Tax Alert: Transfer prices during the energy crisis

Before Christmas, in response to the energy price hike, the General Financial Directorate (GFD) issued a statement on how to take the extraordinarily increase of such expenses into account when transfer prices are determined.

The published statement is focused on the question of how to take into account the increase in energy costs in the case of limited-risk entities when assessing their profitability (such as contract or custom producers, which usually set transfer prices with regards to other companies in the group based on costs and a mark-up). According to the GFD, energy costs are undoubtedly included (should be included) in the calculation of the profitability indicator, and the fact that they have increased exceptionally due to the energy crisis does not play a part. In other words, the GFD states that the increase in energy costs itself will not be sufficient reason for companies not achieving an arm´s length profitability.

At the same time, the GFD adds that if the increase in energy prices in a particular sector is so significant that it cannot be fully reflected in product prices, it will be reflected in a decline in the profitability achieved by comparable independent companies, since these independent companies are also burdened with fluctuations in energy prices. In the GFD's opinion, there is therefore no reason to change the way prices are established between related entities due to the extraordinary increase in energy prices, as this will result in a decline in the profitability on the market, from which the profit mark-up used for determination of transfer prices between related companies within the group is derived. The regularly updated comparability analysis (benchmarks) prepared to derive arm´s length profitability will therefore play a key role in determining and subsequently documenting compliance with the arm’s length principle in the context of the GFD's opinions presented.

Therefore, in the context of the opinions presented by the GFD in this statement, an increased number of tax audits concerning the years affected by the energy crisis (starting in 2022) can be expected in the future, focusing on limited-risk entities with a loss or a significant decline in profitability. We therefore recommend that the subject of transfer prices should receive special attention and that the transfer prices applied in 2022 should be verified in a timely manner in the context of the opinions presented.

Although the GFD's statement is specifically aimed at the energy price hike, we note that the GFD claims in this statement that the issue of exceptionally increased costs in connection with rising energy prices is seen in a similar way as the increase in any costs arising from the COVID-19 pandemic. It can therefore be concluded that, according to the GFD, the increase in costs due to the COVID-19 pandemic (just like due to the energy crisis) is not  itself a reason for moving away from the current practice and for changing price settings between related entities.

If you are interested in any more information on this subject, please do not hesitate to contact our leading transfer pricing experts.