Head of Transfer Pricing Division, Eurofast
Eurofast is a business advisory employing over 200 advisors at 21 offices in Southeast Europe (SEE) and the Middle East. With over 28-year experience, having worked with many global brands and leading institutions, operating in the manufacturing, retail, airline, and professional services sectors, Eurofast is uniquely positioned as a one-stop shop for investors looking to enter the region.
What are the latest transfer pricing developments in Southeast Europe (SEE) and particularly in countries where Eurofast is present?
Anti-avoidance rules are becoming stricter across member states of the European Union as well as beyond the union’s borders. Transfer pricing (TP) rules as part of the Commission’s ambitious agenda towards a more fair and effective corporate taxation in the EU are implemented and embodied in national legislations in a growing number of countries in the SEE Region.
For instance, in Bosnia and Herzegovina the nearest step towards approaching the rules of the Organisation for Economic Cooperation and Development (OECD) was made in early 2016 with the adoption of new laws in the field of taxation for legal entities. Due to a low corporate income tax rate of 10%, there was no motivation for profit shifting away from the country. Tax authorities did not pay much attention to TP until recently, but the introduction of the new legislation has made it a matter of extreme interest so as a result all regions in Bosnia introduced rulebooks on TP in order to further adopt the OECD Guidelines.
In Croatia the latest change related to the TP legislation concerns the Advance Pricing Agreements (APAs) which was introduced in the Corporate Income Tax Act provisions as of January 1, 2017. Furthermore, CbC reporting requirements were published on March 29, 2017 by the Croatian Tax Administration.
To show the increasing importance of TP rules, the Bulgarian Ministry of Finance in 2013 approved a table published by the NRA, according to which, up to March 31, 2014 every legal entity is obliged to complete and submit a table that contains information regarding related party transactions. Additionally, Bulgaria introduced the implementation of the “CbC Report” in August, 2017 in accordance with the OECD Action 13, accompanied with severe penalties for taxpayers. MNEs will submit the CbC report in Bulgaria if the ultimate parent company is tax resident in Bulgaria and the consolidated Group Revenue exceeds 51 million euro for the fiscal year immediately preceding the reporting fiscal year, or if a constituent entity of a MNE Group is tax resident in Bulgaria, the ultimate parent entity is not obliged to submit a CbC report in its jurisdiction and the total consolidated group revenue exceeds 750 million euro, under certain circumstances as well.
Serbia has developed TP rules since 2013 but not yet implemented the CbC report while Romanian Law – in accordance with the ordinance Nb. 442/2016 – defines that “large taxpayers” engaging in material transactions exceeding specific threshold amounts with related parties, should prepare TP documentation on an annual basis.
What are the key TP risk areas?
I always state that large deductible payments to related parties are in the tax authorities’ focus in every country. This includes royalties, interest payments, service transactions without any justification or inconsistent with the business of the taxpayer or inconsistent with the providers’ origin. Can you imagine a Greek company paying high marketing fees a company based in a jurisdiction with significant lower tax rate even if the provider is not a related party? Tax Authorities will definitely look closely into that transaction with the said provider. Another risk area includes transactions with companies registered in jurisdictions with preferential tax systems. Generally, an inconsistent profitability for the taxpayer with what might be expected for a similar uncontrolled taxpayer is indicative and can lead to an audit by the tax authorities.
How do you advise your clients to manage their risks?
A clearly designated person should be dealing with TP reporting in every entity in addition to the experts. Apart from external advisors, every company should have or should recruit a person with international tax experience. MNEs should understand that organising their departments in tax reporting is as important as organising the sales department. We tend to underestimate people who save money and time for an organisation while on the other hand we overestimate people who bring money. Of course, avoiding all the abovementioned risks is one way to mitigate risk and adverse tax consequences as is trusting your TP advisor! At the end of the day, your TP advisor is your choice.