2.5 Simplified Transfer Pricing Rules for SMEs
2.5.1 Simplified Transfer Pricing Measurements
Documentation
The transfer pricing documentation is necessary to prove to the tax authorities that a transfer pricing policy is at arm’s length. Therefore, almost all EU Member States (21 Member States) introduced a statutory transfer pricing documentation require- ments following the TP Guidelines or EU TPD in their legal framework, in contrast to the five EU Member States that kept different approaches—the taxpayer should maintain evidence to justify the relevant transfer pricing policy, so no statutory transfer pricing documentation requirements is needed (for more details, see Table2.9and Fig.2.3). This approach gives flexibility in terms of the form of the transfer pricing documentation produced and reduces the compliance costs of taxation. However, although no statutory transfer pricing documentation require- ments are in place, it is recommended to follow non-legally binding documents
Simplified TPD
Voluntary TPD Full scope of TPD Combination of simplified TPD and exemption from
preparing TPD Exemption from
TP rules Exemption from
preparing TPD
Fig. 2.3 Documentation requirements in relation to size in the EU (own compilation through Google Charts)
reflecting the TP Guidelines or EU TPD, as in the Czech Republic,71Croatia72and Bulgaria,73 and to submit transfer pricing documentation upon the request of tax authorities, usually during a tax audit. It is necessary to note that two EU Member States wholly exclude SMEs from transfer pricing rules—the United Kingdom and Ireland.
If we look at the details on the specific measurements for SMEs or small transactions in the case of transfer pricing documentation requirements, we can distinguish six different groups among Member States (see Fig.2.3):
1. Member States exempt from transfer pricing rules 2. Member States exempt from TPD
3. Member States provide voluntary TPD 4. Member States provide full scope TPD 5. Member States provide simplified TPD
6. Member States exempt from TPD and simplified TPD
Thefirst groupcovers only two Member States—Ireland and the United Kingdom, which apply a voluntary approach to transfer pricing documentation requirements and allow a full exemption of SMEs from the transfer pricing rules. In the case of Ireland, SMEs are outside the scope of transfer pricing legislation,74whose definition is based on the EC Recommendation (2003), i.e., company-size indicators. In the case of theUnited Kingdom, the SMEs75are excluded from the transfer pricing legislation, provided that their counterparty to the transaction is a resident in a qualifying territory,76and in the case of Ireland, company-size indicators are applied through the EC Recommendation (2003). Furthermore, the United Kingdom allows compa- nies that were qualified as dormant77as of 31 March 2004 to be excluded from the preparation of TPD. For more details, see Table2.9and Fig.2.3.
The second group covers nine Member States (Belgium, Denmark, Estonia, Germany, Hungary, Latvia, Lithuania, Poland and Portugal) and allows an exemp- tion of SME and/or small transactions from the obligation to prepare the transfer pricing documentation. In the case ofBelgium, since 2016, every Belgian entity or permanent establishment (hereafter PE) has been exempt from the obligation of TPD in accordance with the company-size indicators, particularly if (i) operational and financial revenues do not exceed EUR 50 million, (ii) a balance sheet total does not exceed EUR 1 billion, or (iii) the annual average number of employees do not
71Decree 334—Communication by the Ministry of Finance in respect of the scope of transfer pricing documentation.
72Guidelines for auditing transfer prices for tax inspectorsissued in 2014.
73Transfer Pricing Manual Guidelines.
74Based on the Taxes Consolidation Act 1997, section 35A inserted by the Irish Finance Act 2010.
75Via definition stated in the EC Recommendation 2003.
76Based on the Taxation (International and Other provisions) Act 2010. A list of qualifying territories is available in International Manual at INTM412090.
77The term of dormant is defined in section 1169 of the Companies Act of 2006.
