Transfer pricing provisions were initially introduced in Greece, in a simplified form, in 1980 (Article 50 L 1041/1980, which was later incorporated in Article 39 of Law No. 2238/1994, the previously applicable income tax code). The rules were subject to regular revisions, gradually extending their scope of application and aligning them with international taxation trends. However, transfer pricing rules were not commonly referred upon by tax authorities, which, until 2008, were known to scrutinise related-party transactions primarily on productivity grounds, with a particular focus on royalties and service fees charged to domestic enterprises. Isolated transfer pricing audits up to that time mostly concerned transactions performed between domestic related parties.
2008 was a milestone in the field of transfer pricing, as it was the first year that domestic enterprises were required to comply with transfer pricing documentation rules in Greece (Article 26, Law No. 3728/2008). Since then, the scope of transfer pricing provisions has been gradually revised and extended, leading to the currently applicable backbone transfer pricing provisions (Articles 50 and 51 of Law No. 4172/2013, the Income Tax Code (ITC)). The current legal framework fully endorses the arm's-length principle, as defined in Article 9 of the OECD Model Tax Convention and interpreted by the OECD Transfer Pricing Guidelines, following the revisions introduced as a result of Actions 8–10 of the OECD BEPS project. Article 50 adopts the arm's-length principle with respect to all types of related party transaction, whereas Article 51 refers exclusively to business restructurings involving related parties.
Transfer pricing provisions apply as regards corporate income taxation, whereas indirect taxes are not impacted from transfer pricing readjustments. There are no separate transfer pricing rules with respect to the taxation of capital.
Transactions between legal entities and individuals fall within the scope of transfer pricing, but may lead to the readjustment of the taxable basis of the legal entity only.
According to Article 2 of the ITC, an individual or legal entity participating directly or indirectly in the capital or management of an enterprise, is defined as a related party for transfer pricing purposes. A 33 per cent (instead of the previously applicable 50 per cent) threshold applies with respect to the minimum direct or indirect participation in the capital or the exercise of voting rights, above which entities are defined as related. The exercise of managerial control or decisive influence over an enterprise is also an element to define related parties, irrespective of any participation in the controlled enterprise's capital or voting rights. According to tax administration guidelines (POL 1142/2015) the exercise of managerial control or decisive influence is a matter to be assessed case by case. The leverage ratio of an enterprise is identified as an indication of the exercise of decisive influence of the lender (excluding financial institutions), over the borrowing enterprise. The same is noted with respect to enterprises entering into supply arrangements on an exclusivity basis, including an end price setting mechanism.
Dealings between a foreign head office and its domestic permanent establishment also fall within the scope of transfer pricing provisions.
ii FILING REQUIREMENTS
Transfer pricing reporting and documentation requirements are set out in Article 21 of Law No. 4174/2013 (the Code of Tax Procedures (CTP)). The content of local transfer pricing files is set out in Ministerial Guidelines that predate the OECD Report on BEPS Action 13. Therefore, the minimum required content of domestic transfer pricing documentation is not yet fully aligned with BEPS Action 13, particularly in relation to value chain analysis.
As regards documentation, domestic enterprises, including Greek permanent establishments of foreign enterprises, should annually draft local transfer pricing documentation. The deadline for drafting documentation is concurrent with the one for filing of the annual corporate income tax return. De minimis thresholds apply, namely an overall value of related-party transactions of up to €100,000 per annum, for enterprises with an annual turnover of less than €5 million. The transaction value threshold rises to €200,000, for enterprises with an annual turnover exceeding €5 million. In the event of a tax audit, the local transfer pricing file should be submitted in Greek, within 30 days following request.
Enterprises bearing the obligation to prepare a transfer pricing file are also subject to annual reporting of the related-party transactions performed during the reported fiscal year. The deadline for annual reporting expires concurrently with the deadline for filing of the annual corporate income tax return.
