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2 December 2021

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Portugal Revises Regulation of Transfer Pricing in Line with OECD Guidelines Including Master and Local File Documentation Requirement

Portugal has published Ordinance No. 268/2021 of 26 November 2021, which revises the regulation of transfer pricing in transactions carried out between taxable persons and any other entity under Article 63 of the Corporate Income Tax (IRC) Code, replacing Ordinance No. 1446-C/2001 of 21 December 2001. Ordinance No. 268/2021 takes into account international developments in the area of transfer pricing in recent years, including the 2017 OECD Transfer Pricing Guidelines and other OECD guidance issued as a result of the BEPS project, including guidance on the application of the profit-split method, the approach to hard-to-value intangibles, financial transactions, and permanent establishments. The ordinance covers:

  • General rules on the principle of arm's-length competition, which apply for transactions carried out between an IRC or Personal Income Tax (IRS) taxpayer and any other (related) entity;
  • The scope of application of the rules, including:
    • related transactions carried out between an IRC or IRS taxpayers and a non-resident entity;
    • relations between a non-resident entity and its permanent establishment located in Portugal, or between such permanent establishment and other permanent establishments of the same entity located outside Portugal;
    • relations between a resident entity and its permanent establishments located outside Portugal or between them;
    • related operations carried out between entities residing in Portugal that are IRC or IRS taxpayers;
  • Adjustments to taxable income where transactions between IRC or IRS taxpayers and non-resident entities are not at arm's length;
  • Methods of determining transfer pricing under the arm's-length principle, including:
    • application of the transfer pricing methods;
    • comparability analysis;
    • determination of the most appropriate method;
    • comparability factors; and
    • specific guidance for each of the five standard transfer methods;
  • Application of the arm's length principle in specific cases, including cost-sharing agreements, provision of intra-group services, operations involving intangibles, and restructuring operations;
  • Ancillary obligations of taxable persons, including that taxable persons must prepare and maintain transfer pricing documentation including elements capable of proving:
    • arm's length terms and conditions agreed upon, accepted, and practiced in transactions with related entities; and
    • the selection and use of the most appropriate method for determining transfer prices, which provides a closer approximation to the terms and conditions practiced by independent entities, and which ensures the highest degree of comparability of operations or series of operations carried out with others by independent entities in a normal market situation; and
  • Corresponding transfer pricing adjustments, including requests for adjustment to avoid double taxation under MAP.

With respect to transfer pricing documentation, several important changes are made as compared to the prior ordinance, including:

  • Taxpayers are exempt from the documentation requirements if, in the period to which the obligation relates, total annual income is less than EUR 10 million (up from EUR 3 million);
  • Even if the annual income threshold is exceeded, an exemption from the documentation requirement applies in respect of operations whose value in the period has not exceeded EUR 100,000 per counterparty or EUR 500,000 in total, considering the respective market value;
  • The above exemptions do not cover related operations carried out with natural or legal persons residing outside Portugal that are subject to a clearly more favorable tax regime as per Article 63-D of the General Tax Law, which includes jurisdiction meeting certain criteria such as low or no taxation;
  • The above exemptions do not preclude the requirement to prove operations are at arm's length when requested;
  • The required documentation elements are provided in Annex I of Ordinance No. 268/2021, including new Master File and Local (Specific) File documentation, which must be delivered together;
  • Further supporting documentation requirements are provided in Annex II of Ordinance No. 268/2021 including relevant official publications, reports, studies and databases, market study reports, price lists, contracts, technical studies, and other documentation produced by the taxable person or by third parties, even if they have not been produced specifically for transfer pricing purposes;
  • Specific documentation requirements are provided for intra-group cost-sharing and service provision agreements in Annex III and Annex IV of the Ordinance; and
  • For taxable persons qualified as small or medium-sized companies and not subject to monitoring by the Large Taxpayers Unit, a simplified documentation requirement applies if not exempted based on the above income and operations thresholds.

Ordinance No. 268/2021 entered into force on 27 November 2021, except for Chapter IV on documentation requirements, which is effective for tax periods beginning on or after 1 January 2021. Ordinance No. 1446-C/2001 is revoked with the entry into force of Ordinance No. 268/2021, although it is provided that Chapter IV on documentation requirements of the older ordinance continues to apply until the tax period beginning or after 1 January 2020 (i.e., beginning before 1 January 2021).

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