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- The arm’s length requirement is established in the Income Tax Act (section 8) and applies to a taxpayer’s transactions with resident as well as non-resident associated enterprises.
- Regulation No. 53 of Ministry of Finance ‘Methods for determining the value of transactions conducted between associated persons’ provides the detailed legal framework for transfer pricing and documentation of transactions between related parties.
- It is recommended to follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations upon applying this Regulation, inasmuch these guidelines do not conflict with the Regulation.
- Documentation must be provided at the tax authority’s request within 60 days.
- The difference between transaction value and arm’s length value is taxed with income tax (effective tax rate as at the time of this survey is 20/80), plus 0.06% interest per day calculated from the following day the tax obligation became due.
- CbC reporting rules have been adopted.
- The Estonian tax authority recommends following the OECD Guidelines as long as it does not conflict with effective Estonian law.
- Estonia accepts all standard transfer pricing methods: including the comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split methods. In addition, the law allows for the use of alternative methods if the provided methods cannot be reliably applied due to the circumstances related to the transaction.
- The taxpayer is required to make disclosures (in monthly presented tax declarations) if it is known to the taxpayer that transaction value differs from the market value and shall pay income tax from the difference (effective tax rate as at the time of this survey is 20/80). General information on transactions with related parties must be disclosed together with the annual financial report prepared within six months from the end of the financial year.
- Since 2017 the transfer pricing documentation is comprised of three parts: master file, local file and Country-by-country report.
- The requirement for having documentation regarding TP expands to all persons transacting with intra-group companies.
- The additional requirements for detailed documentation apply:
- for resident credit institution, insurance undertaking and business association registered in a securities market
- if one transaction party is a person situated in a low tax rate territory
- for a resident business association having together with associated persons 250 or more employees, or turnover of €50 million or more, or having a consolidated balance sheet total of €43 million or more
- for a non-resident being active in Estonia via a permanent establishment and having together with associated persons 250 or more employees, or turnover or €50 million or more, or having a consolidated balance sheet total of €43 million or more.
- In 2017, the Estonian Parliament adopted legislation that introduced the CbC reporting obligation for multinational enterprises with consolidated revenue of over EUR 750 million.
- Requirements for the master and local file follow OECD standards.
- The amount and level of detail of the TP document must be sufficient to prove the transfer price to the market value.
- If documents have been prepared in a foreign language, the taxpayer can submit those documents. However, the tax administrator may assign a reasonable deadline for a translated version.
- The taxpayer can submit additional documents besides the standard format if those documents support the TP documentation.
Certain types of transactions (e.g. financial transactions, payments for use of intellectual property, management services, transfer of company, agreements on sharing of expenses), location of a related party in a tax haven, high loan burden of a company, and deficient documentation and unwillingness to cooperate, signaling the lack of thought-out transfer pricing policy in the company.
The indicators of possible transfer pricing risks are generally large transaction volumes between related parties, regularity of such transactions, constant reporting of losses or significant variations in financial indicators compared to the average for comparable companies or economic sectors.
The difference between transaction value and arm’s length value is taxed with income tax (effective tax rate as at the time of this survey is 20/80), plus 0.06% interest per day calculated from the following day the tax obligation became due.
The maximum administrative penalty for non-compliance is €3,200.
- In very general terms, the transfer pricing process can be seen as comparability analysis. Comparability of a controlled transaction between related parties and comparable transaction between not related parties are influenced by a number of conditions and transactional circumstances. In accordance with subsection 3 (2) of Ministry of Finance regulation no. 53, when making decisions on comparability, all of the characteristics of a transaction, parties and environment that can have an influence on the transaction value are analysed. Above all, the following are compared:
- characteristics of the object of the transaction
- functions fulfilled in the context of the transaction that are identified in the course of analysis of activity
- transaction conditions
- economic conditions that influence fulfilment of the transaction
- business strategies of the parties to the transaction.
- Estonia requires documentation of transfer prices to proceed from general requirements for documenting business transactions and the obligation of the detailed documentation in accordance with thorough requirements is mainly imposed on large corporate groups in Estonia – persons whose annual turnover for all related persons is at least 50 million euros and have 250 or more employees or a balance sheet volume of 43 million euros or more.
However, all undertakings must in fact conduct transactions with related persons according to the arm’s length principle, and companies must be capable, if prompted by the tax authority, to substantiate the transactions based on the principles set forth in Minister of Finance regulation no. 53.
Estonian transfer pricing regulation does not have an advanced pricing agreement mechanism in place.
According to the Estonian tax authority taxpayers may request mutual agreement procedure (MAP) assistance under the terms of the relevant tax treaty and/or the EU Arbitration Convention (European Union Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, 90/463/EEC) in order to resolve international tax disputes. A MAP request can be made when a person considers that actions of one or both countries’ tax administrations result or will result in taxation not in accordance with the relevant tax treaty.
- Although all companies transacting with related parties must keep relevant documents, based on the Minister of Finance regulation no. 53 companies are exempt from a full TP documentation requirement if they are not meeting the following criteria (together with related parties):
- EUR 50 million annual sales or
- EUR 43 million balance sheet or
- 250 employees.
- Apart from the formal transfer pricing documentation and general requirement to disclose the transactions with the related parties in the annual reports, there are no additional reporting requirements related to transfer pricing in relation to inter-company transactions.
- No digital service tax is currently enacted.
- No near-future plans to enact a digital service tax.
- The latest focus has been on management and consultation service transactions concluded between related parties.
- Transfer pricing developments are generally in line with international developments in the field.
- As a result of DAC6 (tax intermediary directive) all cross-border arrangements that impact taxation, reporting financial accounts or identifying beneficial ownership must be reported to the tax authorities as of 31 August 2020. The reporting obligation lies mainly on tax advisers and concerns cross-border arrangements implemented as of 25 June 2018.
- The economic fallout of COVID-19 is likely to have a widespread impact and an increase in tax enquiries globally is expected. All multinational companies should be reviewing their potential exposure to transfer pricing enquiries and updating documentation accordingly.