The tax closing is an important part of tax planning for companies that maintain this healthy policy. It represents the moment in which a company closes its accounting books for the fiscal year, determines the amount of taxes to be paid and prepares the necessary information to prepare its tax returns, also taking into account the transactions that were carried out with related parties. Let us remember that transfer prices are the prices agreed for transactions between related entities, such as subsidiaries of the same company at market price, complying with the principle of free competition or full competition.
IMPORTANCE OF TRANSFER PRICING FOR TAXPAYERS
Transfer pricing is important to taxpayers for two main reasons. First, transfer pricing affects the amount of tax paid if the taxpayer does not comply with the rules governing the matter. A transfer pricing adjustment to the median as outlined in the rule, implies additional tax assessments of thousands and in some cases millions of dollars, also non-compliance leads to fines up to the order of one million dollars. If transfer prices are not properly established, as we have already mentioned, additional tax assessments, tax audits and litigation will be incurred, which will have a financial impact on the company, due to the failure to adequately study these transactions.
Secondly, the transfer prices may be subject to an audit or control by the tax authorities, in our case the General Directorate of Revenue. If the authorities consider that the transfer prices are too low, i.e. below the lower range in prices, by their analysis of comparables, by inconsistent information between what is declared in the income tax return, in the transfer pricing report, and in the audited financial statements, they may initiate an audit and may also bring as a consequence what has already been indicated in the previous paragraph. Therefore, it is important that companies keep an accurate record of their transfer pricing so that when these analyses are submitted the information is the same to mitigate inconsistencies. This helps to ensure that taxes are paid properly and that the tax authorities do not see a risk in our clients who would be taxpayers for them.
In the fiscal closing, it is important that companies review their transfer prices, that in the company’s general ledgers, only these values are declared in the accounts that compose transactions with related parties, without considering import taxes, storage and other charges that do not correspond and at the time of performing the analysis of ranges, it does not show the true situation, causing errors in the analysis of transfer prices.
In summary, the fiscal closing is an important moment to review the transfer prices, so you can be sure that your transactions are within the market range, thus complying with the arm’s length principle.
We encourage you, if you have not performed an analysis of your related party transactions, to do so immediately, as you may be able to make a voluntary adjustment to comply with the rules of this regime.