One of the main focuses of the Tax Administration is to control the transactions between associated entities and to monitor the effect of profit taxes occurring in those transactions. Further increased efforts of the tax authorities are expected in this area. It is important to prepare the necessary documentation in a timely manner so that associated companies are not exposed to unnecessary risks and tax costs.
Transfer pricing rules are based on the OECD methodology and are laid down in Article 13 of the Profit Tax Act and Article 40 of the Ordinance on Profit Tax. Pursuant to the Profit Tax Act, associated entities are required to identify their business in terms of transfer pricing and possess a written document demonstrating how transfer pricing is set for each transaction with an associated entity. In addition, the taxpayer is obliged to provide the reasons for selecting a certain transfer pricing method, and to prepare appropriate documents and estimates based on the comparability analysis, functional analysis and risk analysis.
The OECD guidelines stipulate that when defining transfer pricing between associated entities, the arm’s length principle shall be applied, which is defined as follows: “When conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”
When drafting a transfer pricing study, we apply local regulations and the latest OECD guidelines and use the established databases in the analysis.
