD
French regulations and guidelines are broadly
guidelines can be applied in France as long as they are supported by
an appropriate transfer pricing study. based on and refer to the OECD guidelines1.
Audit risk
Low Effective date of commencement of transfer
Penalties pricing regulations
There are no specific tax penalties in the event of reassessments
TP regulations have been effective in France since
relating to the application of transfer pricing legislation. Standard
penalties indeed apply under such circumstances.
1973.
For insufficient or non-existent documentation, the French tax
authorities apply a minimum penalty of €10,000 which can be
increased 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 in
limited situations. A specific APA procedure exists for SMEs within the
definition of European Union law.

1 OECD transfer pricing guidelines for multinational enterprises and tax

administrations, 1995 and subsequent updates.

Global transfer pricing guide – France 17

Rulings, laws and guidelines A specific additional documentation must be
Besides articles of the French tax law, several tax provided in case of transactions entered into with
guidelines exist which provide insight into the affiliate entities located in ‘non cooperative states’
position of the tax authorities. They concern (Botswana, Brunei, Guatemala, Marshall Islands,
application of article 57 of the French tax code (4 Montserrat, Nauru, Niue and the Philippines).
A-2-73; 4 A-1211; 4 A-5-83); advance pricing
agreements (4 A-8-99; 4 A-11-05); documentation What are the deadlines for documentation
requirements (13 L-7-98; 4 A-10-10) and SME (4 preparation?
A-13-06). According to sections L13 AA and L13 AB, the
documentation should be available at the beginning
Is transfer pricing documentation required? If of the tax audit i.e. as from the date of the first
so, what information should be included? meeting with the tax inspector. For companies that
According to sections L13 AA and L13 AB, TP are not in the scope of sections L13 AA and L13
documentation must be available for the French tax AB, the documentation has to be available upon
authorities at the opening of a tax audit. request of the tax authorities during a tax audit. The
Companies in the scope of these documentation minimum deadline to reply is two months.
requirements are:
• French companies with annual sales or gross In which language should documentation be
assets totaling €400 million filed?
• French subsidiaries with more than 50% of In principle, all documents provided to the French
their capital or voting rights owned, directly or tax authorities must be in French. In practice, if the
indirectly, by French or foreign entities meeting documents are in English, a translation has to be
the €400 million criterion above provided upon request of the tax inspector. It is
• French parent companies that directly or recommended to provide the tax inspector with a
indirectly own at least 50% of companies summary in French of the TP policy as soon as the
meeting the €400 million criterion. tax inspector raises TP questions.

When the annual sales or gross assets do not meet How long is it necessary to keep transfer
the €400 million threshold, taxpayers must still pricing documentation?
comply with the ‘de facto’ documentation The minimum required retention period for TP
requirement in the event of a tax audit in order to documentation is the time allotted by the general
avoid penalties. statute of limitation relating to corporate income
The TP documentation includes two reports: tax return filings i.e. during the years open to tax
• a general report that provides an overview of the audit (see below statute of limitations).
whole group and entities
• a specific report focused on the French entity.

18 Global transfer pricing guide – France

Are intercompany agreements recommended? What is the statute of limitations on assessment
It is strongly recommended that taxpayers of transfer pricing adjustments?
document their intercompany transactions through There is no specific TP statute of limitations. The
intercompany agreements. usual statute of limitation regarding corporate
income tax applies i.e. 31 December of the third
Do you have to make disclosures about transfer year, following the year during which a fiscal year is
pricing in the tax return? What statements or closed. Fiscal years which were in a tax loss position
certifications are required? can still be audited after the three year period, if the
No. said tax losses have been offset against the tax
profits of a fiscal year still open to tax audit.
Which transfer pricing methods are acceptable?
Taxpayers are free to choose any OECD recognised What rates and conditions apply for transfer
TP method as long as the method results in an arm’s pricing penalties? And is there penalty relief?
length pricing for the transaction. Taxpayers are not There is no specific penalty due to the violation of
obliged to test all OECD recognised methods, TP regulations (except documentation rules – see
although they must substantiate the method below). All penalties relating to a tax audit are based
chosen. on the amounts reassessed. The most usual penalties
are late payment penalties i.e. late payment interest
Is there a priority among the acceptable (0.40% per month) or/and late payment fine (5%
methods? or 10%). In the event of tax fraud, penalties can
There is no priority among the acceptable methods, reach 40% or 80% of the tax that has been avoided.
as long as, the result is at arm’s length. The French Companies that are required to have TP
tax authorities nevertheless usually prefer the documentation can be subject to penalties if they do
comparable uncontrolled price (CUP) method, not comply with their requirements (minimum
since article 57 of the French tax code is based on penalty of €10K, and up to 5% of the tax
that method. reassessed per fiscal year).

Are there exemptions to transfer pricing rules in

your country?
No.

Global transfer pricing guide – France 19

Are advance pricing agreement (APA) options Tax audit areas
available? When a French company belongs to an
Unilateral, bilateral and multilateral APAs are international group of companies, the tax inspector
available. Pre-filing meetings are organised with the frequently checks whether TP rules are correctly
French tax authorities to discuss the case, before a applied. This situation also concerns SMEs and
formal APA request is made. The APA, which groups of two companies i.e. a French company
cannot be less than three years or more than five which is a subsidiary of a non French company or
years, makes sure that the concerned companies which has a subsidiary outside France. TP rules are
cannot be reassessed by the tax authorities on the very often a key issue in tax audits. The French tax
basis of their TP policies, for the financial years authorities especially focus on the following areas:
concerned by the agreement and assuming the fact loss making routine functions, intellectual property
pattern given (when the corresponding application (IP) transactions (transfer of IP, royalties) and
was filed) correctly reflects the reality. business reorganisations.
A streamlined procedure exists for SMEs within
the definition of European Union law. The Contact us
For further information on transfer pricing in France please
documentation required by the French tax contact:
authorities is lightened, and the French tax Alexis Martin
authorities assist the companies in the preparation T +33 (0)1 53 42 61 76
E amartin@[Link]
of their request.
Elvre Tardivon-Lorizon
T +33 (0)1 53 42 61 60
E etardivonlorizon@[Link]

Patricia Malocco
T +33 (0)1 53 42 61 43
E pmalocco@[Link]

20 Global transfer pricing guide – France

Germany

Regulatory snapshot • TP documentation has to be provided during an

Overview on-going tax field audit and only on request of
When did transfer pricing rules start?
the tax inspector in charge. There is no need to
2003
Level of TP
submit the TP documentation together with the
Established regime annual tax returns.
Return disclosure • If the taxpayer does not submit the required
No documentation in a timely manner, there will be
Documentation severe consequences. In case of a violation of
Compulsory with threshold
the obligation to cooperate, the tax authorities
Methods
Best method approach
are entitled to increase the tax basis based on
Audit risk their own estimations. In addition to this, the
High tax authority provides for a penalty of 5% to
Penalties 10% of the additional estimated income. If there
High
is a delay in submitting usable documentation, a
Advance Pricing Agreements (APAs)
Available
penalty of at least €100 for each day beyond the
day of the deadline becomes due with a
• The basic rules for Transfer Pricing (TP) in maximum penalty of €1,000,000.
Germany were announced in the early 1980s. • Advance pricing agreements (APAs) are
These rules were expanded by several important available to every taxpayer. An effective APA
supplemented rules, which were promulgated in can cover three to five years.
May 2003 (documentation requirements) and
August 2008 (transfer of business) with an
effective date from 1 January 2003 and 1
January 2008 respectively.
• TP documentation is compulsory within de
minims threshold.
• Germany applies the ‘best method approach’
for conducting TP analysis.
• Acceptable TP methods include comparable
uncontrolled price (CUP), resale-minus, cost
plus, transactional net margin (TNM), profit
split and other methods that comply with the
arm’s length principle.

Global transfer pricing guide – Germany 21

Does your country have transfer pricing rules Is transfer pricing documentation required? If
vs. ruling, laws and guidelines? so, what information should be included?
The arm’s length principle and transfer pricing Taxpayers are obliged to prepare TP documentation
documentation requirements are enacted in ‘article and to keep it in their accounting records. In
1’ of the foreign tax act and ‘section 90 paragraph principle the documentation of the taxpayer should
three’ of the German general tax code. Specific non- substantiate the serious effort to comply with the
statutory guidance was provided by the Federal arm’s length principle. The taxpayer needs to
Ministry of Finance in February 1983 and October explain from his point of view the appropriateness
2010. The German transfer pricing legislation is not of the transfer prices using objective criteria.
necessarily committed to following the OECD’s TP According to German regulations regarding the
guidelines exactly. However, it refers to and is documentation of profit allocation (GAufzV), the
broadly consistent with them. TP regulations apply nature, scope and processing of the relevant facts, as
to all related party transactions without a threshold well as, the direct economic and legal aspects
in which an entity subject to German taxation is thereof need to be exposed. In addition, the
involved. organisational and operational company structure
needs to be displayed. Essentially, the following
Effective date of commencement of transfer parts of the documentation of facts are important:
pricing regulations business description, organisational structure,
TP regulations regarding the obligation to provide functional (including risk) analysis, industry
written TP documentation have been effective in analysis, contractual terms and conditions of the
Germany since 2003. transactions, financial performance, information on
the intercompany transactions, substantiation of
Rulings, laws and guidelines transfer pricing method and prices actually charged.
Besides legally binding articles of the German tax
law, several decrees provide insight into the position
of the tax authorities without a legally binding
effect. These decrees refer to general guidance on
the profit allocation to related companies (BMF IV
C 5 – S 1341 – 4/83), the attribution of profits to
permanent establishments (FM Baden-Würtemberg
S 1300 – 20); intercompany services (BMF IV B 4 –
S 1341 – 14/99), business restructuring (BMF IV B
4 – S 1341 – 08/10003); APAs (BMF IV B 4 – S 1341
– 38/06) and guidance with respect to the
administrative principle procedures (BMF IV B 4 –
S 1341 – 1/05).

22 Global transfer pricing guide – Germany

Is there a threshold for preparing transfer Are intercompany agreements recommended?
pricing documentation? It is recommended that taxpayers document their
Small companies are exempt from the requirement intercompany transactions through intercompany
of the detailed TP documentation. Small companies agreements.
are where neither the total revenue from the
delivery of goods (from transactions with related Do you have to make disclosures about transfer
parties) exceeds €5,000,000 nor the total revenue pricing in the tax return? What statements or
from services other than the delivery of goods certifications are required?
(from transactions with related parties) exceeds In Germany taxpayers are not obliged to disclose
€500,000. Nevertheless, small companies need to any information concerning related party
provide evidence of the compliance with the arm’s transactions in their (corporate income) tax returns.
length principle.
Which transfer pricing methods are acceptable?
What are the deadlines for documentation German tax authorities accept the use of the
preparation? traditional transaction methods (CUP, resale-minus,
The deadline for the submission of the documents cost plus) as well as the use of TNM method and
is 60 days after the documentation has been profit share methods, if applicable.
requested by the Fiscal Authority. If the
documentation contains extraordinary transactions, Is there a priority among the acceptable
the deadline is shortened to 30 days. Absent methods?
(sufficient) documentation will shift the burden of German tax authorities prefer to use the traditional
proof from the German tax authorities to the transaction methods. Nevertheless, taxpayers are
taxpayer, to prove that the transfer prices are at free to choose any other TP methods if the
arm’s-length. traditional methods are not applicable and as long
as the chosen method results in an arm’s length
In which language should documentation be pricing for the transaction. Taxpayers are not
filed? obliged to test all recognised methods, although
Transfer pricing documentation should be filed they must substantiate the method chosen.
with the German tax authorities in German.
What is the statute of limitations on assessment
How long is it necessary to keep transfer of transfer pricing adjustments?
pricing documentation? Basically TP adjustments can be assessed five years
Transfer pricing documentation should be kept for from the tax year-end, plus any extensions provided
at least ten years. by the German tax authorities for filing tax returns.

Global transfer pricing guide – Germany 23

What rates and conditions apply for transfer Tax audit areas
pricing penalties? And is there penalty relief? Transfer pricing is a high risk area since it is a key
A violation of the obligation to co-operate will lead issue in any tax audit. The German tax authorities
to penalties in addition to the tax. The minimum especially focus on the following areas: loss making
penalty is €5,000 and the tax authority provides for routine functions, IP transactions (transfer of IP,
a penalty of 5% to 10% of the additional estimated royalties), transactions with permanent
income. If there is a delay in submitting usable data, establishments, head office activities, principal
a penalty of at least €100 for each day, beyond the structures (including centralised functions and
day of the deadline becomes due with a maximum purchase offices), business reorganisations and
penalty of €1,000,000. financial transactions.

Are advance pricing agreement (APA) options Contact us

For further information on transfer pricing in Germany please
available? contact:
Since 2006 the taxpayer has the opportunity to Harald Müller
obtain an advance pricing agreement (APA) from T +49 211 9524 8139
E [Link]@[Link]
the fiscal authorities. Bilateral and multilateral
APAs are available but unilateral APAs are no
longer supported by the German tax authorities.
Pre-filing meetings are mandatory in the course of
an APA request in order to discuss the case before a
formal APA process is initiated.

24 Global transfer pricing guide – Germany

Guernsey

Regulatory snapshot • No additional charges are levied should there be

Overview a dispute concerning whether a transaction is
When did transfer pricing rules start?
properly calculated within the tax computations
No current transfer pricing rules
Level of TP
of the entity on the understanding that the
Developing regime disclosure was made originally in good faith.
Return disclosure
No Does your country have transfer pricing rules
Documentation vs. ruling, laws and guidelines?
Not compulsory
Although there is no specific legislation, it is
Methods
Best method approach
expected that the arm’s length principle and transfer
Audit risk pricing guidelines laid down by the OECD are
Low followed.
Penalties
Low
Effective date of commencement of transfer
Advance Pricing Agreements (APAs)
pricing regulations
Available
The arms length principle is enshrined in Guernsey
• Guernsey has not introduced formal transfer domestic law and has been in existence since the
pricing rules into its domestic tax legislation original law was enacted.
however under certain double tax treaties there
Rulings, laws and guidelines
is provision to apply generally accepted transfer
pricing principles. Guernsey uses an arm’s length principle and applies
• There is no formal requirement to disclose the domestic law provisions surrounding expenses
intercompany transactions separately. which require them to be incurred wholly and
• Guernsey uses domestic law in that all expenses exclusively for the trade in order to apply a transfer
must have been incurred wholly and exclusively pricing methodology. No formal guidelines have
for the purposes of trade to apply transfer been published.
pricing methodology.
• Although there is no formal requirement for
transfer pricing documentation, in reality
evidence will be required to justify that the
expense has been incurred wholly and
exclusively for the purposes of the trade. The
option on how to accurately calculate this
expense would fall with the claimant and any
method that complies with the arms length
principle would be acceptable.

Global transfer pricing guide – Guernsey 25

Is transfer pricing documentation required? If Are intercompany agreements recommended?
so, what information should be included? It is recommended that taxpayers document their
In order to justify that an intercompany expense intercompany transactions through intercompany
has been incurred wholly and exclusively for the agreements.
trade, the claimant would need to provide (if asked)
transfer pricing documentation. The transfer Do you have to make disclosures about transfer
pricing documentation should describe how pricing in the tax return? What statements or
transfer prices have been determined and include certifications are required?
information which enables the tax authorities to No separate or formal disclosures are required.
evaluate the arm’s length nature of the transactions.
Which transfer pricing methods are acceptable?
What are the deadlines for documentation Taxpayers are free to choose any OECD recognised
preparation? transfer pricing method as long as the method
The burden of proof will rest with the taxpayer to results in an arm’s length pricing for the transaction.
demonstrate that the transfer prices have been Taxpayers are not obliged to test all OECD
calculated at arm’s length. Although at the time of recognised methods, though they must substantiate
the transaction it is not mandatory to produce any the method chosen.
formal documentation the taxpayer should be able,
within a reasonable time, to provide such Is there a priority among the acceptable
information as to justify the charge made. methods?
There is no priority among the acceptable methods
In which language should documentation be as long as the result is at arm’s length.
filed?
English What is the statute of limitations on assessment
of transfer pricing adjustments?
How long is it necessary to keep transfer Transfer pricing adjustments can be assessed six
pricing documentation? years from the tax year-end plus any extensions
Transfer pricing documentation should be kept for provided by the Guernsey tax authorities for
at least seven years. registering appeals. Should negligence or fraud be
proved then there is no time limitation.

26 Global transfer pricing guide – Guernsey

What rates and conditions apply for transfer Tax audit areas
pricing penalties? And is there penalty relief? Connected party transactions are a high risk area in
There are no specific transfer pricing penalties or any tax audit. The Guernsey tax authorities would
rates. focus on the following areas: loss making routine
functions, transfer of intellectual property/royalties,
Are there exemptions to Transfer Pricing rules transactions with permanent establishments, head
in your country? office activities, principal structures (including
All tax returns are required to comply with the centralised functions and purchase offices), business
principle that all expenses claimed for tax purposes reorganisations, captives and financial transactions.
have been incurred wholly and exclusively for the
trade. Contact us
For further information on transfer pricing in Guernsey please
contact:
Are advance pricing agreement (APA) options Mark Colver
available? T +44 (0)1481 753 400
E [Link]@[Link]
Should it be required for a transaction then it is
possible to obtain an APA. Pre-filing meetings can
be organised with the Guernsey tax authorities in
order to discuss the case before a formal APA
request is made.

Global transfer pricing guide – Guernsey 27

28 Global transfer pricing guide – Guernsey
Hungary

Regulatory snapshot Is transfer pricing documentation required? If

Overview so, what information should be included?
When did transfer pricing rules start?
Taxpayers are obliged to prepare transfer pricing
1992
documentation and to keep it in their accounting
Level of TP
Developing regime records. Taxpayers have the right to choose whether
Return disclosure they use the combined documentation (master file
Yes and country specific file) or the separate country
Documentation specific documentation. The transfer pricing
Compulsory
documentation should describe how transfer prices
Methods
Best method approach
have been determined and include information
Audit risk which enable the tax authorities to evaluate the
High arm’s length nature of the transactions. Therefore
Penalties the documentation must contain business
High
description, organisational structure, functional
Advance Pricing Agreements (APAs)
analysis (including risk), industry analysis,
Available
contractual terms and conditions of the
transactions, information on the intercompany
Does your country have transfer pricing rules
transactions, benchmarking, substantiation of
vs. ruling, laws and guidelines?
transfer pricing method and prices actually charged.
The arm’s length principle and transfer pricing
documentation requirements are enacted in article
18 of the Hungarian corporate income tax act and
the 22/2009 ministry of finance decree. In general,
Hungary follows OECD guidelines.

Effective date of commencement of transfer

pricing regulations
Transfer pricing regulations are effective since 1992
in Hungary. Transfer pricing documentation
requirements are effective since 2003.

Rulings, laws and guidelines

The 22/2009 ministry of finance’s decree provides
detailed information on the requirements of the
Hungarian tax authorities referring to transfer
pricing documentation.

Global transfer pricing guide – Hungary 29

What are the deadlines for documentation Do you have to make disclosures about transfer
preparation? pricing in the tax return? What statements or
The documentation must be prepared by the day of certifications are required?
submission of the annual corporate income tax. If Hungarian corporate income taxpayers need to
the documentation is not available upon request of mark in their annual tax returns whether they have
the tax authorities in a tax audit, the taxpayer is chosen the country specific documentation or the
penalised immediately. combined documentation. The documentation itself
does not need to be submitted together with the
In which language should documentation be annual corporate income tax return.
filed? The taxpayer must report related party
Transfer pricing documentation can be filed either companies to the tax authority having executed
in Hungarian or any other foreign language. If the their first contract with that party within 15 days.
documentation is in a foreign language, the tax
authorities have the right to ask for a Hungarian Which transfer pricing methods are acceptable?
translation at the taxpayer’s expense. The corporate income tax act lists the acceptable
methods as follows: comparative price, resale price,
How long is it necessary to keep transfer cost and income, transactional net margin,
pricing documentation? transactional profit split and any other method if
Transfer pricing documentation should be kept for the fair market price cannot be determined by
five years from the last day of the year when the either of the before mentioned methods. Taxpayers
CIT return was submitted, which is the limitation have the possibility to choose from each these
period for taxes. methods.

