The amendments to the Bulgarian Tax and Social Security Procedure Code in August 2019 relating to mandatory transfer pricing (TP) documentation came into effect on January 1, 2020. Thus 2020 is the first year for which TP documentation, including a local file and a master file, should be prepared.
The new rules are based on the Report on Action 13 “Transfer Pricing Documentation and Country-by-Country Reporting“ of the Base Erosion and Profit Shifting (BEPS) Plan developed by the OECD, as well as on the Code of Conduct on transfer pricing documentation for associated enterprises in the EU. As a result, Bulgaria’s documentation rules are largely unified with the rules of a wide range of countries, which are themselves based on these same sources.
The obligation to prove the arm’s length nature of related-party transactions (controlled transactions) had existed in the law before, but there were no clear rules as to the manner of proving. A number of taxpayers, especially those that were part of multinational groups, chose to prepare TP documentation using the available guidelines.
The new requirement for preparing TP documentation applies to local legal entities, foreign legal entities that carry out economic activity in Bulgaria through a permanent establishment, and sole traders, but does not apply to all entities and transactions.
Exempt from the requirement to prepare a local file are those taxpayers that, as of December 31 of the previous year, do not exceed at least two of the following thresholds: (i) book value of the assets - BGN 38 million (approximately EUR 19 million), (ii) net sales revenues - BGN 76 million (approximately EUR 38 million), and (iii) average number of personnel for the reporting period - 250 people. The exemption also applies to taxpayers that are not subject to corporate tax or are subject to alternative taxation under the Corporate Income Tax Act. Entities which perform only domestic controlled transactions are also excluded. Furthermore, there is no obligation to prepare a local file for controlled transactions with individuals (save for sole traders).
The law expressly defines controlled transactions for which a local file should be prepared as those exceeding (on an annual basis): BGN 400,000 (approximately EUR 200,000) for the sale of goods, (ii) BGN 200,000 (approximately EUR 100,000) for other transactions, (iii) BGN 1 million (approximately EUR 500,000) for a loan principal or BGN 50,000 (approximately EUR 25,000) for interest and other income or expenses related with the loan. These thresholds are calculated separately, with an exception made where two or more transactions with one or more related parties are concluded under comparable conditions.
This approach, which keeps the focus on large multinational transactions, is considered justified since the preparation of TP documentation involves additional cost and time for businesses.
Taxpayers that are part of a multinational group of companies and have an obligation to prepare a local file shall also have a master file prepared by the ultimate parent company or another entity in the group. The deadline for preparing the local file is March 31 of the following year and the deadline for the master file is 12 months thereafter. Furthermore, sanctions for non-compliance with the TP documentation rules may be quite significant.
While the new rules concerning mandatory TP documentation have a limited scope of application, the obligation of the taxpayers to prove the market-based conditions of their transactions with related parties remains. This also refers to the right of the tax authorities to reclassify the income or adjust the tax base or the due tax, if tax evasion is found to exist. Taking this into account, the new rules increase the level of predictability by giving the taxpayers information about how they can protect the pricing of their transactions and what the tax authorities expect.
It should also be mentioned that at this point advance pricing agreements are not regulated under Bulgarian law, although Bulgaria can receive issued APAs as part of the automatic exchange of information.
During recent years transfer pricing has become a priority for the Bulgarian tax authorities and the adoption of the TP documentation rules supports this focus. Accordingly, increased tax control over multinational related-party transactions upon tax audits could be expected moving forward.
By Daniela Petkova, Head of Corporate and Tax, Gugushev & Partners