Finally, Greece has enacted legislation introducing the automatic exchange of country-by-country reports among EU member states and OECD Multilateral Competent Authority Agreement signatory jurisdictions. Country-by-country reporting obligations apply to multinational enterprise groups of an annual consolidated turnover exceeding the amount of €750 million. The first reporting year is the one starting after 1 January 2016. Surrogate reporting and local notification requirements have also been adopted.
iii PRESENTING THE CASE
i Pricing methods
All OECD acceptable transfer pricing methods are applicable in the Greek transfer pricing environment, as confirmed by Article 50 ITC, which explicitly refers to the OECD Transfer Pricing Guidelines as the appropriate tool to interpret and apply domestic transfer pricing rules. Traditional methods (the CUP, resale minus and cost-plus method) are preferable compared to transactional methods (the transactional net margin method and profit split method (Ministerial Decision POL 1097/2014, as amended by POL 1144/2014). Rejection of traditional methods should be appropriately justified in local transfer pricing documentation, prior to selecting the application of one of the transactional methods.
Both internal and external comparables are acceptable. Contemporaneous comparables are required upon application of a CUP method. As regards one-sided methods referring to profit level indicators, reference to external comparables should cover a three-year test period and should include a set of at least five comparables. Specific guidance is provided on the use of databases for the selection of external comparables. The tax authorities use the Amadeus database (Bureau van Dijk), as do most of the documenting enterprises. Financial data of selected external comparables should be refreshed annually, whereas a new search for comparables should take place once every three years.
Profit level indicators ranging between the lower, median and upper quartile of an interquartile range are, in principle, acceptable, without an obligation for the taxpayer to apply the median. However, if the tax authorities reject the external comparables presented by the taxpayer and conduct a new search for comparables, they would in practice apply the median of the interquartile range defined as a result of the new search.
As regards business restructurings in particular, pursuant to Article 51 Subsection (c) ITC, consistency with the arm's-length principle in the context of a business restructuring should be proven 'by means of reference to other comparable cases', therefore by application of a CUP method. However, according to the same provision, if the application of a CUP method is not feasible, application of business valuation methods is also suggested, with a preference towards the discounted cash flow method with reference to the future profits that are expected from the going concern being transferred and are linked with the relevant functions and all related underlying assets. According to Subparagraph (d), the two methods are not meant to be the sole options available to the taxpayer, who may apply any other method in order to prove consistency with the arm's-length principle.
iv INTANGIBLE ASSETS
Information on the ownership of intangible assets in the group as well as related-party transactions for the licensing of rights on intangible assets form part of domestic transfer pricing documentation.
The role of each related party in the development, enhancement, maintenance, protection and exploitation (DEMPE) functions of intangible assets is an element of increasing significance, in the scrutiny of related-party transactions between domestic licensees and foreign IP-holding entities. There are no explicit restrictions on the tax deductibility of royalty payments, although Greek tax authorities have traditionally placed an increased focus on the audit of such payments. According to Article 23 ITC, payments made to enterprises resident in preferential tax regimes (regimes offering an income tax rate that is lower than 50 per cent of the one applicable in Greece) are subject to increased scrutiny, although the arm's-length principle prevails as regards their tax deductibility.
Taxpayers may apply for a unilateral, bilateral or multilateral advance pricing agreement (APA), which comprises a decision of the Director of Independent Authority of Public Revenues on the appropriate set of criteria for the determination of transfer prices over a fixed period of time, that may not exceed four years (Article 23 CTP and Ministerial Decision POL 1284/2013). Rollback of the APA is not allowed under Greek law. Greek tax authorities have introduced the option of a preliminary procedure that should allow the taxpayer to discuss the case with the competent authority on an informal, non-binding basis. The purpose of the preliminary procedure is to explore whether the initiation of a formal APA procedure would lead to the intended result. Entering into an APA with the Greek tax authorities may require anything between 18 months (as regards a unilateral APA) and 36 months (as regards a bilateral or multilateral APA). The Independent Authority of Public Revenues has the right to further extend the timeline, if necessary.