Are intercompany agreements recommended? Is there a priority among the acceptable

It is highly recommended that taxpayers document methods?
their intercompany transactions in written There is no priority among the acceptable methods
intercompany agreements. as long as the result is at arm’s length. However
taxpayers must declare in the transfer pricing
documentation, why they have chosen other
methods instead of the five named methods.

What is the statute of limitations on assessment

of transfer pricing adjustments?
Transfer pricing adjustments can be assessed five
years from the end of the year when the annual tax
return should have been submitted.

30 Global transfer pricing guide – Hungary

What rates and conditions apply for transfer Are advance pricing agreement (APA) options
pricing penalties? And is there penalty relief? available?
Those taxpayers, who fail to comply with the Unilateral, bilateral and multilateral APAs are
obligation of keeping records related to the available. The resolution is valid for a specific term,
determination of the arm’s length price, may be minimum of three and maximum of five years.
sanctioned by a default penalty of two million Before submitting APA consultation can be
HUF per each documentation for the first time and organised with the tax authorities. The outcome of
four million HUF per each documentation, if the such prior negotiations shall not be binding upon
infringement of the obligation is committed the applicant or upon the competent authority in
repeatedly. If the taxpayer further on does not meet the proceedings for determining arm’s length price.
the obligation, the maximum amount of the penalty The fee of APA is:
is eight times the amount of default penalty • minimum 500 thousand HUF and maximum
imposed on the taxpayer in the first case. The tax five million HUF for unilateral proceedings,
authorities also adjust the tax base of the taxpayer where fair market price is established by the
with the difference of the market level and the method of comparative prices, by the method of
transfer price and also levy a default penalty, which resale prices or by the cost and income method
is the 50% of the tax lack and late penalty interest is • minimum two and maximum seven million
also charged. HUF for unilateral proceedings, where fair
market price is established by any method other
Are there exemptions to Transfer Pricing rules than mentioned in point a)
in your country? • minimum three and maximum eight million
Small enterprises are not obliged to prepare transfer HUF for bilateral proceedings
pricing documentation, but they are obliged to be • minimum five and maximum ten million HUF
able to prove that the prices applied are arm’s length for multilateral proceedings.
prices. No transfer pricing documentation is
required on transactions where the value is under If fair market price (price range) cannot be
50 million HUF in the current year from the determined as a specific sum, the fee shall equal the
starting date of transaction. There is also no transfer fee minimum, depending on the type of
pricing documentation required in case of proceedings.
recharging, in unchanged amounts, or the costs of
services or goods supplied is not within the scope of
the main activity of the affiliated company. This
exemption is subject to the condition that neither
the company providing the service nor the supplier
of the goods is in affiliated company relationship
with any of the related parties.

Global transfer pricing guide – Hungary 31

Tax audit areas
Transfer pricing is a high risk area. Existence of
transfer pricing documentation is always checked in
a tax audit. In a tax audit not only the existence of
the document, but the prices are also checked in
increasing volume.

Contact us
For further information on transfer pricing in Hungary please
contact:
Waltraud Körbler
T +36 1 4552000
E [Link]@[Link]

32 Global transfer pricing guide – Hungary

India

Regulatory snapshot The 2012 finance act expanded the scope of

Overview TPRs by insertion of a new section 92BA in the
When did transfer pricing rules start?
1961 Indian income tax act, to include specified
1 April 2001
Level of TP
domestic transactions (SDTs). SDTs would include,
Developing regime transactions entered into by domestic related
Return disclosure parties, or by an undertaking with another
Yes undertaking of the same tax payer. However, the
Documentation threshold for this to trigger is INR 50 million
Compulsory with threshold
(approximately USD 1 million).
Methods
Best method approach
When examining transfer pricing issues, India
Audit risk follows the arm’s length principle in determining
High the price of transactions between related parties.
Penalties OECD guidelines are used for guidance purposes
High
only.
Advance Pricing Agreements (APAs)
Available
Effective date of commencement of transfer
pricing regulations
Does your country have transfer pricing rules
vs. ruling, laws and guidelines?
In India, TPRs are effective for all accounting
The 2001 finance act, introduced transfer pricing periods ending on or after 31 March 2002.
law in India through sections 92A to 92F of the
Indian income tax Act, 1961) and rules 10A to 10E
of the 1962 Indian income tax rules (the rules),
which guides computation of the transfer price and
suggests detailed documentation procedures.
Transfer Pricing Regulations (TPRs) are applicable
to all enterprises that enter into an ‘international
transaction’ with an ‘associated enterprise’.
Therefore, generally it applies to all cross border
transactions entered into between related parties.
‘Related parties’ is exhaustively defined and does
not only includes shareholdings of more than 26%,
but also other criteria resulting in control and
management, which are explicitly defined.

Global transfer pricing guide – India 33

Rulings, laws and guidelines Supporting documentation – the information
The transfer pricing legislation contained in the would need to be supported by authentic
2001 finance act is found in section 92 of the Indian documentation
income tax act and rules 10A to 10E of the Indian • official publications and databases from the
income tax rules. government of the country of residence of the
associated enterprise or any other country
Is transfer pricing documentation required? If • market research studies brought out by
so, what information should be included? institutions of national and international repute
The burden of demonstrating the arm’s length • price publications, including stock exchange and
nature of the international transactions rests with commodity market quotations
the taxpayer. Rule 10D of the 1962 Indian income • published accounts and financial statements,
tax act, prescribes thirteen mandatory documents in agreements and contracts between the
this regard and requires the taxpayer to maintain associated enterprises.
documentation contemporaneously. Some of the
requirements are general in nature while others are Information is required to be maintained by
more specific to the relevant international taxpayers who enter into international related party
transactions. This includes: transactions that are valued at more than INR 10
million.
Principal documentation
• business and group’s overview (description of What are the deadlines for documentation
the ownership structure, business of the group preparation?
etc.) The information and documentation specified
• description of international transactions should, as far as possible, be contemporaneous and
• functional asset and risk analysis exist by the specified date of the filing of the income
• selection and application of the most tax return, which is 30 November following the end
appropriate method of the financial year.
• benchmarking and identification of comparables
• other supporting details/documents which help In which language should documentation be
in demonstrating the arm’s length nature of filed?
transaction. Transfer pricing documentation needs to be filed in
English.

How long is it necessary to keep transfer

pricing documentation?
Transfer pricing documentation should be kept and
maintained for at least eight years from the end of
the relevant assessment year.

34 Global transfer pricing guide – India

Are intercompany agreements recommended? Is there a priority among the acceptable
It is recommended that taxpayers document their methods?
intercompany transactions through intercompany There is no priority among the acceptable methods
agreements. as long as the result is at arm’s length. The most
appropriate method will be the method which is
Do you have to make disclosures about transfer best suited to the facts and circumstances of each
pricing in the tax return? What statements or particular international transaction, and which
certifications are required? provides the most reliable measure of an arm’s
The taxpayer is required to file an accountants length price in relation to an international
report in ‘form 3CEB’ with the income tax transaction.
department within the due date of filing the return
of income which, presently, is 30 November What is the statute of limitations on assessment
following the end of the financial year, for taxpayers of transfer pricing adjustments?
subject to transfer pricing. The report provides As per the 2012 finance act, effective 1 July 2012,
details on the international related party the transfer pricing audit order is to be passed
transactions and provides a confirmation of the within three years from the end of the year in
accountant on whether the required documentation which the return is filed.
has been maintained by the taxpayer. An appeal against the order of the transfer
pricing audit lies with the appeals commissioner
Which transfer pricing methods are acceptable? and further appeals lie with tribunal, high court and
The arm’s length price in relation to an international supreme court respectively. Effective from 1
transaction is required to be determined by any of October 2009, a dispute resolution panel (DRP) is
the following methods: comparable uncontrolled constituted for speedy resolutions of disputes
price (CUP), resale price, cost plus, profit split, involving foreign companies or companies with
transactional net margin and the other specified transfer pricing dispute. The DRP is an alternate to
method. the appeals commissioner and a direct route to
Recently, the Central Board of Direct Taxes reach the tribunal should the disputes continue.
(CBDT) clarified the other method by saying “for
determination of the arms’ length price in relation
to an international transaction shall be any method
which takes into account the price which has been
charged or paid, or would have been charged or
paid, for the same or similar uncontrolled
transaction, with or between non-associated
enterprises, under similar circumstances,
considering all the relevant facts”. The other
method or the sixth method is effective from 1
April 2012 i.e. from FY 11-12 onwards.

Global transfer pricing guide – India 35

What rates and conditions apply for transfer
pricing penalties? And is there penalty relief?
Indian TPRs prescribes onerous penal
consequences in the event of non-compliance with
documentation and other obligations set out there
under. The penal provisions are summarised below.

Default Penalty Section of TPRs

Failure in maintaining documentation 2% of the value of each international transaction 271AA
Failure to report any international transaction 2% of the value of each international transaction 271AA
Maintains or furnishes any incorrect information 2% of the value of each international transaction 271AA
or documents
Failure in producing the relevant documents to the 2% of the value of each transaction for which documents 271G
transfer pricing officer cannot be furnished
Failure to file accountant’s report within the due INR 100,000 271BA
date (form 3CEB)
Concealment of income in the event of wilful 100% – 300% of amount of tax sought to be evaded 271(1)(c)(iii) read
manipulation of price along with explanation 7

Are there exemptions to Transfer Pricing rules The detailed rules for APA are awaited which may
in your country? clarify on various procedural aspects like the
No there are no exemptions to transfer pricing application, fees, threshold etc.
rules.
Tax audit areas
Are advance pricing agreement (APA) options Transfer pricing is a high risk area. Transfer pricing
available? is a key issue in any tax audit. The income tax
APA provisions are recently introduced by way of authorities especially focus on the following areas:
sections 92CC and 92CD in the 1962 income tax captive service providers earning low margins,
act. Following are the key highlights of the APA intellectual property (IP) transactions (transfer of
provisions: IP, royalties), management fees, loss making
• available to all taxpayers falling within the ambit entities, share transfers, corporate guarantees and
of Indian TP legislation, no threshold limit is financing and reimbursements. The scrutiny is
prescribed mandatory for all companies on a yearly basis with
• APAs to be entered by the CBDT with the the special transfer pricing cell, wherein transaction
approval of the central government value exceeds INR 150 million. Lower than this
• the APA can be applied for a consecutive period value is scrutinised by the regular assessing officer
of five previous years on a case by case basis.
• the APA has a binding force only on the
taxpayer with whom it is signed and, with Contact us
For further information on transfer pricing in India please contact:
respect to the relevant international transaction, Karishma R. Phatarphekar
vis-à-vis the jurisdictional commissioner of T +91 22 5695 4861
income tax. E [Link]@[Link]

36 Global transfer pricing guide – India

Ireland

Regulatory snapshot • The legislation obliges a person/company

Overview involved in a transaction, which is within the
When did transfer pricing rules start?
scope of the transfer pricing legislation, to have
2011
Level of TP
records/documentation available that may
Developing regime reasonably be required for the purposes of
Return disclosure determining whether the income of that
No – but upon filing corporation tax returns, the company must be person/company has been computed at arm’s
satisfied that all transfer pricing legislation is complied with length.
Documentation
• There are exemptions from these rules for small
Compulsory where a company cannot avail of the SME exemption
Methods
and medium entities (SMEs) where a company
Best method approach has fewer than 250 employees and either
Audit risk turnover of less than €50million or assets of less
Medium than €43million on a group basis.
Penalties
• There is no separate statutory regime for
High to medium
Advance Pricing Agreements (APAs)
transfer pricing penalties. However, normal
Not available penalties which apply to the Irish self–
assessment regime may apply.
• As part of 2010 Finance Act, Ireland introduced • There is no priority among the acceptable
transfer pricing legislation in respect of trading methods as long as the result is at arm’s length.
transactions, which endorses the OECD To establish an arm’s length price, the OECD
guidelines for multinational enterprises and tax guidelines will be referenced.
administrations and adopts the arm’s length • Ireland does not have a formal APA procedure
principle. for Irish companies to agree prices with the
• The rules regarding transfer pricing in Ireland Irish tax authorities for international related
are outlined in Sections 835A to 835H of the party transactions.
Taxes Consolidation Act 1997 (TCA) (the new
rules apply to accounting periods beginning on
or after 1 January 2011). Only new
arrangements entered into on, or after 1 July
2010 are affected. Contracts or arrangements in
place before that time are not affected where the
terms of the agreement are ‘grandfathered’, i.e.
agreed before 1 July 2010.

Global transfer pricing guide – Ireland 37

Does your country have transfer pricing rules Is transfer pricing documentation required? If
vs. ruling, laws and guidelines? so, what information should be included?
Section 835C of the TCA sets out the main transfer The legislation obliges a person involved in a
pricing rules. The legislation endorses the OECD transaction, which is within the scope of the
guidelines for multinational enterprises and tax transfer pricing legislation, to have records available
administrations and adopts the arm’s length that may reasonably be required for the purposes of
principle. The tax authority’s application of the determining whether the income of that person has
rules in relation to documentation will accept both been computed at arm’s length. The documentation
the ‘EU transfer pricing documentation’ guidance must be sufficient to demonstrate a company’s
and Chapter V of the OECD guidelines (the compliance with the transfer pricing rules. The
OECD rules only apply insofar as they relate to documentation is required to contain the following:
trading transactions). There are also certain revenue • the associated persons that are party to the
guideline issues in respect of Irish transfer pricing transaction
and in particular, a number of e-briefs and revenue • the nature and terms of the transaction
notes. • the terms of relevant transactions with both
third-parties and associates
Effective date of commencement of transfer • the method or methods by which the pricing of
pricing regulations the transactions were derived
Transfer pricing regulations apply to accounting • the application of the transfer pricing method
periods of companies beginning on or after 1 and any budgets
January 2011. Only new arrangements entered into • forecasts or other relevant papers relied on in
on, or after 1 July 2010 are affected. Contracts or arriving at an arm’s length result.
arrangements in place before that time are not
affected. Revenue have indicated that the compliance
monitoring programme will begin with transfer
Rulings, laws and guidelines pricing compliance reviews. These reviews may, at a
The rules regarding transfer pricing in Ireland are later date, progress to full transfer pricing audits. As
outlined in Sections 835A to 835H of the TCA. part of this self-review process, the following will
The principles in the OECD guidelines for generally be requested/reviewed:
multinational enterprises and tax administrations • the group structure
must be followed when analysing whether a • details of categories and types of related party
transaction has been entered into at arm’s length. transactions
• pricing structure and transfer pricing
methodology used
• summary of functions, assets and risks of
relevant parties
• summary list of relevant documentation
available and reviewed
• details of the basis on which the arm’s length
principle is satisfied.

38 Global transfer pricing guide – Ireland

What are the deadlines for documentation How long is it necessary to keep transfer
preparation? pricing documentation?
Documentation must be available for transactions The legislation does not provide a specific time
that take place in accounting periods beginning on period. However, guidance notes indicate that a
or after 1 January 2011. It is best practice that the company is required to have transfer pricing
documentation is prepared at the time the terms of documentation available for inspection if requested
the transaction are agreed. It is also considered best by the Irish tax authorities. At a minimum, it
practice that the documentation exists at the time of should be retained for six years but it would be
filing the tax return, so that the company is in a recommend to be retained for a longer period.
position to make a correct and complete return.
The documentation requirements do not apply Are intercompany agreements recommended?
to a transaction, the terms of which were agreed It is recommended that taxpayers document their
before 1 July 2010, if: intercompany transactions through intercompany
• the terms of the agreement clearly envisage the agreements.
transaction
• application of these terms delivers the price of Do you have to make disclosures about transfer
the transaction pricing in the tax return? What statements or
• an agreement to enter into a further agreement certifications are required?
would not meet these conditions. There are currently no requirements on return
disclosures or related party disclosures.
However, intercompany arrangements that were
agreed prior to 1 July 2010, and that are re- Which transfer pricing methods are acceptable?
negotiated and re-signed after 1 July 2010, are Section 835D(2) provides that the basic transfer
within the scope of the rules, i.e. they would no pricing rules are to be interpreted in accordance
longer continue to be grandfathered. with the OECD guidelines and the guidance
contained within on the determination of the most
In which language should documentation be appropriate method (which includes the transaction
filed? methods (comparable uncontrolled price, resale
Transfer pricing documentation must be filed either price, and cost plus) and the profit-based methods
in English or Irish, with the Irish tax authorities. (profit split, transactional net margin method)).
The documentation does not need to be prepared or
kept in Ireland, but must be in a language of the Is there a priority among the acceptable
state, i.e. English or Irish. methods?
There is no priority among the acceptable methods
as long as the result is at arm’s length. To establish
an arm’s length price, the OECD guidelines will be
referenced. Transfer prices should be reviewed at
regular intervals to determine that pricing remains
at arm’s length.

Global transfer pricing guide – Ireland 39

What is the statute of limitations on assessment Are advance pricing agreement (APA) options
of transfer pricing adjustments? available?
The statute of limitations is currently four years Ireland does not have a formal APA procedure for
after the end of the tax year or the accounting Irish companies to agree prices with the Irish tax
period in which the return is made. authorities for international related party
transactions. However, the Irish tax authorities have
What rates and conditions apply for transfer been willing to negotiate and conclude bilateral
pricing penalties? And is there penalty relief? APAs with treaty partners, and they are generally
Part 35A of the TCA does not contain any specific willing to consider entering such negotiations once
penalty provisions with respect to a transfer pricing a case has been successfully accepted into the APA
adjustment. In the absence of specific penalty programme of the other jurisdiction.
provisions being included, the Irish tax authorities
have indicated that the general corporate tax Tax audit areas
penalty provisions and the ‘Code of Practice’ will Transfer pricing is a medium risk area and is a key
apply to assessments raised due to transfer pricing issue in any tax audit. However there are not
adjustments under the new transfer pricing rules. considered to be particular related party
Under the general corporate tax penalty provisions, transactions or industry sectors that could be
interest arises on underpaid tax at a daily rate of regarded as facing a higher-than-normal risk of a
0.0219%, which is circa 8% per annum. transfer pricing enquiry from the Irish tax
authorities. To the extent profits are being shifted
Are there exemptions to Transfer Pricing rules from Ireland to a haven or lower tax countries,
in your country? transfer pricing may be a risk area. It should be
The law provides for an exemption from applying noted that under Irish legislation, revenue will only
the transfer pricing rules where a company is a adjust profits upwards, i.e. it is a one way
SME. Section 835E(2) defines a SME, a company adjustment process.
with fewer than 250 employees; and either a
turnover of €50 million or less, or a balance sheet Contact us
For further information on transfer pricing in Ireland please
total of €43 million or less, on a group basis. The contact:
balance sheet total means total assets and should not Peter Vale
be taken as net of any liabilities. T +353 (0)1 680 5952
E [Link]@[Link]

40 Global transfer pricing guide – Ireland

Israel

Regulatory snapshot • Acceptable TP methods include comparable

Overview uncontrolled price (CUP), resale price, cost
When did transfer pricing rules start?
plus, transactional net margin, profit split and
November 2006
Level of TP
unspecified methods that comply with the
Developing regime arm’s length principle.
Return disclosure • TP audit can be targeted at any transaction if it
Yes results in the reduction of Israel’s tax revenue.
Documentation • Other than general penalties that are stipulated
Compulsory
by the income tax ordinance, deemed profit
Methods
Combined method of hierarchy and most appropriate method
adjustment is applied for not complying with
Audit risk the comparable arm’s length range.
High • Related party definition is available in article
Penalties 85A to the income tax ordinance, including
General penalties applicable
inter alia a holding threshold of 50% and above.
Advance Pricing Agreements (APAs)
Available
• APAs are available to taxpayers.
• The income tax ordinance was amended in
• Israel’s Transfer Pricing (TP) rules were respect of the application of TP legislation on
promulgated under article 85A of the Israeli related party lending transactions. Following
Income Tax Ordinance – 1961 (income tax this amendment, the provisions of article 85A
ordinance) and the Income Tax Regulations do not apply to certain lending transactions
(Determining Market Conditions) – 2006 (with capital characteristics) that meet detailed
(regulations), with an effective date criteria.
commencing 1 November 2006.
• Taxpayers with international related party
transactions must disclose the transaction
details through the Declaration of International
Transactions (Form 1385), during the annual
tax return filing process, and declare that the
international related party transaction was
carried out at arm’s length.
• Certain contemporaneous TP documentation is
compulsory (certain exemptions are available
for one time transactions).
• The regulations set a hierarchy of TP methods
for conducting TP analysis.

