Bulgaria’s National Revenue Agency (NRA) released guidelines on transfer pricing documentation in February, for the first time defining what paperwork the agency expected to be given whenever it inquired about transfer pricing during the course of tax audits and other reviews.

Globalisation and the widening reach of transnational companies has made transfer pricing a sensitive issue for fiscal authorities as government agencies sought to prevent any attempts by companies to reduce taxable profits in their respective jurisdictions.

The focus are cross-border transactions within a company, regardless whether these involve tangible or intangible assets, services or money. Instead of taking the company’s own internal prices set on the transaction, which might not always reflect market rates, government agencies issue guidelines that are used to calculate transfer prices.

Bulgaria’s new guidelines are part of NRA’s audit manual and are not technically part of the law, according to consultants Ernst&Young. The guidelines are based on the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines for multinational enterprises and tax administrations, as well as the European Union’s code of conduct for transfer pricing documentation for associated enterprises.

"The Bulgarian requirements are not in general more onerous than the international norms on which they are based," Ernst&Young said in a statement sent to The Sofia Echo. Existing foreign transfer pricing documentation can be used as a starting point for Bulgarian documentation, Ernst&Young said.

Although not part of the law, it would be "in the interest of taxpayers to comply with the guidelines since they now define what the NRA will normally require under their existing powers. Compliance with the guidelines should therefore greatly reduce the scope for disputes about transfer pricing matters during tax audits," Ernst&Young said.

Other features of the new guidelines include the aggregation of similar transactions – even if each related party transaction should nominally have its own paperwork, similar transactions can be aggregated under certain conditions; an exception for microbusinesses (which are defined in Bulgaria as companies with less than 10 employees, an annual turnover below two million euro and/or net assets of below two million euro); and simplified documentation for lower-value transactions based upon annual thresholds.

The guidelines apply the "arm’s length" principle mandated by the OECD, which stipulates that a transfer price should be the same as if the corporate entities involved were independent and not part of the same corporate structure.

The principle has been part of Bulgaria’s tax laws since 1993 and required that the taxpayer proved that the principle was duly upheld, giving the NRA the power to re-assess tax liabilities if it was not satisfied.

"There has so far been significant uncertainty about what evidence the NRA might require in order to substantiate transfer prices. The guidelines now define the evidential documentation they will generally require when reviewing the transfer pricing during tax audits," Ernst&Young said.

Specifically, the guidelines require that the transfer pricing documentation must have a separate master file – providing information about the multinational group – and a country-specific file, which should document the transactions that the Bulgarian entity was involved in, a description of its functions and risks in the supply chain and a description of the transfer pricing methodology and the reasons for its selection.

The guidelines provide Amadeus (a European database commonly used to find comparable transactions, with data from nine million companies), Orbis and National Statistics Institute databases as sources for comparative data on transfer pricing.

Companies are required to keep their documentation up-to-date and retain it for at least five years after the expiry of the statute of limitations for the relevant tax year. The country-specific file must be in Bulgarian, but the master file could be in another language, but a certified translation could be required by the NRA.

An important aspect of the new guidelines, according to Ernst&Young, is that they can be applied to past periods and put the burden of proof on the taxpayer.
Furthermore, the definition of a related party is different for tax and accounting purposes. "Whereas the latter requires common control, a five per cent shareholding relationship is sufficient to be classified as a related party for Bulgarian tax purposes," Ernst&Young said.

"Although the guidelines are to be welcomed in removing uncertainty about what is required to defend transfer pricing for tax purposes, they also supply new weapons to the NRA arsenal at a time when it is under pressure to collect more revenues."

"We believe it is likely that we will see the guidelines deployed in tax audits quite soon to question and enforce transfer pricing, or simply to try to collect more tax," according to the consultancy firm, which offers transfer pricing-related services, including reviewing existing arrangements and assistance in drafting compliant documentation.