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Transfer Pricing Documentation Guidelines in Bulgaria Overview 13 April 2010.

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Presentation on theme: "Transfer Pricing Documentation Guidelines in Bulgaria Overview 13 April 2010."— Presentation transcript:

1 Transfer Pricing Documentation Guidelines in Bulgaria Overview 13 April 2010

2 Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 4 property physical movement services Board of Directors purchasing raw-material transportation transportation sales services after-sales service sale of end product management services administrative services Supplier Shared Services Sales Central Company Customer distribution services R&D Warehouse Transfer pricing issues Manufacture manufacturing 6

5 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 5 Applicable common standard The Arms length principle International standard advocated by OECD Refers to the price at which third parties would transact under similar terms and conditions

6 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 6 International background and developments Response of OECD, EC and tax authorities 1995 OECD Guidelines – The Arms Length Principle EU Joint Transfer Pricing Forum Code of Conduct for effective implementation of the "Arbitration Convention " and proposal for September 2009 revision COM(2009)472_en.pdf Code of Conduct on transfer pricing documentation for 2006 EU associated enterprises Guidelines for Advance Pricing Agreements (APAs) within the EU COM(2007)71_en.pdf

7 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 7 Countries with effective TP documentation rules U.S.A. Australia France Mexico Brazil Canada Korea U.K. Denmark Venezuela S. Africa Germany Belgium Argentina Japan Poland Kazakhstan India Portugal Colombia Netherlands Thailand Malaysia Indonesia Norway New Zealand Peru Spain Taiwan Hungary Lithuania Ecuador Vietnam Singapore Sweden Israel Finland Estonia China Russia Kenya Turkey Italy Egypt Slovakia Czech Republic Romania Greece Bulgaria

8 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 8 Ernst & Youngs TP Survey Published on 29 September 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 9 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 Ernst & Youngs TP Survey, cont.

10 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 10 Bulgarian developments in a nutshell Arms 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 NRAs official website

11 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 11 Internal legislation in force Corporate Income Tax Act (CITA) Arms 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 arms length is on the taxpayer

13 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 15 Status of the Guidelines The Guidelines are part of the NRAs 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 arms length Without a documentation prepared according to the Guidelines, the NRA may reassess the tax liabilities based upon any publicly available information

18 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 19 Aggregation of similar transactionsAggregation 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 23 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 TP documentation for offshore business

24 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 28 TP documentation should consist of two parts: Group information – Master file Information on the local entity and the transfer methodology applied – Country-specific file TP documentation files

29 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 arms length principle

31 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 31 Contents vs. methodology in drafting a TP documentation file Company Analysis Transaction Description Functional Analysis Industry Analysis Economic Analysis 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

32 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 arms 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 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 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 35 Your key contacts Laszlo Szakal Trevor Link Evguenia Tzenova Mitko Stoykov Main tel: Fax:

36 13 April 2010Transfer Pricing Documentation Guidelines in Bulgaria Page 36 Thank you for your attention!


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