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Mandatory documentation on Transfer Pricing |
| 25 / 11 / 2009 |
The Royal Decree 1973/2008 determines three types of mandatory documentation depending on the group to which the taxpayer belongs or the territory where the entity is located.
The documentation requirements do not apply to:
1. Transactions undertaken between entities forming part of the same consolidated tax group, or between members of a joint venture; and
2. Operations carried out in takeover bids or initial public offerings.
The Royal Decree distinguishes the following types of documentation:
1. Documentation regarding the group to which the taxpayer belongs, which can be prepared and maintained by the dominant company, setting out: (a) a general description of the group; (b) the associated enterprises engaged in controlled transactions; (c) a general description of the nature, amounts and flows of the controlled transactions; (d) a general description of functions performed and risk assumed by the group’s entities; (e) an inventory of intangible property; (f) a description of the group’s transfer pricing policy, including the transfer pricing method; (g) an inventory of cost sharing and service agreements; (h) information about relevant Advance Pricing Agreements (APAs) or Mutual Agreements Procedures (MAPs); and (i) the group’s annual report. Qualifying small and medium-sized companies need not prepare and maintain this documentation.
2. Taxpayer-specific documentation, setting out: (a) taxpayer data and information on the related entities, as well as a detailed description of the nature, characteristics and amounts of the transactions performed; (b) a comparability analysis; (c) a description of the elected valuation method; (d) the allocation criteria for services rendered jointly and for sharing costs agreements; and (e) any other relevant information for determining the valuation of related party transactions. Qualifying small and medium-sized companies must prepare and maintain this documentation, but the extent of the obligation is not as far-reaching as for larger companies.
3. Documentation regarding transactions with non-related residents in territories considered as tax havens. Similar documentation is required as under taxpayer-specific documentation above. However, there is no documentation requirement in respect of the provision of services and international sales of goods, if the taxpayer can prove commercially valid reasons therefore, and that comparable transactions exist with third parties located in countries not considered tax havens.
Penalty Regime
Failure to deliver the required documentation in a complete and accurate manner may trigger tax penalties of EUR 1,500 per omitted data, and EUR 15,000 per group omitted data.
Comparability Analysis
A comparability analysis is mandatory. To ascertain if two transactions are equivalent, the following circumstances must be taken into account to the extent that they are relevant and reasonable to determine:
- The specific characteristics of the goods or services involved in the related transaction;
- A functional analysis (i.e. functions realized, assets emplyed and risks assumed);
- Contractual terms;
- Characteristics of the market or any other economic factor that may impact the transaction; and
- Any other relevant circumstances, such as commercial strategy.
Secondary Adjustment
The Royal Decree provides for two ways for a secondary adjustment where the inter-company transaction value differs from the arm’s length value for a shareholder entity relationship, depending on the person (shareholder or entity) that benefits from the difference.
Advance Pricing Agreements (APAs)
The Royal Decree also develops the procedure for submission to the tax authorities of valuation proposals in respect of transactions to be carried out between related parties.
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