The possibility of concluding transfer pricing agreements (hereinafter TPA), a practice well known in other jurisdictions, was recently introduced in Portugal through Article 128-A of the Corporate Income Tax Code (CIRC) and Ordinance n.º 620-A/2008, of July 16.
With its introduction and regulation, companies are now allowed to communicate to the tax authorities their interest in concluding a TPA, whereby it will be agreed and set, a priori, the methodology to be used when setting the price in transactions with related entities. By concluding a TPA, companies avoid subsequent adjustments and corrections to their taxable base, since tax authorities have previously accepted the method or methods to determine the company’s tax base in related operations according to the arm’s length principle.
These agreements increase the competitiveness and security of both taxpayers and tax authorities, since they enable greater transparency in the tax system, making it more predictable for international operations.
The TPA can pertain to the whole or to part of the company’s operations and may be unilateral, when concluded between a single tax authority and a taxpayer (in this case the Portuguese tax authority and an IRS or IRC taxpayer) or multilateral when, besides being concluded with the Portuguese tax authority, it is also concluded with other tax administrations within the ambit of the friendly procedure laid down in the relevant Double Taxation Treaty.
In the Autonomous Region of Madeira (RAM), the process of concluding a TPA follows the same procedure as the one concluded in mainland Portugal, being therefore subject to the same requirements, forms and deadlines contained in the Ordinance. However, as a result of the tax decentralization that occurred in 2005, the proposed agreement should be addressed, not to the General Director of Taxes and Contributions, as stipulated in the Ordinance, but to the Regional Director of Tax Affairs, which is the appropriate authority in Madeira for these matters.
Indeed Decree-Law nº18/2005 of January 18, a pioneering act of Portuguese tax decentralization, has enabled the transfer, to the Autonomous Region of Madeira, of several tax powers and functions that had until then been performed by the Portuguese Central Government.
As a result of this tax decentralization, a Regional Directorate for Tax Affairs (DRAF) has been created in Madeira, who became responsible for these powers and functions in the Region, performing them independently and autonomously from the General Directorate of Taxes and Contributions.
Under the Regional Regulatory Decree n.º29-A/2005/M of August, 31, which defines and explains the functions and powers of the Regional Directorate for Tax Affairs, it is set that this Directorate has not only the assignment of securing and managing the taxes on income, on the expenditure, on property, and other taxes legally provided, but also those of executing the tax policies and guidelines set, within the RAM, by the Regional Government, without prejudice of what’s provided for in articles 140. º and 141. º of Law n.º 130/99, of August 21; administrating, releasing, levying and collecting taxes that are re-venue of the Region as well as ensuring that other national tax legislation in force is put into practice and respected.
Moreover, it is set that, in the exercise of its powers, the Regional Directorate for Taxes acts independently and autonomously of the General Directorate of Taxes, conducting its activity according to the principles of exemption, independence and strict obedience to confidentiality rules and to the tax system unity.
Therefore, a TPA concluded by a company set up within Madeira’s IBC will be proposed, discussed, negotiated and agreed with the Regional Directorate of Tax Affairs, which is responsible for these matters in Madeira.
The TPA process begins with the submission of a draft agreement to the Regional Directorate of Tax Affairs for a preliminary assessment within the following 60 days. Within that period, DRAF may immediately comment on the matter, or, instead, make use of the entire 60 days period when and if the complexity of the proposal so requires. If the proposal presented does not reveal particular complexity, DRAF will promptly issue a comment on it, and, therefore, the company concerned may then address the Regional Director of Tax Affairs the TPA proposal together with all the data and documents set forth in the Ordinance. Otherwise, the company may only address to the Regional Director of Tax Affairs the TPA proposal after 60 days on presentation of the draft agreement.
Once the proposal is received, the negotiation process begins, undergoing at least four phases: preliminary assessment, proposed agreement, evaluation and negotiation with the tax authorities of other states, where the agreement is multilateral, and final agreement.
Under the Ordinance, these agreements cannot be concluded for more than three years. However, the agreement may be renewed if the concerned company so requests it within six months before the end of its term.
Once the TPA is concluded and considering that the conditions specified therein are respected, the defined price may not be revised, thus leading to greater stability in the operations carried out by companies and providing an always desirable tax security.
The use of these agreements is, therefore, an efficient mechanism for taxpayers to advocate their point of view on this matter, without a pre-litigation or litigation with tax authorities, who in turn are required to present a proactive and co-operative attitude.