Transfer pricing provisions were initially introduced in Greece, in a simplified form, in 1980,2 and 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 considered by the 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.
The year 2008 was a milestone one 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.3 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 Organisation for Economic Co-operation and Development (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 should not be impacted by 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 threshold applies with respect to the minimum direct or indirect participation in the capital or the exercise of voting rights (instead of the previously applicable 50 per cent), 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 guidelines4 the exercise of managerial control or decisive influence is to be assessed on a case-by-case basis. 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 of its 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. The arrangement between the competent authorities of Greece and the United States on the exchange of country-by-country reports has also become operative. 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
All OECD acceptable transfer pricing methods are applicable in the Greek transfer pricing environment, as confirmed by Article 50 of the 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.5 Rejection of traditional methods should be appropriately justified in local transfer pricing documentation, prior to selecting the application of one of the transactional methods. A change to the selected transfer pricing method must be accompanied by a detailed justification.
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) of the 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 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 of the 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 Governor of the Independent Authority for Public Revenue on the appropriate set of criteria for the determination of transfer prices over a fixed period, which may not exceed four years.6 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 (for a unilateral APA) and 36 months (for a bilateral or multilateral APA). The Independent Authority for Public Revenue 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 operations in Greece, confirming a fixed markup to be applied on their total costs. The licence is renewed every four years and, during this 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 one month of the 20-day submission period.
Tax audits should be carried out and tax assessments should be issued within five years of the end of the year in which the relevant corporate income tax return should have been duly filed.7 Greek tax law does not lay down different time limits for each stage of the tax audit process. The applicable statute of limitations, as of 1 January 2014, is extended to 20 years, should the tax audit findings result in tax evasion.8 However, according to recent ministerial guidance, transfer pricing readjustments should not be treated as resulting in tax evasion.9
Transfer pricing dispute resolution is governed by the same procedural rules that govern all tax disputes in Greece.
Once the final tax assessments have been 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.10 The Dispute Resolution Directorate should review the taxpayer's administrative appeal on both the law and the merits. The appeal should be lodged within 30 days of the service of the final tax assessment to the taxpayer (and within 60 days for taxpayers seated abroad). The Dispute Resolution Directorate should review the case and deliver its decision in writing within a 120-day period; otherwise, on the expiry of this deadline, the administrative appeal is deemed to have been tacitly rejected. According to amendments in law, the 120-day period could be either: (1) suspended if an issue of general interest has been brought before the Supreme Administrative Court, or a preliminary ruling by the Supreme Administrative Court is sought and if, in either case, the decision of the Supreme Administrative Court is critical for the review of the taxpayer's administrative appeal; or (2) extended for 30 days, should the taxpayer provide the Dispute Resolution Directorate with new evidence or raise new facts that have occurred during the final 30 days of the 120-day period.11
Filing of an administrative appeal suspends payment of 50 per cent of the amount of tax and penalties imposed on the taxpayer. However, default interest, calculated at an annual rate of 8.76 per cent, 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. From a practical perspective, therefore, upon filing the administrative appeal, taxpayers may opt to pre-pay 100 per cent of the income tax and penalties imposed.
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 30 days (90 days for taxpayers seated abroad)12 of either the date of expiry of the 120-day period or 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 on 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 €150,000, the case is submitted to the jurisdiction of the administrative court of first instance. Surcharges, penalties or fines on any other amount additionally assessed do not count towards the above thresholds.13
Irrespective of the court in which the case is first heard, the judicial review considers the lawfulness and merits of the case. Decisions of the administrative courts of first instance can only be reviewed by the appellate court, and only if specific requirements set out in law are met.
In terms of timing, transfer pricing disputes exceeding the €150,000 monetary threshold should be resolved at the level of the court of appeal within 18 to 24 months of the filing of the judicial appeal. The decision of the court of appeal 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 out in law be met.14 The review proceedings before the Supreme Administrative Court are strictly concerned with issues of lawful interpretation of the applicable provisions.
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 the fiscal year 2008 onwards. Owing to the considerable duration of judicial proceedings, a significant number of decisions refer to regimes that are no longer applicable. However, certain decisions of the Supreme Administrative Court still serve as a valuable reference for the interpretation and application of current rules.
A number of Supreme Court cases have dealt with the matter of defining related parties, with a particular focus on elements establishing a relation of managerial control or economic dependence or control.15 In a recent case brought before the court of appeal, a detailed analysis of the contractual arrangements was used to identify significant economic dependence in a franchise relationship.
