Transfer pricing are those
established between related parties, according to article 16 of Spanish Corporate Tax Law 43/1995, of December 27 (with the wording of Measures of Prevention
of Fiscal Fraud Law 36/2006, of November 29).
The aforementioned article
establishes that transactions between related parties MUST be valued at their
normal market value. This valuation has to be documented in the form
established for that purpose by the Spanish Tax Administration.
Current criteria to determine
market value are those determined in OECD
Pricing Transfer Guidelines for Multinational Enterprises and Tax
Administrations. That is to say:
1. Comparable uncontrolled price – The
C.U.P. method compares the price charged for property and services in a
controlled transaction to the price charged for property and services in an
uncontrolled transaction. However, this system is extremely complex in the
practice:
a.
Because of the difficulty of finding reliable
information on prices and
b.
Due to the impossibility of comparing prices,
since prices are extremely sensitive tot he characteristics of each
transaction. In practice, this method requires a different valuation for each
transaction. C.U.P. method is quite reliable in case of financial transactions,
such as those with commodity sales, for instance. Notwithstanding, it is
totally inefficient in case of operations involving the incorporation of an
intangible asset (e.g.: a Loewe handbag or a Prada dress).
2. Resale price method – The resale price
method begins with the price at which a product that has been purchased from an
associated enterprise is resold to an independent enterprise. This price (the
resale price) is then reduced by an appropriate gross margin on this price (the
„resale price margin“), representing the amount of which the reseller would
seek to cover its selling and other operating expenses and, in the light oft he
functions performed, maek an appropriate profit. This method reduces the need
for comparability of the product, but it requires a greater functional
comparability of the company, the contractual conditions and the economic circumstances
of the transaction.
3. Cost Plus – As in the case of resale
price, cost plus method begins with the costs incurred by the supplier of
property or services in a controlled transaction for property transferred or
services provided to an associated purchaser. An appropriate cost plus mark up
is then added to this cost, to make an appropriate profit in light of the
functions performed and the market conditions. The typical example is that of a
company that provides archtectural services and calculates their prices by
applying a profit margin on the hours of work of their employees. This method
may also represent drawbacks, since it does not take into account production
efficiency.
4. Profit Split – The transactional profit
split method seeks to eliminate the effect on profits of special conditions
made or imposed in a controlled transaction by determining the division of
profits that independent enterprises would have expected to realise from
engaging in the transaction or transactions (that is to say: assets, employees,
expenses). To do so:
a.
The overall profit is determined, adding up the
profits obtained by each party in the operation and
b. The
abovementioned overall profit is distributed among the parties, according to the
proportional contribution to the operation of each of those parties. This
system is more consistent with what is usually done by independent companies,
who usually split results according to their investment on the transaction.
5. Transactional Net Margin Method – The
transactional net margin method examines the net profit relative to an
appropriate base that a taxpayer realises from a controlled transaction. Thus,
it operates in a similar manner to cost plus and resale methods. Like resale
and cost plust methods, transaction net margin one is applied only to one of
the parties. This can affect the overall reliability. Besides, there are also
difficulties in determining an appropriate corresponding adjustment when
applying the transactional net margin.
The determination of the
operation value must be documented in compliance with the requirements of
article 18 of RD 1793/2008. That is to say:
·
Documentation
which must be accompanied by the taxpayer:
o
Identification of the taxpayer and of the
related parties.
o
Description of nature, charateristics and price of
the operation
o
Analysis of comparability, carried out by the
company
o
Justification of the valuation method employed
o
Cost sharing criteria
o
Other relevant information
·
Documentation
which must be accompanied by the group:
o
Organizational, legal and operational structure of
the group
o
Identification of the related parties taking
part in the operation
o
Description of nature, price and flows of
operation
o
Functions and risks assumed by each related
party
o
Ownership of brands and intangibles affected
o
Group policy on transfer pricing
o
Cost sharing agreement
o
Valuation agreements
o
Group Report
