Belarus | Significant amendments to transfer pricing rules 2018

The Belarus Ministry of Finance in its attempt to seek comments from expert community has placed on its website the draft Law “On Amendments to Certain Laws on Taxation and Accounting Issues” (further – the “Draft Law”). Among the others amendments to Tax Code, the Draft Law anticipates specific changes in transfer pricing rules effective from 01 January 2018.

An overview of key highlights pertinent to anticipated changes in Belarusian transfer pricing landscape is outlined below.

Sources of information

The Draft Law sets out clear levels of various data sources that can potentially be used for transfer pricing purposes. As compared to the current version of the Belarus Tax Code, the list of such data sources is unclosed and has not changed significantly.

Furthermore, the Draft Law allows a taxpayer to use for comparative analysis of a tested transaction any data available from public open sources as specified in Article 35 (4) of the Draft Law.

Transfer pricing methods

Comparable Uncontrolled Price Method

When CUP method is used for transfer pricing purposes the Draft Law, unlike the current version of the Belarus Tax Code, sets out provisions according to which an internal comparable data of a taxpayer should be given priority over an external comparable data.

Resale Price Method

Unlike the current law, the Draft Law establishes the priority of the Resale Price Method over other methods (including CUP) whereby goods are bought in a tested transaction and then resold without being processed in a transaction between unrelated parties.

In order to apply the Resale Price Method, gross margin of a reseller (i.e. a purchaser in a controlled transaction) shall be tested and further used as a profit level indicator, provided such gross margin is comparable with the gross margin in a third party transactions. In case when data comparables cannot be ascertained, other transfer pricing methods such as Cost Plus Method, Transactional Net Margin Method and Profit Split Method shall be used to identify the market price of a tested transaction.

Cost Plus Method (CPM)

According to the Draft Law, the main essence of the Cost Plus Method lies in the fact that the gross cost margin return on costs of a particular service provider or seller is verified. However similarly to the Resale Price Method, in the event data comparables cannot be ascertained, Transactional Net Margin Method and Profit Split Method should be used for transfer pricing purposes.

Profit Split Method (PSM)

Current tax rules set out that profit split between the parties to a tested transaction (a group of homogeneous transactions tested) is performed in accordance with the following criteria or combinations thereof subject to transfer pricing analysis:

  • on a pro rata basis to the parties’ contribution into an aggregate profits of a transaction tested, functions performed, assets used and risks taken by the parties;
  • proportionally to the distribution of return on net worth between the parties of a tested transaction; and
  • pro rata with profits split between the parties of a comparable transaction.

In addition to the parties’ contribution analysis, the Draft Law currently provides for a residual profits split analysis that should be performed within Profit Split Method.

The analysis shall be made and residual profits (loss) defined by application of the transfer pricing methods prescribed (Cost Plus Method, Resale Price Method and Transactional Net Margin Method) for each party to a tested transaction. Using the range of market prices (profitability range) obtained, estimated profits (loss) for this party is determined considering functions performed, assets used and risks taken.

The residual profit (loss) is defined as the difference between the aggregate profit (loss) on a tested transaction and the amount of the estimated sales profit (loss) for all parties to the transaction tested.

 

 

Selection of a party in a tested transaction

In the event of Cost Plus, Resale Price or Transactional Net Margin Method are used for identification of the market price of a tested transaction, a taxpayer is required to select a tested party. The current law does not specify how that party should be selected.

According to the Draft Law, a party will be a tested party to a transaction with respect to which application of a chosen transfer pricing method (or a combination thereof) is the most reasonable, for which it is possible to find the most suitable comparables, and which meets the following requirements:

  • Performs less complicated functions in a tested transaction, and
  • Takes lower economic (business) risks as compared to the other party in a tested transaction, and
  • Does not have intangibles posted on accounts which significantly affect the level of the profit margin

If neither party to a tested transaction is consistent with the abovementioned requirements, the party that is most compliant with such requirements should be selected for the comparability analysis.

Selection of a transfer pricing method

Unlike the current version of the Belarus Tax Code, the Draft Law entitles a taxpayer to use a combination of two or more methods for determining the conformity of the price in a tested transaction to the market price.

Among other things, the Draft Law allows the tax authorities not to accept the transfer pricing method selected by the taxpayer on condition that they provide strong argument as to the fact that the method was selected not properly and to assess market price of the transaction based on another much more suitable transfer pricing method.

Comparability analysis

Extension of a period for comparables’ financial data

According to the current wording of the Belarus Tax Code, a taxpayer is allowed to use for transfer pricing purposes the financial data of potentially comparable companies only for the reporting period (calendar quarter).

