Transfer Pricing & Tax Avoidance

The introduction of Transfer Pricing in the domestic legislation of Serbia is a very recent development. In 2012 the transfer pricing provisions were introduced in the Serbian Corporate Income Tax Law (thereafter CITL) and were later expanded in the Transfer Pricing Rulebook. This Rulebook was published on 12 July 2013 in the Official Gazette of the Republic of Serbia (RS no. 61/2013) by the ministry of Finance.Taxpayers should have the appropriate TP documentation in place in order to defense their Transfer Pricing Policy.

According to the Serbian legislative framework, an entity is considered a related party if there is a possibility of exercising control over or exerting considerable influence on business decisions made. The direct or indirect possession of 25 % or more of the shares in capital shall mean that control over the taxpayer is possible.

In the case of direct or indirect possession of at least 25% of the voting rights is considered as having an influence on business decisions.

In addition, companies that directly or indirectly have the same persons in the management, ownership or control, as already described, are also considered related parties. No matter the percentage of ownership or voting rights in a Serbian Company, any company which is a resident of a jurisdiction with a preferential tax system is deemed to be a related party.

Amendments were adapted to the Rulebook by the Ministry of Finance of the Republic of Serbia on January 2014. The amendments were published in the Official Gazette of the Republic of Serbia No 8/2014 on 29 January 2014 and were basically aimed at the reduction of the transfer pricing documentation requirements of taxpayers in the cases of transactions that do not have a material impact on the tax liability of the taxpayer. Therefore, taxpayers may submit an abbreviated report which does not have to include a detailed analysis identifying whether the transfer prices set abide by the provisions of the arm’s length principle.

In order to fall within the new provisions the threshold amount was set at 8 Million RSD (approx. 70.000 EUR).

It should also be noted that the above provisions for the submission of a simplified report are not applicable to loans and credits.

Transfer pricing documentation and choice of the appropriate method

A full Transfer Pricing study must include the following parts:

Analysis of the associated enterprises and the group of the taxpayer,
Taxpayer’s industry analysis,
Functional analysis,
Selection of the most appropriate Transfer Pricing method
Conclusion – Summary of the amounts that should be added to the tax base of the company according to the results of the study
Appendixes
The taxpayer should choose one or a combination of the methods described in the OECD guidelines :
Comparable Uncontrolled Price (CUP) method
Resale Price Method
Cost Plus Method
Transactional Net Margin Method (TNMM)
Profit Split Method

The taxpayers should also describe the decisive reasons for the determination regarding the method used for the reconciliation of the transfer prices with “the arm’s length” principle of the transactions carried out with the associate enterprises.

Transfer Pricing Audits

The Serbian Tax Authorities have increased their attention on transfer pricing audits even though practical experience is still limited. This is evident from the recent developments in the Serbian CITL legislation and the publication of the Rulebook for the purposes of providing clear guidance on transfer pricing issues. In line with the above, the Rulebook sets out all the relevant information for the documentation requested on inter-company transactions and the methods that may used to determine appropriate transfer prices. In addition, the Serbian Authorities will continue to issue guidance so as to clarify any ambiguities in the Rulebook or even enact simplified approaches in order to ensure that all transactions captured by the transfer pricing legislation are appropriately documented.

Transfer pricing is at the top of the agenda of the Serbian Tax Authorities and it is therefore expected to become one of the most important issues of multinationals operating in Serbia.

In more practical terms, the Tax authorities in Serbia are more thorough in cases of large deductible expenses, where the taxpayer makes large deductible payments to related parties (e.g., interest payments, royalties, services, etc). Moreover when the profitability of the local entity is inconsistent with what might be expected from a similar taxpayer then there is a high level indication for a potential tax audit.

Transactions among a company based in Serbia or a permanent establishment in Serbia with entities operating in Jurisdictions with a preferential tax system, also constitute a critical area.

Penalties

According to the article 112 of the CITL in the Republic of Serbia, any taxpayer shall be fined from 100,000 to 2.000.000 dinars for breach of regulations in the following cases:

Failure to declare separately in the tax account the value of the transactions conducted with associated persons in accordance with the “arm’s length” principle (Article 60 of the CITL);
Failure to submit or fulfil documentation from the Article 60.( Paragraph 3 of the CITL) within time frame defined by the notice prescribed by the Article 112a of the CITL(30 to 90 days period).

More specifically, penalties for failure to submit the required transfer pricing documentation within the period stated by the Tax Authorities are as follows:

• Legal entity will be penalized between 100 and 2,000 (amounts in Thousands RSD)

• Responsible person within the legal entity will be penalized between RSD 10 and 100 (amounts in Thousands RSD)

• 15% of corporate income tax will become due on the difference between the arm’s length principle prices and the prices used in respective related parties transactions;

• Penalty interest is to be charged on the amount of the understated corporate income tax, equal to the annual reference rate of the National Bank of Serbia increased by ten percentage points;

• From a period between three months and one year, the taxpayer may be prohibited to carry out a specific business activity in case of a proven indicator that a taxpayer understates on purpose the taxable base.

Future Outlook

Transfer pricing worldwide is probably the most important tax issue Multinational Enterprises (“MNEs”) are currently facing. Companies through transfer prices attempt to reduce their worldwide tax liabilities by transferring their profits from countries with higher tax rates to countries with relatively lower tax rates either by under-charging or over-charging the associated entity for intra-group trade.

The OECD’s work on tax base erosion aims to create new international tax rules with defined paths for income and new standards and guidelines may soon be expected. More and more countries have to tackle cross-border tax evasion – in the line of the above- taking a great step towards tax transparency, OECD released a full version of a global standard for the automatic exchange of information between jurisdictions on July 2014.

First time of general implementation of the new Transfer Pricing Rules in Serbia within 2014 has certainly generated interest on the topic and naturally an adjustment period for the implementation of the new regulations should be expected from both the taxpayers and the tax authorities.

Based on the comments that were published related to the “Discussion Draft on Transfer Pricing Documentation and CbC Reporting” one change for the Serbian Jurisdiction should be the language of the Transfer Pricing documentation. Companies are suffering due to huge translation costs in every jurisdiction they operate. Moreover, a commonly used language such as English would simplify compliance.

Another change that should be adopted in Serbia is the necessity of submitting the file to the local tax authorities. The Transfer Pricing documentation includes highly confidential information about the overall policy and the strategic plan of the whole Group. Therefore the whole TP study should be provided to the tax authorities either upon request or as a part of a regular tax audit and always on the business’s headquarters. This will limit the risk related to information leakage of commercially sensitive information.

Transfer Pricing Legislation