1. Transfer Pricing Documentation Guidelines in Bulgaria
Overview
13 April 2010

2. Table of contents What is Transfer pricing (“TP”)?
International background and developments
Bulgarian TP developments
Transfer pricing documentation guidelines
TP documentation files – contents and methodology
Closing remarks. EY recommendations

3. What is Transfer pricing (“TP”)?
Transfer pricing definition
Pricing of related party transactions
Transfer pricing issues
Integrated business processes
Comparable transactions
Different national rules and practice

4. Transfer pricing issues
R&D
Shared Services
Board of Directors
Sales
administrative services
after-sales service
management services
sales services
purchasing
sale of end product
Supplier
Central Company
Customer
raw-material transportation
manufacturing
distribution services
transportation
property
physical movement
services
Manufacture
Warehouse 6

5. Applicable common standard
The Arm’s length principle
International standard advocated by OECD
Refers to the price at which third parties would transact under similar terms and conditions

6. International background and developments
Response of OECD, EC and tax authorities
1995 OECD Guidelines –
The “Arm’s Length Principle”
EU Joint Transfer Pricing Forum
Code of Conduct for effective implementation of the "Arbitration Convention " and proposal for September 2009 revision
Code of Conduct on transfer pricing documentation for 2006 EU associated enterprises
Guidelines for Advance Pricing Agreements (APAs) within the EU

7. Countries with effective TP documentation rules
U.S.A.
India
Sweden
Australia
Portugal
Israel
France
Colombia
Finland
Mexico
Netherlands
Estonia
Brazil
Thailand
China
Canada
Malaysia
Russia
Korea
Indonesia
Kenya
U.K.
Norway
Turkey
Denmark
New Zealand
Italy
Venezuela
Peru
Egypt
S. Africa
Spain
Slovakia
Germany
Taiwan
Czech Republic
Belgium
Hungary
Romania
Argentina
Lithuania
Greece
Japan
Ecuador
Bulgaria
Poland
Vietnam
Kazakhstan
Singapore

8. Ernst & Young’s TP Survey
Published on 29 September 2009
Main messages:
Transfer pricing – under the scrutiny of tax authorities worldwide
China, Slovakia and Greece - other countries introducing detailed requirements for maintaining theTransfer pricing documentation file with information and analysis
Tax authorities dedicate more resources to TP investigations setting transfer pricing examination teams

9. Ernst & Young’s TP Survey, cont.
Industries, countries and transactions in the spotlight
The main targeted industries are automotive, consumer products, financial services, oil and gas, and pharmaceuticals.
Focus on transactions with perceived tax havens and ‘blacklisted’ countries
TP investigation could be triggered by unusually big losses in a group company; corporate restructurings involving closures or reductions in operations; significant inter-company management fees

10. Bulgarian developments in a nutshell
Arm’s length principle introduced in 1993 (Decree 56 on Business Activity)
TP methods introduced in the Corporate Income Tax Act of 1998
Ordinance 5/1999 on the methods used to establish market prices
Ordinance N-9/2006 on the TP methods based on the OECD TP Guidelines
Transfer Pricing Manual of NRA of 2008
Transfer pricing documentation chapter included in the Manual, published on 8 February on NRA’s official website

11. Internal legislation in force
Corporate Income Tax Act (CITA)
Arm’s length principle:
Article 15 of CITA; Article 9 of Double Tax Conventions of Bulgaria
Tax Code
Setting the TP methods in § 1, item 10
Definition of related parties for tax purposes: a 5 % shareholding relationship is sufficient (§ 1, item 3)
Documents submitted upon request
Burden of proof – Article 116
Exchange of information procedure, Article 143a – Article 143l
Regulation N-9

12. Internal legislation in force
Burden of proof on the taxpayer
Art. 116 of the Tax Code : For transfer pricing matters, the burden of proof that prices are at arm’s length is on the taxpayer

13. Internal legislation in force
Accounting standards/principles
The notes to the financial statements should include information on transactions with related parties
Definition of related party for accounting purposes: where common control exists

14. Related parties For accounting purposes: For tax purposes:
Where common control exists
5 % shareholding relationship is sufficient (§ 1, item 3 from the Tax Code)

15. Status of the Guidelines
The Guidelines are part of the NRA’s TP audit manual, approved by NRA Executive Director order
Technically, they are not part of the law
It is in the interest of taxpayers to comply with the Guidelines since they define what the NRA requires
Compliance with the Guidelines will greatly reduce the scope for disputes about transfer pricing

16. Effect of the Guidelines
TP documentation based on the Guidelines may be required for any open tax year and for tax obligations not covered by the statute of limitations period

17. Lack of TP documentation
There is only insignificant penalty if no TP documentation is available
The burden of proof is on the taxpayer to demonstrate that the transfer prices applied are at arm’s length
Without a documentation prepared according to the Guidelines, the NRA may reassess the tax liabilities based upon any publicly available information

18. Structure of the Guidelines
Two parts
methodology on how to audit transfer prices,
TP documentation requirements
Notes of the financial statements
Focus on the differences in related party definitions
TPD documentation can be required after reviewing the notes
Our conclusion: it is time-consuming to prepare a documentation according to the requirements of the Guidelines. Therefore, the time set by the NRA is likely to be insufficient.

