4.4.1 Data Description and Processing
The compliance costs of transfer pricing for SMEs were determined using the results of the questionnaire distributed to entities having a parent or a subsidiary in the European Union. Of the questionnaires distributed, 144 were returned (distribution is presented in Fig.4.2). Of those returned, 20.1% represented micro entities, 45.2% represented small entities and 34.7% represented medium-sized entities. The entities are operating primarily in the following industrial sectors:
industry sector NACE14C (26%), industry sector NACE G (19.9%), industry sector NACE M (17.8%), industry sector J and L (12.3%), industry sector NACE N (11.6%) and industry sector NACE A, B, E, F, H, I, K, P and S (under 10%).
With respect to determining the compliance costs of transfer pricing, the weighted average value of compliance costs was applied as can be seen in Eq. (4.2).
xẳ
Pn iẳ1wixi
Pn iẳ1wi
ð4:2ị
31 22 29
0 5 10 15 20 25 30 35
CZPL ATSK HURODKBGHRUKDENLLUBEFREEPTLVESLTSEELIEITFISI MTCY
Count of SME based on its residency Fig. 4.2 SMEs based on residency (own processing, questionnaire)
14See note 8.
where weight (w) represents number of answers for each cost or time set in the questionnaire andxrepresents the values of the individual spread of costs or time set in the questionnaire. The calculations take three forms:
• A: Calculation based on the median values15of individual spread of costs/time set in questionnaire,
• B: Calculation based on the highest values16of individual spread of costs/time set in questionnaire and
• C: Calculation based on the lowest values17of individual spread of costs/time set in questionnaire.
Consequently, the compliance costs as determined using this method were used for the determination of the compliance costs of transfer pricing for the category of SME taxpayers operating in the European Union. Based on the annual report of European Commission (2015), there are 22.3 million SMEs active in the non-financial business sector across the EU28. However, these numbers include primarily micro enterprises (93%). Thus, the compliance costs of transfer pricing issues as determined represents a relatively small portion, i.e., 1.56 million, of the SMEs. To identify the portion of compliance costs of transfer pricing to the corpo- rate tax paid, the corporate tax collected for the EU28, as obtained from the Eurostat statistics,18was used.
4.4.2 Determination of Compliance Costs
For the purpose of this study, compliance costs of transfer pricing issues cover only the managing of transfer pricing documentation, which includes the consideration of the most appropriate transfer pricing methods. Contrary to the previous section, i.e., 4.3, compliance costs of country-by-country reporting were not determined as approximately 73%19of the respondents were unable to estimate those costs or they were not obligated to do so according to the CbCR. Other activities related to advance pricing agreements (hereinafter, APA), transfer pricing methods and transfer pricing audits are omitted from the analysis because approximately 50%
of the respondents were unable to estimate the time and costs related to these activities.
15For example spread set in questionnaire is EUR 1001–2000, medium value is 1500 which is further multiplied by the number of answers for that spread of costs according to Eq. (4.2).
16For example spread set in questionnaire is EUR 1001–2000, the highest values is 2000 which is further multiplied by the number of answers for that spread of costs according to Eq. (4.2).
17For example spread set in questionnaire is EUR 1001–2000, the lowest values is 1001 which is further multiplied by the number of answers for that spread of costs according to Eq. (4.2).
18Main national accounts tax aggregates [gov_10a_taxag]—taxes on the income or profits of corporations including holding gains.
19The rest of the respondents’answers from the Czech Republic, Slovak Republic and Poland. For results, see the previous chapter.
98 4 Compliance Costs of Transfer Pricing for SMEs
With respect to tax consultancy services for transfer pricing issues, the survey indicates that 15% of the respondents do not use tax consultant services for transfer pricing issues, which is contrary to the 47% who use tax services for all matters, regardless of whether it is a transfer pricing issue. Furthermore, almost 14% of the respondents use a tax service when preparing transfer pricing documentation, and 11% of respondents claim to use tax services when considering various transfer pricing methods. Moreover, respondents also use tax consultants when settling transfer pricing disputes (9%), preparing country-by-country reports (CbCR) and creating APA (see Fig.4.3for details).