A predecessor of the APA, focusing particularly on domestic enterprises or branches providing services to their foreign related enterprises or their foreign head office, is the cost-plus regime set out in Articles 27 to 35 of Law No. 3427/2005. Qualifying entities may obtain a licence for their operation in Greece, confirming a fixed markup to be applied on their total costs. The licence is renewed every four years, whereas during its term, qualifying entities are exempt from transfer pricing documentation and reporting requirements.
Greek tax procedure rules do not set out a stand-alone framework for transfer pricing audits. Transfer pricing is therefore part of the items assessed by tax authorities in the context of an ordinary tax audit.
A tax audit commences with the issuance of a tax-audit order along with a request for the taxpayer to present a full copy of the local transfer pricing file for each fiscal year under audit, translated in Greek, within a 30-day deadline.
While processing the transfer pricing file and related supporting documentation, tax authorities may raise questions and request additional material, particularly in relation to external comparables.
Once the tax inspectors have completed the review of the submitted transfer pricing file and related supporting documentation they draft a preliminary tax audit report presenting their findings, the proposed transfer pricing readjustment and the corresponding amount of income tax to be assessed.
The preliminary tax audit report is officially served to the taxpayer along with the preliminary tax assessments. The taxpayer is entitled to respond to the preliminary tax audit findings in writing, within a 20-day period. This is an evidence-intensive stage of the dispute, whereby the taxpayer's arguments should be supported by pertinent documentation, particularly in relation to the selection of transfer pricing methods, the reliability of external comparables and any proposed adjustments to the financial results of the selected set of comparables. The final tax assessments, upholding or disregarding the taxpayers' views, are issued within up to one month following this.
Tax audits should be carried out and tax assessments should be issued within a five-year period starting at the end of the year within which the relevant corporate income tax return should have been duly filed (Article 36, Paragraph 3 CTP). Greek tax law does not lay down different time limits for each stage of the tax audit process. The applicable statute of limitation, as of 1 January 2014, is extended to 20 years, should the tax audit findings result in tax evasion (Article 36, Paragraph 3 CTP). However, according to recent ministerial guidance, transfer pricing readjustments should not be treated as resulting in tax evasion (Ministerial Decision POL 1209/2017).
Transfer pricing dispute resolution is governed by the same procedural rules that govern all tax disputes in Greece.
Once the final tax assessments are served to the taxpayer, the latter is entitled to challenge them by lodging an administrative appeal with the Dispute Resolution Directorate of the Independent Authority for Public Revenue (Article 63 CTP and Ministerial Decision POL No. 1064/2017). The latter should review the taxpayer's administrative appeal on both the law and the merits. Said remedy should be lodged within a 30-day deadline from the service of the final tax assessment to the taxpayer (i.e., within 60 days for taxpayers seated abroad). The above administrative agency ought to review the case within a 120-day period. Within the aforementioned period, the Dispute Resolution Directorate should either deliver a decision in writing, or otherwise it is deemed that the administrative appeal is tacitly rejected on the expiry of the above deadline.
Filing of an administrative appeal suspends payment of 50 per cent of the amount of tax and penalties assessed on the taxpayer. However, default interest, calculated at an 8.76 per cent annual rate, accrues up to the time of payment of the full amount to the state. Further, depending on the amount of the tax assessment, safeguarding measures may be imposed on the audited legal entity and the managing directors. Taxpayers may therefore opt, from a practical perspective, to pre-pay 100 per cent of the income tax and penalties assessed upon filing of the administrative appeal.
If the administrative appeal is sustained, the tax assessment is repealed, whereas any amount of tax and penalties already paid to the state is refunded to the taxpayer. In the event of full or partial rejection of the administrative appeal, the taxpayer has the right to seek a review of the case before the administrative courts. The deadline to institute the legal proceedings is within a 30-day period (i.e., within 90 days for taxpayers seated abroad) (Article 64, Paragraphs 2 and 6 of the Code of Administrative Procedure) starting either from the date that the 120-day period has expired, or after the notification of the rejecting decision of the Head of the Dispute Resolution Directorate.
