Transfer Pricing Case Study

Location: Bulgaria, Greece

Filippos Theofanopoulos
Head of Transfer Pricing

Optimizing Compliance and Profit Allocation between Greece and Bulgaria

Introduction

Navigating transfer pricing rules can be particularly challenging for multinational companies operating in multiple jurisdictions. This case study examines how Eurofast assisted a Greece-based parent company, operating in the automotive components sector, to structure and optimize its intercompany transactions with a distribution subsidiary in Bulgaria, ensuring compliance with OECD guidelines and mitigating tax risks.

News – Key Challenges and Compliance Needs

Background: A Greece-based manufacturer, “AutoParts SA,” exports automotive components to its Bulgarian subsidiary, “AutoDistrib EOOD,” which handles sales and distribution in the Bulgarian market. The parent company needed to address several challenges:

  1. Profit Allocation Issues – Tax authorities in both countries questioned whether the pricing model reflected market realities, exposing the company to audit risks.
  2. Regulatory Compliance – Both Greece and Bulgaria follow OECD guidelines but require distinct reporting formats and documentation.
  3. Benchmarking Limitations – Lack of directly comparable companies performing similar functions complicated the selection of an arm’s length pricing model.
  4. Cross-Border Risks – Currency fluctuations, transportation costs, and different VAT rules posed difficulties in pricing consistency.

Eurofast’s Approach:

  1. Functional and Economic Analysis:

According to the OECD TP Guidelines a functional analysis is incomplete unless the material risks assumed by each party have been identified and considered since the actual assumption of risks would influence the prices and other conditions of transactions between the associated enterprises. Therefore, this section considers the six-step approach as delineated by the OECD TP Guidelines in paragraph 1.60 and onwards. The six-step approach taken into account for analyzing risk in controlled transactions is as follows:

1.          Identify economically significant risks with specificity;

2.          Determine how specific, economically significant risks are contractually assumed by the associated enterprises under the terms of the transaction;

3.          Determine through a functional analysis how the associated enterprises that are parties to the transaction operate in relation to assumption and management of the specific, economically significant risks, and in particular which enterprise or enterprises perform control functions and risk mitigation functions, which enterprise or enterprises encounter upside or downside consequences of risk outcomes, and which enterprise or enterprises have the financial capacity to assume the risk;

4.          Steps 2-3 will have identified information relating to the assumption and management of risks in the controlled transaction. The next step is to interpret the information and determine whether the contractual assumption of risk is consistent with the conduct of the associated enterprises and other facts of the case by analyzing (i) whether the associated enterprises follow the contractual terms; and (ii) whether the party assuming risk, as analyzed under (i), exercises control over the risk and has the financial capacity to assume the risk;

5.          Where the party assuming risk under steps 1-4 (i) does not control the risk or does not have the financial capacity to assume the risk, apply the guidance on allocating risk; and

6.          The actual transaction as accurately delineated by considering the evidence of all the economically relevant characteristics of the transaction, should then be priced taking into account the financial and other consequences of risk assumption, as appropriately allocated, and appropriately compensating risk management functions.

According to the above Eurofast Greece performed:

  1. Conducted in-depth interviews and reviewed financial statements to analyze the roles, risks, and resources of each entity.
    1. Evaluated the value chain and determined which party contributed more economic value to justify profit allocation.
  2. Selection of Methodology:
    1. Adopted the Transactional Net Margin Method (TNMM) as the most appropriate model, focusing on the net profit margin for the Bulgarian distribution entity.
    1. Benchmarked net margins using databases of comparable distributors within the CEE region.
  3. Benchmarking Study:
    1. Identified comparable independent companies in the automotive distribution sector in Bulgaria and nearby EU markets.
    1. Established a range of acceptable margins that would align with OECD’s arm’s length principle.
  4. Documentation and Compliance Measures:
    1. Prepared Master File and Local Files for both Greece and Bulgaria, ensuring alignment with each jurisdiction’s specific requirements.
    1. Conducted scenario analysis to evaluate potential audit risks and provided defense strategies.
  5. Advance Pricing Agreement (APA):
    1. Assisted the client in applying for an APA with Bulgarian tax authorities to secure approval for the pricing methodology and prevent future disputes.

Eurofast’s Take – Practical Outcomes and Benefits

Eurofast’s tailored approach provided:

  • Regulatory Compliance: Ensured both jurisdictions accepted the pricing methodology, reducing audit risks.
  • Tax Efficiency: Optimized profit allocation between entities, minimizing double taxation exposure.
  • Proactive Risk Management: The APA offered protection against future disputes, enabling long-term operational stability.
  • Data-Driven Decision Making: Real-time pricing adjustments based on market trends ensured continued alignment with arm’s length principles.

Clients’ names and photos have been changed.

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