BEPS: Integration of Transfer Pricing rules into Greek legislation
Under the Framework of Tax Base Erosion and Profit Shifting (OECD / BEPS Project), OECD developed 15 actions targeting to provide the appropriate tools to the Governments for addressing Tax Evasion. Actions 8 to 10 and 13 focus on Transfer Pricing (TP) matters. In particular, Actions 8-10 scrutinize transactions of intangible assets and transactions that are classified as of high risk for tax evasion. Action 13 refers to the compliance and documentation for transfer pricing purposes.
Due to the aggressive tax planning of big multinational enterprises, not only the majority OECD countries, but also countries that are not OECD members establish mechanisms to monitor and control the cross-border intra-group transactions. These measures allow tax administrations to ensure and maintain their tax base. Such legislation was introduced and intensified in several Asian jurisdictions during 2018 and 2019. Taking into account that significant part of the production of EU and US multinational groups takes place in Asian countries, the new TP rules affect tax planning and compliance globally.
Integration of the guidelines into Greek legislation
Greek legislation has integrated most of the OECD’s Transfer Pricing guidelines, adopting the so-called 3-pillar strategy.
The first pillar refers to Country-by-Country Reporting, which is filed by ultimate parent companies registered in Greece The revenue threshold of Euros 750 million applies for the determination of the liable entities. The relevant report includes aggregate information on the amount of revenue, the earnings (losses) before tax, the income tax, the shareholder’s status, the retained earnings, the number of employees and the book value of assets (except for cash or cash equivalents) for each jurisdiction where a Multinational Group operates. Furthermore, the a tax residence certificate or the incorporation documents for each related company are required .for cross-checking and inspection purposes.
The second and the third pillar refer to the preparation of the Master and Local TP File respectively. In most cases, the Master File is the same for all companies of a group. This document provides information on the group operating and legal structure, the nature of the controlled transactions and the pricing policy implemented. The Local File focuses on figures for each associated company deepening in the analysis of the intra-group transactions and the review of the arm’s length principle.
It should be also noted that the obligation for Country by Country reporting has been introduced in Greece since Law 4490/2017 got in force covering transactions that were carried out in 2017. Furthermore, the obligation to draft a Master and Local File is provided by article 21 of the Law 4174/2013.
The Greek Income Tax Code defines associated companies quite extensively. The connection may result from the direct or indirect participation of one company in the share capital of the other. Two companies hiring the same key management personnel are also deemed as associated.
A controlled company may exempt from the TP rules, if:
- Its revenue is lower than Euros 5 million and the controlled transaction are below Euros 100,000 or
- Its revenue is higher than Euros 5 million and the controlled transaction are below Euros 200,000.
In case a company exceeds the corresponding threshold, the Director shall file a summary table declaring all intra-group transactions. The compliance date for the submission of the summary table and for the preparation of TP File is identical with the deadline for the filing of the corporate income tax return.
The intra-group transactions shall be arm’s length. The application of OECD methodology which reflects the arm’s length principle is incorporated into the Greek legislation (Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin and Transactional Profit Split method). If the pricing policy of a group is not arm’s length, the taxable profits shall be adjusted accordingly.
Case Study: Intra-group financial facilities
The concept of intra-group loans includes both loan agreements and cash facilities between related companies. In these cases, the transaction under review is the interest charged and not the loan principal.
Therefore, the agreed or the actual interest rate, as calculated from the accounting records of the company, is examined from the arm’s length perspective The analysis of intra-group loans usually takes place at three levels:
- The deduction of the interest expense is compared with the nominal interest expense, based on the interest rate on the current accounts of Bank of Greece.
- In terms of comparable interest rates for similar loan agreements
- In terms of thin capitalization rules.
Advanced Pricing Arrangements
The Greek law has also integrated the provisions for Advanced Pricing Arrangements (APAs). This procedure is optional and refers to legal entities that carry out controlled cross-border transactions.
Based on the circular 1284/2013, “The subject of APAs is to set the criteria appropriately in order to determine intra-group prices over a specific period of time”. The purpose of the whole process is for a company to reach an agreement with the tax authority on a commonly accepted framework for conducting intra-group transactions. The APA approves the pricing policy followed, the TP method applied, the nature of the comparable data and any critical assumptions made by the company. The APA can be effective for a maximum period of 4 years.
Concluding, the TP rules have been in force in Greece for more than a decade. This long experience has made tax inspectors familiar with the TP concept and methodologies. Therefore, TP Files shall meet high standards and comply –in full with the current framework.