The highly dynamic global business environment and increasing pressure from tax authorities to generate tax revenues from all sources, put transfer pricing on the top of tax and finance issues today. We help our clients to have better understanding of transfer pricing and prepare full pack of transfer pricing documentation and benchmarking analysis in line with local regulations. Our work is based on OECD Guidelines for transfer pricing, Corporate Income Tax Law as well as relevant databases for preparation reliable benchmarking analysis and conclusions.
Global Transfer Pricing Service Line
The global transfer pricing service line of WTS is represented by WTS Global member firms in all key countries including tax specialists, economists and former revenue authority professionals with extensive transfer pricing experience. The service offering comprises the whole range of TP services including TP conceptual design, global documentation concepts, IP structuring and reorganizations, benchmarking services, tax audit defence, litigation and arbitration proceedings as well as APAs. WTS represents a practice-oriented approach committed to develop innovative and pragmatic solutions for clients from various different industries.
Our team provides full range of services of transfer pricing including Master TP file preparation, Local TP file preparation, benchmarking analysis, TP risk assessment, preparation of intercompany agreement, advisory in specific intercompany transactions. Detailed service list is presented as follows .
Preparation of transfer pricing study
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.
Benchmark studies and other analysis from relevant databases
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:
- 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
- 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
- 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
- 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
- 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.
- 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
- 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.
Advices in pricing policy with related parties
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.
Preparation of intercompany agreements
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.
Transfer of intangibles and intercompany services
Transfer of intangibles
The basis for generating profit inside the Group are intangibles, e.g. brand, licences, franchise, know-how, patent, software etc. Having that fact in mind, Group's profit allocation among its members according to the ''arm's length'' principle is based on contributions of each member in creating Group's intangible assets. Intercompany transactions of using and transferring intangibles are common, but they are rarely documented and valued in accordance with ''arm's length'' principle, which exposes tax payers to transfer pricing risks. When analyzing these transactions, it is important to identify specific intangibles, costs and activities incurred during the process of creating them (analysis of contributions in creating intangibles), their impact on financial performances and benefits which will provide to their owner in future (valuation of intangibles).
Regarding services provided by non-resident companies, from transfer pricing in Serbia perspective, especially parent and other related companies, the distinction must be made between:
A. The necessity of providing documentation which proves that these services were really provided- Article 7a of Corporate Income Tax Law and
B. The analysis of these costs from the perspective of transfer pricing in Serbia, where following matters are analysed:
- Allocation of total costs on Group members
- Justification of adding margin on formed cost base, whose accordance with ‘’arm’s length principle’’ is tested by using adequate transfer pricing method which usually demand using commercial databases
Having in mind the importance of providing intercompany services, it is necessary to pay attention to general legal implication of payments to non-residents.
According to the Law on Foreign Exchange Operations, Article 58, an individual who performs payment collection, who pays or makes payment request, i.e. pays the amount above 100.000 EUR to a non-resident, on the basis of a contract in which the real price is not disclosed or on the basis of false documentation, will be punished for criminal offence. Related to this matter, the main questions are ‘’Are these services really provided?’’ and ‘’How to prove that these services are really provided?’’. Therefore, it is necessary to conduct activities very carefully, so responsible persons do not get charged for the violation of law and criminal offence.
Our team of experts is ready to provide you support in ensuring that any type of these services is in accordance with relevant laws.