GFD: Assessing transfer prices and determining a permanent establishment’s tax base, revisited

In November, the General Financial Directorate published new Instruction D – 32, dealing with a binding assessment of the manner in which the price agreed between related parties and the tax base of a tax non-resident relating to activities performed via a permanent establishment were determined.

This replaces Instruction D – 333 that only dealt with a binding assessment of the manner of determining transfer prices between related parties pursuant to Section 38nc of the Income Tax Act. According to a new provision stated in Section 38nd of ITA, from January 2018 it is also possible to apply for a binding assessment of the method in which the tax base of a tax non-resident relating to activities carried out via a permanent establishment is determined. This is also reflected in new Instruction D – 32. Both Section 38nc and Section 38nd of ITA regulate the procedure of issuing a decision on the binding assessment on a general level. For taxpayers, such a decision brings a higher level of certainty on how the tax administrator will view their method of setting transfer prices and determining the income tax base or, potentially, tax losses.

The instruction also defines periods in respect of which requests for binding assessments can be filed: they may only be filed for the taxable period in which a request is submitted and for subsequent taxable periods, but only for a maximum of three years.  It is not possible to request a binding assessment for elapsed taxable periods. However, if the taxpayer applied the same method of determining transfer prices and allocating profits to the permanent establishment under similar conditions in previous years and if the binding assessment issued for subsequent periods is positive, taxpayers may assume that the tax administrator will during tax inspections proceed similarly as in the case of the binding assessment at issue.

As before, the new instruction does not regulate deadlines within which the tax administrator must issue a decision. It usually takes 6 – 18 months, depending on the complexity of the transaction at issue.

In addition to Instruction D – 32, the GFD is preparing an update of Instruction D – 332 to reflect key changes introduced by the OECD Transfer Pricing Guidelines from 2017. Other modifications should include, for example, changes to the taxpayers’ functional and risk profiles (i.e. taxpayers may have more profiles depending on their position in each individual intercompany transaction). The instruction should also clarify benchmarking analysis rules and recommend that benchmarking analyses be performed at least every three years. It should also provide a more detailed description of the difference between an intangible asset’s legal and economic ownership and comment on the related impacts on the determination of remuneration from a transfer pricing perspective. Updated Instruction D - 332 is expected to be published in the first half of 2019.

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