Global transfer pricing guide – Israel 41

Does your country have transfer pricing rules Is transfer pricing documentation required? If
vs. ruling, laws and guidelines? so, what information should be included?
The arm’s length standard and transfer pricing A taxpayer who is a party to a related party
documentation requirements are enacted in article international transaction must file form 1385 and
85A of the income tax ordinance and the declare that the international related party
regulations. The Israeli regulations are based on transaction is carried out at arm's length. According
both US transfer pricing regulations and the to the instructions related to section 4 of form 1385,
Organisation for Economic Co-operation and the taxpayer should include the total amount of the
Development (OECD) transfer pricing guidelines. transaction and the transfer pricing method that
In general, the regulations apply to all related was selected. Form 1385 constitutes an appendix to
party international transactions in which an entity the taxpayer's annual tax return. In addition,
subject to Israeli income tax is involved, without a according to the regulations, a taxpayer who is a
quantitative threshold. party to a relevant international transaction to
which ‘regulation no. 4’ of the regulations (which
Effective date of commencement of transfer deals with one time transactions) does not apply,
pricing regulations shall submit to the tax assessing officer within 60
Israel's TP rules are effective from November 2006. days of a request, a detailed report which includes:
• inter alia: particulars of the taxpayer
Rulings, laws and guidelines • parties to the international transaction
Besides legally binding articles in the income tax • contractual terms of the transaction
ordinance and the regulations, the Israeli tax • area of activity of the taxpayer and the
authority provided insight into its position in developments therein
respect of transfer pricing, which among others • the economic environment in which the
referred to: general guidance on transfer pricing in taxpayer operates and the risks to which it is
Israel (circular 3/2008); changes in the business exposed
model of an enterprise operating in the field of • use of intangible assets
technology (professional guidance dated July 8, • similar transactions
2010) and application of article 85A to certain • the comparative method selected and the
related party lending transactions (which followed comparative characteristics on the basis of
an amendment of article 85A). which the range was determined
• presentation of the arm’s length range.

42 Global transfer pricing guide – Israel

What are the deadlines for documentation Do you have to make disclosures about transfer
preparation? pricing in the tax return? What statements or
Form 1385 should be submitted on an annual basis certifications are required?
as an appendix to the taxpayer's tax return. In In the event that a taxpayer carried out an
addition, according to the regulations, a taxpayer international transaction with a related party in a
who is a party to an international transaction to relevant tax year, the taxpayer is required to submit
which regulation no. 4 (which deals with one time form 1385 as an appendix to the tax return
transactions) does not apply, should submit to the (submitted on an annual basis). The specific
tax assessing officer a detailed report, within 60 transaction needs to be detailed in form 1385 and
days of a request. the taxpayer should declare that the relevant related
party transaction was carried out at arm's length.
In which language should documentation be
filed? Which transfer pricing methods are acceptable?
In practice, transfer pricing documentation can be The acceptable methods are: CUP, cost plus, resale
filed either in Hebrew or in English at the Israeli tax price, transactional net margin, profit split method
authorities, unless specifically requested otherwise and unspecified methods that comply with the
by the tax assessing officer. Form 1385 is submitted arm’s length principle. The regulations are
in Hebrew. combined from a hierarchy of methods and most
appropriate method.
How long is it necessary to keep transfer
pricing documentation? Is there a priority among the acceptable
Transfer pricing documentation should be kept for methods?
at least seven years. According to the regulations, the CUP method is
preferred over other acceptable methods. In the
Are intercompany agreements recommended? event that the CUP method cannot be applied, the
It is recommended that taxpayers document their taxpayer should apply one of the other methods
related party transactions through agreements. specified above, that is the most appropriate
method for application under the circumstances. In
the event that it is not possible to apply any of the
above methods, the taxpayer can apply an
unspecified method that is more suitable to apply
under the circumstances.

Global transfer pricing guide – Israel 43

What is the statute of limitations on assessment Are advance pricing agreement (APA) options
of transfer pricing adjustments? available?
TP adjustments can be assessed three years from the APAs are available.
tax year-end plus any extensions provided by the
Israeli tax authorities. Tax audit areas
Transfer pricing is a high risk area and a key issue in
What rates and conditions apply for transfer any tax audit.
pricing penalties? And is there penalty relief?
General penalties apply. In addition, if the related Contact us
For further information on transfer pricing in Israel please contact:
party charges deviate from the arm’s length range, Shay Moyal
the price of the related party international T +972 3 7106688
transaction should be reported on the basis of the E [Link]@[Link]

value found in the 50th percentile of the arm’s

Benjamin Gandz
length range of values. T +972 3 7106619
E [Link]@[Link]
Are there exemptions to Transfer Pricing rules
in your country?
Certain documentation exemptions are available for
a one-time international transaction that was
approved by the tax assessing officer as a one-time
transaction.

44 Global transfer pricing guide – Israel

Italy

Regulatory snapshot – 58/E. The letter makes direct reference to

Overview the OECD Transfer Pricing Guidelines for
When did transfer pricing rules start?
Multinational Enterprises and Tax
1973 – arm’s length principle
2003 – advance pricing agreements (APAs)
Administrations, approved by the OECD
2010 – documentation Council on 22 July 2010.
Level of TP • TP documentation is not mandatory for
Under development taxpayers. The measure adopted by the Italian
Return disclosure tax authorities’ director provides information
Yes
about the type of documentation requested (i.e.
Documentation
Not compulsory
master file or country file) and about its
Methods structure.
Best method approach • TP documentation is drawn up to provide
Audit risk evidence of the arm’s length nature of a
High
taxpayer’s TP policy. Furthermore, by drafting
Penalties
High
the TP documentation, taxpayers can take
Advance Pricing Agreements (APAs) advantage of penalty protections in case of tax
Available assessment.
• TP documentation must be filed electronically
• The transfer pricing (TP) rules in force in Italy with the tax authorities, in Italian, within ten
are the following: days after the tax authorities’ request.
– article 110, paragraph 7 of the Italian tax • TP documentation must be drafted on a yearly
code (Presidential decree no. 917/1986) basis but for SMEs , which are entitled not to
– article 9, paragraph 3 of the Italian tax code update the benchmark analysis for the two
(Presidential decree no. 917/1986) taxable periods following the one the
– article 1, paragraph 2 of legislative decree no. documentation relates to, in case the
471/1997 comparability analysis do not incur substantial
– article 8 of law decree no. 269/2003 changes during the above taxable periods.
– measure of the Italian revenue office director
dated 29 September 2010. The measure
makes reference both to EU code of conduct
and to OECD guidelines 2010 on TP
documentation for associated enterprises in
the EU, approved by resolution
2006/c176/01 of 27 June 2006 from the EU
council and government representatives of
member states

1 SME is defined according to quantitative limits provided for the Italian Tax
Authorities Director’s measure adopted on 29 September 2010. Please
note that holding and sub-holding companies may not qualify as SME’s.

Global transfer pricing guide – Italy 45

• TP documentation must disclose all the Rulings, laws and guidelines
intercompany transactions, without any • article 110, paragraph 7 of the Italian tax code
threshold. (presidential decree no. 917/1986)
• Italy applies the ‘best method approach’ for • article 9, paragraph 3 of the Italian tax code
conducting TP analysis. Taxpayers are free to (presidential decree no. 917/1986)
choose any OECD recognised TP method, as • article 1, paragraph 2-ter of legislative decree no.
long as the method results in an arm’s length 471/1997
pricing of the transaction. • article 8 of law decree no. 269/2003
• TP is a high risk area, since it is a key issue in • measure of the Italian revenue office director
any tax audit. According to article 1 of dated 29 September 2010. The measure makes
legislative decree no. 471/1997, the applicable reference both to EU code of conduct and to
administrative penalties range from 100% to OECD guidelines 2010 on TP documentation
200% of the higher tax or credit difference for associated enterprises in the European
assessed. As said above, an appropriate TP Union (EU), approved by resolution
documentation could lead to the non- 2006/c176/01 of 27 June 2006 from the EU
applicability of penalties. council and government representatives of
• Unilateral and bilateral APAs are available. member states
• Circular letter dated 5 December 2010 n. 58/E.
Does your country have transfer pricing rules The letter makes direct reference to the OECD
vs. ruling, laws and guidelines? TP guidelines for multinational enterprises and
The arm’s length principle is contained in article tax administrations, approved by the OECD
110, of the Italian tax code, while TP council on 22 July 2010.
documentation requirements about its structure
and contents are contained in the measure of the Is transfer pricing documentation required? If
Italian revenue office. In general, Italy follows the so, what information should be included?
OECD guidelines for the other TP methods. The TP documentation is not mandatory. If
taxpayers decide to prepare the documentation,
Effective date of commencement of transfer they are obliged to keep it in their records and show
pricing regulations it to the tax authorities if requested by the tax
The TP regulations are effective in Italy since 1973 authority. The TP documentation should describe
(presidential decree no. 597/1973) with regard to how transfer prices were/are determined and
the arm’s length principle. In 2003 the APA include information that enable the tax authorities
regulation was enacted, while it was not until 2010 to evaluate the arm’s length nature of the
that regulation concerning the TP documentation transactions.
was introduced. The measure of the Italian tax authorities
Taxpayers that prepared the TP documentation director provides for two different kinds of
relating to taxable years prior to 2010 could documentation:
communicate the possession of such documentation • a masterfile, for holding and sub-holding
to the Italian tax authorities to take advantage of companies
penalty protection in case of tax assessment. • country-specific documentation, for holding
and sub-holding companies and for those Italian
subsidiaries that are part of a foreign
multinational group.

46 Global transfer pricing guide – Italy

Furthermore, the abovementioned measure Do you have to make disclosures about transfer
provides the specific structure and content of said pricing in the tax return? What statements or
documentation. The documentation has to convey certifications are required?
the following information: business description, Corporate income taxpayers are required to specify
organisational structure, industry analysis, in their annual tax returns whether they have been
functional (including risk) analysis, information on involved in related party transactions or not,
intercompany transactions, contractual terms and showing the total amount of intercompany
conditions of the transactions, benchmark analysis, revenues and costs, as well as whether they possess
TP method adopted and prices actually charged. In the documentation for that year. Furthermore,
lieu of a sub-holding masterfile for the measure, the should the taxpayer be controlled by a non-resident
masterfile regarding the entire multinational group company or control, in turn, a non-resident
can be adopted, even though it is prepared by a company, the information has to provided.
taxpayer resident in another state member of the
EU, subject to the condition that it is consistent Which transfer pricing methods are acceptable?
with the code of conduct. Taxpayers are free to choose any OECD recognised
transfer pricing method as long as the method
What are the deadlines for documentation results in an arm’s length pricing of the transaction.
preparation? Taxpayers are not obliged to test all OECD
The possession of the TP documentation must be recognised methods, though they must substantiate
declared when the company files its annual tax the method chosen.
return. In case of a tax authorities’ request, the
taxpayer has ten days to provide such Is there a priority among the acceptable
documentation. If supplementary information is methods?
needed in addition to the information included in The selection of a TP method always aims at
the documentation already submitted to the tax finding the most appropriate method for each
authorities, then this supplementary information particular case. This does not mean that all the TP
must be provided within seven days from the methods should be analysed in depth or tested in
request or in a longer time period depending on the each case in arriving at the selection of the most
complexity of the TP transactions under analysis. appropriate method. It is important to highlight
that where the comparable uncontrolled price
In which language should documentation be method (CUP) and another transfer pricing method
filed? can be applied in an equally reliable manner, the
TP documentation must be filed in Italian, with the CUP method is to be preferred. In the case the
sole exception of the Masterfile that, in some latter should not be applied, it should be explained
specific cases (namely, in case of a subholding), can the reason of the exclusion.
be kept in English, the sole foreign language that is
accepted by the authorities. What is the statute of limitations on assessment
of transfer pricing adjustments?
How long is it necessary to keep transfer TP adjustments can be assessed five years from
pricing documentation? the tax year-end. This term is doubled during a tax
According to article 43 of the presidential decree assessment when the tax authorities contest
no. 600/1973, taxpayers must keep the TP ‘criminally relevant conduct’.
documentation for all the years potentially subject
to tax audit, usually five years.

Are intercompany agreements recommended?

It is recommended that taxpayers document their
intercompany transactions through intercompany
agreements.

Global transfer pricing guide – Italy 47

What rates and conditions apply for transfer Tax audit areas
pricing penalties? And is there penalty relief? Transfer pricing is a high risk area. Transfer pricing
Whenever the documentation formally complies is a key issue in any tax audit. The Italian tax
with the proper structure required by the law but authorities especially focus on the following areas:
the content and information reported in the loss making routine functions, Intellectual property
document are incomplete or not compliant with the (IP) transactions (transfer of IP, royalties),
provisions set forth by the measure or the transactions with tax havens, transactions with
information given in the document are not fully permanent establishments, head office activities,
accurate or only partially true, the tax authorities principal structures (including centralised functions
are entitled to levy penalties higher than normal, and purchase offices), business reorganisations,
taking into account the taxpayer’s conduct. captives and financial transactions.
According to article 1 of legislative decree no.
471/1997 administrative penalties are applicable Contact us
For further information on transfer pricing in Italy please contact:
from 100% to 200% of the higher tax or credit Paolo Besio
difference assessed. As said above, an appropriate T +39 02 76 00 87 51
TP documentation could lead to the non- E [Link]@[Link]
applicability of penalties.

Are there exemptions to Transfer Pricing rules

in your country?
N/A

Are advance pricing agreement (APA) options

available?
Unilateral and bilateral APAs are available.
In particular, the unilateral APAs were enacted
with a revenue office director’s measure on 23 July
2003. With regard to the bilateral APAs, no specific
provisions are contained in Italian domestic law.
Reference is made to article 25 of OECD model tax
treaty and commentary, the OECD guidelines, with
particular reference to chapter four, annex four, and
to the other documents elaborated by the OECD.
Pre-filing meetings can be organised with the Italian
tax authorities in order to discuss the case before a
formal APA request is made.

48 Global transfer pricing guide – Italy

Japan

Regulatory snapshot Effective date of commencement of transfer

Overview pricing regulations
When did transfer pricing rules start?
Transfer pricing regulations have been effective in
1986
Japan since 1986.
Level of TP
High level
Return disclosure Rulings, laws and guidelines
Yes Besides legally binding articles of the STML, other
Documentation key transfer pricing regulations include the STML
Highly recommended
enforcement order 39-12 and enforcement
Methods
Best method approach
regulations 22-10, respectively laying out detailed
Audit risk rules on foreign related persons and transfer pricing
Medium-high methods, and the transfer pricing information
Penalties corporations are required to report annually on
No specific penalty
schedule 17(4) of the corporate tax return.
Advance Pricing Agreements (APAs)
The STML circular provides further guidance
Available
on control relationships, comparables, and transfer
pricing methods. The National Tax Agency (NTA)
Does your country have transfer pricing rules
commissioner’s directive on the ‘Establishment of
vs. ruling, laws and guidelines?
instructions for the administration of transfer
As a member state of the OECD, Japan’s transfer
pricing matters’ (the administrative guidelines)
pricing rules are consistent with the OECD’s
outlines the various transfer pricing administrative
transfer pricing guidelines, and Japan’s rules
procedures.
consider consistency with OECD guidelines during
audits and assessments.
The Special Taxation Measures Law (STML),
enacted in 1986, remains the central transfer pricing
legislation in Japan. Under STML 66-4, a
transaction between a domestic or foreign
corporation and a foreign related person not priced
in accordance with the arms-length principle will be
deemed to occur at an arms-length price for
corporate tax purposes.

Global transfer pricing guide – Japan 49

Is transfer pricing documentation required? If Documents including the below information used
so, what information should be included? by the taxpayer to calculate arm’s length price:
Taxpayers are required to disclose information • the selected method for calculating the arm’s
about foreign affiliates and related party length price specified in the regulations, reasons
transactions on schedule 17-4 as part of the annual for the selection, and any other documents
corporate tax filing. prepared by the taxpayer in calculating the
In addition to this annual filing requirement, arm’s length price
taxpayers are required to provide transfer pricing • the comparable transactions selection process
documents in response to a request from Japan’s and details of comparable transactions adopted
NTA in the case of a transfer pricing or corporate by the taxpayer
tax audit as follows: • if the profit split method was applied in
Documents associated with the intercompany calculating the arm’s length price, documents
transactions: containing details of the calculation of profits
• a list of assets and description of services attributed
• functions performed and risks assumed by the • in cases when the taxpayer aggregated multiple
taxpayer and related parties transactions into one to calculate arm’s length
• details on the intangible fixed assets and other price, documents containing details of each of
intangible assets used by the taxpayer or related the transactions aggregated and justification for
parties the aggregation
• contracts or documents containing the content • in cases when adjustments were made to
of the contracts comparable transactions, documents containing
• pricing policy and details of price negotiations the adjustment method and reasons for
between the taxpayer and related parties adjustments.
• profits and losses of the taxpayer and related
parties with respect to the intercompany What are the deadlines for documentation
transactions (segmented financials) preparation?
• market analysis and related information In a ‘timely manner’, documents are required to be
• business strategies of the taxpayer and related submitted to the tax authorities in order to evaluate
parties arm’s length price in transfer pricing audit.
• details on other transactions that are closely
associated with the intercompany transactions, In which language should documentation be
if any. filed?
Not specified. However, Japanese is preferable. In
case that English one is submitted to tax authorities,
they may request for a Japanese translation later.

50 Global transfer pricing guide – Japan

How long is it necessary to keep transfer What rates and conditions apply for transfer
pricing documentation? pricing penalties? And is there penalty relief?
Not specified. Since the statute of limitation is six Corporate tax penalties and interest are applicable
years then it should be kept for at least six years. to transfer pricing assessments. For tax
underpayment, a flat 10% is payable on the first
Are intercompany agreements recommended? JPY 500,000 of the unpaid amount and 15% on any
Taxpayers are required to submit intercompany additional unpaid amount thereafter. This increases
agreements at the time of examination. Without to 35% in cases of fraud. Penalties for
submission of such agreements, the tax authority underpayment are non-deductible for corporation
will be doubtful of the transactions reality. tax purposes.
There are no additional transfer pricing-specific
Which transfer pricing methods are acceptable? penalties, but taxpayers failing to submit documents
Arm’s length price is calculated by the use of one of requested by the NTA in a timely manner may be
the following methods: comparable uncontrolled subject to presumptive taxation or be disadvantaged
pricing (CUP), resale price, cost plus, profit split, by the use of ‘secret comparables’.
transactional net margin and equivalent methods.
Are there exemptions to Transfer Pricing rules
Is there a priority among the acceptable in your country?
methods? Not specified.
From the above methods, the most appropriate
method should be selected, considering the facts Are advance pricing agreement (APA) options
and circumstances of each controlled transaction, available?
including functions performed and risk assumed. Japan’s APA system was instituted in April 1987.
The APA guidelines are set out in section 5 of the
What is the statute of limitations on assessment administrative guidelines. Since 2008, the NTA has
of transfer pricing adjustments? required that APA applications be submitted before
A transfer pricing assessment may go back six the start of the fiscal year for which the APA is to
years, one year longer than what is allowed for apply. It is common for taxpayers to have several
corporate tax assessments. informal consultations with NTA examiners before
submitting an APA application. According to NTA
reports, bilateral APA applications have an average
processing time of between two and three years.
The filing of an APA application by the taxpayer
does not stop a transfer pricing audit if already
underway.
While the APA process can be long, obtaining a
high degree of transfer pricing certainty covering
three to five fiscal years, may provide an effective
solution to transfer pricing risk for certain
taxpayers.

