Transfer pricing documentation requirements in regard with controlled transactions

On 05.11.2018 the Ministry of Finance introduced a bill for Amendment and Supplement of the Tax and Social Insurance Procedure Code.

The bill seeks to implement Action 13 of the Base Erosion and Profit Shifting actions (the so-called BEPS actions) of the OECD.   

The bill makes provision for obligations concerning local and foreign taxable legal persons which perform business activities in the Republic of Bulgaria through a place of business activity in the country, and which also carry out the so called “controlled transactions” on the territory of the country – i.e. they have commercial and financial relationships with related parties. For these relationships there will have to be prepared transfer pricing documentation which is to prove that the controlled transactions are carried out on terms that are applicable to independent persons.  

The said documentation will consist of a local and a generalized file (the generalized file is necessary in the event of a multinational group of companies where the parent company will be preparing the file). An obligation to prepare said documentation will arise for a person which as of the 31st of December of the preceding year had carried out controlled transactions in excess of the following thresholds:

  • BGN 8 000 000 –  for the book value of the assets;
  • BGN 16 000 000 – for the net income from sales;
  • BGN 400 000 – for transactions for the sale of goods (without VAT);
  • BGN 200 000 – for transactions for the supply of services (without VAT), as well as for transactions for disposing or granting of intangibles, or transactions with financial assets;
  • BGN 2 000 000 – for extension of loans or when the total amount of interest accrued and the other loan-related income or expenses exceeds BGN 100 000.

Also, penalty payments are stipulated for taxable persons whose activity does not comply with the stipulated provisions, and namely:

  • for lack of a local file or failure to submit such – from 0,5 to 1 per cent of the total value of the transactions for which there had to be prepared documentation; in the event of loan extension or borrowing – from 0,5 to 1 per cent of its total value;
  • for lack of a generalized file – from BGN 5000 to 10 000;
  • for providing untrue or incomplete data in the transfer pricing documentation – from BGN 1500 to 5000;
  • if the breach is repeated the penalty payment will be double the amount.

Transfer pricing documentation will not be required in the following cases:

  • upon execution of controlled transactions with natural persons (this does not apply to sole traders);
  • persons exempt from corporate taxation under part two, chapter twenty-two, section II of the Corporate Income Tax Act;
  • persons performing activity which is subject to alternative taxation under part five of the Corporate Income Tax Act.

The prepared documentation will not be filed in the National Revenue Agency but will be kept by the taxable person to be submitted to the respective revenue authorities upon demand on their part.   

Should the amendment enter into force the local file will have to be prepared by the 31st of March of the year following the year it applies to, whereas the generalized file – no later than the expiration of 12 months after the term stipulated for the local file. As of this moment the bill has not been adopted. As a law firm, which provides full service in the field of tax law, accounting services and audit, we, from Tascheva and Partner, are fully prepared to bring our client’s activities in compliance with the foreseen requirements.

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