19. Aggregation of similar transactions
TP documentation should support each related party transaction
Similar transactions may be aggregated in one TP documentation file:
Contracts of long duration, i.e. above 12 months
Where the objects of the transactions are similar
Periodic supplies of one and the same product or product groups
Complex price for supply of equipment and guarantee service
Compound transactions, e.g. franchise agreements

20. Exception for micro business
Micro business will not be expected to prepare TP documentation
Exception: when the operating profit margin is 20 % lower than the industry average for each of the last three preceding years, simplified TP documentation file should be prepared
NSI and other publicly available sources to be used
Summary of the operating profit margin for the last three years
List of competitors

21. Documenting restructuring of functions and risks
Comparability analysis should be carried out before and after restructuring
What shall be documented?
The actual changes which have occurred as a result of this process
The economic reasons underlying the restructuring and expected benefits
Realistic options that would have been available to the parties in the event of independent market relations
The way restructuring compensations (if any) are affected by the compensation paid to the company

22. Simplified TP documentation
May be prepared for lower value transactions based upon annual thresholds:
BGN200,000, where the object of the transaction is supply of goods
BGN200,000, where the object of the transaction is supply of services
BGN400,000, where the object of the transaction is supply of intangible articles
BGN400,000, where the object of the transaction is granting of a loan (the threshold relates to the amount of interest)
Combination of aggregation and the above thresholds:
The above thresholds apply to the aggregated amount
The above thresholds apply to the transaction with the greatest value among the aggregated transactions, e.g. franchise

23. TP documentation for offshore business
Offshore zone definition: Art. 116(3) from the Tax Code
Presumption for related parties
Shifted burden of proof
Requirement for simplified TP documentation
Detailed version may be required

24. Obligation for presentation
TP documentation should be presented upon the request of the tax authority, e.g. during a tax audit or DTT clearance
No obligation to be submitted to NRA on a regular basis
In case of non-compliance:
EUR250 fine
Reassessment, based on any publicly available pricing information

25. Keeping TP documentation up-to-date
TP documentation should be prepared for each tax year and should be kept up-to-date if changes occur in relevant factors
No changes are also documented

26. Retention of TP documentation
TP documentation should be retained for a period of five years after the expiry of the statute of limitations for the relevant tax year.

27. Language of documentation
The country-specific file should be prepared in Bulgarian
The master file may contain documentation in other languages but the NRA may require certified translations of all or any part of it

28. TP documentation files
TP documentation should consist of two parts:
Group information – Master file
Information on the local entity and the transfer methodology applied – Country-specific file

29. Contents of master file
Legal, functional, financial and management organization of the Group: description/chart
Economic role of each member of the Group – functions and risks assumed;
Allocation and financing of the intellectual property
Explanation of the transfer pricing policy of the Group
Description of the controlled transactions
A list of any agreements for allocation of expenses, advance pricing agreements (APAs), decisions of courts, etc.

30. Contents of country-specific file
Description of the functions, assets and risks of the local company
Description of the controlled transactions in view of their nature and scope
Excerpts of the financial statements of the taxpayer in relation to its related party transactions
The transfer pricing methodology of the Bulgarian company
Description of the method selected and reasons underlying the selection
Internal and/or external comparable transactions
Description of the information sources
Explanation of the adjustments to the comparable transactions applied with the aim to eliminate the differences
Any other information evidencing the compliance with the arm’s length principle

31. Contents vs. methodology in drafting a TP documentation file
Description of the functions, assets and risks of the local company
Description of the controlled transactions
Excerpts of the financial statements of the taxpayer in relation to its related party transactions
Transfer pricing methodology of the Bulgarian company
Industry Analysis
Company Analysis
Transaction Description
Functional Analysis
Economic Analysis
Page 31

32. Final conclusions
The TP documentation file is not just a comparables search or a mechanical comparison of financial ratios. It should involve business analysis.
There is not one proper price or margin BUT a range of prices and margins that are compatible with the arm’s length principle that the Company can use, provided that they are documented properly.
The TP documentation file will lead to a better understanding of the value drivers in the business concerned.

33. Closing remarks Wide range of international rules
TP rules have been in BG legislation since 1993
However, they have not been forced by the NRA as the expectations as to how to document transfer prices were not set
TP Guidelines remove uncertainties but create expectations
The Guidelines are not technically part of the law. However, it is in the interest of the taxpayers to follow them.
We do not see any reason why the NRA will not require TP documentation according to the Guidelines and for any open tax years.

34. Closing remarks
Increase in the number of TP audits/reviews should be expected. Therefore, Ernst & Young recommends:
Health checks to identify and analyze exposures and planning opportunities
Review of group TP policies in view of their compatibility with the Bulgarian rules
Preparation/review of local TP documentation file

35. Your key contacts Laszlo Szakal laszlo.szakal@bg.ey.com Trevor Link
Evguenia Tzenova
Mitko Stoykov
Main tel:
Fax:

36. Thank you for your attention!