Companies part of multinational groups of companies have to prepare transfer pricing documentation if they carry out intra-group transactions.
In some cases, local companies choose not to prepare a transfer pricing documentation but instead use the documentation available at the level of the headquarter.
One issue borne by this approach is that frequently no account is taken of the reality of the geographical characteristic of the place in which the subsidiary is active. For instance, it is common to see that within a group there are charged royalties for the use of intangible assets at a uniform royalty rate, no matter the location of the subsidiary.
Therefore, a company which possibly has a low market share is charged the same level of royalty as a related company which is a market leader. No consideration is granted to the size of the market or the strength of the brand in the specific market.
Nevertheless, in taking the decision of whether to localize the transfer pricing documentation in Romania or nor, one could argue that is no suggestion that this level of detail is absolutely necessary for every business that has intra-group related party transactions.
Moreover, one would also bring up arguments that the costs for the localization of the transfer pricing documentation file would be excessive and inappropriate for a business with intra-group transactions with low amounts.
Having the above in mind, while for a small business it may be enough to simply use the group transfer pricing documentation as it is and explain in addition why the pricing is considered appropriate from the perspective of local company, for a company having material intra-group transactions, one should evaluate carefully what the risks are.
The responsibility of properly evaluating the cost/benefit of localization of the transfer pricing documentation file lies with the management of the local company.
While evaluating these risks, the management of the local company should consider not only the fines that a company could take but especially the transfer pricing adjustments that the tax authorities can make.
To evaluate the risks of adjustments, the local company should localize the transfer pricing documentation and ensure that the quality of supporting documentation will help in defending the case.
In conclusion, failure to correctly localize the transfer pricing documentation in Romania or acceptance of transfer prices that are not arm’s length could result in transfer pricing adjustments and additional corporate income tax imputed by the tax authorities.