Intra-group purchases increasingly controversial in tax inspections

Given the high number of tax inspections over the past two years, a number of tax issues have made it onto the list of those closely examined by tax inspection teams, with intra-group transactions being a constant among them. In this respect, tax inspection teams show a predisposition towards certain approaches and topics that have become, to some extent, standard in tax inspections in recent years. One of the most recent such topics is the documentation of how prices are determined for purchases of goods and/or services from the group.

Price components for purchases increasingly disputed in tax inspections

Tax inspection teams are paying ever closer attention to the price and, more precisely, to the elements included in it and the way in which they are allocated to the Romanian subsidiary under review. Until recently, when verifying compliance with the transfer pricing principle in such transactions, the tax authorities focused on checking the profit added to a reasonable cost base, and less on the cost elements themselves; they are now increasingly focused on (i) the reasonableness of each element included in the price and, above all, (ii) the extent to which these are attributable to the Romanian subsidiary.

To verify these two aspects, tax inspections on transfer pricing increasingly often request documents proving the nature of the cost elements, that they are real, and that they are attributable to the goods or services purchased by the Romanian subsidiary from the group; such documents are usually not available at the level of the company. Although, from a transfer pricing perspective, the tax authorities cannot oblige a taxpayer to produce or hold information and/or documents that are beyond its control, at the same time, under the law, the taxpayer is obliged to prove that the prices applied in the intra-group transactions carried out comply with market levels.

Deductibility of certain price components

What happens when the tax authorities are not convinced of the reasonableness and attribution of certain cost elements to the Romanian subsidiary is not hard to imagine: those elements are removed from the cost base to which the supplying group company added its profit margin, and are treated as non-deductible when calculating corporate income tax. Moreover, as regards VAT too, in practice there are situations in which the tax authorities adjust the amounts of VAT deducted, even though clear rules exist in the Fiscal Code on the situations in which the VAT taxable base may be adjusted for reasons relating to the adjustment of prices applied between affiliated persons. The tax authorities' arguments are that certain cost components (mainly services) cannot be justified in terms of their link with the transactions concerned.

It is very difficult for a taxpayer to present documents/information on certain elements of the price of the goods/services purchased, even where the transactions are between affiliated persons. If the tax authorities consider that the price of the goods/services concerned includes certain components that are not justified and that the price must therefore be adjusted accordingly, the specific provisions of the Fiscal Code on the situations in which the VAT taxable base may be adjusted must be applied. The fundamental principle of the VAT system is the neutrality of the tax and, therefore, as a general rule, an adjustment to the price of transactions between affiliated persons should not give rise to a VAT adjustment, except in particular situations provided for by law (for example, where one of the parties does not have a full right to deduct VAT). 

A detailed analysis of price components is increasingly necessary

Therefore, if your company is involved in purchases of goods and/or services from the group, the documentation of the prices applied in this type of transaction must also cover the cost elements included in the cost base, in terms of their allocation and their relevance to the activity of the Romanian subsidiary.