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When is transfer pricing mandatory for a company?

Are you going to carry out a transaction with a company that is related to yours? If your answer is yes, then it is important for you to know in which cases it is mandatory to inform the Inland Revenue (Hacienda) and to document those transactions in order to justify the transfer prices. We will tell you all about it in this post.

In a commercial transaction between unrelated companies, prices are set so that a profit is made. However, when there is a link between companies, prices can be manipulated and differ from those on the market (upwards or downwards). 

In order to avoid this situation, the term transfer pricing was created, which implies the need to set prices according to market values when a transaction is carried out between related entities. Therefore, the Tax Agency controls transfer pricing to prevent tax avoidance in Spain. 

Who has to prepare the transfer pricing documentation and to inform the tax administration?

The obligations regarding transfer pricing are established in Article 18.1 of the Corporate Income Tax Law. This law states the following:

Transactions carried out between related people or entities shall be valued at their market value. The market value shall be understood as the price that would have been agreed upon by independent people or entities under conditions of free competition.

As a general rule, companies that carry out transactions with related entities for an amount greater than 250,000 euros, during the same tax period and with the same person or related entity, must submit the transfer pricing documentation. 

In addition to the above, they will have to document all the transactions carried out with other people or entities that reside in a country or territory qualified as a tax haven.

Transfer pricing obligations are divided into the obligation to inform Hacienda about related transactions through the use of form 232 (informative declaration of related transactions and transactions and situations related to countries or territories classified as tax havens); and the obligation to provide the documentation of the transaction. In this way, it will be necessary to have the documentation on the structure of the company and on the taxpayer prepared.

What happens if the transfer pricing obligations are not met?

Failure to provide or providing incomplete or false information about related-party transactions to Tax Authorities is a tax infringement. 

On the other hand, Article 16 of the Corporate Income Tax Law establishes that Tax Authorities may verify that the transactions carried out between related persons or entities have been made at their normal market value. When appropriate, they will make the necessary valuation adjustments to the transactions that are subject to this tax, personal income tax or nonresident income tax, based on the documentation provided by the taxpayer and the data and the information available, and with the objective to match the normal market value.

The infringement related to transfer pricing is considered a serious tax infringement and is sanctioned as follows:

  • A fixed pecuniary fine of 1,000 euros for each piece of data and 10,000 euros for each set of data, omitted or forged, related to each of the documentation obligations legally established for the group or for each person entity in its condition of taxpayer. 
  • This penalty will have as a maximum limit the lower of the following amounts:
    • 10% of the total amount of the transactions subject to this tax, to personal income tax or to non-resident income tax carried out in the tax period. 
    • 1% of the net amount of the turnover. 

However, in the case of a value adjustment, the penalty will be 15% of the adjusted amount. It is important to remember that it is up to the taxpayer, since they are the ones who have to provide proof, to prove through appropriate documentation that the transaction between related entities has been carried out in accordance with market prices. In addition, the taxpayer must include in the corporate income tax return (Form 200) information on the transactions carried out with related entities, as well as information on the valuation method used. As a consequence of all of the above, if your company is going to carry out a transaction between related entities, it is important that you consult a business consultancy with a department specialized in transfer pricing, which will study your case and help you to carry out the necessary procedures to comply with all the legal obligations.

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