Lithuanian tax authorities are now aware that in many cases the single largest tax adjustment is connected with controlled pricing. There is theoretically no upper limit to amounts which can be assessed in this regard and rarely, if ever, a definitive, single correct answer. Transfer pricing is therefore both extremely subjective and potentially material.
These two facts combined can make transfer pricing an attractive target of any investigation.
In Lithuania, the subject has been brought to the fore through extensive, recently introduced statutory documentation requirements, but Tax Authorities as yet lack practical experience to ensure predictable and consistent treatment at all times. There is also at present no case law or APA program which could assist a taxpayer by providing some clarity or indication of approaches.
The comparative lack of experience of inspectors can mean that the subject is either left alone or approached in a manner which may initially appear to be non-standard or confrontational.
Avoiding tax authority interest in transfer pricing should therefore be among the top tax priorities of any Lithuanian member of a multinational organization. A comparatively easy start to this objective is advance and proficient compliance with the documentation requirements. Experience of other jurisdictions has shown that tax authorities initially focus on taxpayers giving the impression of being unprepared, or unconcerned by statutory requirements. Such taxpayers are seen as more likely to have ignored other rules, such as the arm’s length principle in general.
We can also assist in identifying areas of exposure by way of meetings or more formal reviews. The reviews generally focus on areas most often not taken account of in group master files, such as local internal comparables or wording of legal and supporting documentation.
Naturally, we have access to databases of independent companies, capable of producing a wide array of indicators against which arm’s length margins can be benchmarked. This applies also to interest rates used for loans.
When preparing documentation from a master file or pan-European core set, we not only select the section which are required by law, but also represent the information in a manner which would be more understandable for Tax Authorities.