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- Bulgaria’s transfer pricing (TP) legislation is based on the arm’s length principle as per Article 9 of the OECD Model Tax Convention on Income and Capital, i.e. it follows the OECD Guidelines.
The TP legislation in Bulgaria is:
- Article 15 of CITA (establishes the principle of independent market relations)
- The Tax and Social Security Procedure Code (TSSPC) Chapter Eight 'a' (New, SG No. 64/2019, effective 1.01.2020) TRANSFER PRICING DOCUMENTATION.
- Article 116 of the TSSPC and § 1 item 10 of the Additional Provisions of the TSSPC (establishes the methods for determining market prices)
- Ordinance № 9 on the procedure and methods for applying the methods for determining market prices (TP Guidelines in Bulgaria)
- The TP rules apply to Bulgarian taxpayers (Bulgarian entities, including Bulgarian non-residents with Bulgarian permanent establishment) There is a self-assessment regime, ie the onus is on the taxpayer to confirm its transfer pricing meets the standard or to adjust its tax return accordingly.
- The filing of transfer pricing documentation with the National Revenue Agency (NRA) is not mandatory, but because of the self-assessment regime, transfer pricing analysis, and documentation is required to help protect against penalties. The TP documentation (local file) is submitted to the Tax Authorities upon request, within 14 days of the request, in the course of a tax audit.
- The OECD’s Master File and Local File concept are regarded as best practice, applied in Bulgaria.
- In addition, for larger groups (over €750m) the UK has implemented CbCR (Country by Country Reporting) and Notification Obligation from a multinational group of undertakings.
Bulgaria’s transfer pricing rules follow the OECD Guidelines. The Guidelines, updated in 2010, are mentioned in Bulgaria legislation, and unlike in many countries, they must be used for interpretation of the arm’s length principle.
The OECD has also released further guidance, including its report on Financial Transactions in February 2020.
- The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods applied in Bulgaria are (§ 1, item 10 of the Additional Provisions of the TSSPC):
- comparable uncontrolled price
- resale price
- cost plus
- transactional net margin
- profit split methods
- All the methods must be used in line with the functional and risk profile of the entity.
- There is no set hierarchy as the Bulgarian legislation currently refers to the 2017 OECD Guidelines and BEPS Actions 8-10 Final Reports published by the OECD on 5 October 2015. In practice, however, a ‘natural hierarchy’ may be said to favour the comparable uncontrolled price method.
The analysis of transfer pricing will allow the companies to determine whether the profit is properly distributed between the individual companies in the group and whether each country in which the group company is located has received its due fair share of consolidated profits.
- TC documentation supports the process of creating a tax culture
- It enables the taxpayer to defend his tax position
- Gives confidence to tax administrations that taxpayers are:
- performed the necessary analysis of their tax position
- analyzed the relevant comparable data
- achieved a consistent and reasonable market price for tax purposes
- The requirements for up-to-date documentation give guarantees that the prices are set one by one in a fair way, limiting the ability to set prices after completion of transactions.
Bulgaria accepts the OECD transfer pricing documentation model based on the Master File and Local File (BEPS Action 13) approach. This approach is considered best practice in the Bulgaria.
Mandatory transfer pricing (TP) documentation becomes effective in Bulgaria pursuant to the amendments in the TSSPC approved by the National Assembly. The first year for which the mandatory TP documentation, comprising a local file and a master file, will have to be prepared is 2020.
Companies concerned: Bulgarian taxpayers which, as of 31 December of the previous year, exceeded at least two of the following indicators, are obliged to prepare a local file:
BGN 38 million (approximately EUR 19 million) book value of assets.
BGN 76 million (approximately EUR 39 million) net sales revenue.
average number of the personnel for the reporting period of 250.
Affected controlled transactions
A local file shall be prepared each year for related party transactions exceeding the following annual thresholds:
BGN 400,000 for sales of goods (approximately EUR 205,000)
BGN 200,000 for other transactions (approximately EUR 103,000)
BGN 1 million loan principal (approximately EUR 512,000) or BGN 50,000 interest (approximately EUR 26,000) and other related to the loan revenue or expenses.
Taxpayers which are part of a multinational group of companies and are obliged to prepare a local file must also have available a master file prepared by the ultimate parent company or another member of the group.
Deadlines for preparation
The deadline for preparation of the local file is in line with the deadline for submission of the annual CIT return for the respective year and the deadline for the master file is within 12 months after this term. For example, the local file for 2020 shall be prepared by 31 March 2021 (with the option for an extension until 30 September 2021 in case of an amending CIT return), while the master file for 2020 has to be compiled/available by 31 March 2022.
The TP documentation is not required to be submitted before the revenue authorities. The documentation is to be kept by the taxpayer and must be available upon request from the tax authorities or in the course of a tax inspection or a tax audit. Administrative sanctions are laid down for failure to present the TP documentation upon request and for presenting incorrect or incomplete data and can be substantial.
Lack of carefully prepared documentation will generally be seen as (at least) 'careless' behavior and any adjustment will likely result in penalties.
Bulgaria has also introduced CbCR (Country by Country Reporting) regulations which are effective for fiscal years starting on or after 1 January 2016 for groups with revenues over €750m.
