Article by: Fotodotis Malamas (Bernitsas Law)
What transfer pricing methods are acceptable? What are the pros and cons of each method?
All the OECD transfer pricing methods are accepted by the Income Tax Code (Law 4172/2013).
According to Ministerial Circular POL 1097/2014, as amended by POL 1144/2014, there is a preference for the traditional methods over the transactional methods. The traditional methods provide the most direct approach to estimate whether the transactions between affiliate entities comply with the arm’s-length principle. Only in the event that there is no sufficient or available data for the application of the traditional methods, the legal persons may apply the transactional methods. However, in the latter case, the legal persons must justify the application of the transactional methods instead of the traditional methods. The comparable uncontrolled price method (CUP) appears to be the most appropriate for controlled transactions. However, in the absence of controlled transactions, alternative methods should be used. The resale price method may be used where controlled and uncontrolled transactions are comparable in all characteristics (functions performed, economic circumstances etc) save the product itself. The same applies for the cost-plus method. However, material differences in the way the companies perform their activities may bias the accuracy of the profit margin index between the companies. The cost-plus method is useful for the suppliers of goods and services, especially when markups are examined. However, the difficulty with this method is the measurement of the cost and the items that comprise the direct and indirect cost. Some companies may treat a payment as part of the cost of goods sold and other companies may treat it as an operating expense.
With regard to the transactional methods, the Transactional Net Margin Method (TNMM) is broadly used when the contributions of the party in the transaction are not unique. This method is less affected by transactional differences and it may be used for only one party (the ‘tested’ party). However, the net profit indicator may be influenced by factors that would have an effect on the price or the gross margin between independent parties. Timing is another factor that may affect TNMM. At the time the company has available internal comparables, the external comparables may not be available. In these cases, the profit split method may be more appropriate. This last method is difficult to apply, since it uses as a basis the operating profit that derives from operating expenses. These expenses may not be known or other companies may include them in the cost of goods sold. Nevertheless, it may prove useful in cases where comparables data is available and it may be supported by the division of profits that would have been achieved between independent enterprises.Restructurings
In the case of restructurings, article 51 of Law 4172/2013 favours the CUP method unless its use is not feasible. In this case, a valuation of the business is required, taking into consideration the discounted cash flow method on future profits expected from the restructuring.Tangible property
The preferable method for transfer of tangible property is the CUP method. For marketing and sales operations, the methods usually used are the resale price method or the TNMM method. For products and semi-finished goods again the CUP is the preferable method. Alternatively, the TNMM and cost-plus methods may be used.Intangible property
For intangible property transactions the preferable method is the CUP. In the absence of controlled transactions, TNMM and the profit split method may be accepted. In practice, TNMM is usually used instead of the profit split method.Service transactions
For service transactions, the CUP method is the most appropriate. Alternatively, the cost-plus method is used for the pricing of services, which may comprise either full cost plus a markup, or direct cost plus a markup. The use of indirect costs only is not viable since they do not include costs attributed directly to the service, and indirect costs may prove misleading as they are calculated on the basis of cost drivers.Loans and advances
Loans or advances are usually examined under the CUP method since the main driver – the interest rate – may be compared to publicly available information. However, the specific terms and conditions of the loan or the advance payment should always be taken into account.Cost-sharing
Are cost-sharing arrangements permitted? Describe the acceptable cost-sharing pricing methods.
The cost contribution arrangements (CCAs) are acceptable under the tax legislation. There are no specific guidelines regarding the acceptable cost-sharing pricing methods and there are no specific provisions for the tax treatment of payments to a contributor of existing intangibles to a CCA. In order for a CCA to satisfy the arm’s-length principle, it is required that the contribution of the participants is equivalent to the contribution that the legal person would agree with an independent third party in a comparable situation. The contribution actually relates to the benefit that the legal person (the contributor) expects to have from its participation in the CCA. In order to determine whether the cost contribution meets the requirements of the arm’s-length principle, the basic principle is that the cost contributed to the CCA should reflect the share of the participant in the expected benefit. The drivers that can be used to measure the distribution are sales, the materials used for the production, the products sold, the gross or operation margin, the number of employees or capital invested etc.
The contribution payments are tax-deductible, subject to general deductibility provisions (they must be incurred for the benefit of the legal person, they must correspond to actual payments, the expense must be posted in the accounting books of the legal person within the accounting year in which it was incurred and it must be supported by the proper documentation).
Depending on the nature of the CCA (eg, royalties or services), withholding tax at the rate of 20 per cent may apply (this rate may be reduced or eliminated depending on the applicability of double tax treaties or the Interest and Royalties Directive).Best method
What are the rules for selecting a transfer pricing method?
There are no specific rules for selecting a transfer pricing method. As stated in Ministerial Circular POL 1097/2014, the preference of the legislation is for traditional methods. In general, the CUP method is considered the most accurate. However, depending on the nature of the transactions and the availability of comparables data, the general best-method rule may apply, to the extent that this method is justified by the taxpayer.Taxpayer-initiated adjustments
Can a taxpayer make transfer pricing adjustments?
In general, transfer pricing adjustments are allowed, and they can be posted either in the books of the legal person or directly to the tax return. Self-initiated adjustments are allowed to the extent that they increase the taxable income. It is noted that debit or credit invoices for adjustments are not viewed positively by Greek tax auditors, especially if they are issued at year end and result in a reduction of the taxpayer’s profits or increase tax losses. In this case, such invoices are thoroughly scrutinised by the tax auditors.Safe harbours
Are special ‘safe harbour’ methods available for certain types of related-party transactions? What are these methods and what types of transactions do they apply to?
There are no ‘safe harbour’ methods available, per se. However, there are services of small value for which a follow-on charge may apply (covering only the cost of these services). Although there is no official monetary threshold for the application of ‘safe harbour’ methods, in practice the value of transactions for which there is no requirement for documentation is used as a threshold. In particular, Greek legal persons and branches of foreign multinational legal entities with intragroup transactions of a total value of less than €200,000 or €100,000 (depending on whether their turnover is more or less than €5 million), are not required to submit transfer pricing documentation. For these transactions, and depending on the gross revenues of the legal person, the tax auditors may accept charges on a cost recovery basis. Also, in special cases, and only for short periods of time, below-cost sales may be accepted for transfer pricing purposes, as per the OECD Guidelines.