On 18th September 2019 Law no. 119/2019 was published in Portugal. This law introduced relevant updates to the Portuguese transfer pricing regime, specifically in what concerns (i) documentation requirements, (ii) the scope of transfer pricing rules, (iii) the adoption of transfer pricing methods, (iv) advance pricing agreements, (v) adjustments to the taxable income and (vi) penalties.
These changes essentially intend to align the Portuguese transfer pricing legislation with the most recent international developments that resulted from the Base Erosion and Profit Shifting (BEPS) project, and can be briefly described as follows:
- Documentation requirements: taxpayers that are monitored by the Large Taxpayers Unit are required to submit transfer pricing documentation to the Portuguese Tax Authority (PTA) within the deadline for the submission of the annual tax and accounting statement (IES);
- Scope of transfer pricing rules: the scope of the Portuguese transfer pricing rules was widened to explicitly cover restructuring processes. As such, now more than ever, it is of utmost importance that (i) taxpayers are able to demonstrate the economic rational and substance of restructuring processes, (ii) that the related party transactions that will arise following the restructuring processes are remunerated at arm’s length and (iii) that taxpayers carefully evaluate whether exit charges should be applied to compensate for the loss of expected future profits resulting from the restructuring processes;
- Adoption of transfer pricing methods: the hierarchy for the application of transfer pricing methods was removed. Therefore, taxpayers are now entitled to adopt any transfer pricing method that provides the most reliable measure of the terms and conditions that would have been agreed between independent parties. Special reference was also made to the use of other methods or valuation techniques in cases where the transfer pricing methods cannot be reliably applied;
- Advance pricing agreements: the term of the advance pricing agreements was extended to a maximum of four years (previously it had been three years);
- Adjustments to the taxable income: the PTA has reinforced its power to perform adjustments to the taxable income in cases where the terms and conditions associated with related party transactions do not follow the arm’s length principle;
- Penalties: a fine of up to €20,000 (plus 5% per each day of delay in fulfilling the obligation) for failure to submit the Country-by-Country notification form (Modelo 54) within the legal deadline was expressly introduced.
This law entered into force on 1st October 2019.
Previously, the Ministerial Order 35/2019 was published on 28th January 2019. This introduced a new transfer pricing disclosure form in the IES with the purpose of providing PTA with more accurate and precise information regarding transfer pricing.
Key takeaways
The amendments represent the most noteworthy changes to the Portuguese transfer pricing regime since its enactment in December 2001, which clearly shows that the PTA has realized the need for placing transfer pricing high on the agenda. Also, the new compliance obligations provide the PTA with tools to perform tax audits in a more efficient way, allowing it to pay special attention to related party transactions that effectively present transfer pricing risk.
As such, an increased scrutiny of the transactions carried out between related parties is expected, especially in the case of the taxpayers that are monitored by the Large Taxpayers Unit.
In this context, we strongly advise taxpayers to proactively manage their transfer pricing risk by performing a thorough analysis to the terms and conditions applied in related party transactions, as well as to review their transfer pricing compliance obligations in light of the abovementioned updates.
For additional information, please contact our transfer pricing specialists in Portugal (https://www.quanteraglobal.com/our-team/).