Preparation of transfer pricing documentation
The efforts of the tax authorities of many countries to tax the profits made in respective country have led to the obligation of taxpayers, who conducts its business with related parties, to submit studies on transfer pricing. Conducting business with related parties, may lead to profit manipulation, which could result in tax evasion.
Legal regulations for transfer pricing in Serbia:
- Corporate income tax law,
- Transfer pricing rulebook.
What is transfer pricing?
- Transfer Prices are prices realized between related parties, in transactions such as selling products and services, or when approving loans and borrowings. Thus, transfer pricing occurs when related parties conduct transactions with each other, so called - controlled transactions.
Who are related parties?
- Legal entities were between them is possibility of control or the possibility of significant influence on business decisions trough possession of at least 25% of shares or stocks, ie votes in management boards (Article 59, paragraphs 3 and 4 of the CIT Law);
- Legal entities in which the same individual or legal entities participate in management and equity ownership (Article 59, paragraph 5 of the CIT Law);
- Relatives of owners of legal entities that are related on the basis of ownership at least 25% of shares or stocks, i.e. votes in management board (Article 59, paragraph 6 of the Law);
- Legal entities from jurisdictions with a preferential tax system - the so-called. tax heavens (Article 59, paragraph 7 of the Law).
Who is obliged to submit transfer pricing study in full extent?
- All companies and entrepreneurs doing business with related parties if the total value of transactions or one-off transaction with individual related parties exceeds the value of RSD 8,000,000 (the limit does not apply to borrowings and loans).
Submission deadline for transfer pricing study:
- For companies 180 days from the date of expiration of the period for which the tax liability is determined,
- For entrepreneurs until March 15th next year,
- In case of status changes, liquidation or bankruptcy of the taxpayer, submission deadline is within 15 days from the date of expiration of the deadline prescribed for submission of financial statements.
Transactions that are not subject of analysis:
- The recipient of the interest-free loan has no obligation to prepare a transfer pricing study;
- Payments of founders from abroad that do not increase the equity;
- Payments of the parent company from abroad to its branch in Serbia - transfer of money from account to account;
- Sale of fixed assets that are subject to capital gains tax.
Transactions that are subject of analysis:
- Sale/purchase of goods and services;
- Sale of equipment ;
- Procurement of real estate, plant and equipment;
- Sale/purchase of intangible assets;
- Loans and borrowings;
- Joint participation in research and development costs.
What does a full extent transfer pricing study contain?
- Group analysis:
Group analysis includes a description of the economic activities of the group, organizational and legal structure of the group, ownership, history and general financial data, description of the business and business policy of the group, highlighting significant policy changes; history and ownership of the taxpayer himself, description of the taxpayer's business policy, financial overview and key business factors; review of basic data on related parties with whom the taxpayer realized intercompany transactions.
- Activity analysis:
Activity analysis includes a description of all activities that the taxpayer is engaged in, definition and classification of the activity; analysis of the market and basic factors; review of special legal regulations, identification of business risks, analysis of market share, as well as review of major competitors, customers and suppliers.
- Functional analysis:
The subject of functional analysis are the transactions that the taxpayer realized with related parties. We perform a detailed analysis of transactions, their type, considering whether there is a possibility of a unified approach or each transaction to be observed individually; we perform the analysis of assumed functions, risks and engaged assets, as well as the analysis of the most important factors that affect the price, and the determination of the essential economic position of the participants in the transactions.
Transfer pricing regulation allows application of several methods in assessing the compliance:
- Comparable uncontrolled price method,
- Cost plus method,
- Resale method,
- Transactional net margin method,
- Profit split method,
- All other adequate methods based on reasonable assumptions.
According to the realized transactions, we select the most adequate method in accordance with the type of transaction, availability and reliability of available data, the level of comparability and the possibility of quantifying differences in order to reconcile them to a comparable level.