Transfer Pricing in Belarus
At the end of 2011, over two hundred amendments were made to the general and special sections of the Tax code of the Republic of Belarus (the Tax Code) via Law No 330-Z. Amendments to the general section introduced TP rules in Belarus, which entered into force on January 1, 2012 and are outlined in Article 30-1 of the Tax Code. It is worth mentioning that no TP control existed in Belarus before these amendments were made. The adoption of legislation relating to TP control formed an integral part of the law harmonization process within the Eurasian Economic Union, as TP rules had already been adopted by the Russian Federation in 2012 and by the Republic of Kazakhstan in 2008. TP control established a new form of tax control over taxpayers, and attempts to prevent tax evasion through price manipulation.
In 2015, the TP rules provided for in the Tax Code saw a few changes and amendments. Foreign trade transactions being subject to TP control were extended from transactions with goods only to transactions with goods, works and/or services. The biggest change made was in regards to the threshold of transactions falling under TP control. The threshold was reduced from 6m Belarusian Rubles (BYR) to 100 00 BYR. The comparable profit method was also introduced as an accepted TP method. The consequences of these adjustments were an increase in the number of transactions that fall under the TP control and further convergence with the approaches followed by the
legislation of OECD member states.
In line with the Government initiative to develop national TP rules to avoid the transfer of profit to foreign or local companies benefiting from tax incentives or lower tax
rates, further changes to the Belarusian Tax Code covering, amongst other things, Belarusian TP rules, were made effective as of January 1, 2016.
These new regulations (i) further expanded the list of the transactions subject to TP control, (ii) introduced the profit split method as an accepted TP method, (iii) obliged taxpayers to report controlled transactions to the tax authorities and prepare documents to support the arm’s length nature of the prices they apply, and (iv) provided much greater TP controlling power to the Tax Authorities.
Please note: Notwithstanding the fact that some years have passed since the first TP provisions were introduced to the Tax Code of Belarus, TP rules are still far from being well developed, and most of the provisions are unclear and quite ambiguous, especially for the taxpayer. Currently, the Belarusian tax authorities have insufficient practical experience with TP regulations that take into consideration the principles of the OECD Model Convention. However, since 2016, taxpayers are obliged to notify the tax authorities on controlled transactions they have made, while the tax authorities
will be entitled to request from the taxpayers TP documentation and confirmation of the economic feasibility of the prices for such transactions. While in Russia and Ukraine such notification is a separate report, in Belarus the notification is done via the new electronic VAT invoice system. So no separate annual report is required.
It should be noted that a group’s TP policy, as well as TP documentation of a particular Belarusian taxpayer, if prepared, may need to be adjusted according to the new requirements of the Belarusian TP rules.
Main Provisions and Definitions of the TP Law
For TP purposes, the concept of related parties mainly refers to legal entities and / or individuals whose relationships directly impact the conditions or economic results of their mutual activities or the activities conducted by the persons they are representing. These relationships include the following:
The law provides (three) different types of transactions, which fall under the control of tax authorities:
- Between the shareholders (founders) of a single company;
- in case one person or a party directly or indirectly holds at least 20% of shares / participation interest in the other company;
- in case one person or party is subordinated to the other due to the official position it occupies or one person is under the direct or indirect control of the other person;
- in case the parties jointly control (directly or indirectly) the third party;
- Between spouses, kinships or close relatives, adoptive parents and adoptees, custodian and ward.
- Between trustees and beneficiaries, trustee and trust management companies.