Global transfer pricing guide – Japan 51

Tax audit areas Transfer pricing audits can begin directly
Recently, audit targets in Japan are going down to through questions asked by a transfer pricing
fairly large or medium size companies, but not examiner or can result from questions that arise
extremely large size companies. Around ten years during a general corporate tax audit. Before
ago, extremely large size companies like Honda, formally undertaking a transfer pricing audit, an
Takeda Pharmaceutical, Coca-Cola and so on were examiner will typically undertake an informal
main targets of Japanese transfer pricing audit. This inquiry to determine whether a taxpayer is an
trend was changed as these extremely large size appropriate target, and if so, the examiner will
companies have already adopted counter-measures follow up more formally with a meeting or
for transfer pricing risks like APA, global policy or information request. Taxpayers failing to supply
global documentation and so on. It is felt that requested information in a timely manner, risk
foreign companies which have more than ten treatment under Japan’s ‘presumptive taxation’
million US dollar sales in Japan and Japanese rules. These rules can be disadvantageous to the
companies with more than hundred million US taxpayer as they afford examiners broad discretion
dollar sales in foreign countries need to seriously to make assessments, including the ability to apply
consider the risks of a transfer pricing audit. secret comparables, and to make income
adjustments or apply a transfer pricing method
without consultation or input from the taxpayer.

Contact us
For further information on transfer pricing in Japan please contact:
Toshiya Kimura
T +81 3 5770 8829
E [Link]@[Link]

52 Global transfer pricing guide – Japan

Jersey

Regulatory snapshot • Although there is no formal requirement for

Overview transfer pricing documentation, in reality
When did transfer pricing rules start?
evidence will be required to justify that the
No TP rules
Level of TP
expense has been incurred wholly and
Developing regime exclusively for the purposes of the trade. The
Return disclosure option on how to accurately calculate this
No expense would fall with the claimant and any
Documentation method that complies with the arms length
Not compulsory
principle would be acceptable.
Methods
Best method approach
• No additional charges are levied, should there
Audit risk be a dispute concerning whether a transaction is
Low properly calculated within the tax computations
Penalties of the entity on the understanding that the
Low
disclosure was made originally in good faith.
Advance Pricing Agreements (APAs)
Available
Does your country have transfer pricing rules
vs. ruling, laws and guidelines?
• Jersey has not introduced formal transfer
pricing rules into its domestic tax legislation Although there is no specific legislation it is
however under certain double tax treaties, there expected that the arm’s length principle and transfer
is provision to apply generally accepted transfer pricing guidelines laid down by the OECD are
pricing principles. followed.
• There is no formal requirement to disclose
intercompany transactions separately.
• Jersey uses domestic law in that all expenses
must have been incurred wholly and exclusively
for the purposes of trade to apply transfer
pricing methodology.

Global transfer pricing guide – Jersey 53

Effective date of commencement of transfer What are the deadlines for documentation
pricing regulations preparation?
The arms length principle is enshrined in Jersey The burden of proof will rest with the taxpayer to
domestic law and has been in existence since the demonstrate that the transfer prices have been
original law was enacted. calculated at arm’s length. Although at the time of
the transaction it is not mandatory to produce any
Rulings, laws and guidelines formal documentation the taxpayer should be able
Jersey uses an arm’s length principle and applies the to, within a reasonable time, provide such
domestic law provisions surrounding expenses information as to justify the charge made.
which require them to be incurred wholly and
exclusively for the trade in order to apply a transfer In which language should documentation be
pricing methodology. No formal guidelines have filed?
been published. English.

Is transfer pricing documentation required? If How long is it necessary to keep transfer

so, what information should be included? pricing documentation?
In order to justify that an intercompany expense Transfer pricing documentation should be kept for
has been incurred wholly and exclusively for the at least seven years.
trade, the claimant would need to provide (if asked)
transfer pricing documentation. The transfer Are intercompany agreements recommended?
pricing documentation should describe how It is recommended that taxpayers document their
transfer prices have been determined and include intercompany transactions through intercompany
information which enables the tax authorities to agreements.
evaluate the arm’s length nature of the transactions.
Do you have to make disclosures about transfer
pricing in the tax return? What statements or
certifications are required?
No separate or formal disclosures are required.

54 Global transfer pricing guide – Jersey

Which transfer pricing methods are acceptable? Are advance pricing agreement (APA) options
Taxpayers are free to choose any OECD recognised available?
transfer pricing method as long as the method Should certainty be required for a transaction it is
results in an arm’s length pricing for the transaction. possible to obtain an APA. Pre-filing meetings can
Taxpayers are not obliged to test all OECD be organised with the Jersey tax authorities in order
recognised methods, though they must substantiate to discuss the case before a formal APA request is
the method chosen. [Link].

Is there a priority among the acceptable Tax audit areas

methods? Connected party transactions are a high risk area in
There is no priority among the acceptable methods any tax audit. The Jersey tax authorities would
as long as the result is at arm’s length. focus on the following areas: loss making routine
functions, transfer of intellectual property/royalties,
What is the statute of limitations on assessment transactions with permanent establishments, head
of transfer pricing adjustments? office activities, principal structures (including
Transfer pricing adjustments can be assessed six centralised functions and purchase offices), business
years from the tax year-end plus any extensions reorganisations, captives and financial transactions.
provided by the Jersey tax authorities for
registering appeals. Should negligence or fraud be Contact us
For further information on transfer pricing in Jersey please contact:
proved then there is no time limitation. John Shenton
T +44 (0)1534 885 885
What rates and conditions apply for transfer E [Link]@[Link]

pricing penalties? And is there penalty relief?

There are no specific transfer pricing penalties or
rates.

Are there exemptions to Transfer Pricing rules

in your country?
All tax returns are required to comply with the
principle that all expenses claimed for tax purposes
have been incurred wholly and exclusively for the
trade.

Global transfer pricing guide – Jersey 55

56 Global transfer pricing guide – Jersey
Korea

Regulatory snapshot Does your country have transfer pricing rules

Overview vs. ruling, laws and guidelines?
When did transfer pricing rules start?
The TP rules in Korea are governed by the LCITA
1996
of Korea, which is based on the arm’s length
Level of TP
Established regime principle. Before the LCITA was enacted, the
Return disclosure corporate income tax law of Korea governed
Yes transfer price charged for the transactions
Documentation conducted between foreign related parties.
Not compulsory
The LCITA, which is generally consistent with
Methods
Best method approach
the OECD transfer pricing guidelines, states that in
Audit risk intercompany transactions between foreign related
High parties, if the price is either below or above an arm’s
Penalties length price, the tax authorities may determine or
High
recalculate taxable income and tax of the resident
Advance Pricing Agreements (APAs)
based on the arm’s length price.
Available

Effective date of commencement of transfer

• The core transfer pricing (TP) rules were
pricing regulations
promulgated under the Law for the
The LCITA was enacted in 1995 and took effect
Coordination of International Tax Affairs
from 1996, in an effort to conform the Korean TP
(LCITA) of Korea which is based on the arm’s
regulations to internationally recognised rules.
length principle.
• Taxpayers with cross-border intercompany
transactions must submit certain TP firms when
filing corporate income tax return.
• Contemporaneous TP documentation is not
compulsory.
• Best method approach is applicable for
conducting TP analysis.
• Acceptable TP methods include comparable
uncontrolled price (CUP), resale price, cost
plus, transactional net margin, profit split and
other methods which comply with the arm’s
length principle.
• TP audit can be targeted at any cross-border
intercompany transaction.
• Advance Pricing Agreement (APA) is available.

Global transfer pricing guide – Korea 57

Rulings, laws and guidelines In which language should documentation be
The Korean tax authorities have issued relevant TP filed?
rulings since the LCITA took effect in 1996, No specific requirement under the LCITA.
however, these would not be legally binding. However, in practice, the tax authorities generally
request for the submission documents to be in
Is transfer pricing documentation required? If Korean.
so, what information should be included?
TP documentation is not required. However, How long is it necessary to keep transfer
taxpayers engaged in intercompany transactions pricing documentation?
with its foreign elated parties are generally required TP documents should be kept for at least five years.
to submit (with threshold), when filing their
corporate income tax return: Are intercompany agreements recommended?
• the transfer pricing method selected with a brief It would be recommendable that taxpayers
explanation on the reason for its selection document their intercompany transactions through
• the statement of inter-company transactions intercompany agreements.
• the summarised income statement of the foreign
related parties. Do you have to make disclosures about transfer
pricing in the tax return? What statements or
What are the deadlines for documentation certifications are required?
preparation? Taxpayers engaged in intercompany transactions
TP documentation is not compulsory. However, with its foreign elated party are generally required
the Korea tax authorities may, at any time of the to submit (with a threshold), when filing the
year, request the taxpayer to submit relevant TP corporate income tax return:
documents. Upon the request of the tax authorities, • the transfer pricing method selected with a brief
the taxpayer is required to submit the concerned explanation on the reason for its selection
information within 60 days of a request. If the • the statement of inter-company transactions
taxpayer fails to comply with the tax authorities’ • the summarised income statement of the foreign
request for submission of the requested documents, related parties.
it will be subject to the penalty up to KRW 100
million (approximately US$ 90,000) for each
instance.

58 Global transfer pricing guide – Korea

Which transfer pricing methods are acceptable? What rates and conditions apply for transfer
The LCITA states that an arm’s length price should pricing penalties? And is there penalty relief?
be calculated by the most reasonable transfer For TP adjustments, an underreporting penalty of
pricing method given the facts and circumstances. 10% will apply of the additional corporate tax and
Also, the LCITA describes several different the underpayment penalty of 10.95% per annum.
methods that the taxpayer can use for TP analysis. In this regard, the underreporting penalty could be
These methods can be classified into two general waived if the taxpayer demonstrates an arm’s length
categories: primary methods and other reasonable nature of its TP through the mutual agreement
methods. For the primary methods, the LCITA procedure (or the APA) or if contemporaneous TP
specifies three methods: the comparable documentation is maintained.
uncontrolled price (CUP), resale price, cost plus.
On the other hand, other reasonable methods are Are there exemptions to Transfer Pricing rules
specified under the presidential enforcement decree in your country?
to the LCITA, which includes the profit split Not applicable..
method and the transactional net margin methods.
The LCITA also permits the application of the Are advance pricing agreement (APA) options
other unspecified methods. available?
Unilateral and bilateral APAs are available. Pre-
Is there a priority among the acceptable filing meetings can be organised with the Korean
methods? tax authorities to discuss the case before a formal
There is no priority among the acceptable methods APA request is made.
as long as the result is at arm’s length.
Tax audit areas
What is the statute of limitations on assessment Transfer pricing is a high risk area and a key issue in
of transfer pricing adjustments? any tax audit for foreign invested companies and
In general, TP adjustments can be assessed every branches of a foreign company.
five years.
Contact us
For further information on transfer pricing in Korea please contact:
Dong-Bum Kim
T +82 2 2056 3706
E [Link]@[Link]

Global transfer pricing guide – Korea 59

60 Global transfer pricing guide – Korea
The Netherlands

Regulatory snapshot • acceptable TP methods include: Comparable

Overview Uncontrolled Price (CUP), resale price, cost
When did transfer pricing rules start?
plus, transactional net margin, profit split and
Yes
Return disclosure
other methods that comply with the arm’s
No length principle
Documentation • TP audits are selected based on risk assessments
Compulsory by the Dutch revenue, changes and drops in
Methods income, business reorganisations, Intellectual
Best method approach
Property (IP) transactions, loans, transactions
Audit risk
High
with tax havens; captives, profit allocation to
Penalties permenant establishments and centralised
High purchase companies
Advance Pricing Agreements (APAs) • in the absence of sufficient documentation, the
Available
penalty is that the burden of proof will shift
from the Dutch tax authorities to the taxpayer
• the core Transfer Pricing (TP) rules were to demonstrate that the transfer prices are at
promulgated under the decrees 2001/295m and arm’s length
2004/680m • transfer pricing adjustments can be subject to
• taxpayers with intercompany transactions must penalties, levy interest, withholding tax and
prepare transfer pricing documentation double taxation
• thresholds: OECD definition (direct or indirect • unilateral, bilateral, multilateral, and combined
participation in management, control or capital) APA/ATRs are available to all taxpayers. An
• documentation is generally expected to be effective APA can cover four years.
complete when the taxpayer enters into a
transaction. If the transfer pricing
documentation is not available upon the tax
authority request, taxpayers are granted at least
four weeks to prepare the documentation. This
period may be extended up to three months,
depending on the complexity of the
intercompany transactions in which the
taxpayer is engaged
• there is no priority amongst transfer pricing
methods. Transfer pricing methods however
have to be motivated and to result into an arm’s
length outcome

Global transfer pricing guide – The Netherlands 61

Does your country have transfer pricing rules Rulings, laws and guidelines
vs. ruling, laws and guidelines? Besides legally binding articles of the Dutch tax law,
The arm’s length principle and transfer pricing several decrees provide insight into the position of
documentation requirements are enacted in article the tax authorities without a legally binding effect.
8b of the Dutch corporate income tax act. In These decrees regard to general guidance on the
general, the Netherlands follows OECD application of the OECD Guidelines
guidelines1. Various decrees2 have been issued to (IFZ2001/295M); intercompany services, valuation
explain the policy and to provide guidance. Transfer of intangibles, contract R&D (IFZ2004/680M);
pricing regulations apply to all related party advance pricing agreements (IFZ2004/124M);
transactions without a threshold in which an entity financing companies (IFZ2004/126M and
subject to Dutch corporate income tax is involved. IFZ2004/127M); mutual agreement procedures
(IFZ2008/248M); and attribution of profits to
Effective date of commencement of transfer permanent establishments (IFZ2010/457M).
pricing regulations
Transfer pricing regulations are effective since 2002 Is transfer pricing documentation required? If
in the Netherlands. so, what information should be included?
Taxpayers are obliged to prepare transfer pricing
documentation and to keep it in their accounting
records. The transfer pricing documentation should
describe how transfer prices have been determined
and include information which enable the tax
authorities to evaluate the arm’s length nature of the
transactions. Parliamentary history provides the
following examples for the content of such
documentation: business description, organizational
structure, functional (including risk) analysis,
industry analysis, contractual terms and conditions
of the transactions, financial performance,
information on the intercompany transactions,
substantiation of transfer pricing method and prices
1 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations, 1995 and subsequent updates
actually charged.
2 APA decree, IFZ2004/124M; ATR decree, IFZ2004/125M; Decree
regarding financial service activities, IFZ2004/126M; Questions and
answers on the decree regarding service entities and grandfather regime
ruling policy, IFZ2004/127M; Decree on advance certainty and good faith
versus treaty partners, DGB2004/1337M; Decree on APAs, advance tax
rulings (ATRs), financial services entities, interposed holdings, contact point
potential foreign investors, organization and competency rules,
DGB2004/1338M; Implementation decree regarding the Coordination
Group Transfer Pricing, DGB2004/1339M; Adjustments to the transfer
pricing decree of 30 March 2001, application of the arm’s length principle
and the OECD guidelines, IFZ2004/680M; Accelerated Mutual Agreement
Procedure decree, IFZ2008/248M decree on profit allocation to
permanent establishments (PEs), IFZ2010/457M.

62 Global transfer pricing guide – The Netherlands

What are the deadlines for documentation Do you have to make disclosures about transfer
preparation? pricing in the tax return? What statements or
The documentation should be available at the time certifications are required?
when the company enters into a transaction. Absent Dutch corporate income taxpayers are need to
(sufficient) documentation the burden of proof will specify annually in their annual tax returns whether
shift from the Dutch tax authorities to the taxpayer they have been involved in related party
to demonstrate that the transfer prices are at arm’s- transactions. The specific transactions needs to be
length. However, if the documentation is not detailed in the corporate income tax return.
available upon request of the tax authorities, the
taxpayer has four weeks to prepare such Which transfer pricing methods are acceptable?
documentation. This period can be extended to Taxpayers are free to choose any OECD
three months depending on the complexity of the recognized transfer pricing method as long as the
intercompany transactions. method results in an arm’s length pricing for the
transaction. Taxpayers are not obliged to test all
In which language should documentation be OECD recognized methods, though they must
filed? substantiate the method chosen.
Transfer pricing documentation can be filed either
in Dutch or in English at the Dutch tax authorities. Is there a priority among the acceptable
methods?
How long is it necessary to keep transfer There is no priority among the acceptable methods
pricing documentation? as long as the result is at arm’s length. The Dutch
Transfer pricing documentation should be kept for tax authorities prefer traditional transaction
at least 7 years. In case of international transactions, methods over transactional profit methods.
it is recommended to keep documentation for 12
years. What is the statute of limitations on assessment
of transfer pricing adjustments?
Are intercompany agreements recommended? Transfer pricing adjustments can be assessed five
It is recommended that taxpayers document their years from the tax year-end plus any extensions
intercompany transactions through intercompany provided by the Dutch tax authorities for filing tax
agreements. returns. In certain (international) cases, this period
can be extended to twelve years.

Global transfer pricing guide – The Netherlands 63

What rates and conditions apply for transfer Tax audit areas
pricing penalties? And is there penalty relief? Transfer pricing is a high risk area. Transfer pricing
Penalties apply not specifically for non-compliance is a key issue in any tax audit. The Dutch tax
with documentation requirements, but for an authorities especially focus on the following areas:
intentional act to manipulate transfer prices under loss making routine functions, IP transactions
the circumstance of an incorrect income tax return. (transfer of IP, royalties), transactions with tax
In case of a pure intentional act, the tax may be havens, transactions with permanent
increased with a maximum of 100% of the tax due, establishments, head office activities, principal
plus interest. It is unlikely to have transfer structures (including centralised functions and
pricing/tax penalties if there is proper transfer purchase offices), business reorganisations, captives
pricing documentation in place. and financial transactions.

Are advance pricing agreement (APA) options Contact us

For further information on transfer pricing in the Netherlands please
available? contact:
Unilateral, bilateral and multilateral APAs are Michiel van den Berg
available. Pre-filing meetings can be organised with T +31 (0) 182 53 19 22
E [Link]@[Link]
the Dutch tax authorities in order to discuss the
case before a formal APA request is made.

64 Global transfer pricing guide – The Netherlands

New Zealand

Regulatory snapshot • New Zealand’s TP rules are based on the arm’s

Overview length principle, and follow the OECD
When did transfer pricing rules start?
guideline principles
1996/7
Level of TP
• The arm’s length price is calculated using the
Established regime method that produces the most reliable method
Return disclosure (or a combination of the methods) which
No include: the comparable uncontrolled price
Documentation (CUP), resale price, cost plus, profit split and
Not compulsory
comparable profits.
Methods
Best method approach
• High level risk reviews may be undertaken by
Audit risk the issuing of TP questionnaires to taxpayers,
Normal requiring disclosure of things like financial
Penalties performance, groups financial performance,
High
cross-border association party transactions etc.
Advance Pricing Agreements (APAs)
Available
• Specified penalties may be applied in addition to
adjustments arising from transfer pricing issues
• A comprehensive transfer pricing (TP) regime and can range from 20% up to 150% of the tax
was introduced by legislation in 1995, with an shortfall. Determination of the penalties focuses
effective date from the 1996/97 income year. on culpability and can also reflect the level of
• The inland revenue subsequently released co-operation by the taxpayer. Interest will also
transfer pricing guidelines in October 2000, be charged on any tax shortfall.
which cover the application of New Zealand’s • APA’s are available to taxpayers and can either
TP rules and a general overview of the be bilateral or unilateral APA’s. An effective
framework. APA can cover three to five years and may be
• Limited high level intercompany and cross renewed on an on-going basis.
border transaction disclosures are required by
an entity as part of the annual income tax return
completion.
• There is no statutory requirement for taxpayers
to prepare transfer pricing documentation,
however the burden of proof to demonstrate
that consideration is consistent with the arm’s
length principle is on the taxpayer. Penalties will
apply if no documentation is prepared and a tax
shortfall is determined.

