New requirements for the mandatory transfer pricing documentation

The expected amendments to the Tax and Social Procedural Code were promulgated in August 2019, introducing the obligation for certain categories of persons to prepare and store transfer pricing documentation. The purpose of the amendments is to further ensure compliance with the arm’s length principle by regulating mandatory documentation that proves that transactions with related parties are conducted on a market basis. The amendments mainly concern Bulgarian taxpayers (legal entities) and permanent establishments of foreign companies operating in the country who are part of multinational groups and carry out transactions within the group. The amendments will become effective as of January 1, 2020 and this is the first year they will apply for.

1.  Who are the parties and the transactions concerned?

Local and foreign legal entities operating in Bulgaria, carrying out transactions with related parties and meeting the accounting criteria for large enterprises are obliged to prepare transfer documentation.

The specific quantitative criteria to be met are as follows:

  • assets with a balance sheet value exceeding BGN 38 million, and
  • annual net revenue exceeding BGN 76 million, or
  • personnel exceeding 250 people for the reporting period (regardless of the value оf the assets and the net revenue.

Exceptions to the above rule are the following:

  • entities that are not subject to corporate income (e.g. certain collective investment schemes etc.);
  • entities engaged in activities subject to alternative tax (e.g. budget enterprises or taxi companies);
  • entities carrying out transactions with related parties only in the country.

The transactions requiring transfer pricing documentation are controlled transactions (those through which commercial and financial relationships between related parties is established), the value of which (excluding VAT and excise duty) for the respective year exceeds BGN 400,000 – for sale of goods and BGN 200,000 – for all other transactions.

File is also required for loans, both received from or provided to related parties, exceeding BGN 1 million or with a total amount of accrued interest and other loan related income or expenses exceeding BGN 50,000.

Each transaction is calculated individually, and in certain cases, transactions can be grouped.

2.  Mandatory documentation

The mandatory documentation to be prepared includes: a local file and a master file, the detailed content of which are regulated by law. The content to its great extent is consistent with the European and international standards set by the European Commission and the Organisation for Economic Co-operation and Development.

  • Local file

The local file should contain information about the business and property of the entity, as well as the transactions carried out with related parties and methods of market pricing. The deadline for compiling the local file is March 31 of following year. In case of submission of a corrective annual tax return, the information in the local file is to be updated within 14 days, but no later than September 30.

  • Master file

The master file contains information on the organisational structure and activities of the multinational group of companies, the functions of each of the members, the transactions carried out within the group, as well as the applied transfer pricing policy. The master file needs to be compiled by the parent company or another entity within the group and is to be prepared and available no later than 12 months after the deadline for preparing of the local file.

The documents which are part of the transfer pricing documentation need to be prepared on annual basis and kept by the obliged entity. The documents shall be presented to the revenue authority upon its request, in the course of an inspection or audit.

3.  Sanctions

The following sanctions can be imposed in case of violations of the newly adopted provisions:

  1. For failure to prepare a local file, the sanction can reach up to 0.5 % of the total value of the transactions for which transfer pricing file should have been prepared.
  2. For not presenting a master file, the sanction can be in the amount from BGN 5,000 to 10,000.
  3. For providing untrue or incomplete data, the sanction can vary from BGN 1,500 to 5,000.

Source: Dimitrov, Petrov & Co