The Tax Code envisages three separate groups of transactions which fall under the TP control of the tax authorities in Belarus:
Real estate transactions, if the transaction price deviates by more than 20% from the market price as of the date of the sale or acquisition, including cases when the transactions are made by means of residential bonds and co-funded construction;
Foreign trade transactions (goods / works / services / property rights):
- if the total price of the transactions performed with a single qualifying party within one tax year exceeds 100 000 Belarusian Rubles (BYR) as of the date of the transaction, excluding indirect taxes:
- with a related party;
- with a party (an individual or a company) from a tax haven jurisdiction / offshore zone (the list of such territories is currently prescribed by the President Decree of the Republic of Belarus);
- with a related party and a party (an individual or a company) from a tax haven jurisdiction / offshore zone made with participation of an independent third-party intermediary (intermediaries) via a set of transactions, provided such party neither performs any additional functions nor is involved in this transaction with any assets;
- if the total price of the transactions performed with a single qualifying party within one tax year exceeds one million Belarusian Rubles (BYR) as of the date of the transaction (major transaction), excluding indirect taxes:
- on transactions regarding sales and (or) acquisition of certain strategic goods (oil, gas, other hydrocarbons, some wood products, etc.) according to the list defined by the Belarusian Government );
- on sales and (or) acquisition related to transactions made by companies qualifying for the so-called “major taxpayers”.
Local (onshore) transactions (goods / works / services / property rights):
- if the total price of the transactions performed with a single qualifying party within one tax year exceeds 100 000 Belarusian Rubles (BYR) as of the date of the transaction, excluding indirect taxes:
- with a related party being a Belarus resident (including transactions made via a set of transactions with participation of an independent third-party intermediary (intermediaries)), who has been benefiting from tax incentives and not paying corporate income tax for the respective tax period in line with the legislation (e.g. High Tech Park residents, the residents of Free Economic Zones, taxpayers under simplified taxation regimes, taxpayers registered with or conducting activities on specific territories, etc.).
Please note: A major taxpayer is a local company with annual revenue declared for corporate income tax purposes for the previous tax year exceeding the equivalent of EUR 50m. (Paragraph 3 of Article 64-1 of the Belarus Tax Code).
For the abovementioned purposes “foreign trade” is defined as:
- The sale (including commission and agency agreements, as well as similar civil law contracts) of goods / works / services / property rights to foreign legal entities and/or individuals;
- The acquisition (including commission and agency agreements as well as similar civil contracts) of goods / works / services / property rights from foreign legal entities and/or individuals.
According to the Tax Code, the following transaction prices in are not subject to TP control in Belarus:
- Prices set in accordance with the International Treaty;
- Prices for securities, forwards, futures and other financial instruments;
- Prices set according to the requirements of the antimonopoly bodies;
- Prices for banking operations as specifically listed in the Banking Code of Belarus;
- Prices formed by trade sessions at a registered commodity exchange or in the course of public sale (tender);
- Prices as set in accordance with Belarusian or foreign legislation;
- Prices set by a state control body, or when there are limits to prices, markups or discounts, or when there are other limitations on profitability.
Transfer Pricing Methods
Belarus is not an OECD member country yet, and Belarusian legislation does not provide for any reference to OECD methodology or approaches. Nevertheless, recent changes to the Tax Code (taken effect as from January 1, 2016) established new TP rules and methods that are quite similar to those as outlined in Chapter II of the OECD Guidelines. Current Belarusian TP legislation enumerates five TP methods that shall be consistently used when determining, for tax purposes, the conformity of transaction prices to market prices. These are as follows:
- Comparable uncontrolled price method (CUP): This method is the most commonly applied by the Tax Authorities in Belarus.
- Resale price method
- Cost plus method
- Comparable profits method: This method is the same as the Transactional net margin method (TNMM). The comparison is based on the annual financial statements and attachments there to prepared in accordance with Belarusian accounting legislation. This method is widely applied by the taxpayers and professional services companies due to availability of the information on profitability by independent parties performing comparable transactions on similar markets (databases Amadeus, Orbis and etc.).
- Profits split method: This method can be applied to check transfer prices in any transactions to be made by the tax payers starting from January 1, 2016.
Please note: Each method indicated above is used if the market price of goods cannot be determined by the application of one of the previous methods.
Please refer for the more detailed description of the methods here.
