Presentation on theme: "Transfer Pricing Documentation Guidelines in Bulgaria"— Presentation transcript:
1Transfer Pricing Documentation Guidelines in Bulgaria Overview13 April 2010
2Table of contents What is Transfer pricing (“TP”)? International background and developmentsBulgarian TP developmentsTransfer pricing documentation guidelinesTP documentation files – contents and methodologyClosing remarks. EY recommendations
3What is Transfer pricing (“TP”)? Transfer pricing definitionPricing of related party transactionsTransfer pricing issuesIntegrated business processesComparable transactionsDifferent national rules and practice
4Transfer pricing issues R&DShared ServicesBoard of DirectorsSalesadministrative servicesafter-sales servicemanagement servicessales servicespurchasingsale of end productSupplierCentral CompanyCustomerraw-material transportationmanufacturingdistribution servicestransportationpropertyphysical movementservicesManufactureWarehouse6
5Applicable common standard The Arm’s length principleInternational standard advocated by OECDRefers to the price at which third parties would transact under similar terms and conditions
6International background and developments Response of OECD, EC and tax authorities1995 OECD Guidelines –The “Arm’s Length Principle”EU Joint Transfer Pricing ForumCode of Conduct for effective implementation of the "Arbitration Convention " and proposal for September 2009 revisionCode of Conduct on transfer pricing documentation for 2006 EU associated enterprisesGuidelines for Advance Pricing Agreements (APAs) within the EU
7Countries with effective TP documentation rules U.S.A.IndiaSwedenAustraliaPortugalIsraelFranceColombiaFinlandMexicoNetherlandsEstoniaBrazilThailandChinaCanadaMalaysiaRussiaKoreaIndonesiaKenyaU.K.NorwayTurkeyDenmarkNew ZealandItalyVenezuelaPeruEgyptS. AfricaSpainSlovakiaGermanyTaiwanCzech RepublicBelgiumHungaryRomaniaArgentinaLithuaniaGreeceJapanEcuadorBulgariaPolandVietnamKazakhstanSingapore
8Ernst & Young’s TP Survey Published on 29 September 2009Main messages:Transfer pricing – under the scrutiny of tax authorities worldwideChina, Slovakia and Greece - other countries introducing detailed requirements for maintaining theTransfer pricing documentation file with information and analysisTax authorities dedicate more resources to TP investigations setting transfer pricing examination teams
9Ernst & Young’s TP Survey, cont. Industries, countries and transactions in the spotlightThe main targeted industries are automotive, consumer products, financial services, oil and gas, and pharmaceuticals.Focus on transactions with perceived tax havens and ‘blacklisted’ countriesTP 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
10Bulgarian 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 1998Ordinance 5/1999 on the methods used to establish market pricesOrdinance N-9/2006 on the TP methods based on the OECD TP GuidelinesTransfer Pricing Manual of NRA of 2008Transfer pricing documentation chapter included in the Manual, published on 8 February on NRA’s official website
11Internal legislation in force Corporate Income Tax Act (CITA)Arm’s length principle:Article 15 of CITA; Article 9 of Double Tax Conventions of BulgariaTax CodeSetting the TP methods in § 1, item 10Definition of related parties for tax purposes: a 5 % shareholding relationship is sufficient (§ 1, item 3)Documents submitted upon requestBurden of proof – Article 116Exchange of information procedure, Article 143a – Article 143lRegulation N-9
12Internal legislation in force Burden of proof on the taxpayerArt. 116 of the Tax Code : For transfer pricing matters, the burden of proof that prices are at arm’s length is on the taxpayer
13Internal legislation in force Accounting standards/principlesThe notes to the financial statements should include information on transactions with related partiesDefinition of related party for accounting purposes: where common control exists
14Related parties For accounting purposes: For tax purposes: Where common control exists5 % shareholding relationship is sufficient (§ 1, item 3 from the Tax Code)
15Status of the Guidelines The Guidelines are part of the NRA’s TP audit manual, approved by NRA Executive Director orderTechnically, they are not part of the lawIt is in the interest of taxpayers to comply with the Guidelines since they define what the NRA requiresCompliance with the Guidelines will greatly reduce the scope for disputes about transfer pricing
16Effect 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
17Lack of TP documentation There is only insignificant penalty if no TP documentation is availableThe burden of proof is on the taxpayer to demonstrate that the transfer prices applied are at arm’s lengthWithout a documentation prepared according to the Guidelines, the NRA may reassess the tax liabilities based upon any publicly available information
18Structure of the Guidelines Two partsmethodology on how to audit transfer prices,TP documentation requirementsNotes of the financial statementsFocus on the differences in related party definitionsTPD documentation can be required after reviewing the notesOur 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.