The Draft Laws extends currently existing “acceptance period” for comparables’ financial data by introducing the new rule according to which, a taxpayer, while assessing the market profitability range, should use either (i) the information available as at the date of a tested transaction (but not later than 31 December of the year of a tested transaction), or (ii) data from statutory accounts (financial statements) for 3 calendar years preceding the year of a tested transaction.

In the event no comparables are available in the reported period, a taxpayer is allowed to use corresponding data pertaining to certain other reported periods, provided such data is properly adjusted to match BYR official exchange rate fluctuations set by the Belarus National Bank and (or) price indexes of the Belarus National Statistics Committee.

Comparable entities

According to the Draft Law, a comparable company can be selected for transfer pricing purposes provided the following criteria are simultaneously met:

  • Comparable activity (where an entity runs comparable activities in relation to the taxpayer that has completed the transaction tested)
  • Absence of losses (in case of an entity incurs no sales / operation losses for more than one year out of several years within a period under review)
  • Positive net assets (where a company’s has positive net assets as of 31 December of the end of a period under review)
  • Independence (where an entity neither holds (directly and (or) indirectly) more than 20% of shares / interest in the share (equity) capital of the other entity, nor is owned by another company having a direct interest of more than 20%)

It should be noted that in the event when fewer than four comparables are found because of application of the abovementioned criteria, the level of independence could be increased from 20% to 50%.

Arm’s-length range

The Draft Law abolishes a 20% deviation rule for prices (profit level) in the controlled transactions. It is expected that commencing from 1 January 2018, the arm’s-length range will be defined as a full range, i.e., the range starting from the lowest value to the highest value of prices/margins.

Analysis of the transaction

Unlike the current version of the Belarus Tax Code that requires each controlled transaction to be analyzed for the purposes of transfer pricing documentation (solely applicable to major transactions) in terms of each agreement, annexes thereto and specification, if any available, the Draft Law allows a taxpayer to test transactions by groups of agreements for homogeneous transactions. However, the Draft Law neither provides guidance as to what shall be understood under “a group of homogeneous transactions.”

It should be mentioned that documentation is required in relation to major transactions only. For all other controlled transactions, a simplified documentation package called “economic justification” is required. For the purpose of a simplified documentation, the abovementioned analysis by groups of agreements for homogeneous transactions is not required.

Transfer pricing documentation deadline

According to the Draft Law, transfer pricing documentation on major transactions as well as transactions with strategic goods shall be filed with tax Authorities by 1 June of the year following the reported tax period. Economic justification shall be submitted to the tax authorities only upon corresponding request.

Reporting period

Currently, the tax authorities are entitled to audit controlled transactions for transfer pricing purposes on a quarterly basis, which means that taxpayers have to test controlled transactions on a quarterly basis. With new rules, the tax authority would be entitled to undertake a TP audit only on annual basis.

Transfer pricing related penalty interest

According to the Draft Law, in case where there the profits tax base is adjusted by a taxpayer to report market prices of corresponding transactions due to application of the arm’s length principle:

  • Penalty interest is not changed by the Tax Authorities if a taxpayer makes an additional tax payment before the annual tax payment established deadline (current profits tax payment deadline for the reported year is 22 March of the next year).
  • Tax Authority has to reduce penalty interest by 50% in a situation where a taxpayer makes an additional tax payment before the annual tax payment established deadline for the tax period following the one for which the adjusted profits tax return was filed.

In all other cases not specified above, Tax Authorities accrue transfer pricing related penalty interest equaling to 1/360 of the National Bank’s refinancing rate (0.0306% penalty interest daily rate as from 18 October 2017).

 

With respect to transfer pricing penalties, the rules remain the same as in 2017; in the case of a tax audit, the penalty at 20% of the underpayment of tax because of a transfer pricing adjustment is applied and transfer pricing documentation does not provide for any penalty protection.

Implications for taxpayers and issues to consider

Overall, the proposed amendments focus on further alignment of the Belarusian TP legislation with the transfer pricing rules and standards developed by OECD. Many of the amendments are quite significant tending to pursue the objective of improving the effective transfer pricing rules.

However, certain provisions of the Draft Law allow Tax Authorities to make use of the wide range of transfer pricing controlling tools and definitely increase administrative burden for the taxpayers. The aforementioned amendments show once again that transfer pricing issues remains a priority matter for Belarus Tax Authorities.

We hope you find this newsletter useful. SCHNEIDER GROUP is prepared to support you in dealing with any transfer pricing and other tax related issues by contributing its experience and competence for the growth of your business.

With respect to transfer pricing penalties, the rules remain the same as in 2017; in the case of a tax audit, the penalty at 20% of the underpayment of tax because of a transfer pricing adjustment is applied and transfer pricing documentation does not provide for any penalty protection.

Contact our expert:
Sergey Odintsov
Head of Tax Department, Minsk
+375 (17) 290 25 57
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