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Effects of COVID-19 and the 2020 Annual Tax and Customs Control Plan on related-party transactions and transfer pricing

Contributed by Kreston
August 24, 2020

Elena Ramirez - Fiscal Department Partner, Mario Quilez - Transfer Pricing Manager and Mario Pires - Transfer Pricing Consultant. Kreston Iberaudit, Spain

Since its appearance in the world at the end of 2019 and so far in 2020, COVID-19 has caused changes to commercial, contractual, financial, and other relations that have undoubtedly affected some related-party transactions and transfer prices.

Therefore, the need arises to make adjustments, or even rethink the transfer pricing (TP) policy in its entirety from the 2020 fiscal year to thus avoid future risks before the Spanish Tax Administration.

What is clear is that, depending on the specific case of each company, it will be necessary to analyse every particular case and determine the effects of COVID-19 to therefore adjust, if applicable, the TP policy and correctly document related-party transactions.

For this reason, companies must be prepared to justify the effects caused by COVID-19 in the 2020 fiscal year and safeguard the documentation and evidence that justify and prove, for example: decreased sales, additional costs, stoppage of commercial, manufacturing or service activity, etc.

All this is of vital importance to companies in Spain, as with the publication at the end of January of the 2020 Annual Tax and Customs Control Plan and the Strategic Tax Agency Plan for 2020–23, it is evident that the Spanish Tax Administration is increasingly taking into account the issues related to related-party transactions and transfer prices in its actions to investigate and verify tax fraud.

In this regard, the 2020 Annual Tax Control Plan outlines that, in order to control internal taxes, a series of specific verification actions will be carried out over related-party transactions, based on the following guidelines:

  • Implementation of a new automated TP risk analysis system based on all the information available on related-party transactions currently held by the Tax Administration, making effective use of the information available to the Inspection as a consequence of the BEPS project, both in the OECD and in the European Union, which includes the automatic exchanges of information on various incomes, those referring to unilateral agreements with Tax Administrations, as well as the information derived from the country-by-country report approved in development of BEPS Action 13.
    • This is due to the better knowledge that the Tax Administration currently has of the national and international business groups and of the sectors in which they operate, which will allow a better risk analysis through the development of indicators, indices and models, and of the identification of behavioural patterns of high tax risk.
  • Particular attention will be paid to compliance with the documentation and information obligations regarding transfer prices, without prejudice to the substantial analysis of the valuation of functions, assets and risks contained in this documentation. The areas that will be subject to this particular attention in 2020, in matters of transfer prices, are:
    • Business restructuring
    • The valuation of intra-group transfers of different assets (specifically intangible assets)
    • The deduction of items that may significantly damage the tax base, such as payments of fees derived from the transfer of intangible assets or from intra-group services
    • The existence of repeated losses.
  • Priority attention will be given to the lack of an income statement, derived from the provisions of non-invoiced services.
  • Preferential attention will be given to tax-related financial transactions (loans, inter-company accounts, etc.).

Considering the above, it is evident that the Spanish Tax Administration will take a closer look from 2020 at the control of related-party transactions; at the request for TP documentation; and now at even more, as companies must justify the disruption caused to its activities as a result of COVID-19.

Given that the Spanish Tax Agency (AEAT) is prioritising action around related-party transactions and the impact of COVID-19 in the 2020 fiscal year, we stress the need to comply with the documentation requirements, making any relevant adjustments, to avoid potential sanctions.


Tags: accounting | audit | tax | regulation | standards



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