The rise of transfer pricing audits and the key risks identified in practice

Earlier this month, the National Agency for Fiscal Administration (ANAF) announced that it will initiate tax audits for more than 500 large taxpayers. The purpose of these actions is to verify compliance with tax and accounting legislation, assess the accuracy of the obligations declared and paid to the consolidated general budget, and identify and address tax non-compliance risks.

In this context, companies need to maintain supporting documentation for transactions carried out with affiliated parties, update their transfer pricing documentation annually, and identify risks in a timely manner to avoid potential adjustments that may arise during a tax audit.

Recent trends confirmed by ANAF data

Data published in ANAF’s 2024 Performance Report confirm the intensification of transfer pricing audits. Following the audits conducted in 2024, the tax authorities established adjustments to the tax base amounting to RON 1.79 billion, generating additional corporate income tax of approximately RON 89.66 million and reducing tax losses by nearly RON 269.57 million.

The report also indicates a shift in the authorities’ working approach: 57% of all tax control actions were carried out through desk-based audits, and approximately 11,513 unannounced inspections were conducted in 2024.

It is important to note that an unannounced inspection is an auxiliary tool used in risk analysis to obtain information; however, it cannot be used to adjust a taxpayer’s taxable base.

Moreover, in 2024, ANAF issued two Advance Pricing Agreements (APAs), reflecting the growing interest in preventive and predictable solutions.

Key risks to consider during transfer pricing audits

Companies engaging in transactions with affiliated entities must pay increased attention to how they document and support their transfer pricing policies. Practical experience highlights several risk areas on which tax authorities place particular focus:

1. Operational losses: For entities with a limited functional profile and/or those conducting predominantly intra-group transactions, sustained operational losses are difficult to justify from an arm’s-length perspective. Tax authorities generally consider that such entities should earn a stable remuneration aligned with the functions performed and risks assumed, regardless of the group’s overall performance. It is therefore essential that losses be explained through objective factors and properly documented in the transfer pricing file.

2. Profitability fluctuations: Significant year-to-year fluctuations in profitability represent another red flag for the tax authorities, particularly when margins fall below the arm’s-length range established in the comparability analysis. Although changes in profitability may have economic causes, in the absence of supporting documentation, the authorities may conclude that the transfer pricing policy was not applied consistently. We recommend periodic monitoring of margins and analysis of variations before closing the financial year.

3. Voluntary adjustments: In practice, groups perform year-end voluntary transfer pricing adjustments to align subsidiary results with the arm’s-length range. The authorities may request supporting documentation, especially where the adjustment reduces the profit of the Romanian entity. Without evidence such as explicit contractual clauses allowing adjustments or a clear economic rationale, such amounts may be subject to tax adjustments.

4. Intra-group services and their nature: Intra-group services remain one of the most frequently scrutinised areas during audits. Lack of supporting documentation or discrepancies between contractual terms and operational reality may lead to the rejection of cost deductibility and transfer pricing adjustments.

5. Functional profile: Accurate determination of the functional profile is one of the most sensitive components of transfer pricing analysis. During a tax audit, the authorities may reclassify the taxpayer’s functional profile, which may change the level of arm’s-length profitability. It is recommended that the functional profile be reviewed annually to reflect actual business operations.

Essential steps for taxpayers

To be prepared for a potential transfer pricing audit, taxpayers should follow several key steps:

• Analyse the real economic substance of intra-group transactions, clearly documenting the business rationale, benefits obtained, and activities actually performed.
• Update the transfer pricing documentation annually to reflect changes within the group, economic conditions, and the most recent financial data.
• Review comparability and update benchmarking studies to demonstrate compliance with the arm’s-length principle.
• Assess the opportunity to apply for an Advance Pricing Agreement (APA) as a strategic compliance tool that offers tax predictability and reduces the risk of future disputes. The law now allows the validity of an APA to be extended for up to five fiscal years prior to the year in which the application was submitted.

Furthermore, if an application for the issuance or extension of an APA is under review while a tax audit is ongoing for the same fiscal periods, the audit may be suspended until the application is resolved.

In practice, during a transfer pricing audit, the timeframe granted by the authorities for submitting documentation is usually insufficient for preparing a complete file. For this reason, taxpayers should maintain documentation updated annually to be able to respond promptly to requests.

Conclusion

In a fiscal environment undergoing continuous transformation, transfer pricing is becoming a barometer for tax compliance and transparency. Taxpayers who approach this area strategically - rather than merely as an administrative obligation - are better positioned to handle audits, anticipate risks, and maintain a constructive dialogue with tax authorities.

Investing in the regular update and analysis of transfer pricing policies and, where appropriate, in preventive tools such as Advance Pricing Agreements (APAs) brings tangible benefits: tax certainty, reduced risk of adjustments, and strengthened trust in the relationship with the authorities.