For the comparison of transactions with market prices, the tax authority may use information:
- On prices used for transactions involving identical (homogenous) goods/works/services in the Republic of Belarus;
- On prices based on foreign trade statistics of the Republic of Belarus that were published or obtained from customs or statistics authorities at the request of a tax authority;
- On prices used for transactions involving identical (homogenous) goods / works / services in foreign states;
- On prices on exchange of quotations from official information sources of government bodies of the Republic of Belarus or foreign states (http://www.belstat.gov.by; http://www.butb.by );
- On prices used for identical (homogenous) goods / works / services from competent bodies of foreign states, as requested by state bodies of the Republic
- Data from price-information agencies.
In cases where these information sources cannot be used, the Belarusian Tax Code prescribes the following sources:
- Information on prices and quotations from published and/or publicly available information systems and publications;
- Information of the market value of objects as determined under the valuation laws of the Republic of Belarus or foreign states;
- Information on the market value of identical (homogenous) goods / works / services obtained from Belarusian or foreign state statistic agencies;
- Information obtained from organizations’ financial statements and state statistical reporting, including information from publicly available information systems;
- Other information that the tax authorities have at their disposal.
Transfer Pricing Reporting
The TP notification on controlled transactions shall be submitted via the system of electronic VAT invoices. Separate reports, like in Russia or Ukraine, are not yet required.
Transfer Pricing Documentation
Changes to the Tax Code of Belarus (which came into effect on January 1, 2016) introduced the obligation for taxpayers who are engaged in controlled transactions to prepare and make available upon the corresponding request of the tax authorities:
- Economic justification for the price of the transaction, which should be provided by the taxpayers with respect to each controlled transaction (regardless of deviation in transaction price from arm’s length prices), and (or)
- TP documentation – should be provided by qualifying major taxpayers to support the prices applied in major transactions performed.
Please note: A major transaction is a foreign trade transaction performed by a major taxpayer with a single party within one tax year of an amount exceeding one million Belarusian Rubles (BYR) as of the date of the transaction (excluding indirect taxes) Subparagraph 1.3. paragraph 1 of Article 30-1 of the Belarus Tax Code).
The abovementioned supporting documentation shall be provided only in relation to the transactions directly indicated in the relevant request (notification) of the tax authorities and within the following deadlines:
- For the purpose of an off-site (desk) tax audit – within the deadline specified in the request of the tax authorities, but not earlier than in 10 business days as from the date the request is sent.
- For the purpose of tax audits other than off-site tax audit – in line with the time limit as provided for in the tax audit order but not earlier than in 5 business days as from the date of its receipt.
There is no pre-defined format for the preparation of TP documentation, however the Tax Code of Belarus enumerates the set of documents or a single document that can be prepared by the taxpayer as TP documentation, provided these comprise of the following data / information:
- Full details of the counter-party to the transaction, including related party or a party registered in a tax haven jurisdiction (an offshore zone), including description of their business operations, market sector and business reputation, purpose for the goods, works, services or property rights acquisition or sale, identification of the functions to be performed by the parties participating in the transactions (including assets used and risks undertaken by the parties), and other relevant information;
- General description of the group (including parent company and its subsidiaries), as well as the organizational structure of the group, description of business activities of the group, transfer pricing policies;
- Description of the transactions, including the subject and conditions for their implementation (price, time frames, INCOTERMS 2010 references, payment conditions and other specific terms set by the Belarus legislation binding for agreements or contracts);
- Information on sales and management strategy of the taxpayer in the corresponding tax period;
- Description of the goods / works / services of the controlled transaction including technical characteristics thereof, quality and reputation on the market, the country of origin and the manufacturer, trademark and other information related to the quality of the goods / works / services.