Local file contents:
- Information about the entity
- Information on the controlled transactions subject to the local file requirement
- Financial information
Master file contents:
- A description and diagram/chart illustrating the MNE’s organizational structure, a list of all related parties in the group, as well as the jurisdictions in which each of them is resident for tax purposes, or, when not a resident of any jurisdiction, the jurisdiction under whose legislation it is created
- A brief description of the MNE’s business(es)
- A brief description of the related-party transactions
- The related-party policy applied within the group, or a description of the group’s transfer pricing method that proves the arm’s length character of the prices of the controlled transactions
- A brief description of important service arrangements between members of the MNE group, other than contracts for services in the field of research and development
- A description of the main geographic markets for the group’s products and services
- A brief functional analysis describing the contributions to value creation by individual entities within the group
- A description of important business restructuring transactions, acquisitions, and divestitures occurring during the fiscal year
- A description of the business strategy, as well as any changes that occurred compared to the previous taxable year
- Information regarding intangible assets
- Information related to the group’s financial intercompany activities
- The group’s financial and tax positions.
- Risk analysis and assessment of a high level
- Identification of potential risk
- Assess the scale of the problem
- Prioritise this risk among many other risks.
- NRA strategy for counteracting the risk from transfer to profits:
- Building administrative capacity
- Creating a sustainable process to deal with this risk
- Providing a budget.
- In case of failure to submit the TP file by a taxpayer to the tax authorities, a penalty of 0.5% of the total amount of transactions that should have been documented may be imposed. It will be considered that a local transfer pricing file has not been prepared when such file is not provided to that Bulgarian tax authorities upon their request and within the course of audit inspection.
- If a taxpayer fails to submit the master file, a penalty between BGN 5,000 and BGN 10,000 may be imposed.
- Finally, in case of the submission of incomplete or incorrect data, the penalty ranges from BGN 1,500 to BGN 5,000.
- The amount of the penalties may be doubled in case of repeated failure to meet the requirements for preparation of transfer pricing documentation.
- A company which fails to submit a CbCR, shall be punished with a penalty payment in the amount of BGN 100,000 to BGN 200,000, and for a repeated infringement – from BGN 200,000 to BGN 300,000.
- A company which fails to specify or specifies incorrect or incomplete data or circumstances in the CbCR, shall be punished with a penalty payment in the amount of BGN 50,000 to BGN 150,000, and for a repeated infringement – from BGN 100,000 to BGN 250,000. This punishment shall be also imposed in cases where incomplete or incorrect data are due to refusal by the ultimate parent undertaking to provide information.
- A composite undertaking which fails to fulfil the notification obligation under Article 143y from TSSPC, shall be punished with a penalty payment amounting from BGN 50,000 to BGN 150,000, and for a repeated infringement – from BGN 100,000 to BGN 200,000.
Article 15 of CITA
§1 item 8 of the Additional Provisions of the TSSPC
Articles 5 and 6 of Ordinance № N 9
Transfer pricing analysis is not possible without reliable market data on comparable elements (companies or transactions)
The search for comparable elements is one of the most difficult tasks in transfer pricing, due to the lack of ideal comparability, expensive access to databases and market information, lack of transactions similar to transactions between related parties to exist between independent parties.
Sources of market information
Internal comparable elements are the perfect (but rare) comparability
External comparable elements
Information stored in the Registry Agency
External private databases AMADEUS ORBIS, DIANE OneSource, OSIRIS, Loan Connector, Royaltystat KOMPASS, ACIDS, KV RISKCALC, FAME, ODIN;
Publications, reviews, analyzes on the Internet
Statistical information of the BNB, NSI and other institutions
Stock exchange bulletins and publications on stock exchange prices in specialized publications
Specialised and branch publications
Concept and Approaches to Price Regulation
Principle of independent market relations (arm’s length principle)
Transfer pricing methods
Pricing approaches for specific transactions
The principles enshrined in the OECD Guidelines further develop the rule of Art. 9 of the OECD DTT Model, followed by Bulgaria in negotiations for concluding bilateral DTTs
- No APA opportunities or binding ruling is currently applicable.
- Taxable entities are allowed to file a request for a written opinion from the National Revenue Agency or the Minister of Finance on the interpretation and application of the tax law regarding a specific tax issue. However, the value of the position of the tax authorities on a particular tax aspect is very limited as the tax authorities refuse to provide any opinion about transactions that have not been yet structured and documented.
- There are opportunities for availability/access to MAP.
Companies which are exempt from preparing a local file:
- Bulgarian taxpayers which, as of 31 December of the previous year, do not exceed the abovementioned thresholds:
- BGN 38 million (approximately EUR 19 million) book value of assets
- BGN 76 million (approximately EUR 39 million) net sales revenue
- average number of the personnel for the reporting period of 250
- Entities which are not subject to corporate income tax (CIT)
- Entities which are subject to alternative taxes
- Entities performing only related party transactions within Bulgaria.
- The economic fallout of COVID-19 is likely to have widespread impact and an increase in TP, DPT and Corporation Tax enquiries globally is expected. All MNCs should be reviewing their potential exposure to transfer pricing enquiries and DPT and updating documentation accordingly.
- It is also likely that NRA will continue to focus challenges towards companies with commissionaire/LRDs and 'cost plus' service entities, especially where they are claiming losses because of the pandemic.
- Where supply chains have been disrupted or work brought to a halt due to lockdown measures, expected profits may not eventuate. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.