Transfer Pricing Penalties

Did you know that if you don’t comply with the obligations related to transfer pricing in transactions between related entities, you can be penalized? In this post we will tell you all you need to know about the transfer pricing penalties regulated in the Corporate Income Tax Law, including the infractions and penalties established by law and what measures you can take to avoid infringement.

Penalties for non-compliance with transfer pricing: regulations

The transfer pricing penalties are regulated in article 18.13 of the Corporate Income Tax Law. This regime focuses on the non-compliance with the two main obligations companies or individuals have when carrying out related-party transactions:

• The obligation to prepare and to keep the specific documentation related to the transaction, as established by law.
• The obligation to provide certain information on related-party transactions.

Transfer pricing abuse

There are several offenses regulated by the corporate income tax law regarding transfer pricing, as follows:

Failure to provide documentation, even if there is no valuation adjustment.

This infraction is committed by those entities that must keep at the disposal of the Tax Authorities the documentation of the related transactions, but fail to provide such documentation or they provide it incompletely or with false data, even if there is no valuation adjustment made by the administration. In these cases, arguing that the transaction has been made according to the market value is not enough, since the legally established documentation has not been provided.

Failure to provide documentation and valuation adjustment.

In this case, the infraction is the same as described previously, but there is also a substantial valuation misstatement, so the Tax Authorities need to make a valuation adjustment.

Declaring a different value than the one derived from the documentation with valuation adjustment.

In this case, the taxpayer is obliged to document the related transaction, and although he/she has done so and the documentation is correct, he/she has not included the market value derived from such documentation as correct in the corporate income tax declaration, the personal income tax or the non-resident income tax, when adjustments have been made by the Tax Authorities.

What penalties can be imposed for committing transfer pricing abuse?

There are different types of penalties:

• In the case of documentary noncompliance without valuation adjustment, the penalty is 1,000 euros for each piece of data and 10,000 euros for each group of omitted or false data. The maximum limit of the penalty will be the greater of the following amounts:
  • 10% of the total amount of the operations subject to IS, IRPF or IRNR.
  • 1% of the net amount of the turnover.

• In the case of documentary noncompliance with valuation adjustment or declaration of a value different from the market value in the documentation with valuation adjustment, the penalty will be 15% of the amount resulting from the corrections applied to each transaction. In addition, other penalties derived from the General Tax Law may be imposed.

Can reductions be applied to penalties?

Penalties can be reduced by application of the regulation of the General Tax Law. The reductions will be as follows:

• 50% for those cases in which an agreement act is signed. An appeal against the penalty cannot be filed and the debt must be paid during the voluntary period.
• 30% in cases of agreement with the regularization proposal. In this case, an appeal against the regularization must be filed.
• If the 30% agreement reduction is applied, a 25% reduction can be applied if the entire penalty is paid during the voluntary payment period or within the deadlines set in the approved deferment or installment agreement by the Tax Agency.

In addition to the above, an additional penalty may be imposed in the event of resistance, obstruction, excuse or refusal to comply with the actions of the Tax Authorities. These cases occur, for example, in the event of failure to comply with a requirement that has been correctly notified by the Tax Agency or coercion of an official of the tax administration.

On the other hand, it is important to consider that the sanctioning regulation will only have retroactive effect when it is favorable to the interested party or taxpayer. In short, if you have carried out a transaction between related entities or people, it is important that you have an expert tax advisor in this type of transactions in order to comply with the regulations on transfer pricing in transactions between related persons or entities, and to avoid that the Tax Agency imposes penalties for the commission of the offenses provided in the Corporate Income Tax Law, as we have seen.