The rules on Transfer Pricing usually define the form, deadline and content of the transfer pricing documentation, the selection and manner of the application of transfer pricing methods, as well as the manner of assessment of the base for the calculation of the depreciation of fixed assets acquired in transactions with related parties. According to the regulations the content of mandatory report is as follows:

• Analysis of Group of Companies
• Analysis of Company Business and Factual analysis
• Presentation of intercompany transactions
• Functional Analysis - Value chain and determination activities performed and risks assumed
• Consideration of Transfer pricing methods used for transactions
• Findings and final tax corrections
• Appendix (extract from relevant database, intercompany agreements etc.)

According to the Rulebook on Transfer pricing in Serbia, following methods are allowed, including potential combination of methods:

• Comparable Uncontrolled Price Method (CUP)
• Cost plus method
• Resale minus method
• Transactional net margin method (TNMM)
• Profit Split method (PS)
• All others appropriate methods based on reasonable assumptions

Transfer pricing are quite new discipline in economics and they are the consequence of the new conditions and terms under which the global business is done nowadays. This field brings out significant risks, due to conflicting aspirations of the tax authorities to increase their tax revenues and multinational companies to pay lower income taxes. Regarding the fact that the calculated amount of income tax depends on the certain assumptions, such as the given data, company’s strategy and the price determining factors, it is necessary to say that the transfer prices aren’t an exact science and that the key goal is to find a reasonable estimation of the income tax in accordance with the “arm’s length” principle.

Questionnaire for transfer pricing services

In our developed transfer pricing practice we prepare more than 100 benchmarking studies each year. Our experience in preparing benchmarking studies cover many different sectors (agriculture, technology businesses, manufacturing, wholesale, retail sector etc.). When providing benchmarking study services, we take detailed holistic approach, which is in line with the 2017 OECD Transfer Pricing Guidelines and local Transfer pricing regulations. Our approach is tailor-made, adapted to the client’s specific business model and needs.

The first principle in our holistic approach is that we perceive benchmarking studies as a part in much broader process of the comparability analysis. Therefore, we do not solely provide services of preparing benchmarking studies, but we take a much larger view and perform detailed comparability analysis with the client. Detailed comparability analysis includes following steps, according to the 2017 OECD Transfer pricing Guidelines:

1. Analysis of the taxpayer’s circumstances (industry, competition, economic and regulatory factors): this is the preparatory step in our analysis. The goal is to understand the economics of taxpayer’s business, but not yet within the context of looking at the specific transactions in question
2. Understanding the controlled transaction:analysing functional profiles of related parties, as well as other comparability factors. Those factors are contractual and economic terms, business strategies of each related party, as well as characteristics of property transferred or services provided. The purpose of this step is to delineate the controlled transaction. By doing so, we answer the question Which are desired attributes of comparable independent transactions? To be more specific, the goal of comparability analysis is to identify transactions between independent parties, whose comparability factors are as close to the tested transaction as possible
3. Review of potentially comparable internal transactions (if any): according to the OECD Guidelines, internal comparables may have a more direct and closer relationship to the controlled transaction than external comparables. The reason why is that tax payer has more information on its own internal transactions than external ones. Therefore, before performing benchmarking studies, we should analyse if there are any internal comparables. Even if we rule out internal comparables, it helps us to define the desired attributes of external comparables more clearly
4. Identifying external comparables (benchmarking study):two main types of identification is recognized by OECD Guidelines. The first one is the additive approach. The additive approach consists of drawing up a list of potentially comparable companies, such as taxpayer’s competitors. The second method is the deductive approach. The deductive approach starts with a wide set of companies operating in the same sector (Nace Rev 2. Business activity code), established using domestic or international databases. The main criteria when creating the list of potentially comparable companies from the database in the benchmarking studies of companies are:

• Independence: potentially comparable companies must not have any related parties
• Available financial statements in last 3 – 5 years
• Activity: searching only active companies which still perform regular business activities
• Geographic market: starting from the country of the taxpayer and then expanding the geographic reach if necessary
• Excluding companies with negative financial results in three consecutive years
• Year of incorporation: The criterion year of incorporation screening prevents the arm’s length range from being affected by companies that are in a start-up phase and therefore have non-comparable economic conditions during the considered period
• Industry Screening: using NACE Rev. 2 codes
• Revenues and number of employees: In order to ensure better comparability and eliminating the impact of specific factors that may affect the business, we select potentially comparable companies on the basis of the amount of revenues and number of employees

    The list is then shortened through qualitative analysis:

• a description of activities provided in the base
• content on the websites of companies and other publicly available information on the internet
• additional assurances that the company identified no related parties and the comparability regarding the use of net working capital and fixed assets (through ratio analysis of financial statements)
• comparison of balance sheet items and ratio numbers

5. Comparability adjustments (if necessary): in certain cases, it is necessary to make adjustments to the controlled transaction or to the comparables in order to reconcile the differences which may affect the implementation of the arm’s length principle. Adjustments may relate to different accounting policies, different levels of capital employed etc.
6. Selecting transfer pricing method and financial indicator: this step is directly linked to the identification of comparables. To be specific, some of the main factors in choosing adequate transfer pricing method are the availability of accounting, commercial and other data on the controlled transaction and available data on potentially comparable transactions. When performing benchmarking studies, the most common transfer pricing method is transactional net margin method (TNMM).While using TNMM, financial indicators such as EBIT/Operating costs and EBIT/Operating revenue are commonly used
7. Interpretation of results: after performing benchmarking studies, we discuss the results with the client and make amendments, if necessary

WTS Serbia team has built a reputation as being one of the leading transfer pricing practices in the region. In case you are in need of benchmarking study services, please contact our consulting team.

In order to minimize potential transfer pricing risks, taxpayer should proactively plan and structure transactions with its related parties. Different structure mean different risks and expenses. A taxpayer can define its transfer pricing policies in a way which will reduce tax expenses significantly.

For preparation of Master file or constructing policy of transfer pricing and reforming current transfer pricing policies, we remain at your disposal.

The policies of transfer pricing must be regulated by intercompany agreements, so tax authorities can be assured that prices in tax payer’s transactions with related parties are in accordance with ‘’arm’s length principle’’. For the purpose of preparing intercompany agreements, we remain at your disposal.