Global transfer pricing guide – New Zealand 65

Does your country have transfer pricing rules Is transfer pricing documentation required? If
vs. ruling, laws and guidelines? so, what information should be included?
New Zealand transfer pricing rules are contained There is no statutory requirement for taxpayers to
within section GC of the current New Zealand prepare transfer pricing documentation, however
income tax act. In October 2000 the New Zealand the burden of proof is on the taxpayer to
inland revenue also released transfer pricing demonstrate that consideration is consistent with
guidelines. These guidelines are not enforced by law the arm’s length principle. Therefore the inland
in New Zealand and are intended to supplement the revenue expect that taxpayers prepare some form of
OECD guidelines by providing additional documentation in order to record how their
information on how to comply with New Zealand transfer prices have been determined and how they
transfer pricing rules. are consistent with the above principle, with the
level of detail dependent upon the transfer pricing
Effective date of commencement of transfer tax at risk. It is suggested that at the very least the
pricing regulations following minimum documentation should exist:
Extensive transfer pricing regulations came into • an identification of the cross-border
effect from the 1996/97 income year in New transactions for which the taxpayer has a
Zealand. transfer pricing exposure
• a broad functional analysis of the taxpayer’s
Rulings, laws and guidelines operations to identify the critical functions
In addition to New Zealand transfer pricing being performed
legislation and guidelines, taxpayers also have the • an estimate of the business risk of not
ability to apply for bilateral or unilateral advance undertaking and documenting a more detailed
pricing agreements. Taxpayers are also directed to transfer pricing analysis
seek guidance if required from the guidelines issued • an estimate of the costs of complying with the
by the Australian Taxation Office (ATO) and the transfer pricing rules.
United States s482 regulations. If required the New
Zealand courts and the inland revenue can also take What are the deadlines for documentation
guidance from New Zealand and overseas case law preparation?
involving transfer pricing issues. Not applicable.

66 Global transfer pricing guide – New Zealand

In which language should documentation be Which transfer pricing methods are acceptable?
filed? New Zealand legislation provides five transfer
English, taxpayers wishing to maintain records in a pricing methods available in New Zealand to
foreign language must apply to the commissioner of determine arm’s length consideration being,
the inland revenue for discretion to do so. comparable uncontrolled price, resale price, cost
plus, profit split, and the comparable profits
How long is it necessary to keep transfer method.
pricing documentation?
Business records are required to be kept for a Is there a priority among the acceptable
period of seven years after the end of the income methods?
year to which they relate. There is no priority among the acceptable methods
as long as taxpayers choose the method that
Are intercompany agreements recommended? produces the most reliable measure (or a
It is recommended that taxpayers document their combination of the methods).
intercompany transactions through intercompany
agreements. What is the statute of limitations on assessment
of transfer pricing adjustments?
Do you have to make disclosures about transfer Transfer pricing adjustments can be assessed up to
pricing in the tax return? What statements or four years following the end of tax year in which
certifications are required? the tax return was filed. If there is fraud or an
New Zealand corporate income taxpayers are omission of the mention of taxable income of a
required to specify annually in their annual tax particular nature or a particular source, then there is
returns whether they have been involved in related no time limit.
party transactions, however details of these
transactions are not required to be disclosed.

Global transfer pricing guide – New Zealand 67

What rates and conditions apply for transfer Tax audit areas
pricing penalties? And is there penalty relief? The New Zealand inland revenue considers transfer
Specified penalties may be applied to adjustments pricing to be one of the most important issues
arising from transfer pricing issues. These penalties arising in international tax and therefore actively
range from 20% up to 150% of the tax shortfall. focus on this area. Audits or investigations may be
Determination of the penalties focuses on performed specifically for transfer pricing issues or
culpability and can also reflect the level of co- alternatively combined with normal tax audits. The
operation by the taxpayer. Interest will also be inland revenue use transfer pricing questionnaires as
charged on any tax shortfall and tax payments not a high level risk review and are generally used as the
made on time will also incur late payment penalties. first (information gathering) phase of a formal
transfer pricing review. These questionnaires allow
Are there exemptions to Transfer Pricing rules the inland revenue to evaluate the significance of
in your country? cross-border associated party transactions/dealings,
Not applicable. assess key performance indicators and identify any
unusual or one-off items.
Are advance pricing agreement (APA) options
available? Contact us
For further information on transfer pricing in New Zealand please
Unilateral and bilateral APAs are available. contact:
Greg Thompson
T +64 (0)4 495 3775
E [Link]@[Link]

68 Global transfer pricing guide – New Zealand

Poland

Regulatory snapshot • TP audit may lead not only to profit

Overview adjustments but also an application of a penalty
When did transfer pricing rules start?
corporate income tax (CIT) rate of 50% – in
January 2001
Level of TP
cases where the taxpayer does not submit the
Developing regime TP documentation on the demand of the tax
Return disclosure authorities (in comparison with the 19% CIT
Yes rate if there is TP documentation). Late
Documentation payment interest on the additional tax due will
Compulsory with threshold
also apply.
Methods
Hierarchy
• APAs are available to taxpayers, but the number
Audit risk of obligations referring to the range of
Low information which entities have to prepare in
Penalties order to draw up an APA makes this procedure
High
very expensive and time consuming. As a
Advance Pricing Agreements (APAs)
Available
consequence, in recent years less than 30 APA’s
were obtained.
• The core Transfer Pricing (TP) rules were
implemented in January 2001.
• Contemporaneous TP documentation is
compulsory with the minimum threshold.
• Acceptable TP methods include comparable
uncontrolled price (CUP), resale price, cost
plus, transactional net margin, profit split and
other methods that comply with the arm’s
length principle however, the priority is given to
CUP method.
• TP audit can be targeted at any transaction if it
results in reduction of Poland’s tax revenue, but
recently is more focused on Intellectual
Property (IP) and financial services transactions.

Global transfer pricing guide – Poland 69

Does your country have transfer pricing rules Is transfer pricing documentation required? If
vs. ruling, laws and guidelines? so, what information should be included?
The arm’s length principle and transfer pricing The obligation of preparing transfer pricing
documentation requirements are enacted in article documentation applies to a transaction or
9a and 11 of the Polish CIT Act. Similar regulations transactions between related entities, in which the
are also introduced into the Personal Income Tax total amount resulting from the contract or the total
Actl. According to Polish law, transactions between amount actually paid in the tax year has exceeded
related entities shall be carried out in accordance the equivalent of:
with the arm’s length principle which would be • 100,000 EUR – if the value of transaction is less
accepted by non-related entities. Polish legislation than 20% of the initial capital
partially implemented the Organisation for • 30,000 EUR – in case of performance of
Economic Co-operation and Development services, selling or leasing intangible assets
(OECD) guidelines in this scope. • 50,000 EUR – in other cases.

Effective date of commencement of transfer Additionally, the taxpayers are obliged to prepare
pricing regulations TP documentation if it concludes transaction with
Transfer pricing regulations have been effective the entity having its seat in a tax haven (only in case
since 2001 in Poland. of transactions where the value exceed the
equivalent of 20,000 EUR in a fiscal year).
Rulings, laws and guidelines According to article 9a of the CIT Act, TP
Besides legally binding articles of the Polish tax law documentation should include following
there is one decree: ‘The Regulation of the Minister information (elements):
of Finances’ of 10 September 2009 covering the • description of the functions performed by the
manner and procedure of determining income of transaction parties (including what assets will be
taxpayers by price estimates in transactions used and the risks born)
conducted by taxpayers (Journal of Laws of 2009, • determination of all predicted costs, connected
item 160, No. 1268). The decree generally with transaction, as well as the form and term of
determines the terms of applying individual transfer payment
pricing methods and the conditions of stipulating • methods and ways of calculating the profits and
the comparability of the transactions between determining the price of the subject transaction
related parties. • determination of the economic strategy and
other actions in its course, if the value of the
transaction has influenced by economic strategy
established by entities
• indication of other factors if, in order to
determine the value of the subject transaction
those factors were taken into consideration by
parties taking part in the transaction
• determination of expected benefits connected
with the receiving of services (if the transaction
concerns intangible services).

70 Global transfer pricing guide – Poland

What are the deadlines for documentation Which transfer pricing methods are acceptable?
preparation? Polish tax law provides for traditional methods
Polish TP regulations do not determine the including, CUP, resale price, reasonable margin
deadlines for preparing TP documentation. (cost plus), as well as transactional profit methods,
Generally it is recommended for taxpayers to profit split and transactional net margin method.
prepare TP documentation systematically during Polish tax law implemented the OECD
the fiscal year, in which the transaction is guidelines in the scope of applicability of the
concluded. transfer pricing methods.
A taxpayer is obliged to submit the transfer However, the priority is given to traditional
pricing documentation within seven days of a tax methods (especially the CUP method). If it is
authorities’ request. impossible to apply the traditional methods, the
transaction profit methods can be applied.
In which language should documentation be
filed? Is there a priority among the acceptable
TP documentation must be filed in Polish. methods?
The Polish tax authorities prefer traditional
How long is it necessary to keep transfer transaction methods over transactional profit
pricing documentation? methods, and priority is given to the CUP method.
The TP documentation should be kept by the Regulations are due to change i.e. the rule of
taxpayer for a period of five years. ‘priority of CUP method’ is about to be changed to
the ‘best method approach’ for conducting TP
Are intercompany agreements recommended? analysis as presented in OECD guidelines.
It is recommended that taxpayers document their
intercompany transactions through intercompany What is the statute of limitations on assessment
agreements. of transfer pricing adjustments?
TP adjustments can be assessed five years from the
Do you have to make disclosures about transfer tax year-end.
pricing in the tax return? What statements or
certifications are required? What rates and conditions apply for transfer
Polish corporate income taxpayers need to declare pricing penalties? And is there penalty relief?
annually in their annual tax returns, whether they If the tax inspector makes an assessment of the
are obliged to prepare transfer pricing taxable income/tax deductible costs and there is no
documentation (yes/no answer in the form). The documentation in place for the transactions subject
specific transactions do not need to be detailed in to the assessment, the difference between the profit
the CIT return. established by the tax authority and that declared
by the taxpayer will be taxed at a 50% CIT rate (in
comparison with the 19% CIT rate if there is a
documentation) and late payment interest on the
additional tax due will also be applied.

Global transfer pricing guide – Poland 71

Are there exemptions to Transfer Pricing rules The Ministry of Finance imposes a charge for
in your country? the APA application. This charge is equal to 1% of
Transactions concluded between related parties that the value of the transaction that is subject to the
are members of a tax group are exempt (the group APA application (minimum PLN 5,000, maximum
of related parties for which the common tax base is PLN 200,000)
calculated on the purpose of stipulating the value of Entities which decide to draw up an APA have
CIT to be paid; the terms of establishing tax groups to prepare wide documentation containing detailed
are strictly determined in the domestic CIT Act). information about concluded transactions with
Also companies undertaking transactions under affiliated parties, especially method of calculation
approved APAs do not need to prepare TP transaction’s value, information about costs
documentation. Some entities working in special connected with the transaction etc. Entities bear
legal forms (general partnership) do not need to additional costs for professional consultants who
prepare TP documentation (however, this is to be know how to prepare appropriate documents.
changed). Once an APA is established, the taxpayer’s
transaction with the related entity may be viewed as
Are advance pricing agreement (APA) options almost completely secure.
available? Obligations referring to the range of
The Minister of Finance in Poland may issue, on information that entities have to prepare in order to
request of the taxpayer, a decision as to whether it draw up APA makes this procedure very expensive
finds a given method of determining the transfer and time consuming. As a consequence, in recent
price between related parties acceptable. Under the years (from 2006 to 2012) less than 30 APA’s were
law, the decision will be binding upon the tax obtained. This form of ensuring TP security is not
authorities in the case of other tax procedures popular in Poland.
(such as tax audits and tax-legal proceedings).
The APA regulations set out three different Tax audit areas
types of APA: unilateral agreement, bilateral TP is an average risk area and is not a key issue in
agreement and multilateral agreement. any tax audit. The Polish tax authorities especially
Currently, the period for which the APA in focus on the following areas: loss making
Poland is valid is five years. The APA may be companies, IP transactions (transfer of IP,
extended for another five years under the condition royalties), head office activities, financial
that the criteria used to evaluate such an agreement transactions (loans, guarantees) and transactions
has not changed and the entity applies to prolong concluded with foreign entities.
the agreement six months before it expires.
Contact us
For further information on transfer pricing in Poland please
contact:
Rafał Śmigórski
T +48 61 625 1320
E [Link]@[Link]

72 Global transfer pricing guide – Poland

Portugal

Regulatory snapshot • Advanced Pricing Agreements (APAs) are a

Overview mechanism foreseen in the Portuguese transfer
When did transfer pricing rules start?
pricing legislation.
1998
Level of TP
• Tax authorities have formed a specific audit
Long standing and established regime department to deal with transfer pricing issues,
Return disclosure but these questions can also be raised by any tax
No inspector. In view of that, it is essential that
Documentation Portuguese businesses are prepared for any
Compulsory with threshold
challenges by tax authorities.
Methods
Best method approach
• Under Portuguese transfer pricing regulation,
Audit risk any Portuguese company with a turnover
Medium higher than three million euros must prepare a
Penalties transfer pricing file, including all relevant
Medium
information in respect of the transfer price
Advance Pricing Agreements (APAs)
Available
method chosen, supported by any documents,
reports, studies, contracts, benchmarking, etc.
• Transfer pricing in Portugal was introduced in • But even for companies that are not obliged to
1998 and at that time was one of the Europe’s have a proper file (because their turnover is less
most aggressive legislations, covering a wide than three million euros) transfer pricing policy
range definition of related parties and being is still required and companies must justify their
applicable not only to international transactions prices. If companies are unable to do so when
but also to domestic transactions. challenged by the tax authorities they may have
• Originally, transfer pricing dealt only with their tax situation corrected.
imposing arm’s length prices for goods and
services provided under international agreement
between related parties. Today, it’s a much wider
concept and many of the European transfer
pricing laws are now introducing a larger scope
in order to also cover domestic transactions.
• Ttransfer pricing laws generally prescribe that
related party transactions be undertaken to a
commercially justifiable arm’s length basis in
order to not to shift taxable profit from one
jurisdiction/company to another. The rules
potentially apply to the movement of all goods
and services, including the use in tangible assets.
• Generally, Portuguese law follows the OECD
models and guidelines.

Global transfer pricing guide – Portugal 73

• Portuguese business must also gather enough Rulings, laws and guidelines
documentation, evidencing arm’s length, Besides legally binding articles of the Portuguese
whenever there are cost sharing agreements and tax law, a specific decree (Portaria 1446-C/2001)
rendering of intra-group services. provides insight into the position of the tax
• Major transfer prices methods (such as authorities. This decree regards to general guidance
comparable uncontrolled price (CUP), resale on the application of the OECD guidelines; transfer
minus, cost plus or profit split) are acceptable pricing methods, cost sharing agreements,
under Portuguese regulation, but it is also intercompany services agreements, supporting
possible to use a typical method for determining documentation and correlative adjustments.
a price as long as it is possible to demonstrate
that it is at ‘arm’s length’. Is transfer pricing documentation required? If
so, what information should be included?
Does your country have transfer pricing rules Taxpayers are obliged to prepare transfer pricing
vs. ruling, laws and guidelines? documentation and to keep it in their accounting
The arm’s length principle and transfer pricing records. The transfer pricing documentation should
documentation requirements are enacted in article describe how transfer prices have been determined
63 of the Portuguese corporate income tax law and and include information which enable the tax
in a specific decree (Portaria 1446-C/2001). In authorities to evaluate the arm’s length nature of the
general, Portugal follows the OECD Guidelines1. transactions. The above mentioned decree provides
Transfer pricing regulations apply to all companies. the following examples for the content of such
However, the obligation to have a proper transfer documentation: business description, organisational
pricing file is only applicable to companies with a structure, functional (including risk) analysis,
turnover higher than €3 million that engage in industry analysis, contractual terms and conditions
related party transactions. of the transactions, financial performance,
information on the intercompany transactions,
Effective date of commencement of transfer substantiation of transfer pricing method and prices
pricing regulations actually charged.
Transfer pricing regulations have been effective
since 1998 in Portugal.

1 OECD transfer pricing guidelines for multinational enterprises and tax

administrations, 1995 and subsequent updates.

74 Global transfer pricing guide – Portugal

What are the deadlines for documentation Do you have to make disclosures about transfer
preparation? pricing in the tax return? What statements or
The documentation should be available at the time certifications are required?
when the company enters into a transaction. Portuguese corporate income taxpayers need to
However, if the documentation is not available specify annually in their annual tax returns whether
upon request of the tax authorities, the taxpayer has they have been involved in related party
a certain period to disclose such documentation. transactions. The specific transaction amounts
This period can usually be negotiated with the tax needs to be detailed in the corporate income tax
authorities depending on the complexity of the return.
intercompany transactions.
Which transfer pricing methods are acceptable?
In which language should documentation be Taxpayers are free to choose any OECD recognised
filed? transfer pricing method as long as the method
Transfer pricing documentation should be filed results in an arm’s length pricing for the transaction.
preferentially in Portuguese. Where the Taxpayers are not obliged to test all OECD
documentation is in another language a translation recognised methods, though they must substantiate
may be required. the method chosen.

How long is it necessary to keep transfer Is there a priority among the acceptable
pricing documentation? methods?
Transfer pricing documentation should be kept for There is no priority among the acceptable methods
at least ten years. as long as the result is at arm’s length.

Are intercompany agreements recommended? What is the statute of limitations on assessment

It is recommended that taxpayers document their of transfer pricing adjustments?
intercompany transactions through intercompany Transfer pricing adjustments can be assessed four
agreements. years from the tax year which is also the general tax
statute of limitations in Portugal.

Global transfer pricing guide – Portugal 75

What rates and conditions apply for transfer Are advance pricing agreement (APA) options
pricing penalties? And is there penalty relief? available?
The only penalty specifically defined for transfer Starting 1 January 2008, the Portuguese transfer
pricing is that related to the non-compliance with pricing legislation allows for the establishment of
the obligation to possess a transfer pricing file. This APA’s between the tax authorities and the
fine varies between €1,000 and €10,000. taxpayers. The process starts with a written request
Penalties may also be applicable for late or no by the taxpayer where the operations, participants,
payment of tax due (in this case as a consequence of methods used, duration and any other relevant
manipulation of transfer prices). These penalties information are explained. Once analysed and
vary between 30% and 100% of the tax due plus agreed upon by the tax authorities the APA will
compensatory interest at 4%. enter into force for a maximum period of three
years.
Are there exemptions to Transfer Pricing rules
in your country? Tax audit areas
As mentioned before, Transfer pricing rules apply There is no specific policy defined in this regard.
to all companies that engage in related party However, as there is a special audit group within
transactions. However the obligation to have a the tax authorities tax audit department, dedicated
specific transfer pricing file only applies to only to transfer pricing issues, it is likely that they
companies with a turnover higher than €3 million decide on the companies to inspect based in
that engage in such related party transactions. economic factors, namely the amount of taxable
income that is influenced by related party
transactions.