In tax disputes, the judicial competence of the administrative courts is contingent to monetary thresholds; should the tax assessed exceed the amount of €150,000 the case will be heard by the Administrative Court of Appeal. Otherwise, where the amount of the tax assessed does not exceed the amount of €150,000 the case is submitted to the jurisdiction of the Administrative Court of First Instance. Surcharges, penalties, fines on any other amount additionally assessed do not count in measuring the above thresholds (Article 6 of the Code of Administrative Procedure).
Irrespective of the court in which the case will be introduced, the judicial review consists of the lawfulness and the merits of the case. Only the decisions of the Administrative Courts of First Instance could be reviewed by the appellate court, should specific requirements set forth in law.
In terms of timing, transfer pricing disputes exceeding the €150,000 monetary threshold should be resolved at the level of the Court of Appeals within 18 to 24 months following filing of the judicial appeal. The decision of the Court of Appeals is immediately enforceable.
Finally, once all court instances are exhausted, the case may be brought to the Supreme Administrative Court, should specific procedural requirements set forth in the law be met (Article 53 PD No. 18/1989). The revision proceedings before the Supreme Administrative Court strictly involve the review of the lawfulness of the lower court's judgment.
ii Recent cases
Case law on related-party transactions is built around two pillars: the tax deductibility of intra-group charges, which was a matter commonly raised by tax authorities until 2008; and application of the arm's-length principle and related compliance with transfer pricing documentation rules for fiscal year 2008 onwards. Owing to the considerable duration of judicial proceedings, a significant number of decisions refer to regimes that are not currently applicable as such. However, certain decisions of the Supreme Administrative Court still serve as valuable reference for the interpretation and application of currently applicable rules.
A number of Supreme Court cases deal with the matter of defining related parties, with a particular focus on elements establishing a relation of managerial control or economic dependence or control.2
Other cases that remain relevant refer to the benefit test conducted for purposes of substantiating the tax deductibility of intra-group royalties, service fees charged to domestic enterprises3 and domestic branches of foreign enterprises.
A number of decisions have dealt with the question on who bears the burden of proving compliance with the arm's-length principle. Prior to the introduction of transfer pricing documentation rules, the burden lay with the tax authorities. Intention to evade the payment of taxes was at that time also an element that should be proven by tax authorities for a transfer pricing readjustment to be valid.4 Following introduction of transfer pricing documentation rules, the burden of proof has been shifted to the tax authorities. However, as long as the taxpayer produces the appropriate transfer pricing documentation, the burden is shifted back to the tax authority, which is required to justify any challenge of the taxpayer's position (e.g., by proving the inappropriateness of the selected transfer pricing method or the non-reliability of the selected comparables). The Administrative Court of Appeals verified that the tax authority may not proceed to creating a new set of comparables without justifying the reasons for rejecting the one selected by the taxpayer.5
Although fragmented, recent decisions of the Court of Appeals seem to set the focus on documentation and engage in analyses of comparability, but to also touch upon issues regarding the proportionality of documentation-related penalties that were imposed under previously applicable regimes.6
viii SECONDARY ADJUSTMENT AND PENALTIES
Greek law does not provide for secondary adjustments in the field of transfer pricing. Any transfer pricing readjustment resulting from a tax audit shall lead to the increase of the taxpayer's taxable profits and the assessment of corporate income tax (currently applicable at a 29 per cent rate). Penalties are also imposed for the initial filing of an inaccurate tax return at a rate of up to 50 per cent over the amount of income tax assessed. Default interest accrues at an 8.76 per cent annual rate, from the time of filing of the initial income tax return for the audited fiscal year and up to the time of full payment of the tax assessed.