19Aggregation of similar transactions TP documentation should support each related party transactionSimilar transactions may be aggregated in one TP documentation file:Contracts of long duration, i.e. above 12 monthsWhere the objects of the transactions are similarPeriodic supplies of one and the same product or product groupsComplex price for supply of equipment and guarantee serviceCompound transactions, e.g. franchise agreements
20Exception for micro business Micro business will not be expected to prepare TP documentationException: 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 preparedNSI and other publicly available sources to be usedSummary of the operating profit margin for the last three yearsList of competitors
21Documenting restructuring of functions and risks Comparability analysis should be carried out before and after restructuringWhat shall be documented?The actual changes which have occurred as a result of this processThe economic reasons underlying the restructuring and expected benefitsRealistic options that would have been available to the parties in the event of independent market relationsThe way restructuring compensations (if any) are affected by the compensation paid to the company
22Simplified TP documentation May be prepared for lower value transactions based upon annual thresholds:BGN200,000, where the object of the transaction is supply of goodsBGN200,000, where the object of the transaction is supply of servicesBGN400,000, where the object of the transaction is supply of intangible articlesBGN400,000, 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 amountThe above thresholds apply to the transaction with the greatest value among the aggregated transactions, e.g. franchise
23TP documentation for offshore business Offshore zone definition: Art. 116(3) from the Tax CodePresumption for related partiesShifted burden of proofRequirement for simplified TP documentationDetailed version may be required
24Obligation for presentation TP documentation should be presented upon the request of the tax authority, e.g. during a tax audit or DTT clearanceNo obligation to be submitted to NRA on a regular basisIn case of non-compliance:EUR250 fineReassessment, based on any publicly available pricing information
25Keeping 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 factorsNo changes are also documented
26Retention 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.
27Language of documentation The country-specific file should be prepared in BulgarianThe master file may contain documentation in other languages but the NRA may require certified translations of all or any part of it
28TP documentation files TP documentation should consist of two parts:Group information – Master fileInformation on the local entity and the transfer methodology applied – Country-specific file
29Contents of master file Legal, functional, financial and management organization of the Group: description/chartEconomic role of each member of the Group – functions and risks assumed;Allocation and financing of the intellectual propertyExplanation of the transfer pricing policy of the GroupDescription of the controlled transactionsA list of any agreements for allocation of expenses, advance pricing agreements (APAs), decisions of courts, etc.
30Contents of country-specific file Description of the functions, assets and risks of the local companyDescription of the controlled transactions in view of their nature and scopeExcerpts of the financial statements of the taxpayer in relation to its related party transactionsThe transfer pricing methodology of the Bulgarian companyDescription of the method selected and reasons underlying the selectionInternal and/or external comparable transactionsDescription of the information sourcesExplanation of the adjustments to the comparable transactions applied with the aim to eliminate the differencesAny other information evidencing the compliance with the arm’s length principle
31Contents vs. methodology in drafting a TP documentation file Description of the functions, assets and risks of the local companyDescription of the controlled transactionsExcerpts of the financial statements of the taxpayer in relation to its related party transactionsTransfer pricing methodology of the Bulgarian companyIndustry AnalysisCompany AnalysisTransaction DescriptionFunctional AnalysisEconomic AnalysisPage 31
32Final conclusionsThe 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.
33Closing remarks Wide range of international rules TP rules have been in BG legislation since 1993However, they have not been forced by the NRA as the expectations as to how to document transfer prices were not setTP Guidelines remove uncertainties but create expectationsThe 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.
34Closing remarksIncrease in the number of TP audits/reviews should be expected. Therefore, Ernst & Young recommends:Health checks to identify and analyze exposures and planning opportunitiesReview of group TP policies in view of their compatibility with the Bulgarian rulesPreparation/review of local TP documentation file