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 enterprises16 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.17 Following the introduction of transfer pricing documentation rules, the burden of proof has been shifted to the taxpayer. 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 to the taxpayer's position (e.g., by proving the inappropriateness of the selected transfer pricing method or unreliability of the selected comparables). The Administrative Court of Appeal of Athens has verified that the tax authority may not proceed with creating a new set of comparables without justifying the reasons for rejecting the set selected by the taxpayer.18
Although fragmented, recent decisions of the courts of appeal seem to set the focus on documentation, and engage in analyses of comparability, but also to touch upon issues regarding the proportionality of documentation-related penalties imposed under previously applicable regimes.19 Recent decisions of the courts of appeal appeared not to disregard the impact of centralised decision-making on price setting when judging the intent of domestic wholesalers in evading customs duties in instances where the wholesalers had purchased products at a value lower than in previous and subsequent years.
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 (at a rate of 28 per cent with respect to fiscal year 2019). 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 if 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 within 60 days of being requested; the fine rises to €10,000 if the file is presented between the 61st and 90th day following its request by the tax authority; and
- failure to file 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. The Greek tax authorities have clarified that the assessment of corporate income tax of an amount exceeding €100,000 does not constitute tax evasion to the extent that the assessment results from transfer pricing readjustments.
A €100,000 threshold applies with respect to corporate income taxation. However, by way of Ministerial Decision POL 1209/2017, the Greek tax authorities have recently clarified that the assessment of corporate income tax of an amount exceeding €100,000 does not constitute tax evasion to the extent that the 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 to effectively combat artificial arrangements whose aim is tax avoidance. For example, Article 38 of the CTP sets out a General Anti-Abuse Rule, according to which tax authorities may reclassify any artificial arrangement whose aim is tax avoidance. In the same context, according to Article 4 of the ITC, the place of effective management is a key element in defining a legal entity's state of tax residence.
According to Article 23 of the ITC, payments to entities established in non-cooperative jurisdictions or preferential tax regimes are not recognised as tax-deductible, unless the taxpayer can prove that the payments are made in the ordinary course of business and their aim is not the avoidance of taxes. Preferential tax regimes are defined as those offering an income tax rate lower than 50 per cent of the rate applicable in Greece. Payments to related parties established in preferential tax regimes are ultimately 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 the passive income derives from related-party transactions.
Article 49 of the ITC sets out an earnings-stripping rule. As 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 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, and credit institutions are exempt from these 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 a legal and procedural framework, and to the limited work capacity of the relevant teams of the competent authority.
Having committed itself to the implementation of the OECD BEPS Action 14 Minimum Standard, Greece 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 decisions, 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 that have been set.
Certain issues regarding access to the MAP remain unresolved, in particular in instances where domestic statutes of limitations apply or where domestic courts have issued decisions. Greece has stated that it is currently considering a shift in its policy regarding these issues, which were identified during Stage 1 of the MAP peer review.20
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 case21 may give rise to arguments by the customs authorities that the customs value declared upon import does not reflect the actual transaction value (because of 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 between local transfer pricing documentation rules and 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 have 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 in transfer pricing disputes is also likely to lead to an increase in 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 access to the MAP irrespective of domestic judicial decisions or statutes of limitations. 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 certainty with respect to the tax treatment of their operations in Greece.
Finally, the new rule on business restructurings22 may gradually assume primary significance, as tax authorities move their audits into the fiscal year 2014 and onwards; from the perspective of enterprises doing business in Greece, these have been years of restructuring as a reaction to the economic downturn and the related adverse conditions of the Greek economy, including the capital controls introduced in June 2015. The compliance of these 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 partner at Zepos & Yannopoulos.
2 Article 50, Law No. 1041/1980, which was later incorporated in Article 39 of Law No. 2238/1994, the previously applicable income tax code.
3 Article 26, Law No. 3728/2008.
4 POL 1142/2015.
5 Ministerial Decision POL 1097/2014, as amended by POL 1144/2014.
6 Article 23 CTP and Ministerial Decision POL 1284/2013.
7 Article 36, Paragraph 3 CTP.
9 Ministerial Decision POL 1209/2017.
10 Article 63 CTP and Ministerial Decision POL 1064/2017.
11 Article 68 of Law No. 4587/2018 in conjunction with Circular (IAPR) E2010/2019 of the Independent Authority for Public Revenue.
12 Article 64, Paragraphs 2 and 6 of the Code of Administrative Procedure.
13 Article 6 of the Code of Administrative Procedure.
14 Article 53 PD No. 18/1989.
15 Namely, Supreme Administrative Court decisions 3803/1988, 1976/1993, 4413-4/1996, 4464/1997, 1303-4/1999 and 1644/2005.
16 Supreme Administrative Court decisions 2033/2014, 4627/2014, 1290/2017, 2185/2017 and 2190/2017.
17 Supreme Administrative Court decisions 3803/1988, 826/1995, 1303/1999, 45/2006 and others.
18 Administrative Court of Appeal of Athens decision 3677/2017.
19 Administrative Court of Appeal of Athens decisions 2436/2017, 4171/2017 and others.
20 OECD (2019), Making Dispute Resolution More Effective – MAP Peer Review Report, Greece (Stage 1): Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.
22 Article 51 ITC.