Without prejudice to the penalties for inaccuracy of tax returns filed, documentation related penalties also apply, as follows:
- delayed or inaccurate reporting of intra-group transactions triggers a penalty ranging between €500 and €2,000, calculated at a rate of 0.1 per cent over the value of relevant intra-group transactions. In cases of inaccuracy, the penalty is only imposed provided the inaccuracy affects more than 10 per cent of the total value of the reported transactions;
- revisions to the initial reporting of intra-group transactions are not sanctioned and do not impact the value of the reported transactions. Revisions of values exceeding €200,000 trigger a fine of between €500 and €2,000;
- failure to report intra-group transactions triggers a penalty of up to €10,000, calculated at a rate of 0.1 per cent over the total value of intra-group transactions that should have been reported;
- failure to submit a transfer pricing file in the event of a tax audit is sanctioned by a fine of €20,000. The same fine applies if the file is submitted later than 90 days following a relevant tax authorities request;
- delayed submission of the transfer pricing file in the event of a tax audit is sanctioned by a fine of €5,000 if the file is submitted up to 60 days following request. The fine rises to €10,000 if the file is presented between the 61st and 90th day following a tax authority request;
- the non-filing of a country-by-country report triggers a penalty of €20,000, whereas a penalty of €10,000 applies in the event of inaccurate or late filing; and
- criminal liabilities may arise in the event that a transfer pricing readjustment is classified as criminal tax evasion within the scope of Article 66 CTP. Tax evasion is defined as the intentional concealment of income or capital leading to the non-payment of taxes exceeding specific thresholds.
A €100,000 threshold applies with respect to corporate income taxation. However, the Greek tax authorities have recently clarified by way of Ministerial Decision POL 1209/2017 that the assessment of corporate income tax of an amount exceeding €100,000 does not constitute tax evasion to the extent that such assessment results from transfer pricing readjustments.
ix BROADER TAXATION ISSUES
i Diverted profits tax and other supplementary measures
There is no diverted profits tax provision applicable in Greece. However, the ITC and the CTP set out a number of rules that aim to effectively combat artificial arrangements aiming at tax avoidance.
By way of indication, Article 38 of CTP sets out a General Anti-Abuse Rule, according to which tax authorities may reclassify any artificial arrangement that aims to the avoidance of taxes. In the same context, according to Article 4 of ITC, the place of effective management is a key element to define a legal entity's state of tax residence.
According to Article 23 ITC, payments to entities established in non-cooperative jurisdictions or preferential tax regimes are not recognised as tax-deductible, unless the taxpayer proves that such payments are made in the ordinary course of business and do not aim in the avoidance of taxes. Preferential tax regimes are defined as the ones offering an income tax rate that is lower than 50 per cent of the one applicable in Greece. Payments to related parties established in preferential tax regimes are eventually tested under the arm's-length principle.
Article 66 of the ITC introduces a Controlled Foreign Corporation (CFC) rule, pursuant to which undistributed profits earned by a CFC are added to the taxable profits of the shareholder, under the following conditions:
- a shareholder directly or indirectly controls the foreign corporation;
- the CFC is tax-resident in a non-cooperative jurisdiction or in a jurisdiction with a preferential tax regime;
- more than 30 per cent of the income earned by the CFC is classified as passive income (e.g., interest, royalties, dividends); and
- more than 50 per cent of such passive income derives from related-party transactions.
Article 49 of the ITC sets out an earnings-stripping rule. As applicable from 1 January 2017, net deductible interest, which is the amount by which interest expenses exceed interest revenues is limited to 30 per cent of EBITDA (earnings before interest, taxes, depreciation, and amortisation) under Greek accounting principles. Moreover, this limitation applies only if the net interest exceeds €3 million per year. The disallowed interest expenses can be carried forward indefinitely, whereas credit institutions are exempt from such rules.
Finally, interest expenses paid to independent entities, other than financial institutions and limited companies issuing bond loans, are deductible to the extent that the interest rate agreed does not exceed the interest rate that would have been payable on revolving lines of credit provided to non-financial institutions.
ii Double taxation
Although Greece has incorporated Article 25 of the OECD model on most of its bilateral tax treaties and has ratified the EU Arbitration Convention, application of mutual agreement procedure (MAP) processes has been stagnating, as demonstrated by relevant OECD statistics. This has mostly been due to the lack of legal and procedural framework.
