Transfer Pricing. The Roll-Back Mechanism of the Advance Pricing Agreement. Practical Challenges and Solutions

Three years after the adoption of the most recent version of the OECD Transfer Pricing Guidelines (2022), the Romanian Government adopted Ordinance no. 11/2025 for the amendment and completion of the Tax Procedure Code, through which it granted taxpayers the right to extend the validity of the advance pricing agreement to a period of up to 5 prior fiscal years before the year in which they submitted the application for issuing the agreement.

Thus, the roll-back mechanism provided by the OECD Guidelines was transposed into national tax law, which allows the advance pricing agreement to regulate the conditions and methods of determining transfer prices not only in future transactions between affiliates, but also in transactions already carried out.

Very briefly, we explain what an advance pricing agreement (APA) is. We prefer an explanation different from the legal definition, our own, which we also deliver to our clients when, in the evolution of their business, they encounter the issue of transfer pricing for the first time: the advance pricing agreement is a pact with the tax authorities, through which the rules for determining the prices of transactions between affiliates are established, so that they conform to the market price.

If the pact is respected and documented in the annual reporting, then the bridge is also crossed, in the sense that, during the validity period of the APA, the taxpayer does not risk tax control procedures resulting in the establishment of additional corporate income tax and accessories (related to non-compliance with the arm’s length principle, not other causes).

If we transpose the discussion from public law to private law, we can say that the advance pricing agreement, in the form now regulated, is a sort of transaction through which a tax dispute is prevented. The price of this deal? Between 10,000 and 20,000 euros issuance fee per agreement, plus concessions and waivers, just as in contract law – with the difference that, in our case, how much the taxpayer concedes depends on how well they prepared their transfer pricing documentation.

Until recently, the APA could only regulate the conditions of future transactions between affiliates, not those from the past, regarding which the taxpayer had already performed a comparability analysis and already applied a method of determining transfer prices. Thanks to the recent legislative amendment, the taxpayer has the possibility to ”negotiate” with the tax authorities before receiving a tax decision (we keep the quotation marks, because in practice it is a stretch to call it negotiation, and the APA remains nonetheless an administrative act).

Considering that the issuance of the advance pricing agreement can be a lengthy process, it is useful to know that the extension over a prior period can also be requested for pending APA issuance applications.

The condition for the advance pricing agreement to be retroactively extended to already carried out transactions is that these past transactions took place under conditions similar to those for which the advance pricing agreement is requested for the future. In other words, a certain symmetry (and perhaps even continuity) is needed, and here a first practical challenge appears.

The symmetry must exist at least in the contractual conditions practiced, in the type of goods and services transacted between affiliates and, in general, in the business model. Otherwise, there is a risk that the tax authority will refuse the roll-back mechanism, that is, the retroactive extension of the APA.

The solution resides in the taxpayer’s diligence, that will present, within the supporting documentation, an analysis of the transaction conditions from previous years, a comparison matrix of these with future transactions and the result of internal audits on transfer prices related to previous periods, which should coincide with the data in the transfer pricing file (TPF).

Another challenge arises when a tax inspection procedure and an advance pricing agreement issuance procedure with retroactive extension are carried out in parallel, which concern the same taxpayer and, at least partially, the same subject matter and the same period. In such situations, the OECD Guidelines mention that the independence of the control function of the tax authorities may be compromised if the taxpayer is given the chance to ”negotiate” an APA.

On the other hand, in practice, the taxpayer’s interest in the issuance of an APA with a roll-back mechanism is all the greater when there is an ongoing tax inspection. Ultimately, the issuance of the advance pricing agreement according to the taxpayer’s request grants them the ”approval” of the tax authority regarding the practice, in the past, of the correct price.

The solution is the suspension of the tax inspection procedure until the resolution of the APA issuance application, so that, in the situation where the application is granted and the APA validates the transfer price already practiced by the affiliated taxpayer, the tax inspection will result in no additional tax obligations.

The result depends on a solid argumentation of the taxpayer within the suspension request, coupled with the strategic conduct of the APA issuance procedure. A positive result in this procedure will lead to an identical result of the tax inspection, considering that the tax authority is obliged to respect its own previously adopted solution [art. 6 para. (1) of the Romanian Tax Procedure Code].

These are just some of the practical challenges faced by taxpayers who are bold enough to attempt a deal with the tax authorities. In more complex situations, we encounter other challenges, such as:

(1) divergences between the tax authorities involved in issuing bilateral or multilateral APAs (in the case of multinational companies),

(2) the conflict between tax transparency and the need to maintain trade secrecy (since the supporting documentation submitted for resolving the application may reveal the commercial strategy, pricing policy and profit margins of the group),

(3) the availability and quality of information from transfer pricing analysis databases and the reluctance of tax authorities to refer to regional or global (non-local) comparables,

(4) the taxpayer’s obligation to strictly comply with the APA (including through the implementation of internal monitoring mechanisms),

(5) the regulation of critical assumptions that could affect the agreement, as well as adjustment clauses for exceptional situations.

The lawyers' role is decisive in any of the procedure’s stages:

- from legal assistance within the preliminary discussion with the tax authority or in exercising the right to be heard,

- to establishing the procedural strategy in close collaboration with the taxpayer’s management, the financial-accounting department and the specialized entities that prepare the transfer pricing supporting documentation,

- to drafting the necessary procedural documents and,

- in less fortunate cases, but common in the Romanian tax landscape, to legal assistance and representation of clients in tax disputes.

Our team fulfills all these roles, regardless of the degree of complexity of the case, having extensive experience in the field of taxation in general and taxation of groups of companies in particular.