Contact us
For further information on transfer pricing in Portugal please
contact:
Joaquim L. Mendes
T +351 21 413 46 31
E [Link]@[Link]

Pedro Ferreira Santos

T +351 21 413 46 33
E [Link]@[Link]

76 Global transfer pricing guide – Portugal

Russia

Regulatory snapshot Does your country have transfer pricing rules

Overview vs. ruling, laws and guidelines?
When did transfer pricing rules start?
The new transfer pricing rules in Russia were
2012
enacted by the federal law no. 227-FZ of 18 July
Level of TP
Developing regime 2011 (the law) and came into force starting from 1
Return disclosure January 2012. According to the law the companies
No which fall under the scope of TP rules are obliged
Documentation to disclose controlled transactions as well as to
Compulsory with threshold
provide the Russian tax authorities on their request
Methods
Best method approach
with TP documentation proving prices applied. In
Audit risk general, Russian TP rules are similar to OECD
Low principles but OECD guidelines are not officially
Penalties enacted.
Low
The law provides for the following list of
Advance Pricing Agreements (APAs)
controlled transactions:
Available
• related parties cross-border transactions (no
volume threshold is defined)
• The core transfer pricing (TP) rules were
• foreign trade transactions with commodities
promulgated in July 2011 (law no. 227-FZ) with
with total income exceeding RUR 60 million
an effective date from 1 January 2012.
(approximately USD 2 million) per calendar
• In general TP rules in Russia are similar to
year
OECD rules, but have certain specifics.
• transactions with companies incorporated or
• Preparation of comprehensive TP
residing in offshore jurisdictions (including
documentation files on controlled transactions
non-related parties). A threshold of RUR 60
by companies is required.
million (approximately USD 2 million) per
• TP documentation is compulsory on request of
calendar year has been established for such
tax authorities with relevant threshold.
transactions
• Acceptable TP methods include comparable
uncontrolled price (CUP), resale price, cost
plus, transactional net margin, profit split.
• Russia applies a ‘quasi-priority’ approach for
the choice of TP methods.
• A TP audit can be targeted at any controlled
transaction if it results in a reduction of Russia’s
tax due.
• Additional tax assessment and penalties are
imposed due to not complying with the TP
rules.
• APA is available only to so-called ‘large
taxpayers’.

Global transfer pricing guide – Russia 77

• transactions between related parties carried out Is transfer pricing documentation required? If
via unrelated intermediary companies, provided so, what information should be included?
such intermediary companies do not perform Transfer pricing documentation can be requested
any additional functions, assume any risks and for all controlled transactions. Exemptions are
employ any assets provided for 2012 when for the controlled
• Domestic transactions between related parties transactions with turnover less than RUB 100
will be subject to control in the following cases: million (approximately USD 3 million)
– if the amount of such transactions exceeds documentation is not required. The same
certain limit (RUR 3 billion for 2012 exemption is applicable for 2013 with the threshold
(approximately USD 100 million), RUR 2 of RUB 80 million in 2013 (approximately USD 3
billion for 2013, RUR 1 billion starting million).
2014) The statutory form of documentation is not
– if a party of a transaction is a taxpayer of defined but its main features are generally outlined
mineral extraction tax, unified agricultural in the tax code.
tax, unified imputed income tax, resident of The documentation shall include the following
special economic zone or eligible for 0% information:
profits tax. The law provides for certain • description of the controlled transaction, its
minimal thresholds and effective dates for parties and conditions, including the description
defining such transactions as controlled. of the pricing method (if any) and other
information on the transaction
Effective date of commencement of transfer • information on transaction parties’ functions (if
pricing regulations functional analysis is carried out by the
The new transfer pricing rules in Russia were taxpayer), assets employed (related to the
enacted by the Federal Law No. 227-FZ of 18 July controlled transaction) and commercial risks
2011 and came into force starting from 1 January borne.
2012. • if a taxpayer uses methods, established by the
tax code, the following information should also
Rulings, laws and guidelines be provided:
TP rules are included in the tax code. Rulings or – the ground for choice and applicability of
guidelines are expected, although not yet available. the method used
Russian TP rules are similar to OECD principles – the sources of data
but OECD guidelines are not officially enacted. – calculation of the market prices interval
(margin interval) used for the benchmarking
– the grounds for choice and applicability of
comparables
– information about other facts, which had
influence on the controlled transaction price
(margin), etc.

78 Global transfer pricing guide – Russia

What are the deadlines for documentation Which transfer pricing methods are acceptable?
preparation? The Russian TP rules set five methods for
Taxpayers must report to the tax authorities on the determining the transaction price: comparable
controlled transactions no later than 20 May of the uncontrolled price (CUP), resale price, cost plus,
calendar year following a year when the specific transactional net margin and profit split.
controlled transaction took place. TP
documentation shall be provided to the tax Is there a priority among the acceptable
authorities within 30 days from the date of request methods?
issued by tax authorities but not earlier than 1 June The CUP method is named as a preferred method.
of the following year. If it is not applicable a company may use the most
appropriate method of the others. However, there
In which language should documentation be are certain provisions in the law which stipulate
filed? other methods as preferable ones in certain cases. If
TP documentation has to be filed to the Russian tax the above mentioned methods do not allow to
authorities in Russian. define the price of an individual transaction it can
be determined through an independent valuation.
How long is it necessary to keep transfer
pricing documentation? What is the statute of limitations on assessment
There are no special provisions in the Russian TP of transfer pricing adjustments?
rules in respect to the length of time to keep Transfer prices are audited by tax authorities in the
transfer pricing documentation. However, there are course of a separate TP audit with certain
general requirements of the tax code saying that transitional provisions prescribed by the tax code.
accounting and tax data and other documents In particular, an audit for the year 2012 may only be
necessary for calculation and payment of taxes shall initiated before 31 December 2013, while a 2013
be kept within four calendar years. audit may only be initiated before 31 December
2015. After the above provisions expire, a TP audit
Are intercompany agreements recommended? may cover three years preceding the year when the
Yes, intercompany invoicing has to be based on the audit is initiated.
intercompany agreements.

Do you have to make disclosures about transfer

pricing in the tax return? What statements or
certifications are required?
There are no TP disclosures in profit tax returns.
However, companies must separately report to the
tax authorities on the controlled transactions no
later than 20 May of the calendar year following a
year when the controlled transaction took place.

Global transfer pricing guide – Russia 79

What rates and conditions apply for transfer Are advance pricing agreement (APA) options
pricing penalties? And is there penalty relief? available?
The Russian TP rules exempt any transactions that Taxpayers may be entitled to conclude an APA.
occur during the years 2012 and 2013 from transfer This is only possible for Russian companies
pricing penalties. A penalty of 20% will apply to registered as the ‘largest taxpayers’. To conclude an
transactions occurring during the period 2014-2016. APA a taxpayer should prepare an application with
Starting from 2017, a 40% penalty will be imposed a description of methods, sources of information,
in cases of a transfer pricing adjustment. Submission etc. and pay a state duty in the amount of RUR 1.5
of TP documentation protects a taxpayer from million (approximately USD 50 000). An APA
penalties even if an adjustment is made. For a late protects the company from potential tax
payment, interest on the amount of the assessment assessments, penalties and late payment interest.
is approximately 10% per annum.
Tax audit areas
Are there exemptions to Transfer Pricing rules Transfer prices are audited by tax authorities in the
in your country? course of a separate TP audit with certain
There are some exemptions prescribed by the transitional provisions prescribed by the tax code.
Russian TP rules, in particular: In particular, an audit for the year 2012 may only be
• cross-border transactions with turnover less initiated before 31 December 2013, while a 2013
than RUB 100 million (approximately USD 3 audit may only be initiated before 31 December
million) for 2012 are not subject to TP rules. 2015. After the above provisions expire, a TP audit
The same exemption is applicable for 2013 with may cover three years preceding the year when the
the threshold of RUB 80 million in 2013 audit is initiated. The Russian TP rules provide for
(approximately USD 3 million). Starting 2012 the presumption that market prices applied by the
no minimal threshold applies for the cross- company are in line with the market level. Thus,
border transactions Russian tax authorities still have to prove that prices
• domestic transactions between related parties of controlled transactions do not correspond to the
are not subject to control if the amount of such market level.
transactions does not exceed certain limits, in
particular RUR 3 billion for 2012 Contact us
For further information on transfer pricing in Russia please
(approximately USD 100 million), RUR 2 contact:
billion for 2013, RUR 1 billion starting 2014). Alexander Sidorenko
T +7 495 258 99 90
E [Link]@[Link]

80 Global transfer pricing guide – Russia

Slovak Republic

Regulatory snapshot • According to the income tax act, accepted TP

Overview methods include: fair market price, subsequent
When did transfer pricing rules start?
sale, increase costs (methods based on a
2009
Level of TP
comparison of prices), profit split and net
Developing regime margin (methods based on a comparison of
Return disclosure profits). Preferred methods are methods based
No on a comparison of prices.
Documentation • A penalty of €60 - €3,000 may be imposed if
Compulsory
the TP documentation is not submitted to the
Methods
OECD
tax authorities within 60 days of the request and
Audit risk the penalty may be imposed repeatedly. Other
High penalties may be imposed for unpaid or
Penalties understated tax liability.
High
• The taxpayer may request approval of the
Advance Pricing Agreements (APAs)
Available
Slovak tax authorities for the selected TP
method.
• The core transfer pricing (TP) rules were laid
Does your country have transfer pricing rules
down in ‘act no. 595/2003 coll.’ on income tax
vs. ruling, laws and guidelines?
(income tax act) with an effective date of 1
January 2009. Required content of TP The arm’s length principle and the obligation to
documentation is stipulated in guidance no. keep TP documentaion is enacted in article 18 of
MF/8288/2009-72 of the Slovak ministry of the Slovak income tax act. Requirements relating to
finance. TP rules generally conform with the the content and the rules for preparing the TP
OECD guidelines. documentation are stipulated in guidance of the
• There is no obligation to enclose the TP Slovak ministry of finance no. MF/8288/2009-72.
documentation to the tax return. However, the Currently a very limited number of rulings exist.
transactions between the Slovak entity and
foreign related parties must be disclosed in the
financial statement notes.
• TP documentation is compulsory for
transactions between the Slovak entity and
foreign related parties. Tax payers should
submit TP documentation within 60 days of the
Slovak tax authorities request.

Global transfer pricing guide – Slovak Republic 81

Effective date of commencement of transfer What are the deadlines for documentation
pricing regulations preparation?
Transfer pricing regulations are effective since 2009 TP documentation must be submitted to the tax
in the Slovak Republic. authorities within 60 days after being requested.

Rulings, laws and guidelines In which language should documentation be

Besides legally binding articles of the Slovak tax filed?
law, the ministry of finance published in the TP documentation should be filed in Slovak
financial newsletter the OECD transfer pricing language.
guidelines. These are not legally binding; however,
the tax authorities should follow them practically. How long is it necessary to keep transfer
pricing documentation?
Is transfer pricing documentation required? If Not specifically stated in the Slovak income tax act.
so, what information should be included?
Entities which are obliged to prepare financial Are intercompany agreements recommended?
statements under IFRS must maintain full scope TP It is recommended that taxpayers document their
documentation, which consist of a master file and intercompany transactions through intercompany
country file. The master file is supposed to include agreements.
information relating to the whole group and the
country file provides information about the Slovak Do you have to make disclosures about transfer
entity. The country file should include a transfer pricing in the tax return? What statements or
pricing study. certifications are required?
Taxpayers which are not obliged to prepare There is no obligation to enclose the TP
financial statements under IFRS are allowed to keep documentation to the annual tax return. However,
simplified TP documentation which proves notes to the financial statements must disclose
compliance with the arm’s length principle for transactions between the Slovak entity and foreign
significant controlled transaction with foreign related parties in euros without any further details.
entities.
Entities which do not perform any controlled
transactions with foreign related parties are
currently not obliged to prepare TP
documentation.

82 Global transfer pricing guide – Slovak Republic

Which transfer pricing methods are acceptable? Are there exemptions to Transfer Pricing rules
Taxpayers may use OECD TP methods – fair in your country?
market price, subsequent sale, increase costs N/A
(methods based on a comparison of prices); profit
split, net margin (methods based on a comparison Are advance pricing agreement (APA) options
of profits). available?
Unilateral APAs. According to the Slovak income
Is there a priority among the acceptable tax act the taxpayer can request approval of the
methods? Slovak tax authorities for selected TP methods.
Taxpayers may use preferably methods based on
the comparison of prices. If such methods are Tax audit areas
practically not possible they may use methods Tax authorities are currently developing a special
based on the comparison of profit. task force for transfer price issues. The likelihood is
that taxpayers with transactions to foreign related
What is the statute of limitations on assessment parties will increasingly be subject to a tax audit.
of transfer pricing adjustments?
Generally five years from the year for which the tax Contact us
For further information on transfer pricing in the Slovak Republic
return was filed, in cases where double taxation please contact:
agreements have been applied then ten years. Dr. Wilfried Serles
T +421 2 59 300 400
E [Link]@[Link]
What rates and conditions apply for transfer
pricing penalties? And is there penalty relief?
A penalty of €60 - €3,000 can be imposed by the
tax authorities for not submitting the TP
documentation within 60 days of the tax authority’s
request. A penalty may be imposed repeatedly if the
TP documentation is not filed within the agreed
period. Other penalties may be imposed for unpaid
or understated tax liability. The penalty in this case
is three times the current basic interest rate of the
European Central Bank but not less than 10%.

Global transfer pricing guide – Slovak Republic 83

84 Global transfer pricing guide – Slovak Republic
Spain

Regulatory snapshot • transfer pricing analysis must be done for local

Overview transactions and not only for foreign
When did transfer pricing rules start?
transactions
2006
Level of TP
• taxpayers should prepare transfer pricing
Established regime documentation
Return disclosure • the AEAT (Spanish tax authorities) could
Yes request the transfer pricing report. Taxpayers
Documentation need to address 14 points in their transfer
Compulsory with threshold
pricing reports, and for every point that the
Methods
Hierarchy
taxpayer omits, a penalty could be applied
Audit risk • specific legislation on secondary adjustments. In
High particular, secondary adjustments are seen as
Penalties automatic once a primary adjustment is
High
proposed in all cases
Advance Pricing Agreements (APAs)
Available
• prior to 2007, the burden of proof was on the
side of the Spanish tax authorities
The main characteristics of the Spanish transfer • in the corporate income tax return, the
pricing rules in force since December 2006 are: company must disclose related party
• Spain is an OECD member so the rules follow transactions
its guidelines regarding applicable methods • the threshold for not preparing the transfer
• the use of external comparables is possible, pricing documentation amounts is €250,000 for
generally provided by international database transaction performed with the same related
suppliers party
• if a related party transaction price or margin • every taxpayer must have its own
falls into the inter-quartile range, there is no documentation.
adjustment on the price and the transaction is
deemed to be on an arm’s length basis
• potential adjustments are calculated by the
difference between the real price and some point
(not specified) in the range
• related party transactions are understood to
include, among others, those operations
between:
– an entity and its shareholders or partners
(5% of the shares)
– an entity and its administrators or directors
– two entities belonging to the same group
– two entities where one holds an indirect
interest in the other of at least 25% of the
share capital or the net equity.

Global transfer pricing guide – Spain 85

Does your country have transfer pricing rules Rulings, laws and guidelines
vs. ruling, laws and guidelines? Tax administration; corporate income tax act (royal
Article 16 of the Spanish Corporate Income Tax legislative degree 4/2004) and non-residents tax
Law (CITL) and modified by law 36/2006, shifted act (royal legislative decree 5/2004). Article 16 of
the burden of proof to the taxpayer and introduced CITA (royal legislative degree 4/2004) governing
the obligation of transfer pricing documentation transfer pricing rules has been changed significantly
applicable for fiscal years commencing on or after 1 by the tax fraud prevention act published on 30
December 2006. Although article 16 established November 2006 (law 36/2006). Royal decree
that related-party transactions should be priced 1793/2008 develops the corporate income tax
under the arm’s length principle, the formal regulation.
documentation requirements were only published Additionally, new regulations were approved in
on 18 November 2008; in the royal decree 2010: Royal decree 6/2010 on the simplification of
1793/2008. This specifies the compulsory elements the documentation requirements for small and
that Spanish transfer pricing documentation should medium-sized enter-prises, and royal decree
contain from 19 February 2009 onwards. 897/2010, which develops the simplification of the
Previously, the regulation of transfer pricing among taxpayer documentation in general.
related companies was characterised by the Royal decree 1793/2008, effective from 19
following premises: February 2009, provides detailed documentation
• only the tax administration could realise rules, penalty procedures, tax audit transfer pricing
adjustments to market prices, therefore, the process, secondary adjustments, and APA-specific
burden of proof fell on the administration. procedure.
Consequently, experience demonstrates that in
cases of administrative regularisation for Rulings: formal consultations to tax authorities.
transfer pricing, sanctions are not usually Royal decree 1794/2008, governing the mutual
imposed, but the administration only demands agreement procedure and EU arbitration
the tax debt, if it has not been paid, plus convention (EU/90/436) from a Spanish domestic
interests for delayed payment. perspective.
• the contributor did not have the obligation to
prepare documentation, except in the case of Is transfer pricing documentation required? If
management support services contracts and so, what information should be included?
contributions for research and development Taxpayers carrying out related party transactions
activities. have to prepare the documentation that supports
the application of the arm’s length principle.
The law of reform for the prevention of tax fraud Article 16.2 of the CITL establishes a general
raises an important reform regarding the regulation, rule, stating that related persons or entities must
relative to the related operations in general and keep available documentation as from the end of
especially transfer pricing, its principal innovations the voluntary return or assessment period in
are: question for the tax authorities. The royal decree
• the valuation at market prices of the operations implements this statutory requirement by drawing
among related entities, for both domestics as on the principles contained in the EU code of
well as cross-border transactions, becomes an conduct on transfer pricing documentation. There
obligation of the contributor; therefore, the are two sets of documents that have to be prepared:
possibilities of imposing sanctions increase • documentation concerning the group to which
• the existence of the contributor’s obligation to the taxpayer belongs – This documentation
justify the valuation, with the necessary should include among other matters, the
documentation. following:
– a general description of the organisational
Effective date of commencement of transfer structure of the group
pricing regulations – the type amounts and flow of the
Transfer pricing regulations have been effective transactions carried out
since 2006 in Spain. – a general description of the functions,
benefits and risks for each of the parties that
intervene in the transaction.

86 Global transfer pricing guide – Spain

• documentation relating to the taxpayer – This How long is it necessary to keep transfer
documentation will include, among other pricing documentation?
questions, the following: The statute of limitations on assessment of transfer
– the identity of the taxpayer and the related pricing adjustments is up to a four year period.
persons or entities involved in the
transaction Are intercompany agreements recommended?
– a comparison analysis leading to the correct It is recommended that taxpayers document their
application of the transfer pricing intercompany transactions through intercompany
methodology agreements, however it is not compulsory.
– an explanation concerning the selection of Regarding the cost-sharing agreements, tax
the chosen transfer pricing methodology deductibility of the amounts paid is admitted as
– the details of the range of valuations arising long as it is supported by a written agreement.
from that methodology.
Do you have to make disclosures about transfer
What are the deadlines for documentation pricing in the tax return? What statements or
preparation? certifications are required?
The described documentation covers the related- In the CIT form, taxpayer’s related party
party transactions carried out by the taxpayer from transactions must be disclosed by indicating the
19 February 2009 onwards; and needs to be company name, the fiscal code of the people or
available by the end of the voluntary period for entities with which the operation is carried out, as
filing the corporation tax return; notwithstanding well as a description of their nature, characteristics
this, the tax authorities may ask for the and amount of transactions with each related party.
correspondent fair market value analysis for those Also, methods used to determine an arm’s length
transactions carried out since 1 December 2006. principle will need to be disclosed in the form filed
For following years documentation should be for tax returns.
updated/prepared annually by the end of the period Also, in the financial statements the taxpayers
for filing voluntary declarations. The transfer must provide information about the transfer pricing
pricing study or documentation is policy.
contemporaneous with the filing of the
corresponding corporate income tax return, which Which transfer pricing methods are acceptable?
is generally due in six months and 25 days from the Market value will be determined by comparative
fiscal year-end. (i.e. for FY ending 31 December analysis. The circumstances surrounding related
2010, the due date is 25 July 2011). party transactions will be compared with those
There is no deadline to submit documentation, between independent entities or persons that are
but the tax authorities may request it even the day comparable. Comparable uncontrolled price
after filing the annual corporate tax return. Upon a (CUP), resale price, cost plus, profit split and
tax audit, the tax inspector will determine the transactional net margin methods are all acceptable.
submission deadline on a case-by-case basis with a
minimum period of ten business days counting Is there a priority among the acceptable
from the business day subsequent to the request. methods?
CUP, resale price and cost plus methods have
In which language should documentation be priority. Profit-based methods (profit split and net
filed? margin) should only be applied if the use of
There are no specific rules in this regard. transaction based methods are not possible due to
Documentation should be acceptable in line with the complexity or the information of the
the recommendations of the EU joint transfer transactions.
pricing forum. In an ordinary tax audit, the tax
auditor may accept the transfer pricing What is the statute of limitations on assessment
documentation in other languages, but a translation of transfer pricing adjustments?
into Spanish still may be requested. In litigation, The last four years from the due date or from the
any document used must be written in Spanish or filing date of the last tax return.
in the official language of the autonomous region of
the taxpayer, that is, Catalan, Basque, Galician, or
Valencian.

