transfer pricing documentation guidelines in bulgaria overview 13 april 2010
TRANSCRIPT
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Transfer Pricing Documentation Guidelines in BulgariaOverview
13 April 2010
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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
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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
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property
physical movement
services
Board of Directors
purchasingraw-material transportation
trans
porta
tion
sales services after-sales service
sale of end product
management services adm
inis
trat
ive
serv
ices
Supplier
Shared Services
Sales
Central Company
Customer
distribution services
R&D
Warehouse
Transfer pricing issues
Manufacture
man
ufac
turin
g
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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
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International background and developments
► Response of OECD, EC and tax authorities► 1995 OECD Guidelines – www.oecd.org
► 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
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:176:0008:0012:EN:PDF
http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/COM(2009)472_en.pdf
► Code of Conduct on transfer pricing documentation for 2006 EU associated enterprises
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:176:0001:0007:EN:PDF
► Guidelines for Advance Pricing Agreements (APAs) within the EUhttp://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/
transfer_pricing/COM(2007)71_en.pdf
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Countries with effective TP documentation rules
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Ernst & Young’s TP Survey
► Published on 29 September 2009► www.ey.com/tpsurvey
► 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
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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 & Young’s TP Survey, cont.
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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 http://portal.nap.bg/
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Internal legislation in force
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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
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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
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Related parties
For accounting purposes: For tax purposes:
Where common control exists 5 % shareholding
relationship is sufficient (§ 1, item 3 from the Tax Code)
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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
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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
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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
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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.
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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
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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
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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
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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
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► 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
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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
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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
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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.
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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
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► 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
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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.
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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
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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
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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.
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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.
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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
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Your key contacts
► Laszlo Szakal
[email protected]► Trevor Link
[email protected]► Evguenia Tzenova
[email protected]► Mitko Stoykov
Main tel: +359 2 81 77 100
Fax: +359 2 81 77 111
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Thank you for your attention!