NAFA fiscal risk analysis: Behaviors that generate the initiation of a fiscal control and the request of the transfer pricing file

Since the beginning of 2019, the National Commission for Strategy and Forecast (CNSP) and ANAF have initiated a collaboration to identify taxpayers with high tax risk, in order to streamline checks and reduce tax evasion. This collaboration directly resulted in the establishment of a risk analysis department within ANAF, at the level of which statisticians were mainly employed.

Thus, when the tax authority decides to initiate an audit on a particular taxpayer, this is because its tax conduct has raised suspicions in the risk analyzes carried out.

Especially in the context of the movement to make internal tax processes transparent at European and national level, the sources of information for the authorities are becoming more and more numerous (see CbCR reports and new DAC6 reports).

Of course, the grid of indicators applied by ANAF in the analyzes for calculating the degree of fiscal risk of Romanian taxpayers is not public. In terms of practice, however, it is possible to identify certain patterns of tax behavior associated with transfer pricing that can generate checks by tax inspection teams.

Recording of accounting losses in the last 5 years
Especially in cases where related party transactions have an increased share in the turnover of the company or of a taxpayer who is captive within the group to which he belongs, recurrent accounting losses may ensure a visit from the tax authorities.

In the free market, companies will give up their business partners, either suppliers or customers, who cause them these losses or will leave the market altogether. In order to understand the source of the sustained losses of an affiliated taxpayer – who often does not have the same freedom to choose his partners as an independent company – the tax authorities can request the transfer pricing file.

Although there are cases where these losses arise from operational and commercial reasons, they must be documented extensively and consistently in the transfer pricing file to avoid potential transfer pricing adjustments in related party transactions or penalties.

Pay attention to VAT refund requests from the state budget
A taxpayer who has to recover VAT from the state budget also has a risk of a possible tax inspection of transfer pricing.

Even if the trend in recent years is to reimburse VAT, with a notification for a subsequent background tax inspection, the existence of the transfer pricing file may cause the tax authorities, in certain situations, not to require a subsequent control.

Thus, before starting this procedure, taxpayers must consider preparing the documentation so that it can be made available to the authorities, in the time devoted to the category of taxpayers to which they belong.

Recording voluntary internal adjustments of transfer pricing in other accounting periods
Whether we are talking about the adjustments of the initial purchase prices in the transactions with the affiliated parties, or about the year-end adjustments of the profit margins obtained by the local entity through the prism of some group policies, they are of increased interest from the tax authorities.

Invoices with positive values ​​paid to foreign entities, for any reason other than strictly commercial ones, generate an increased fiscal risk and it is necessary that they be supported by correct reasoning and supporting documentation in the transfer pricing file.

Taxpayers must also consider how to record these invoices – registration in a year other than the one for which the transfer price adjustments are made is a behavior that can indirectly contribute to the start of a tax inspection by having the potential generate variations in reported financial results.

Return 394 – discrepancies between taxpayers’ VAT reporting obligations and those of their partners
If taxpayers transact with related entities, the value of purchases and deliveries must be declared balanced by both parties in the return 394.

Being a directly accessible source of information, discrepancies in the case of intentional or unintentional omission in the declaration of one of the parties are quickly identified by the tax authorities, discrepancies that may lead to subsequent verifications.

Restructuring (mergers, divisions, dissolutions, business transfers, insolvencies)
Mergers, divisions, business transfers or dissolutions often lead to significant variations in the financial-accounting results reported by a company.

These variations may attract the attention of tax authorities who may decide to initiate a tax inspection in which case it is indicated that assessment reports have already been prepared.

In addition, the declaration of insolvency proceedings may lead to non-collection of taxes and fees by NAFA, which is why the commencement of insolvency proceedings is often preceded by a substantive tax inspection which also verifies the transfer pricing file.

Furthermore, in the case of a transfer of business or constituent assets, in addition to the optional documentation on changes at the functional level, taxpayers must prepare and be able to provide the tax authorities with an assessment report justifying the value at which they were traded, and even, in certain situations, to wait for the start of a substantive tax inspection.

The place of profit reporting differs from that of carrying out economic activities according to the CbCR reports
The Organization for Economic Co-operation and Development (OECD) published in July 2020 statistics from the CbCR reports, the main conclusion being that there are discrepancies between the jurisdiction in which profits are reported and the jurisdiction in which economic activities take place.

The performance report of NAFA for 2019 mentions that the data from the CbCR reports are already capitalized in the risk analysis on transfer pricing.

Thus, it is expected that those companies that report lower profit margins locally than the other companies within the group will be subject to a tax inspection of transfer pricing in the near future.

Failure to file or delay in filing tax returns / late payment of taxes and fees
Tracking tax collections is one of the important functions that NAFA structures perform.

Obviously, for a more efficient collection, the tax authorities also have at hand the tool represented by tax inspections that can be triggered immediately in cases where the submission of tax returns is delayed or, worse, due taxes and fees are not paid on time.

Administrative services (e.g. management) with significant value
Another situation that may raise questions for the authorities is the case where, in the list of transactions with related parties, there are services of an administrative nature received from an external entity within the group – management, IT, accounting. They can even increase the degree of risk if these services are justified only by invoices with a limited description, have significant values compared to the turnover of the Romanian entity or even cause losses at the local level.

Taxpayers must thus ensure that the administrative services received within the group bring real benefits to local business processes and that they can provide the authorities with analyzes and supporting documents to prove that the services received are in fact provided at an appropriate price.

Return 394 – indicates the existence of related party transactions
Starting with September 2020, the existence of transactions with affiliated persons will have to be signaled separately in the form 394 “Informative declaration regarding the deliveries / services and purchases made on the national territory”.

Return 394 will contain a section in which it will tick YES or NO – whether or not transactions were made with affiliates during the reporting period covered by the form (regardless of whether they are with Romanian or foreign affiliates).

Thus, it is expected that the information provided in this statement will not in itself trigger a tax inspection, but the combination of this information with, for example, information on certain financial indicators may lead to the initiation of a substantive tax inspection.

Discrepancies between the amounts reported in the financial statements and the tax returns
Income and expenses reported in Statement 101 “Income tax return” and those reported in the balance sheet Form 20 “Profit and loss account” may not correspond in certain situations.

In such situations, the tax authorities may notify and initiate a substantive tax inspection in which to request the transfer pricing file.

Contact an Advisor

If you have any questions regarding this topic and how it might have an impact on your business, please contact the Mirus Consultant with whom you regularly work, or:

Ionut Zeche

  • Tax & Legal
  • Bucharest
  • + 40 (31) 228 20 77