Transfer price

Recently, legislation regarding transfer price has suffered important modifications. The current laws were introduced by the law 23/2006, measures preventing from tax fraud. These measures have been developed by the Real Decreto 1793/2008 by which the income tax rules and procedures are modified.

- All the operations done with related parties must be valued with the principle of freecompetition, (market value)
- The new law sets that taxpayer has to elaborate and keep the documentation related to all the operations.
- Introduction of new sanctions, tax authorities will sanction all de incorrect omitted and false data.

But the main modification is that now the burden of proof lies on the taxpayer.

Taxpayer obligations

| |FY startedbefore 01/12/2006 |FY started as of 01/12/2006 |FY ended as of 19/02/2009 |
|Burden of proof |Tax authorities |Taxpayer |Tax payer |
|Documentation requirements |No |Yes |Yes according to RD/17932008 |
|Sanction regime|In case of adjustment, general |General regime, in case of adjustment|NEW penalty regime |
| |regime |and lack of documentation | |
| | |requirements | |Determining the regular market value

In order to determine the regular market value we have to compare:

-the circumstances of the operations done between related parties
- with the circumstances of the operations done between persons or independent and comparable entities.
We consider that operations are comparable when no significant differences exist in between the to parties ( price of thegood or service, and operational margin). Also comparable analysis can be carried out, although differences arise, the analysis can be carried out with the corresponding adjustments.

This analysis is fundamental to determine the appropriate method of valuation for each operation.

Comparable Analysis:

The following circumstances will be taken in consideration:

1) Goods and servicesspecs
2) Functions of each party
3) Risk assumption of each party
4) Contractual term and conditions
5) Market specs
6) Commercial estrategies

The absence of comparable operations and the no consideration of one of the circumstances detailed above must be justified.

Documentation requirements

Applicable requirements as of 19/02/2009
The documentation must beavailable for the tax authorities from the end of the voluntary term of income tax presentation. Organizations only have to present this information if the tax authority requires it.

The tax authority will not ask for the documentation, but instead for the valuation, to the operations done by:

- Between entities of a tax consolidation group
- Members of a temporary consortium or EconomicInterest Groupings.

The documentation must be referred to the current tax period where the operations are done. But can be valid for upcoming periods, with the proper adaptations.

We distinguish between two types of documentation:
1, Group documentation (Master File)
2, Taxpayer documentation (Country specific file)

GROUP DOCUMENTATION

By group is meant:

- What is established in thearticle 16.3 TRLIS (income tax law)
- The group constituted by a resident entity or not, and its permanent establishments offshore.

1. Group general description, of its organization structure, legal and operative.
2. Identification of the group entities with related operations with the taxpayer entity (liaison diagram)
3. Description of the nature, amounts and flows of the...