Fundamental Changes To Fiscal Sanctions for Transfer Pricing

Until the end of 2018 fiscal sanctions for transfer pricing were imposed if a taxpayer failed to submit the transfer pricing documentation during a tax audit. When tax authorities reassessed income from a transaction, and the taxpayer failed to submit the relevant transfer pricing documentation, the additionally assessed income was subject to a penalty tax rate of 50%.

These fiscal penal regulations caused many problems also to tax authorities. A decision establishing the penalty rate had a shorter statute of limitations (3 years only), which in practice often prevented the imposition of sanctions, taking into account the time interval between the inspected year and the issuance of the decision. In addition, a construction of these regulations based on the failure to submit the transfer pricing documentation caused doubts in interpretation. One of the doubtful issues was the point in time until which the authority should “wait” for the documentation to be submitted by a taxpayer and how filing of an incomplete documentation should be treated. These issues were reflected in the audit practice of tax authorities, who imposed a 50% penal tax rate barely a dozen of times in the period 2011-2018, while the total number of successful transfer pricing (and tax optimization) audits exceeded five hundred in 2017 and 2018 only.