Global transfer pricing guide – Spain 87

What rates and conditions apply for transfer Are there exemptions to Transfer Pricing rules
pricing penalties? And is there penalty relief? in your country?
The Spanish documentation requirements have 14 The documentation will not be required when the
points that tax payers need to address in their consideration of all transactions with the same
transfer pricing reports, and for every point that the related party does not exceed the amount of
taxpayer omits, a penalty could be applied. €250,000 (market value), nor will be required for
Based on the new penalty regime introduced by small size entities when the total related party
law 36/2006, and applicable from 19 February 2009 operations do not exceed the aggregate amount of
onwards, penalties linked to the formal €100,000 (market value). It should be noted that
requirements of the documentation – are also the obligation to apply market values is applicable
enforceable and may apply to both (i) the in all cases even when there is no obligation to
adjustments performed and to (ii) the lack of prepare documentation.
support of the related-party transactions performed At the same time, the regulations establish
by the taxpayer, thus establishing the following two reduced documentation obligations for related
types of penalties: party transactions involving small companies (net
• when there is no transfer pricing adjustment, a revenues for the consolidated group of less than
fixed fine of €1,500 per data and €15,000 per €10 million in the previous tax year) and individual
group of omitted, inaccurate or misleading data persons. It should be noted that documentation is
might be imposed on the taxpayer due to faults required for transactions with entities, related party
in the documentation provided or not, resident in tax havens.
• when a transfer pricing adjustment is proposed
by the tax authorities, a penalty of 15% of the Are advance pricing agreement (APA) options
additional tax base is applicable in addition to available?
the tax due, the corresponding delay payment Spanish law provides taxpayers with a statutory
interest and the minimum fine will be twice the right to seek APAs; regulation includes the
fine that would result from the application of procedure for processing and deciding on unilateral,
the preceding section. bilateral or multilateral APAs, involving other tax
authorities.
In addition, for transactions between a
partner/shareholder and an entity, a secondary Tax audit areas
adjustment has been created. This may result in Transfer pricing issues, until recently, have been
taxable income for the relevant tax being adjusted considered to be part of a general tax audit and not
for the difference between the value agreed between the subject of special investigations. However, with
the parties and the market value, which will be the new legislation, transfer pricing audit activity
treated as taxable income for the related parties. has increased significantly.
It is important to highlight that, regarding self- Special attention has been directed towards the
initiated adjustments, the general tax directorate has management fees and royalties. In addition, the
publicly expressed its distaste for self-initiated Spanish tax authorities are quite sensitive to
adjustments, because they could mean the taxpayer ‘business restructuring’ and may assert that a
has not fulfilled the ‘fair value’ accounting permanent establishment exists of a foreign party to
compulsory principle, however this position could which significant business functions have been
evolve. transferred.
Regarding management fees, the Spanish tax
authorities expect to see the application of rational
and continuous cost-allocation criteria and actual
evidence of the benefits received from the services.

Contact us
For further information on transfer pricing in Spain please contact:
Gabriel Yakimovsky
T +34 93 206 39 00
E [Link]@[Link]

88 Global transfer pricing guide – Spain

Sweden

Regulatory snapshot • TP audit can be targeted at any transaction if it

Overview results in reduction of Sweden’s tax revenue,
When did transfer pricing rules start?
and is more prone to IP-valuation, interest rates
1928/2007
Level of TP
and recently restructuring issues
Long standing/Developing regime • TP audit adjustments are subject to a 40%
Return disclosure (maximum) penalty surcharge on the tax levied
No by the adjustment plus an ‘interest surcharge’
Documentation on the tax debt
Compulsory with thresholds
• Advance Pricing Agreements (APAs) are
Methods
Best method approach
available to large taxpayers but only if they are
Audit risk mutually agreed between the tax agencies. No
High unilateral agreement APAs are allowed, only
Penalties bilateral or multilateral agreements. An APA is
High
usually effective after two years of procedure.
Advance Pricing Agreements (APAs)
Available
The APA is associated with a fee to the STA.

Does your country have transfer pricing rules

• The Transfer Pricing (TP) rules were elaborated
vs. ruling, laws and guidelines?
from 1916 and effective from 1928 (arm’s length
principal) The arm’s length principle and transfer pricing
• Taxpayers with intercompany transactions must documentation requirements are enacted in chapter
document the transaction details as described by 14, paragraph 19 of the Swedish income tax act. In
regulations issued by the Swedish Tax Agency general, Sweden follows OECD guidelines1.
(STA), effective from 1 January 2007 Transfer pricing regulations apply to all related
• Contemporaneous TP documentation is parties that shares economic interest. If share capital
compulsory with thresholds. The thresholds exceeds 50%, the taxpayer is obliged to document
regard comparability analysis to be included (in the transactions according to Swedish
the documentation) or not documentation rules (with certain exceptions).
• Sweden applies the ‘best method approach’ for
conducting TP analysis however any method
can be used as long as the result is at arm’s
length
• Acceptable TP methods include comparable
uncontrolled price (CUP), resale price, cost
plus, transactional net margin, profit split and
other methods that comply with the arm’s
length principle

1 OECD transfer pricing guidelines for multinational enterprises and tax

administrations, 1995 and subsequent updates

Global transfer pricing guide – Sweden 89

Effective date of commencement of transfer What are the deadlines for documentation
pricing regulations preparation?
TP regulations (arm’s length principle) have been The documentation should be available at the time
effective since 1928. Documentation regulations of the STAs request (generally within 30 days).
have been effective since the 1 January 2007 in Absent or insufficient documentation will demise
Sweden. the STAs burden of proof to demonstrate that the
transfer prices are not at arm’s-length. This can be
Rulings, laws and guidelines extended from the initial 30 days depending on the
Besides legally binding articles of the Swedish tax complexity of the intercompany transactions;
law, a notification of the STA provides insight into however documentation that has been created after
the position of the STA without a legally binding a commencement of a transfer pricing audit will
effect. This notification regards general guidance on generally be considered as less reliable compared to
the application of the implementation of the legally one that has been previously established.
binding articles regarding rules of documentation in
the Swedish Procedural Law. The notification also In which language should documentation be
gives good insight on the STAs view on the arm’s filed?
length principle. Transfer pricing documentation can be filed either
in Swedish, Norwegian, Danish or English.
Is transfer pricing documentation required? If
so, what information should be included? How long is it necessary to keep transfer
Taxpayers are obliged to prepare transfer pricing pricing documentation?
documentation. The transfer pricing documentation For tax purposes, transfer pricing documentation
should describe how transfer prices have been should be kept for at least six years. For accounting
determined and include information which enables purposes the time frame is ten years.
the tax authorities to evaluate the arm’s length
nature of the transactions. The documentation rules Are intercompany agreements recommended?
provides the following examples for content of such It is recommended that taxpayers document their
documentation: business description, organisational intercompany transactions through intercompany
structure, functional analysis (including assets used agreements.
and risk assumed), industry analysis, contractual
terms information on the intercompany Do you have to make disclosures about transfer
transactions, choice of transfer pricing method and pricing in the tax return? What statements or
comparability analysis. certifications are required?
Swedish taxpayers do not need to annually specify
in their annual tax returns whether they have been
involved in intercompany transactions.

90 Global transfer pricing guide – Sweden

Which transfer pricing methods are acceptable? Are there exemptions to Transfer Pricing rules
Taxpayers are free to choose any OECD recognised in your country?
transfer pricing method as long as the method TP documentation requirements regarding
results in an arm’s length pricing for the purposes of transactions between a permanent establishment
the intercompany transaction. Taxpayers are not and its head office (the same company) are not
obliged to test all OECD recognised methods, mandatory under the law, although the arm’s length
although they must substantiate the method principle still applies. However, permanent
chosen. establishments’ transactions with other group
companies must be documented in the same way as
Is there a priority among the acceptable between companies.
methods?
There is no priority among the acceptable methods Are advance pricing agreement (APA) options
as long as the result is at arm’s length. The Swedish available?
department of finance prefers traditional Bilateral and multilateral APAs are available. Pre-
transaction methods over transactional profit filing meetings can be organised with the Swedish
methods. The STA does not have a specific TP tax authorities in order to discuss the case before a
method preference, as long as it leads to arm’s formal APA request is made. In Sweden the APA is
length results. associated with a cost to the STA.

What is the statute of limitations on assessment Tax audit areas

of transfer pricing adjustments? Transfer pricing is a high risk area. The STA
Transfer pricing adjustments can be assessed five especially focus on the following areas: loss making
years from the tax year-end. routine functions, Intellectual property (IP)
transactions (transfer of IP, royalties), transactions
What rates and conditions apply for transfer with tax havens, interest rates and business
pricing penalties? And is there penalty relief? restructurings.
Penalties do not apply specifically for non-
compliance with the documentation requirements. Contact us
For further information on transfer pricing in Sweden please
Tax penalties are applied for acts leading to an contact:
incorrect income tax return (i.e. results that are not Per Hedrén
arm’s length), intent does not matter. In a case of a T +46 (0)8 563 072 63
E [Link]@[Link]
pure intentional act, criminal charges can be
applied. In such cases the STA reports to either the
Swedish economic crimes bureau or to the public
prosecutor.

Global transfer pricing guide – Sweden 91

92 Global transfer pricing guide – Sweden
Taiwan

Regulatory snapshot • Profit-seeking entities with annual revenue

Overview exceeding TWD 300 million together with
When did transfer pricing rules start?
related party transaction amounts of more than
2004
Level of TP
TWD 200 million are required to have TP reports
Established regime available at the time of filing a corporation income
Return disclosure tax return and be presented within one month
Yes when prompted by the tax authority.
Documentation • The maximum fine is three times the
Compulsory with threshold
underpayment of corporation income tax
Methods
Best method approach
liabilities dependent upon audit results. Failure
Audit risk to present TP documentation when prompted
High by the tax authority is subject to a fine ranging
Penalties from TWD 3,000 to TWD 30,000 dependant
High
upon discretion of the tax office.
Advance Pricing Agreements (APAs)
Available
• Advance Pricing Agreement (APA) options are
available in Taiwan. Once the APA is granted,
• Taiwan’s ‘Regulations Governing Assessment of an APA can be effective for 3 to 5 years from
Profit-seeking Enterprise Income Tax on Non- the year of application.
Arm’s Length Transfer Pricing’ have been
Does your country have transfer pricing rules
effective since 28 December 2004 and enacted
vs. ruling, laws and guidelines?
pursuant to the provisions set out in paragraph
5, article 80 of the Income Tax Act. Yes, transfer pricing regulations in Taiwan are called
• Profit-seeking enterprises are required to ‘Regulations Governing Assessment of Profit-
disclose significant related party transactions in seeking Enterprise Income Tax on Non-Arm’s
the annual tax return. Length Transfer Pricing’ (TP audit regulations).
• Transfer Pricing (TP) documentation is Several transfer pricing related tax rulings have also
compulsory with prescribed threshold. been issued by MoF.
• Taiwan applies the ‘best method approach’ for
conducting TP analysis.
• Acceptable TP methods include: Comparable
Uncontrolled Price (CUP), resale price, cost
plus, comparable profit, profit split, comparable
uncontrolled transaction, and other arm’s length
methods approved by the Ministry of Finance
(MoF). However, specific types of transactions
may not allow certain method types.

Global transfer pricing guide – Taiwan 93

Effective date of commencement of transfer • controlled transactions are categorised as either
pricing regulations operating revenues or operating expenses and
In Taiwan, the TP audit regulations have been the same type of controlled transactions
effective since 28 December 2004. The regulations amounts to less than a threshold of TWD 10
are enacted pursuant to the provisions set out in million per annum; for the controlled
paragraph 5, article 80 of the Income Tax Act. transactions not categorised as operating
revenues or operating expenses, the threshold
Rulings, laws and guidelines amount is then divided by two
The MoF finalised and published the TP audit • a profit-seeking entity whose controlled
regulations, enacted by paragraph 5, article 80 of transactions, within the Republic of China,
Income Tax Act in 2004. TP audit regulations were belong to items of operating revenues or
promulgated by the Taiwan MoF, taking into operating expenses, does not claim any tax
consideration OECD transfer pricing guidelines credits, nor do they offset against any net
and related legislations published by other major operating losses aggregated from the past five
countries, especially the USA. years, its reported gross margin is above the
mean of other enterprises in the same industry,
Is transfer pricing documentation required? If and the same type of controlled transactions
so, what information should be included? amounts to less than a threshold of TWD 20
TP documentation, including a TP report, should million per annum; for the controlled
be prepared by taxpayers and be ready for transactions not belonging to operating
inspection at the time of corporation income tax revenues or operating expenses, but reported
return filing if there are significant related party profit margin is above the mean of other
transactions carried out during the year. enterprises in the same industry, the threshold
In this regard, a business entity meeting one of amount is then divided by two.
the following criteria can elect to use alternative • controlled transactions categorised as ‘Uses of
supporting documents to justify its transfer price Fund’ type, when the reported income by the
instead of preparing a full TP report: fund provider is greater than the amount of
• combined operating revenue and non-operating fund provided at the Taiwan bank prime rate on
income is less than TWD 300 million for the 1 January of the same year and the amount of
filing year fund is below TWD 300 million; when the
• combined operating revenue and non-operating reported costs or expenses by the user is less
income is more than TWD 300 million but less than the amount of fund used at the Taiwan
than TWD 500 million, and the business entity bank prime rate on 1 January of the same year
has not claimed any tax credits in excess of and the amount of fund used is below TWD 300
TWD 2 million, has not offset against any net million.
operating losses in excess of TWD 8 million for
the tax filing year and has no related enterprises A TP report should include the following contents:
outside of Taiwan background information and industry overview,
• total value of related party transactions carried functional and risk analysis of all the transacting
out is less than TWD 200 million per annum. parties, evaluation of each controlled transaction
based on prescribed rules, selection of comparable
In addition to the above, after taking OECD TP parties based on certain criteria, analysis of degrees
guidelines into consideration, the Taiwan MoF then of comparability, selection of the most appropriate
publishes safe harbor rules under MoF tax ruling method, disclosure of pricing strategy and other
number 09704555160, which provides relief to relevant information regarding other participants in
certain controlled transactions to allow alternative the controlled transactions, and determination
supporting document instead of a full TP report. whether the controlled transactions are within arm’s
Certain controlled transactions specified in safe length range.
harbor rules are:
• one of the participants in the controlled What are the deadlines for documentation
transactions is a government agency or a state- preparation?
run enterprise A business entity needs to indicate on its
• in the controlled transactions, all of the corporation income tax return, whether a TP report
participants located within the Republic of has been prepared at the time of filing corporation
China do not claim any tax credits, nor do they income tax return. Accordingly, it’s recommended
offset against any net operating losses that companies prepare and have a TP report ready
aggregated from the past five years prior to filing corporation income tax return.

94 Global transfer pricing guide – Taiwan

In which language should documentation be Regulations do not require taxpayers to obtain
filed? special certification over disclosed information.
Documentation needs to be prepared or translated
to Mandarin. Which transfer pricing methods are acceptable?
Acceptable TP methods include: Comparable
How long is it necessary to keep transfer Uncontrolled Price (CUP), resale price, cost plus,
pricing documentation? comparable profit, profit split, comparable
Transfer pricing documentation should be kept for uncontrolled transaction and other arm’s length
at least seven years since statute of limitation runs methods approved by the MoF. However, certain
for seven years. types of transactions may not be evaluated using
certain types of methods.
Are intercompany agreements recommended?
It is recommended that taxpayers document their Is there a priority among the acceptable
intercompany transactions through intercompany methods?
agreements. Taiwan TP audit regulations adopt the best method
approach. There is no priority among the
Do you have to make disclosures about transfer acceptable methods as long as the method is the
pricing in the tax return? What statements or most appropriate arm’s length method for the
certifications are required? controlled transactions. Taiwan tax authorities
Profit-seeking enterprises are required to disclose generally prefer traditional transaction methods
significant related party transactions in the annual tax over transactional profit methods.
return in prescribed formats. In other words, a
business entity that meets one of the following What is the statute of limitations on assessment
criteria can be exempted from disclosing related party of transfer pricing adjustments?
transactions in its corporation income tax return and As per article 21 of the tax collection act, if a timely
hence does not need to prepare a TP report: return is filed and the tax due paid in full, and there
• combined operating revenue and non-operating is no intention to defraud the tax office, the general
income is less than TWD 30 million for the statute of limitations is five years. If the return is
filing year not filed timely or there is an intention to defraud
• has generated total combined operating revenue the tax office, then the statue of limitation runs for
and non-operating income less than TWD 300 seven years.
million per annum while having no related
entities outside of Taiwan, not claiming any tax What rates and conditions apply for transfer
credits in excess of TWD 500,000 per annum pricing penalties? And is there penalty relief?
and not offsetting against net operating losses If the required TP documentation is not presented
aggregated from past ten years in excess of when prompted by the tax authority, a fine ranging
TWD 2 million per annum. from TWD 3,000 to TWD 30,000 will be assessed
dependant upon discretion of the tax office.
Enterprises not meeting the disclosure In addition, article 34 of the assessment rules asserts
exemption rules above that from taxable year 2005, a transfer pricing
If a non-exempt business entity carries out penalty will be assessed if a taxpayer misstates its
transactions with all related enterprises in aggregate income tax as a result of not following the transfer
amount of more than TWD 50 million per annum or pricing rules when filing its tax return. Such penalty
with the same related enterprise in aggregate amount will be assessed and calculated based on article 110
of more than TWD 12 million, the transactions are of Taiwan Income Tax Act which allows a
deemed significant and required to be disclosed maximum penalties of two times the resulting
accordingly. Whereas, in the case of a non-exempt underpayment of income tax liabilities.
business entity carrying out transactions with related
people instead of related enterprises, transactions
with all related people in aggregate amount of more
than TWD 25 million per annum or with the same
related person in aggregate amount of more than
TWD 6 million, the transactions are regarded
significant and required to be disclosed. The
definition of related enterprises and related people
are defined in the TP audit regulations.

