Global Tax Alert | 3 July 2013

Portugal's Madeira's International Business Center regime transfer pricing deadline 15 July

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The new Madeira International Business Center (MIBC) regime (in force from 1 January 2012 until the end of 2020) provides, among other tax incentives, reduced corporate income tax rates of 4% (in 2012) and 5% between 2013 and 2020.

Given the new regime, companies are reminded of the importance of preparing and keeping available for inspection transfer pricing documentation covering the last four years, prepared according to the Portuguese requirements laid down in Decree-Ruling no 1446-C/2001. Transfer pricing requirements having always been in force for companies licensed to operate in MIBC. The fact that the majority of companies operating in the MIBC are no longer entitled to benefit from corporate income tax exemption (which was in force until the end of 2011), but benefit now from reduced corporate income tax rates, underscores the importance of transfer pricing documentation.

Taking into consideration the Portuguese transfer pricing framework, MIBC licensed companies should take the following action plan into consideration:

Documentation requirements

Whenever a taxpayer’s annual turnover and other income exceeds, in the prior year, €3 million, the preparation of transfer pricing documentation in the Portuguese language is mandatory. The documentation must provide evidence of market parity regarding the terms and conditions agreed, accepted, and practiced in the operations carried out with related parties, as well as the selection and utilization of the best method.

Documentation deadline

In Portugal, the documentation must be prepared by the 15th day of the seventh month after the corresponding tax year-end. For companies adopting the calendar year, documentation must be prepared by 15 July.

Transfer pricing returns

Transfer pricing information is disclosed on the Annual Tax and Accounting Return (IES) in its transfer pricing annexes. Taxpayers must indicate therein that the requirement is met. As noted above, the deadline to submit IES is 15 July for companies adopting the calendar year.

Statute of limitations on transfer pricing assessments

In Portugal, assessment is possible during the four year period after the end of the assessment year. All Portuguese-based companies have a statutory obligation to keep available (at the Portuguese establishment or premises) and in good order, their transfer pricing documentation for the relevant year for a 10-year period.

Transfer pricing penalties

Transfer pricing rules were extended by the publication of specific legislation on penalties for noncompliance with the documentation obligations in 2012. The General Regime on Tax Infractions (RGTI) addresses the following penalties:

  • The taxpayer stated in the IES that transfer pricing documentation is prepared and despite being notified by the tax authority to submit it, was late in its delivery. The penalty related to late delivery can reach €20,000 per year, per company.
  • The taxpayer does not state in the IES that transfer pricing documentation is prepared but was notified by the tax authority to submit it. The penalty for noncompliance related to omission/lack of evidence in the Annual Tax and Accounting Return can reach €45,000 per year, per company.
  • The taxpayer stated in the IES that transfer pricing documentation is prepared and was notified by the tax authority to submit it, but the documentation was not prepared. The penalty for noncompliance related to improper fulfillment can reach €75,000 per year, per company.
  • The taxpayer stated in the IES that transfer pricing documentation is prepared but refused to submit it to the tax authority (when duly requested). The penalty for noncompliance related to the refusal of transfer pricing documentation can reach €150,000 per year, per company.

How can EY help?

EY has a team of transfer pricing experts who can assist multinational groups to prepare transfer pricing documentation reports and assess compliance with Portuguese transfer pricing requirements.

For additional information with respect to this Alert, please contact the following:

Ernst & Young, S.A., Lisbon
  • Paulo Mendonca
    +351 21 791 2045
    paulo.mendonca@pt.ey.com
  • Pedro Simões Pereira
    +351 217 912 142
    pedro.simoes-pereira@pt.ey.com

EYG no. CM3604