Tranfer pricing - Concepts

Extract from the Chapter 11². Special rules for determining compliance with the arm's length principle when setting a transfer price

Article 226¹⁷. Concepts:
(1) For the purposes of this chapter, the following terms are used:
1) Affiliated person - a person is considered affiliated with another person, including one undergoing insolvency proceedings, if the relationship between them is determined by at least one of the following situations:
a) an individual is considered affiliated with another individual if they are spouses or relatives up to the second degree of kinship inclusive;
b) an individual is considered to be affiliated with a legal entity if the individual owns, directly or indirectly, including shareholdings of affiliates, at least 25 percent of the voting shares or if he effectively controls the legal entity;
c) a legal entity is considered affiliated with another legal entity if it owns, directly or indirectly, including shareholdings of its affiliates, at least 25 percent of the voting shares or if it effectively controls that legal entity;
d) a legal entity is considered affiliated with another legal entity if the third party owns, directly or indirectly, including blocks of shares of persons affiliated with it, at least 25 percent of the voting shares of both the first and second legal entity or if it actually controls their.
A person is considered to have actual control of a legal entity if it is established that he has both the actual and legal ability to make decisions about the activities of the relevant legal entity through:
– appointment or recall of a majority of members of the supervisory body (council) of a legal entity, executive body or a majority of members of the executive body and/or auditor or a majority of members of the audit commission;
– exercising control on the basis of an agreement concluded with a legal entity, one of the provisions of the constituent document or charter of the legal entity, or on the basis of an agreement concluded with other persons holding shares with voting rights of the legal entity.
A person is considered to exercise indirect control if he owns shares of a legal entity with voting rights through another individual and/or legal entity or through several individuals and/or legal entities.
Its permanent representative office is also considered affiliated with a legal entity.
2) An independent person is a person who is not an affiliated person.
3) Transfer price - established or prescribed conditions, rules and pricing methods that exist in commercial or financial relationships between affiliated entities, different from those existing between independent entities.
4) The arm's length principle is an international standard that provides that if the terms of commercial or financial relationships between affiliated persons differ from those between independent persons, then any income that would have been received in favor of one of the persons in the absence of these conditions may be included in that person's income and taxed accordingly.
5) Arm's length price is the price that would be paid by an independent person to another independent person at the same time and in the same place for the same or a similar product or service under fair competition.
6) Transaction - any kind of sale, purchase, provision and receipt of a service, assignment, leasing, credit, loan or any other transfer in any way of any interest or rights to use any tangible or intangible property.
7) Controlled transaction – a transaction made between affiliated persons.
8) A comparable transaction is a transaction made between independent parties, which can be used, due to the similarity of conditions, as a comparison sample for a controlled transaction.
9) Local transaction – a transaction concluded between resident taxpayers, in which one or both taxpayers are residents of free enterprise zones/information technology parks or apply different rates and/or have a different taxable base for business income tax.
10) Cross-border transaction – a transaction made between a resident taxpayer and a non-resident taxpayer located outside the territory of the Republic of Moldova.
11) Preliminary pricing agreement – a decision issued by the State Tax Service, which establishes and justifies the conditions and methods for forming transfer prices during a certain period, related to a controlled transaction/transactions carried out between affiliated persons.
12) Unilateral agreement on preliminary pricing – an agreement issued by the State Tax Service based on the application of the taxpayer, related to a controlled transaction/transactions carried out between affiliated persons.
13) Bilateral/multilateral agreement on preliminary pricing – an agreement issued by the State Tax Service and competent foreign authorities of the states in whose jurisdiction the applicant’s affiliates are located, related to a controlled transaction/transactions carried out between affiliated persons.
14) Competent foreign authority – a competent tax authority authorized to issue an agreement on preliminary pricing for a foreign affiliated company.

(2) The concepts provided in paragraph (1) are supplemented by the concepts provided in the Transfer Pricing Guidelines for Multinational Enterprises issued by the Organization for Economic Co-operation and Development, as subsequently amended/amended (hereinafter referred to as the OECD Transfer Pricing Guidelines).