Global transfer pricing guide – Taiwan 95

Are there exemptions to Transfer Pricing rules Are advance pricing agreement (APA) options
in your country? available?
Yes, there are exemption rules relating to disclosure Yes, APA options are available in Taiwan. Before
as well as the necessity of providing any TP the end of the accounting period that the
documentation. A business entity meeting one of transactions occur in, the profit-seeking enterprise
the following criteria is exempted from disclosing meeting all of the criteria below can apply for APA
related party transactions carried out in its with prescribed forms:
corporation income tax return and hence does not • its aggregate controlled transaction amount has
need to prepare a TP report: exceeded TWD 1 billion or controlled
• combined operating revenue and non-operating transaction amount for the current tax year is
income is less than TWD 30 million for the over TWD 500 million
filing year. • no significant tax evasions were committed by
• has no related entities outside of Taiwan and has the applicant in the past three years
not claimed any tax credits in excess of TWD • documentation including a TP report as
500,000 per annum, has not offset against net required under article 24 of the TP audit
operating losses aggregated from past ten years regulations is well prepared
in excess of TWD 2 million per annum and has • other criteria approved by the MoF.
generated a total combined operating revenue
and non-operating income less than TWD 300 Generally, within one month, a written notice will
million per annum. be delivered to the applicant stating whether the tax
authority accepts the APA application. If the tax
As outlined by Taiwan MoF tax ruling number authority accepts the application, the applicant
09704555180 and in addition to the disclosure should present required documentation within one
exemption rules above, in the event that a non- month upon the receipt of the written notice. In the
exempt business entity carries out transactions with event of the applicant being unable to present the
a state-run enterprise, an agent or a distributor and documentation within one month, the applicant can
a monopolistic enterprise (defined under the fair file for an extension, however the extension can not
trade act), the underlined transactions falling under exceed one month. Once the APA is granted, an
any of the following (as outlined under number 3 APA is effective for three to five years from the
through 5, item 8, article 3 of TP Audit year of application.
Regulations) are exempted from providing any
transfer pricing documentation but disclosure in the Tax audit areas
tax return is still required. Given that a non-exempt Taiwan tax authorities generally focus on the
business entity and the counter party are not in a following areas: low profit margin transactions,
controlling and subordinate relationship when transactions carried out that are not in line with
conducting transactions: ordinary business arrangements, cross border
• a non-exempt business entity cannot commence transactions, surety and loans granted to related
its production and business activities without parties etc.
the other enterprise’s provision of patent,
trademark, copyright, secret formula, Contact us
For further information on transfer pricing in Taiwan please
proprietary technology or any franchises and contact:
such production and business activities account Jay Lo
for 50% or more of the total sales of a non- T +886 2 2758 2688
E [Link]@[Link]
exempt business entity in the same tax year
• a non-exempt business entity’s purchasing price
and terms of raw materials, components and
goods are controlled by the other enterprise,
and such purchases account for 50% or more of
the total purchases of raw materials,
components and goods by the non-exempt
business entity in the same tax year
• sales of a non-exempt business entity are
controlled by the other enterprise and the
underlined sales account for 50% or more of the
total sales of the non-exempt business entity in
the same tax year.

96 Global transfer pricing guide – Taiwan

United Kingdom

Regulatory snapshot • Acceptable OECD methods to demonstrate

Overview compliance with the arm’s length standard are
When did transfer pricing rules start?
required.
1915
Level of TP
• Both a fixed penalty and a tax geared penalty
Established regime could be levied should documentation not be
Return disclosure available.
Transfer pricing documentation is not included within the tax return but • Where it is deemed that the inter-company
should be available upon request transaction does not produce an arm’s length
Documentation
result, an upward adjustment can be made by
Required if certain criteria are met
Methods
HMRC.
Most appropriate method detailed in the OECD guidelines • Taxpayers can go to Competent Authority
Audit risk under a double tax treaty in perceived cases of
Medium double taxation, and where a double taxation
Penalties
agreements exists, MAP can be sought. For
High
Advance Pricing Agreements (APAs)
forward looking agreements on Transfer
Available Pricing, APAs can be entered into.
• Thin capitalisation is also part of the UK
• The UK has had transfer pricing rules since transfer pricing regime. Any interest on debt
1915 and the regulations were incorporated into borrowed from a related party above the level
the UK’s self-assessment regime for accounting that could be borrowed by an independent
periods ending on or after July 1999. The rules party acting in its own interest is non-
can be found at TIOPA1 2010 Part 4. deductible. For UK-UK debt funding, a
• Small and medium sized enterprises are exempt corresponding adjustment can be claimed in the
from transfer pricing requirements, although lending company.
there are a few exceptions to this general rule.
There is also an exemption for some dormant
companies.
• HMRC consider transfer pricing
documentation to include primary accounting
records, tax adjustment records, records of
related-party transactions and evidence of an
arm’s length result.
• Acceptable transfer pricing methods are based
on the OECD guidelines and should provide
the most reliable measure of an arm’s length
policy.

1 Taxation (International and Other Provisions) Act 2010

Global transfer pricing guide – United Kingdom 97

Does your country have transfer pricing rules What are the deadlines for documentation
vs. ruling, laws and guidelines? preparation?
The UK’s current transfer pricing legislation is to be For corporation tax purposes, it is necessary to
found at TIOPA part 4, and is based on the arm’s keep primary accounting records and all supporting
length principle as stated in Article 9 of the OECD documents needed to deliver a correct and complete
Model Tax Convention on Income and Capital, tax return.
which forms the basis of the OECD Transfer The accounting records are created during the
Pricing Guidelines. The rules are not heavily year period in question. Tax adjustment records,
formulaic but instead are principles based. records of inter-company transactions and
The rules apply to UK taxpayers, including UK documentation demonstrating an arm’s length
branches of overseas companies. result do not need to be prepared at the same time
as the accounting records.
Effective date of commencement of transfer At the time of filing, the taxpayer need not have
pricing regulations assembled its evidence to support that the
Transfer pricing rules were first introduced to the transactions are at arm’s length, but it does need to
UK in 1915. have reached a conclusion and needs to have a basis
of reaching that conclusion. If requested by
Rulings, laws and guidelines HMRC, taxpayers usually have a maximum of 30
Besides UK tax legislation in TIOPA 2010 which in days to produce transfer pricing documentation. It
turn refers to the OECD Transfer Pricing is recommended that documentation should be
Guidance, July 2010, HMRC has an International updated every two to three years or upon change to
Manual providing guidance on its view of transfer the business structure or functional analysis.
pricing matters.
In which language should documentation be
Is transfer pricing documentation required? If filed?
so, what information should be included? English.
Yes, documentation is required. For filing purposes,
there are four types of documentation that should How long is it necessary to keep transfer
be kept: pricing documentation?
• Primary accounting records; Transfer pricing documentation must be preserved
• Tax adjustment records; until the latest of six years from the end of the
• Record of transactions with associated accounting period, the date on which any enquiry
businesses; and into the return is completed, or the date on which
• Documentation to demonstrate an arm’s length HMRC is no longer able to open an enquiry.
result.
Are intercompany agreements recommended?
The documentation requirements are not Yes.
prescriptive. HMRC’s view is that transfer pricing
documentation should usually include a Do you have to make disclosures about transfer
background to the company, a group structure, an pricing in the tax return? What statements or
outline of the key intercompany transactions under certifications are required?
analysis, an analysis of the key functions, assets and The UK has a self-assessment regime, where the
risks of the company, an industry analysis and an onus is on the taxpayer to ensure that transfer
economic analysis including supporting evidence pricing regulations are adhered to. There is a ‘tick
such as comparables, if required. box’ on the tax return form for taxpayers to
confirm their eligibility for the small and medium
sized enterprise exemption from the transfer pricing
rule, and a second ‘tick box’ for taxpayers to claim
corresponding adjustments (for UK–UK
transactions). HMRC require taxpayers to make
computational adjustments in cases where
transactions, as recorded in the statutory accounts,
are not on an arm’s length basis and the taxpayer is
potentially advantaged in respect of UK tax by the
actual provision.

98 Global transfer pricing guide – United Kingdom

Which transfer pricing methods are acceptable? What rates and conditions apply for transfer
The most appropriate pricing method should be pricing penalties? And is there penalty relief?
selected on a transaction by transaction basis, Penalties in relation to transfer pricing
providing the most reliable measure of an arm’s documentation relate directly to the general record-
length result in each case. The current OECD keeping requirements. Under these rules, two types
methods are categorised as traditional transaction of penalties may apply; penalty for failure to keep
methods (Comparable Uncontrolled Price (CUP), or produce documentation and a tax geared penalty
Resale Price and Cost Plus) and transactional profit for a careless or deliberate error. At the time of
methods (Profit Split and Transactional Net Margin writing, the fixed penalty for failure to keep or
method). Other methods can also be used if produce documentation is £3,000. The tax geared
justifiable and appropriate. penalty is dependent on whether the inaccuracy is
considered to be:
Is there a priority among the acceptable • careless (maximum penalty of 30% of potential
methods? lost revenue (PLR))
There is no hierarchy as the UK legislation refers to • deliberate but not concealed by the taxpayer
the 2010 OECD Transfer Pricing Guidelines, (maximum penalty of 70% of PLR)
although in practice the CUP or adjusted CUP may • deliberate and concealed by the taxpayer
be viewed favourably in the UK. (maximum penalty of 100% of PLR).

What is the statute of limitations on assessment Where a transfer pricing adjustment reduces a loss
of transfer pricing adjustments? (or turns a loss into a profit), then the PLR will be
An enquiry into a tax return by HMRC may be calculated to include any tax due as a result of
made up to 12 months from the date on which the changing the original loss to the correct amount. If
return was filed, providing it was filed on time the loss has been used to reduce a liability (ie by
(unless the company is part of a group which is not carry back or group relief), then the PLR will be
small, in which case the HMRC can enquire into based on this additional amount due. Where there is
the tax return up to 12 months from the due filing a reduction in the amount of losses carried forward,
date of the tax return). If the return is filed late, the a penalty of 10% of the reduction may be due,
enquiry can be made anytime up to the quarter date depending on the likelihood of utilisation of the
following the first anniversary of the date on which losses.
the return was filed. The quarter dates are 31 A business may receive a mitigation to a penalty
January, 30 April, 31 July and 31 October. If no if it had made a reasonable attempt to demonstrate
enquiry notice is issued then the tax return may be an ‘arm’s length’ result but it was subsequently
considered as closed. Any adjustment and further established that the appropriate ‘arm’s length’ result
assessment of profits subject to tax will usually be was different from that reflected in its tax return.
made on completion of the enquiry.
HMRC may in certain circumstances make an
enquiry on a company which is not a self-
assessment (a discovery assessment) under the
following circumstances:
• if they discover that an amount which ought to
have been assessed has not been assessed
• an assessment is or has become insufficient
• relief has been given which is or has become
excessive.

From 1 April 2010, discovery assessments can be

raised where the loss of tax is classified as follows:
• not due to careless or deliberate behaviour – up
to 4 years
• careless behaviour of the taxpayer or its agent –
up to 6 years
• deliberate behaviour of the taxpayer or its agent
– up to 20 years.

Global transfer pricing guide – United Kingdom 99

Are there exemptions to Transfer Pricing rules Where companies are debt funded, an Advance
in your country? Thin Capitalisation Agreement (ATCA) can be
There are exemptions from transfer pricing used to agree an appropriate amount of intra-group
documentation for small and medium sized debt. This will determine the amount of interest
enterprises(SMEs), dormant companies (which have that will be treated as deductible. ATCAs are
been dormant since 31 March 2004 and continue to typically unilateral agreements.
be), charities and life assurance companies. It
should be noted that for the SME exemption only Tax audit areas
applies if the transactions are between a UK In the UK, tax audits comprise of a mixture of
taxpayer and a related party in a qualifying selected audits and random audits, but most
territory, which is broadly a territory which is not a enquiries are based on the risk profile of the
tax haven. business. HMRC are likely to enquire into the
The exemption criteria are based on EU transfer pricing of a UK business when a UK
recommendation 2003/361/EC as follows: company shows the following in its statutory
• small: Less than 50 employees, and either accounts or tax return:
turnover or gross assets not exceeding €10m • losses
• medium: less than 250 employees and either • tax planning structures involving low tax
turnover not exceeding €50m or gross assets of jurisdictions or tax havens
less than €43m. • high levels of debt funding
• business restructurings, particularly where they
HMRC can direct that medium sized enterprises give rise to a tax advantage
should apply transfer pricing rules, though this is • transactions in valuable or unique intangible
uncommon in practice. assets.

Are advance pricing agreement (APA) options Contact us

For further information on transfer pricing in the United Kingdom
available? please contact:
APAs may be agreed on a unilateral, bilateral or Wendy Nicholls
multilateral basis. Bilateral and multilateral APAs T +44 (0)20 7728 2302
E [Link]@[Link]
will only be entered into with countries which the
UK has a double taxation agreement in force with a
mutual agreement procedure clause. APAs are
entered into at the discretion of HMRC and it may
decline a taxpayer an APA programme. APAs
usually address complex transfer pricing issues or
those for which there is a serious doubt as to the
manner by which the transfer pricing rules should
be applied.

100 Global transfer pricing guide – United Kingdom

United States

Regulatory snapshot • Acceptable TP methods for the provision of

Overview services include services cost, comparable
When did transfer pricing rules start?
uncontrolled services price, gross services
1934
Level of TP
margin, cost of services plus, comparable
Established regime profits, profit split, and unspecified methods.
Return disclosure • The penalty on transfer pricing assessment is
Yes 20% or 40% of additional tax resulting from
Documentation adjustments exceeding objective thresholds.
Not compulsory, but highly recommended
Interest is also assessed from the due date of the
Methods
Best method approach
original filing and the interest payable is
Audit risk determined under US domestic tax rules.
High • Multilateral, bilateral and unilateral APAs are
Penalties available under rev. proc. 2006-9. The APA
High
filing fees are varied based on the size of the
Advance Pricing Agreements (APAs)
Available
business as well as whether the APA is an
original or renewed one. An effective APA can
• The final Transfer Pricing (TP) regulations were cover five years with longer terms being
promulgated under Internal Revenue Code considered as appropriate.
(IRC) 482 in July 1994 and are applicable to
taxable years beginning after 6 October 1994.
• Taxpayers with intercompany transactions must
disclose detailed information on controlled
transactions with foreign entities via Forms
5471 and 5472 which are submitted along with
their tax returns.
• Contemporaneous documentation is required
for penalty protection under Reg. § 1.6662-6.
• The United States apply the best method
approach for conducting TP analysis.
• Acceptable TP methods for tangible and
intangible property transfers include
Comparable Uncontrolled Price
(CUP)/Comparable Uncontrolled Transaction
(CUT), resale price, cost plus, comparable
profit, profit split and unspecified methods that
comply with the arm’s length principle.

Global transfer pricing guide – United States 101

Does your country have transfer pricing rules Is transfer pricing documentation required? If
vs. ruling, laws and guidelines? so, what information should be included?
Yes, the predecessor to IRC 482 was issued in 1934 No. Submitting a contemporaneous transfer pricing
which was later amended in the tax reform act of documentation study to the tax authority is used
1986. Since then, the IRS has introduced several only for penalty protection purposes. However,
proposed and temporary regulations to sec. 482, failure to prepare contemporaneous documentation
including the 1994 final regulations, which are can result in penalties of 20% to 40% of any
currently in effect. Most recently, the IRS has adjustment levied.
adopted final cost sharing regulations under reg. In order to achieve penalty protection, certain
§1.482-7, which became effective on 19 December principal documents are required, and those are: an
2011 and final services regulations under reg. overview of the taxpayers business, a description of
§1.482-9, which became effective 17 August 2009. the organisational structure, documents explicitly
required by the regulations, a description of the
Effective date of commencement of transfer method selected and an explanation of why that
pricing regulations method was selected, a description of the alternative
The final transfer pricing regulations are effective as methods that were considered and an explanation
of July 1994 in the US. of why they were not selected, a description of the
controlled transactions and any internal data used
Rulings, laws and guidelines to analyse them, a description of the comparables
IRC §482, reg. §1.482, and reg. §1.6662-6. and comparability considerations used, an
Revenue Procedure (Rev. Proc.) 2006-54, Rev. Proc. explanation of the economic analysis and
99-32, and Rev. Proc. 2006-9 projections relied upon in developing the method, a
description or summary of any relevant data that
the taxpayer obtains after the end of the tax year
and before filing a tax return and finally a general
index of the principal and background documents.

What are the deadlines for documentation

preparation?
The study should be prepared contemporaneously
with the filing of the US tax return for the fiscal
year under consideration to qualify for penalty
protection. In the event that the tax authority
requests documentation, it must be presented
within 30 days of the request.

1 The IRS considers its transfer pricing laws and regulations to be wholly
consistent with OECD transfer pricing guidelines (OECD guidelines).
However, for domestic use, the OECD guidelines do not provide support,
and would not be directly relevant, to the application of any pricing
methods.

102 Global transfer pricing guide – United States

In which language should documentation be Which transfer pricing methods are acceptable?
filed? Tangible property transfers: CUP method, resale
TP documentation should be filed in English. price method, cost plus method, profit split
methods (comparable and residual), comparable
How long is it necessary to keep transfer profits method (comparable to the OECD
pricing documentation? transactional net margin method), and unspecified
TP documentation should be kept for the three methods.
most recent tax years open for assessment under the Intangible property transfers: CUT method,
IRS statute of limitations. comparable profits method, profit split method,
and unspecified methods. For platform
Are intercompany agreements recommended? contribution payments: the CUT method, income
It is recommended that taxpayers document their method, acquisition price method, market
intercompany transactions and transfer pricing capitalisation method, and unspecified methods are
policies through intercompany agreements. allowed.
Provision of services: services cost method,
Do you have to make disclosures about transfer comparable uncontrolled services price method,
pricing in the tax return? What statements or gross services margin method, cost of services plus
certifications are required? method, comparable profits method, profit split
Yes, taxpayers are required to complete Form 5471 method, and unspecified methods.
and 5472, providing detailed information on
controlled transactions with foreign entities. Is there a priority among the acceptable
Additionally, reg. §1.482-7(k)(4) requires a methods?
controlled participant to file a cost sharing There is no priority among the acceptable methods
statement with the IRS within 90 days after the first as long as the result is at arm’s length and the
occurrence of intangible development costs, and to method most appropriately measures the
make specified disclosures on its annual tax return. transaction based on the facts and circumstances of
The new IRS schedule of Uncertain Tax Positions the case.
(UTP) is required for certain taxpayers beginning
with 2010 tax returns. What is the statute of limitations on assessment
of transfer pricing adjustments?
Transfer pricing adjustments can be assessed three
years from the original due date or filing date of the
tax return, whichever is later. For substantial
omissions of income, the period is extended to six
years. In cases of non-filing or fraud, the period is
unlimited.

Global transfer pricing guide – United States 103

What rates and conditions apply for transfer Are advance pricing agreement (APA) options
pricing penalties? And is there penalty relief? available?
Taxpayers may be liable for either a 20% or 40% Unilateral, bilateral and multilateral APAs are
penalty for underpayment of tax, as a percentage of available. Pre-filing meetings can be organised with
the underpayment, or the penalty may apply to a the Advance Pricing and Mutual Agreement
valuation misstatement. There is no penalty for (APMA) Program personnel in order to discuss the
failure to have documentation; however, case before a formal APA request is made. These
documentation may help avoid penalty under reg. meetings may occur on an anonymous basis, but
§1.6662-6. Documentation does not assist in the taxpayer must disclose its identity upon
avoiding adjustments, but rather in avoiding the applying for an APA.
additional 20% to 40% penalty that may result
from adjustment along with challenge by the IRS in Tax audit areas
the event of an audit. Transfer pricing is typically a key issue in any tax
audit. In general, risk for transfer pricing scrutiny
Is there penalty relief? during an audit is high, particularly when
Yes, penalties may be avoided by disclosure on IRS international transactions are considerable. The US
Form 8275, of disregarding rules or regulations and tax authority has also classified CSAs and
of a substantial understatement of income tax. intellectual property transactions as tier 1, or high-
risk, transactions requiring additional scrutiny
Are there exemptions to Transfer Pricing rules during an audit. Documentation will often be
in your country? requested at the onset of any audit related to
No. Any firm with controlled international international issues, but experience has shown that
operations and intercompany transactions is subject adequate documentation will often reduce further
to the TP regulations. For TP purposes, the challenges from the tax authority.
definition of control, includes all kinds of control,
direct or indirect, whether legally enforceable or Contact us
For further information on transfer pricing in the United States
not. The reality of the control is decisive, not the please contact:
form in which it is exercised. David Bowen
T +1 202 521 1580
E [Link]@[Link]

104 Global transfer pricing guide – United States

Contacts

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Russia
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Mark Colver New Zealand United States
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T +36 1 4552000
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Global transfer pricing guide 105

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