Transfer Pricing: What is it?

How the Transfer Pricing Regime Works

The transfer pricing (TP) regime is a set of tax rules that aim to ensure that transactions between related companies, especially multinationals, are carried out at market prices — the so-called “arm’s length” principle. In other words, the prices charged between companies within the same group must be equivalent to those charged between independent companies under comparable conditions.

The objective is to prevent price manipulation in international or domestic transactions to artificially shift profits, reducing the tax base in one country and increasing it in another, where the tax burden is lower.

In Portugal, the regime is primarily regulated by the IRC Code (Articles 63-A to 63-G) and the OECD guidelines on transfer pricing, which are internationally recognized.

Main components of the regime:

• Reporting Obligation: Companies must declare transactions with related entities, stating the amounts and nature of the transactions.
• Supporting Documentation: Companies must maintain documentation proving that the prices charged are in compliance with the arm’s length principle.
• Valuation Methods: Portuguese law allows the application of various methods to determine transfer prices, such as the uncontrolled comparable price method, the cost-plus method, the resale price method, among others.
• Adjustment of Results: If the Federal Revenue Service deems it necessary If the prices charged do not correspond to market value, the Company may make adjustments and charge the corresponding tax, plus compensatory interest.

To Whom the Transfer Pricing Regime Applies

The regime applies to companies and entities subject to IRC (Corporate Income Tax) that carry out transactions with related parties, whether domestic or foreign. Typical examples of taxable transactions are:

• Transactions involving goods and merchandise;
• Provision of services;
• Financial transactions, such as loans or guarantees;
• Transfer of intellectual property;
• Other businesses or transactions that may influence taxable income.

Companies required to comply with the regime:

• Multinational companies: Groups with entities in different jurisdictions, where there is a risk of profit shifting.
• Companies with relevant business relationships: Regardless of whether they are groups, companies that hold relationships of control or significant influence (more than 25% stake or decision-making power) with other entities.
• Companies with relevant operations: Even small companies may be subject to the tax if they conduct significant transactions with related parties.

Tax Risks of Improperly Operating in the Transfer Pricing Regime

Non-compliance with the transfer pricing regime can lead to several risks for the company, namely:

1. Tax Adjustments and Additional Tax Payments

• The Federal Revenue Service may adjust the reported prices, increasing the company’s tax base and requiring payment of the additional tax due.
• This adjustment may also incur compensatory interest from the date of the original payment.

2. Penalties and Fines

• Failure to submit documentation or incomplete submission may result in significant fines.
• Non-compliance may be interpreted as an attempt at tax evasion, increasing the penalties.

3. Reputational Risk and Audit Difficulties