Greece, having committed itself to the implementation of the OECD BEPS Action 14 minimum standard, enacted legislation required to establish clear procedural rules on access to and use of the MAP. Application of the aforementioned legislation has been rendered possible after several procedural details (the competent authority, form and substance requirements, compatibility with cases pending before court, legal type and results of MAP decision, communication requirements, etc.) were determined by means of administrative guidelines. All matters stipulated are applicable to MAP applications filed after the issuance of these guidelines; pending cases shall be updated appropriately to fulfil the conditions set therein.
Despite these developments, certain issues concerning the implementation of an MAP decision leading to tax refund for a Greek tax resident remain formally unaddressed by tax authorities, such as the type of administrative act that may allow a tax refund for a fiscal year that has previously been finalised, following completion of an ordinary tax audit.
iii Consequential impact for other taxes
Transfer pricing adjustments do not have an impact on the taxable base for VAT purposes according to Greek law.
However, retrospective price adjustments may impact the value of goods used for customs purposes. On the basis of relevant administrative guidelines concerning the determination of customs value, customs authorities should examine in the context of their audits whether post-import amendments of prices invoiced to importers by related (non-EU) suppliers have taken place. Further, the decision of the Court of Justice of the European Union in the Hamamatsu case (C-529/16) may give rise to arguments of the customs authorities that the customs value declared upon import does not reflect the actual transaction value (due to the retrospective price adjustments). In this respect, the prospect of filing simplified customs declarations upon import of goods supplied between related parties should be considered in situations like the above.
x OUTLOOK AND CONCLUSIONS
During the past few years, and mostly since January 2014, when the currently applicable ITC and CTP came into force in Greece, transfer pricing has become an area of primary focus for the tax authorities. Enterprises doing business in Greece, including branches of foreign enterprises, are required to comply with a detailed legislative framework, which is mostly aligned with the OECD Transfer Pricing Guidelines and the Reports on Actions 8–10 of the OECD BEPS project.
Inconsistencies of local transfer pricing documentation rules with the Report on Action 13 of the OECD BEPS project may, however, still trigger additional compliance costs for multinationals doing business in Greece, as they still need to localise their transfer pricing documentation.
Tax authorities are developing a more sophisticated approach in dealing with transfer pricing audits. Disputes have moved into matters concerning the reliability of comparable data, the reasonableness of comparability adjustments and lately the appropriateness of selected transfer pricing methods. Court jurisprudence may, therefore, be expected to also gradually focus on substantive transfer pricing matters in the near future.
An increase of transfer pricing disputes is likely to also lead to an increase of MAP proceedings involving the Greek tax authorities, although there is still room for improvement in this field, primarily by securing appropriate resources to handle the proceedings and providing guidance on practical matters to ensure enforceability of MAP outcomes. It is also expected that the number of APA proceedings will increase in the near future, particularly in relation to new activities or isolated transactions, as enterprises seek to ensure certainty with respect to the tax treatment of their operations in Greece.
Finally, the new rule on business restructurings (Article 51 ITC) may gradually become of primary significance, as tax authorities move their audits into fiscal years 2014 and onwards. These have been years of restructuring from the side of enterprises doing business in Greece, as a reaction to the economic downturn and related adverse conditions of the Greek economy, including the capital controls introduced in June 2015. Compliance of such restructurings with the arm's-length principle is a matter that is likely to be assessed in the course of future tax audits.
1 Elina Filippou is a partner, Elina Belouli is an associate and Dimitris Gialouris is a senior associate at Zepos & Yannopoulos.
2 Namely, Supreme Administrative Court decisions 3803/1988, 1976/1993, 4413-4/1996, 4464/1997, 1303-4/1999, 1644/2005.
3 Supreme Administrative Court decision 2033/2014, 4627/2014, 1290/2017, 2185/2017 & 2190/2017.
4 Supreme Administrative Court decisions 3803/1988, 826/1995, 1303/1999, 45/2006 and others.
5 Administrative Court of Appeals of Athens decision 3677/2017.
6 Administrative Court of Appeals of Athens decision 2436/2017, 4171/2017 and others.