2.5 Simplified Transfer Pricing Rules for SMEs 49
exceed 100 full-time equivalents. In the case ofDenmark, SMEs78are exempt from the obligation, provided they do not have controlled transactions with companies and other party to transactions in tax havens, as is the case of Estonia. InGermany, tax authorities exclude small enterprises from the obligation to prepare TPD through a transaction-size indicator, particularly if the remuneration for inter- group deliveries of tangible goods is less than EUR 5 million and is less than EUR 500,000 for other transactions. Moreover, taxpayers generating income from business relationships other than profit income are excluded. In the case of Lithuania, SMEs are excluded from the obligation to prepare TPD if they are not financial and credit institutions or insurance companies or if they are entities or PE with revenues exceeding EUR 2,896,200. InLatvia, a combination of company- and transaction-size indicators are used, and SMEs are exempted from TPD if their turnover does not exceed EUR 1.43 million and they do not have a controlled transaction with an associated enterprise in an amount exceeding EUR 14,300. In Portugal,only the company-size indicator is used; SMEs not exceeding the turn- over threshold in the amount of EUR 3 million per year are excluded from the obligation to prepare TPD. In the case of Hungary, SMEs are not required to prepare TPD79; however, there are further exemptions through Article 18(1), (3) or (5) of the Corporate Income Tax.80 In Poland, transaction-size indicators are used; however, SMEs are not obliged to prepare TPD81if transactions do not exceed thresholds (i) EUR 100,000, if the value of the transaction does not exceed 20% of the share capital, (ii) EUR 30,000 in the case of performance of services, sale or marketing available of intangible assets and legal values, or (iii) EUR 50,000 in the remaining cases of transactions. However, all entities that are nevertheless associated or non-related must prepare TPD if a transaction is made directly or indirectly for benefits of tax havens resident and exceeding EUR 20,000. Further, since 2015, groups of fruits and vegetables producers and agricultural producers have been wholly excluded from the transfer pricing rules. For further details, see Table2.9and Fig.2.3.
The third group covers only two Member States, the Czech Republic and Croatia, which maintain a different approach in the form of non-legally binding transfer pricing documentation requirements that follow TP Guidelines and EU
78Defined as companies that (i) employ fewer than 250 persons and (ii) have an annual turnover not exceeding DKK 250 million or an annual balance sheet not exceeding DKK 125 million.
79According to the Corporate Income Tax, Article 18(3) and 18(5). Further, definition of small enterprise is mentioned in the Act on Small and Medium-sized Enterprises and the Support Provided to Such Enterprises known as SME Act.
80Such as, a transaction with the APA decision, cost recharge transactions under specific condi- tions, transaction not exceeding the threshold of HUF 50 million, stock exchange transactions, or transaction with the state-dictated prices or any prices determined in a legal regulation, trans- actions between domestic PE and its associated party if tax base is determined on the basis of tax treaties, and in entity in which the Hungarian state has direct or indirect majority control or public- benefit non-profit organizations.
81In accordance with new Corporate Income Tax Act effecting from 1 January 2017.
TPD. In both countries, no special rules for SMEs or small transactions are applied.
For further details, see Table2.9and Fig.2.3.
Thefourth groupcovers three Member States,France, Netherlands and Luxem- bourg, which provide a full scope of transfer pricing documentation requirements, regardless of the size of entity or transactions. However, in the case ofFrance, SMEs82outside the scope of the new rules under Article L13 AA and L13AB of the Tax Procedure Code (i.e., they follow rules under L13 B of Tax Procedure Code), are subject to less strict deadlines for the submission of TPD and penalties. For further details, see Table2.9and Fig.2.3.
Thefifth groupcovers five Member States, Austria, Italy, the Slovak Republic, Slovenia and Sweden, that allow simplified transfer pricing documentation to be submitted for SMEs or small transactions under special conditions. InAustria, the company-size indicator is applied, and SMEs not exceeding a turnover threshold of EUR 50 million (in each of the two preceding years) can prepare simplified TPD through administrative guidelines (i.e., without obligation to prepare a master file and local file). The same approach is applied inItaly,where SMEs83can prepare the simplified TPD, which will be updated on a 3-year basis, rather than on an annual basis, as is the case for other enterprises. In the case of theSlovak Republic, the simplified TPD can be prepared if SMEs report in Slovak GAAP; otherwise (when reporting under IFRS), the full scope TPD must be prepared. For Slovenia, in accordance with the Tax Procedure Act and the principle of proportionality, smaller and less complex enterprises should be subject to the simplified TPD. InSweden, the transaction-size indicator is used, and based on it, the simplified TPD can be prepared for inter-group transactions of limited value.84 For further details, see Table2.9and Fig.2.3.
