Transfer pricing regulations are based on the principle of free competition or also called the “Arm’s Length principle”. This principle seeks to determine what the price of the operation or the margins obtained by the parties would have been if all their transactions had been carried out within a competitive market, that is as if the operation had been carried out between independent parties.
Transactions carried out between related entities will be valued at their normal market value. The normal market value shall be understood as that which would have been agreed upon by independent persons or entities under conditions of free competition.
Therefore, the transfer pricing regulations try to avoid the transfer of income from one entity to another related entity which entails reducing or reducing the taxation in the Corporation Tax and operating both nationally and internationally.
It is necessary to differentiate between the obligation to inform about operations with related entities and the obligation to keep the documents that justify the valuation at the market price of operations between related persons or entities.
Operations to report
In relation to the obligation to inform, the following operations must be reported to the Tax Agency, through form 232:
- Those that are with the same person or related entity and exceed the amount of 250,000 Euros during the tax period
- Specific operations that exceed the amount of 100,000 Euros during the tax period.
- Operations exempt from informing: operations between related entities that are part of the same tax consolidation group, operations carried out by AIEs (“Agrupación de Interés Económico”) and UTEs (“Unión Temporal de Empresas”), operations in the field of public offers for the sale or acquisition of securities and those that do not exceed the amount of 250,000 Euros with the same person or related entity.
Groups of entities with an INCN equal to or greater than €750M will report related-party transactions country by country through form 231.
In relation to the obligation to keep the documents, it consists of having at the disposal of the Authorities the documents that justify the execution and valuation at the market price of the related operations.
- SPECIFIC DOCUMENTATION RELATED TO RELATED-PARTY TRANSACTIONS OF THE GROUP (MASTERFILE): An obligation exists when the INCN of the group is equal to or greater than €45M.
> Information regarding the structure and organization of the group.
> Information regarding the activities of the group.
> Information regarding the intangible assets of the group.
> Information relating to a financial activity.
> The financial and fiscal situation of the group.
- SPECIFIC DOCUMENTATION OF THE TAXPAYER: According to the INCN (“Net turnover”) of the companies, the documentation to be available to the Authorities is the following:
> Related entities with INCN equal to or greater than €45 million: Taxpayer information, related transactions, and economic-financial information on the taxpayer.
> Related entities with INCN less than €45M: Description of operations with related entities, tax identification data, valuation method used and comparables.
Operations excluded from the duty of documentation in this case:
> Carried out by IRPF (“Personal Income Tax”) taxpayers to which the objective estimation method is applicable with entities linked to them
> Business transfer operations
> Securities transmission operations not admitted to trading or admitted in tax havens
> Operations on real estate
> Transactions on intangible assets.
- “PYMES” (“Small and Medium Enterprises”): The specific documentation is understood to be completed through the standardized form.
The operations on which there is no obligation to have documentation that justifies their valuation at market price, are the same ones that are excluded from the duty of information.
In case of questions about this or other matters, do not hesitate to contact our tax advisors in Barcelona.