Within the framework of international tax developments resulting from the Base Erosion and Profit Shifting (BEPS) Plan, in particular the recommendations issued under actions 8 to 10 - Assure that transfer pricing outcomes are in line with value creation and action 13 - Re-examine transfer pricing documentation, Ministerial Order No. 35/2019, of 28 January, was published, which amends certain annexes that are part of the IES model/Annual Statement (“DA”), of note being the major changes to the statements introduced regarding transfer pricing.

In fact, in order to increase transparency in the modus operandi of multinational economic groups, avoiding practices that lead to eroding the tax base and profit shifting between jurisdictions, especially of economic groups that were not required to submit their financial and tax statement by country (Model Statement 55 commonly known as the Country by Country Report) because they surpassed the limit of € 750 million of annual consolidated income, the scope of the information to be reported under the IES/DA on transfer pricing was broadened.

As a result of the changes introduced, the Tax Authority (TA) will now have highly detailed information on the value chain of these economic groups and on the related operations carried out within them. In fact, these new reporting obligations require, as well as other information, the complete identification of (i) the entities that have holdings, directly or indirectly, in the reporting entity’s share capital, as well as the entities in which the reporting entity has, directly or indirectly, share capital holdings, (ii) the amounts of linked transactions made by the reporting entity, by category of transaction and counterparty [1], (iii) the transfer pricing methods used and any changes that have occurred at this level, as well as (iv) the guarantees and/or collaterals and (v) changes that have occurred in the reporting entity’s business model.

Indeed, it is clear that the main objective of these new reporting obligations is to provide the Tax Authority with tools that allow it to undertake a risk assessment of economic groups, in order to carry out more assertive and targeted inspections in areas where there is a high probability of non-compliance with transfer pricing rules.

Therefore, an increase in transfer pricing inspections is expected and it is crucial that taxpayers ensure that the terms and conditions associated with linked transactions undertaken comply with the arm’s length principle and are endowed with economic substance and a rationale, especially in areas that are traditionally associated with higher transfer pricing risks, such as transactions associated with intangible assets and intra-group financing transactions.  

With regard specifically to intra-group financing operations, it should be noted that although this is usually an area of considerable focus for Tax Authority inspections, following the publication, in February 2020, of the OECD Guidelines for this area, which aim to clarify the methodology and criteria to be adopted in their economic analysis, it is also foreseeable that there will be an increased focus by the Tax Authorities in this area, especially if we take into account the new obligation to declare guarantees and collateral shown in intra-group financial transactions in the IES/DA.

Finally, it should be noted that, although these new reporting obligations were initially planned to come into force for the delivery of IES/DA declarations for the 2019 tax period and subsequent periods, following the exceptional decisions to ease compliance with the tax and reporting obligations adopted by the Government during 2020 to mitigate the impact on companies resulting from the COVID-19 pandemic, according to the information available at this time, these new reporting obligations will only come into effect with the delivery of IES/DA declarations for the 2021 tax period, under the terms of subparagraph b) of paragraph 2 of Article 404 of Law 75-B/2020, of 31 December (commonly known as the 2021 State Budget).

Therefore, in order to be suitably prepared for these new obligations, companies should, from now on, ensure the adoption of robust and consistent transfer pricing policies, endowed with an economic rationale and substance, as well as internal control procedures that simplify the reporting process of the new information required and ensure its reliability.   

It should be noted that, to date, no change has been announced to the deadline for submission of IES/DA declarations for the 2020 tax period, so companies with a tax period coinciding with the calendar year must comply with this obligation by 15 July.

Sofia Xavier
Tax consultant (Transfer Pricing)

[1] It should be noted that related operations amounting to 100,000 euros or less per type and entity are excluded from being reported, provided that the total amount of the transactions excluded does not exceed € 500,000.