In the issue 64/13.08.2019 of The State Gazette, the Law on the Amendment and Supplementation of the Tax and Social Insurance Procedure Code (TSIPC) has been promulgated. A new Chapter 8 A has been created and it specifically introduces rules for the preparation of transfer pricing documentation.
The Transfer Pricing documentation should be prepared to demonstrate the nature of commercial and financial relationships of the taxpayer with related parties. This obligation is in force in the existing TSIPC but there were no clear and specific rules about the means of proof and the necessary content.
As of 01.01.2020, the documentation must provide that the conditions of commercial and financial relationships between related parties are compliant with the arm’s length principle. Specifically:
• the conditions that would be established between independent persons in comparable circumstances
• the transactions were carried out at market prices
The transactions that establish a commercial and financial relationship between related parties are called controlled transactions.
The TP documentation consists of a local file that includes activity information, controlled transactions (related party transactions) and market pricing methods used. The local file must be prepared by 31 March of the year following the year to which it relates. This deadline is consistent with the deadline for filing the annual tax return under Art. 92 of the Corporate Income Tax Act.
When individuals are part of a multinational enterprise group, they should also have a summary dossier containing information about the group, including organizational structure, activity, controlled transactions, functions of group entities and the applicable transfer pricing policy.
Entities which have the obligation to prepare TP documentations include:
• As per Art. 71b, par.1, the local legal entities, foreign legal entities carrying out economic activity in the Republic of Bulgaria through a place of business, and sole proprietors who determine their taxable income in accordance with Art. 26 of the PITA, are obliged to prepare a local file when conducting controlled transactions.
The obligation is not applicable to:
- The persons who are exempt from corporate tax under Part Two, Chapter Twenty Two, Section II of the CITA;
- The persons carrying out activity subject to an alternative tax under Part Five of the CITA
- The persons who did not exceed the following indicators as of December 31 of the previous year: a) the carrying amount of the assets does not exceed 38 000 000 BGN b) the net sales revenue is up to 76 000 000 BGN or c) the average number of employees over the reporting period does not exceed 250 ees.
- The entities are conducting controlled transactions only in the country.
The TP local file is not to be prepared for controlled transactions with individuals other than sole traders. Thresholds have been introduced in order to determine the requirement to prepare the TP file. Specifically, transactions involving sale of goods exceeding BGN 400,000 (or BGN 200,000 in other cases) give rise to the requirement to prepare a TP file. Additional thresholds are defined for loan-related transactions.
A taxpayer who fails to prepare a local file under Chapter Eight (a) shall be liable to a pecuniary sanction of up to 0.5 % of the total value of the transactions for which the documentation was to be prepared. Additional sanctions have been prescribed as well, for incorrect or incomplete information.