Thelast groupcovers five Member States, Bulgaria, Greece, Finland, Romania and Spain, which exempt SMEs or small transactions from the obligation to prepare TPD and/or allow simplified transfer pricing documentation to be prepared. In Greece, the simplified procedure for very small and small enterprises as well as exemptions from the TPD for very small enterprises are allowed.85 Furthermore, Greece uses a combination of company- and transaction-size indicators to deter- mine exemptions from transactions for TPD obligation, particularly if the trans- actions do not exceed EUR 100,000 in total, the gross revenues per year do not exceed EUR 5 million, and if transactions do not exceed EUR 200,000 in total and gross revenues per year exceed EUR 5 million. In addition, Interpretative
82SMEs are defined as an entity having less than 250 employees, turnover lower than EUR 50 million or total assets less than EUR 43 million via EC Recommendation 2003/361.
83SMEs defined as enterprises with an annual turnover of less than EUR 50 million.
84In accordance with Tax Agency regulations (SKVFS 20017:1) transactions relating to the sale or purchase of goods with a total market value of a max. SEK 27 million (630 basis), and other transactions of a total aggregated market value of a max. SEK 5 million (125 basis).
85For more details see amendment of the Income Tax Code by law 4410/2016.
2.5 Simplified Transfer Pricing Rules for SMEs 51
Circulars86published by the Ministry of Finance provide additional exemptions. In the case ofSpain, the Royal Decree provides (through the company-size indicator) a simplified TPD to entities with a turnover of less than EUR 45 million. The exemption from the TPD is allowed87in the case of transactions taking bid or a public stock offering, in the case of transactions conducted with the same related individual or entity when the aggregate consideration for all the transactions does not exceed EUR 250,000, for transactions between companies that are involved in a tax consolidation group and for joint ventures under special conditions. In the case ofRomania, SMEs must submit the full scope of TPD if the minimum thresholds of controlled transactions are reached: (i) EUR 50,000 (EUR 200,000 in the case of LEs) in the case of interest received or paid for financial services, (ii) EUR 50,000 (EUR 250,000 in the case of LEs) with respect to transactions or services received or provided, or (iii) EUR 100,000 (EUR 350,000 in the case of LEs) with respect to transactions for purchases of sales of tangible and intangible assets. InBulgaria, the taxpayer is obliged to hold only the evidence that proves that its relations with associated enterprises are in line with the arm’s length principle. The preparation of TPD is on a voluntary basis. Based on the Transfer Pricing Manual, transactions are exempted from the evidence through the transaction-size indicator, particularly if they do not exceed (i) BGN 200,000 in the case of delivery of goods, (ii) BGN 200,000 in the case of providing services, (iii) BGN 400,000 in the case of granting intangible assets, and (iv) BGN 400,000 in the case of interest charged, where loans are granted. The simplified TPD (evidence) should be performed for a (i) taxpayer not exceeding thresholds above which the other party is a non-resident person from a non-EU Member States, under specific conditions, and (ii) taxpayer not exceeding thresholds above which the rate of operating profits is more than 20% lower than the average for the relevant economic sector, under specific conditions. Moreover, based on the Bulgarian Transfer Pricing Manual, micro enterprises should be exempted from the evidence of transfer prices; however, due to the different definitions mentioned in the Small and Medium-Sized Enterprises Act and Accoun- tancy Act, it is recommended that they prepare the simplified TPD (evidence). In the case ofFinland, SMEs88are excluded from the obligation to prepare TPD. The simplified TPD can be prepared in the case of insignificant transactions through the Law on Tax Procedure based on the transaction-size indicator—the amount of the transaction does not exceed EUR 500,000. For further details, see Table2.9and Fig.2.3.
86See No. 1093/22.4.2015 at 22.4.2015 and 1142/2015 providing that legal entities that are exempted from income tax are also exempted from transfer pricing documentation obligations e.g. portfolio investment companies.
87In accordance with Article 18.3 of the Corporate Income Tax Law 27/2014 of 27 November 2014.
88Via EC Recommendation 2003/361.