Transfer pricing

We can’t talk about transfer pricing if we don’t know what transfer pricing refers to. Let’s define this term right away.

Transfer pricing is the price at which products and services are sold between related parties, as well as the granting of mutual loans and credits.

Since this is a transaction between related parties, there is a possibility of manipulation in order to avoid paying taxes.

Transfer pricing is often referred to as controlled transactions, because of the possibility for related parties to agree on adjustments and manipulations.

The law defines related legal entities as relationships of connection on the basis of:

• Capital – ownership with possession of over 25% of ownership;
• Managerial function – Legal entities where the same natural or legal persons participate in management and control or capital – managerial functions (director, chairman of the board of directors)
• Kinship relations – when one legal or natural person is the founder or co-founder of several companies that work together. This means that when the owners or managers of the company do business with the family

All countries in the world, including ours, protect their budgets and make sure that there is no uncontrolled outflow of capital. It is not uncommon for multinational companies to set up subsidiaries or branches in countries where the tax rate is lower than in their home country, and thus transfer profits from one country to another in order to pay less tax.

Checking whether the transactions made by related parties at “controlled – transfer pricing” or at prices “out of reach” aims to verify the correctness of the calculated and paid tax.

More and more companies are taking over the business of banks and lending money to each other. The person who does the transfer pricing study is tasked with checking whether it is a depletion of the company that received the loan through high interest rates or whether it is market interest rates.

Companies that give their related parties an interest-free loan are also under scrutiny, since the state does not want to give up income (tax) on uncollected interest. For this reason, the lender has an obligation to state what the interest would have been if it had been charged and ultimately pay tax on that amount.

• Turnover of products and services;
• Turnover of fixed assets (equipment, business facilities, land), and intangible assets (trademarks, intellectual property, licenses, trademarks…)
• Financing – mutual loans, regardless of whether they are given with or without interest;
• Joint participation in research and development

Who is responsible for the transfer pricing report?

Any company that does business with related legal entities is obliged to perform transfer pricing calculations.

One of the significant features of transfer pricing is that it is largely independent of the influence of market factors. When related parties enter into transactions between themselves, all rules regarding transactions and final prices are defined within the related legal entities. Therefore, the amount of the seller’s income, i.e. the amount of the buyer’s expenses, is directly affected, which ultimately leads to the control of the tax bases of both legal entities.

A taxpayer who has transactions with related parties is obliged to have transfer pricing documentation at the time of filing the corporate income tax return, which contains sufficient data and analysis on the basis of which it can be confirmed that the terms of transactions with related parties are in accordance with the “out of reach” principle.

The taxpayer is obliged to submit the transfer pricing documentation to the Tax Administration within 30 days from the date of receipt of the Tax Administration’s request for its delivery.