Taxing authority and tax law
Tax authority: The Tax and Customs Board
Tax law:
- Estonian Income Tax Act Article 50 sections 4–6
- Article 53 section 46
- Article 14 section 7
- Article 50 section 7 — documentation requirements
Current Estonian transfer pricing legislation is effective as of 1 January 2007. Based on the amendments to the Income Tax Act, which are applicable as of 2011 (and not as of 2010 as initially anticipated), the definition of related parties shall be broadened, thus expanding the list of persons who must conclude transactions at arm’s length to persons who have a common economic interest or a prevalent influence over another person.
Furthermore, persons formally not related based on the current Income Tax Act, but who in spite of the formal unrelated status undertake transactions that decrease the taxable income in Estonia, are considered from 2011 as related entities and should undertake transactions at arm’s length.
Relevant regulations and rulings
The Ministry of Finance issued a transfer pricing regulation on 10 November 2006 (No. 53), which came into force on 1 January 2007. The regulation sets out in more detail the principles for determining arm’s length prices, and it also establishes documentation requirements. There have been a few court rulings and an increasing number of tax proceedings on transfer pricing issues in Estonia.
OECD guidelines treatment
The tax authorities follow the OECD Transfer Pricing Guidelines. Nevertheless, the domestic legislation is the prevailing law.
Priorities/pricing methods
The Tax and Customs Board accepts the CUP, Resale Price, Cost Plus, Profit Split, Transactional Net Margin methods or, if necessary, any other suitable method. The methods are not hierarchical and are all treated as equal. However, if available, internal and Estonian domestic data is preferred for determining arm’s length prices.
Transfer pricing penalties
If the required documentation or the relevant tax return is not submitted in time, the fine may be as high as EUR 3,200. In case of intentional submission of wrong information on the tax return that results in less tax paid, a criminal penalty may be imposed and the fine may be as high as EUR 15m. If tax is assessed, interest from the tax amount at the rate of 0.06% per day will be imposed retroactively as of the date when the tax was supposed to be paid.
Penalty relief
There is no penalty relief if a taxpayer has the necessary documentation, but the transfer pricing is determined to be non-arm’s length and there is an income tax adjustment. However, imposing a fine is probably more an exception than a rule. Interest for the delay of the tax fine payment is always enforced.
Documentation requirements
All entities must be able to prove that transactions with related parties take place at arm´s length. Yet, an additional documentation requirement is imposed in the following cases if at least one of the preconditions is met:
- Resident credit institution, financial institution, insurance agency and listed company
- If one party of the transaction is a resident of a low tax rate territory
- Resident legal person or non-resident who has a permanent establishment in Estonia
- who has more than 250 employees with related parties or
- whose turnover, including related-parties, in the previous financial year was at least €50m or
- whose consolidated net assets were at least €43m
Categories of documentation required:
- Company analysis
- Industry analysis
- Functional analysis
- Economic analysis
Documentation deadlines
There is no deadline for preparing transfer pricing documentation. However, taxpayers are obliged to submit the documentation within 60 days upon the request of the tax authority.
Statute of limitations on transfer pricing assessments
The statute of limitations period for making an assessment of tax is three years. In the event of intentional failure to pay or withhold an amount of tax, the limitation period for making an assessment of tax is six years. A limitation period starts from the due date of submission of the tax return, which was not submitted or which contained information that caused an amount of tax to be calculated incorrectly.
Return disclosures/related-party disclosures
An annual report including a description of transactions with related parties is required to be filed within six months from the end of the relevant financial year. If the taxpayer has the obligation to prepare transfer pricing documentation, a respective analysis must be carried out per financial year.
The documentation does not have to be filed with the tax return.
Audit risk/transfer pricing scrutiny
The taxpayers in Estonia run a high risk that transfer prices will be scrutinized during a tax audit. However, today the overall transfer pricing tax risk for Estonian taxpayers can be evaluated as medium.
APA opportunity
Currently, the Estonian tax laws do not provide any opportunity to conclude APAs. Yet, the transfer pricing methodology and the general approach for determining transfer prices can be verified with the authorities within the scope of a binding ruling request.
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