Info Tax no. 21, December 2011
Transfer pricing has become one of the hottest tax issues today. As it is not an exact science, the topic is hard to approach and creates difficulties, not only when it is studied in-house but, in many cases, also when it is outsourced with reputed advisers.
By this analysis, we do not aim at clarifying the transfer pricing topic in general, as the issue is much to vast, but provide the answer to a question not yet uniformly answered by the business community or tax administration: may the transactions between Romanian legal persons be subjected to transfer pricing adjustments?
1. Legal background
Law no. 76/2010 for the modification of the Fiscal code, with applicability starting 14 May 2010, seems to provide the answer to this long disputed question, clearly establishing that transactions between Romanian legal persons do constitute object of transfer pricing analyses.
The question which remains, however, concerns the transactions carried out before this date, under the circumstance where the Fiscal code as applicable by the respective date used to provide solutions contradicting those provided for under its own application Norms.
2. The dilemma
Prior to 14 May 2010, the Fiscal code used to subject to transfer pricing all transactions between affiliated persons, not distinguishing between Romanian and non-Romanian persons. On the other side, the Norms for the application of the Fiscal code, as they were worded before the said date, used to exclude the transactions carried out between Romanian legal persons from the scope of possible transfer pricing adjustments.
As a matter of legal process, such a ruling is at least defective. This would be due to the fact that the norms, having inferior legal power as compared to the law, must strictly limit to the law in whose support they are issued and cannot contain solutions that are contradictory to those to be reached if applying strictly the wording of the law, as if the norms themselves did not exist.
In this context, there are not few those who may take the view that, in the case under analysis, the norms must be totally ignored and, consequently, the transactions carried out between Romanian legal persons before 14 May 2010 must be subjected to the transfer pricing regulations, as the Fiscal code seems to prescribe.
3. Our approach
On one side, such an approach means to ignore a piece of regulation which, although with less legal power than the law, is still one approved by the government and, thus, must produce legal effects in a state which pretends it is subject to the rule of law. However, not in few occasions, the tax inspectors themselves did solicit the documentation of the transactions carried out between Romanian legal persons before 14 May 2010, simply ignoring the provisions laid down in the application norms.
As we do not hold legal expertise, we choose not to issue an opinion about the legal correctitude of such a conduct from the perspective of the applicability or, conversely, inapplicability of the norms to the Fiscal code. However, we cannot miss from our analysis the provisions laid down under the Fiscal procedure code itself and applicable in the area of interpreting the laws, which pretends that the interpretation of the fiscal laws should follow the will of those who made the law as it was expressed within the law.
Further, starting from the objective to identify the will (intention) of those who made the law, there must be withheld the wordings of the explanatory memorandum to Government decision no 791/2010 which mentions, literally: Law 76/2010 extends the transfer pricing mechanism for the transactions carried out between Romanian and non-Romanian affiliated persons also to the transactions carried out between Romanian affiliated persons.
Thus, in a context where the declared intention of those who made the law was to extend the scope of transfer pricing regulations, there becomes evident the fact the, prior to these regulations, the intention of the law makers was not to subject the transactions carried out between Romanian legal persons to the regulations applicable in the area of transfer pricing.
4. Conclusion
Having said all the above, the only conclusion that may be reached is that, before 14 May 2010, the transactions carried out between Romanian legal persons were framed outside the scope of the transfer pricing regulations. Consequently, any request on the side of the tax inspectors to document the transactions carried out between Romanian legal persons prior to the said date is an abuse and needs to be responded accordingly.