Transfer Pricing
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Bruno Domínguez AlonsoThe company name is only visible to registered members.Spain
The key point of the new Spanish regulation on transfer pricing (Law 36/2006 on measures for the prevention of tax fraud, that entered into force on 1 December 2006), is that the burden of proof that intra-group transactions are valued at fair market values is shifted to the taxpayer and, therefore, it is now the taxpayer that is obliged to provide evidence of compliance with the arm's-length principle to the Tax Administration.
Finally, on 31 October 2008 the Spanish government also approved the long-awaited regulations for the development of the new Spanish transfer pricing regime, Royal Decree 1793/2008 establishing the rules for the comparability analysis and laying down the content of the new documentation obligations, the secondary adjustments, the advanced pricing arrangements and the mutual agreement procedures, among others.
Transfer pricing rules may apply both to transactions carried out between resident and non-resident entities and between resident entities. As a consequence, multi-national groups established in Spain are now not only obliged to apply fair market prices to intra-group transactions, but also required to keep adequate documentation of its transfer prices.
Valuation methods
With regard to valuation methods, the Spanish regulation is in line with the latest OECD Guidelines and to the conclusions of the Transfer Pricing European Forum, admitting different methods in order to determine the normal market value of related-party transactions (such as comparable uncontrolled price, cost-plus, resale price, profit-split and transactional net margin method) and requesting a comparison between the circumstances of the related-party operations and the circumstances of comparable transactions between unrelated entities, taking also into account the characteristics of the markets and the goods or services involved, as well as the functions and risks assumed or assets employed by the parties
In order to allow the deductibility of charges for intra-group services, it is required that the service provides an advantage or benefit for the taxpayer. The criterion of rationality should be respected in order to allocate expenses between different companies of the group when the service could benefit many of them.
The tax deductibility of the amounts paid by virtue of cost sharing agreements is only admitted as long as it is supported by a written agreement where information regarding the identification of the other participating companies, the projects covered by the agreements, its duration, the criteria for calculating the expected benefits and contributions of each of the parties, the specific functions and responsibilities of each of them, and the consequences of joining or retirement of the participants is foreseen.
Documentation obligations
Following the OECD Transfer Pricing Guidelines and the recommendations of the EU Joint Transfer Pricing Forum on transfer pricing documentation, according to the new Spanish regulations two levels of documentation need to be prepared:
a) One level relating to the group (so-called masterfile), including information regarding:
• General description of the business, the group’s organizational, legal and operational structure.
• General identification of the associated enterprises engaged in controlled transactions.
• General description of the controlled transactions and the amounts involved.
• General description of functions and risks assumed by the parties involved.
• Ownership of intangibles.
• Description of the transfer pricing policy where methods used are described to justify that transactions between related parties are based on the arm’s length principle.
• List of cost contribution agreements or any other kind of services agreements within the group’s related parties, APAs or administrative rulings regarding transfer pricing issues.
• Annual statement of the corresponding fiscal year.
b) Another level referring specifically to the taxpayer (so-called countryfile) including information regarding:
• Identification of the associated entities involved within controlled transactions where the taxpayer is concerned as well as a detailed description of the flows of these transactions and its correspondent amounts.
• Comparability analysis.
• An explanation about the selection and application of the transfer pricing methods.
• List of cost contribution agreements.
• Any other relevant information to justify controlled-transactions valuation as well as agreements among partners.
Simplified documentation regimes are established for groups having low risk operations and for small and medium size enterprises (groups with a global turnover less than € 8 million).
Penalty regime and secondary adjustments
Since taxpayers are now expected to prepare and keep documentation concerning how prices and conditions for the controlled transactions are set, if they fail to prove that transfer prices for tax purposes have been fixed according to the arm’s-length principle the Tax Administration is entitled to adjust prices in any case (even if there is no tax deferral or the adjustment does not mean an increase of the tax due), but the specific transfer pricing penalties regime is very much linked to the adequate compliance of documentation requirements.
Failing to comply with the documentation requirements opens the possibility for the Tax Administration to impose important penalties to taxpayers (up to € 15,000 for each non-documented data, if no correction of the valuation of the operation by the related parties derives for this lack of documentation, or, if so, up to 15% of the correction, with a minimum € 30,000 penalty per data).
The Tax Administration is entitled to adjust prices in any case (even if there is no tax deferral or the adjustment does not mean an increase of the tax due). A secondary adjustment guiding principle is established. The tax consequences depend on the relationship between the parties: if the difference is in favour of the shareholder, it shall be regarded as a dividend; if it is in favour of the affiliate, it will be considered as a contribution to its equity to the extent of the participation stake, and a taxable donation for the excess.
It is expressly stated that the correction of the valuations by the Tax Authorities will not constitute an infraction if the taxpayer has complied with the transfer pricing documentation requirements, and the market value that is derived from the documentation prepared by the taxpayer has been declared for Corporate Income Tax purposes, even if that valuation is afterwards corrected by the Tax Authorities.
Conclusions
There is no doubt that all these new obligations may imply both a considerable financial effort and workload to multinational groups in Spain, but this should also be regarded as an opportunity to review and plan carefully the internal structure of the group and its controlled transactions in order to improve its efficiency and minimize any tax exposure.
It is therefore now time for implementing the following procedures in Spain:
• Identification of any controlled transactions with Spanish related companies, analyzing the fulfilment of the arm’s length principle.
• Review of the group’s general information and documentation on transfer pricing (i.e. masterfile, etc.), analyzing it under the new Spanish Law requirements.
• Preparation of the specific documentation and information that the Spanish company should keep in order to comply with the new Spanish regulation on transfer pricing (i.e. countryfile, etc.), and additional documentation (i.e. contracts, etc.) where necessary.
- 16 Feb 2009, 8:05 pm
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Hans W. Waldvogel Premium Member Group moderatorThe company name is only visible to registered members.- 12 Aug 2009, 09:01 am
