By Ekaterina Aleksova, Senior Manager, PricewaterhouseCoopers Bulgaria
A new law introducing mandatory transfer pricing documentation in Bulgaria was officially published in the State Gazette in early August.
Effective 1 January 2020, the new rules will require that Bulgarian taxpayers (legal entities, as well as permanent establishments of foreign companies) having cross-border related party transactions prepare transfer pricing documentation justifying the arm’s length nature of their related party transactions.
Thus, Bulgarian companies having local transactions only are relieved from the newly introduced enhanced TP documentation rules.
Bulgaria transfer pricing thresholds
Transfer pricing documentation will be mandatory for large companies only. In particular, if as of 31 December of the preceding year, the balance sheet asset value of an entity exceeds BGN 38 million (around EUR 19 million or USD 21 million) and either its net sales exceed BGN 76 million (around EUR 39 million or USD 43 million) or its average number of employees is more than 250, the entity must prepare transfer pricing documentation for the following year.
Covered transactions
Materiality thresholds have been introduced to determine which transactions should be covered in the company’s local file.
Generally, a transaction with a foreign company should be analysed in the transfer pricing local file if it exceeds BGN 400,000 (around EUR 194,000 or USD 227,000) in case of sale of goods or BGN 200,000 (around EUR 102,000 or USD 113,000) in all other cases (e.g. royalty, service transactions, etc.) in the respective year.
Loans are captured by the new rules only if they exceed BGN 1 million (about EUR 511,000 or USD 566,000) or if of interest expenses and other related costs exceed BGN 50,000 (EUR 26,000 or USD 28,000). Under certain conditions, transactions could be aggregated for purposes of the threshold test.
Content of the local and master file
The rules related to the content of the local and master files largely copy the respective parts of the current version of the OECD transfer pricing guidelines, but also some additional requirements are introduced.
For example, in addition to the required content of a local file under the OECD guidelines, the must include in their local file’s description and justification of the allocation keys used in case of intra-group services.
Deadlines
The first year for which transfer pricing documentation should be prepared under the new rules is calendar year 2020 (in Bulgaria, the fiscal year is identical to the calendar year).
The main rule is that the local file should be ready by 31 March of the following year (i.e., by the deadline for submission of the corporate income tax return). The master file must be prepared at a group level and provided to the Bulgarian taxpayer within 12 months after the applicable deadline for the local file.
Penalties
Transfer pricing related penalties have been introduced for the first time in the Bulgarian legislation.
If a local file has not been prepared (or provided to the tax administration upon request), a penalty up to 0.5% of the total value of the transactions that should have been documented, may be imposed.
Specific penalties are also envisaged in case of lack of master file or incomplete local file/master file contents.
Smaller companies
Even if a company does not meet the thresholds outlined above, it is required to substantiate the market nature of its elated party transactions in case of a tax audit under the general rules (i.e. by having a transfer pricing documentation, internal policies or other relevant documents).
Ekaterina Aleksova
Ekaterina Aleksova is Senior Manager leading the transfer pricing team of PwC Bulgaria.
She has participated in various transfer pricing projects for companies in various industries such as banking, retail, automotive, telecommunications, etc. related to the development of transfer pricing policy/documentation, designing and implementing transfer pricing models, as well as dispute resolution cases.
Ekaterina holds a Master's Degree in Business Taxation from Osnabrueck University, Germany.
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