To determine the compliance costs of transfer pricing, it is necessary to identify the costs and time related to such activities. As indicated in Table4.7, the managing of transfer pricing documentation includes determining the most suitable transfer pricing methods, a process that takes between 100 and 300 h/year. However, 28.7%
of the respondents were unable to estimate the time needed to manage transfer pricing issues. This may be because many of the respondents use tax advisory services for this type of tax compliance. With respect to the borne costs for managing transfer pricing documentation, the survey revealed that in the case of the European entities, approximately 20% of the respondents spent up to EUR 3000/year and almost 22% of the respondents spent up to EUR 6000/year (for more details, see Table4.7).
Consequently, according to the results of the survey, the weighted average of the compliance costs was determined. Accordingly, the compliance costs were found to range between EUR 3090/year and EUR 4179/year for an entity operating in the EU28. These costs equate to between 18 and 30 work days/year to managing transfer pricing issues. Furthermore, by taking into account the number of SMEs acting in the EU28, the compliance costs of transfer pricing were determined using the cost indicator range of EUR 4.8 billion to EUR 6.5 billion, which indicates a range between 1.32% to 2.38% of the corporate tax collected in the EU28 (for more details, see Table4.8).
In all tax matters
47%
Not using 15%
TPD (local or Master files)
14%
Consideration TP methods
11%
CbCR 2%
In case of TP disputes
9%
Preparation of APA
2%
Fig. 4.3 Using of tax consultancy in the respect of transfer pricing issues (own processing, questionnaire)
Table 4.7 Transfer pricing documentation—costs and time—European Union (own calculation, questionnaire)
15. Please estimate the time necessary for preparation of transfer pricing documentation. When doing the estimation, please take into account also the time
necessary for up-date of transfer pricing documentation No. %
Up to 100 h 19 16.5
101–200 h 21 18.3
201–300 h 26 22.6
301–500 h 2 1.7
More than 500 h 4 3.5
I am not able to estimate 33 28.7
There is not an obligation to prepare transfer pricing documentation in our country 10 8.7 16. With respect to the previous question, please estimate the costs related to this issue
Up to EUR 1000 10 8.6
EUR 1001–3000 23 19.8
EUR 3001–6000 25 21.6
EUR 6001–9000 17 14.7
EUR 9001–12,000 1 0.9
EUR 16,001–20,000 2 1.7
I am not able to estimate 27 23.3
There is not an obligation to prepare transfer pricing documentation 11 9.5
Table 4.8 Determination of compliance costs of transfer pricing for SMEs—European Union—cost indicator (own calculation)
Type
Compliance costs for entity (in EUR/per year)
Compliance costs for group of SMEsa(in million EUR)
Corporate tax collection in 2015 in the EU28b
(in million EUR)
Portion of compliance costs to corporate tax collection (in %) Processing Eq. (4.1) Eq. (4.1)*
No. SMEs
Dataset of MF Compliance costs of transfer pricing/
corporate tax collection
A 4179.5 6520.0 363,990.2 1.79
B 5564.1 8679.9 2.38
C 3090.7 4821.5 1.32
A—Calculation based on the median values of the individual spread of costs established in the questionnaire. See Table4.7. For example, spread EUR 101–200, medium value is 150, which is further multiplied by number of answers for that spread of costs. For more details, see Eq. (4.2) B—Calculation based on the highest values of individual spread of costs established in the questionnaire
C—Calculation based on the lowest values of individual spread of costs established in the questionnaire
a1.56 million SMEs are operating in the EU. Compliance costs for group of SMEs was determined as compliance costs for one entity multiplied by the number of SMEs operating in the EU
bSource: Eurostat
100 4 Compliance Costs of Transfer Pricing for SMEs