- Results of the comparison study of commercial and financial conditions of the transaction;
- Selection and justification of the applied TP method: in this part, the taxpayer shall indicate the selected TP method, justify the selection, specify the information sources used and make an economic analysis by calculating the market price range or profit margin range;
- Any corporate income tax adjustments and amounts thereof due to application of the Belarus transfer pricing rules, if any;
- Range of market prices or profitability on comparable transactions with independent parties,
- Any other information to support that the prices in the controlled transactions are consistent with the arm’s length prices applied in controllable transactions.
In cases where the provided information is not sufficient, the tax authorities may require the taxpayer to submit additional information which must be filed within a deadline as specified in the corresponding request.
Please note: According to the Belarusian Tax Code, the profitability ratio for the purposes of TP control shall be defined based on the accounting data and financial
statements prepared in accordance with local accounting standards and financial reporting applied in Belarus. TP documentation should be prepared in Belarusian /
Major taxpayers have to prepare and keep TP documentation on any controlled transaction qualifying for the requirements as set forth in the Tax Code of Belarus. TP documentation only has to be filed if requested by the tax authorities, and in within the
deadlines set in a relevant notification.
Transfer Pricing Audit
As a result of the introduction of TP control, the tax authorities are empowered to compare prices used in certain transactions with the market prices and, provided that these prices differ, adjust the corporate income tax base if this results in an increase in profit (corporate income) tax. This empowerment is due to the fact that the Tax Code stipulates that market prices used for TP control must be comparable.
Under the Tax Code, a tax authority revises the profit tax base as follows:
- In the first step it compares the terms of the analyzed transaction with information on market prices for identical (homogenous) goods / works / services / property rights that it has at its disposal and that meets the requirements of Article 30-1 of
the Tax Code;
- In case such information is not available, the tax authority consequently applies the following methods; (1) resale price method, (2) cost plus method and (3) comparable profits method.
The following transactions can currently be reviewed by the tax authorities exercising TP control:
- Sales of real estate in 2012 – 2015, irrespective of the transaction price;
- Foreign trade transactions on sales of goods, including those with related parties, which amount exceeds the threshold of:
- 20bn BYR – for the transactions completed in 2012, and
- 60bn BYR – for the transactions made in 2013 – 2014.
- Foreign trade transactions on sales / acquisition of goods (works, services), including those with related parties, which amount exceeds the threshold of:
- 1bn BYR – for the transactions performed in 2015
Starting from 2016, the following transactions will be subject to TP audit:
- Foreign trade transactions on sales / acquisition of goods (works, services, property rights) which exceed the threshold of:
- 100’000 BYR – for transactions with related parties and residents of tax haven jurisdictions (offshore zones) as per the list specified by the President of Belarus;
- 1 million BYR – for transactions involving sales and (or) acquisition of certain strategic goods as per the list to be defined by the Belarusian government, and for transactions performed by major taxpayers.
- Sales and acquisition of real estate provided the transaction price deviates by more than 20% from the arm’s length price.
For profit tax purposes, the correctness of calculation of the tax base from the controlled transactions is checked during the tax audit of a particular taxpayer. Adjustments to the tax base, if made due to the application of TP control, do not involve any taxes other than corporate income tax.
Please note: Since 2016 taxpayers are required to report electronically to the tax authorities any controlled transaction they have performed in the corresponding
tax period. Hence, the tax authorities are able to perform TP control on the transactions based on the information contained in the relevant reports of the taxpayers.
If a TP adjustment results in additional tax liability, the taxpayer is subject to late payment interest of 1/360th of the refinancing rate established by the National Bank of
the Republic of Belarus effective for each period of delayed payment (the current annual rate applicable from March 15 is 15 %).
The penalty for underpayment of tax arising from noncompliance with the transfer pricing regulations (as well as non-compliance with any other tax regulations) is 20
percent of the underpaid tax.
According to Article 13.6 of the Belarus Code of Administrative Offences, the recalculation of profit tax may result in administrative liability.
Criminal liability may occur in cases where the underestimation of the tax base was made deliberately or the tax base underestimation causes major damage (exceeding 1000 basic units; approx. 11’500 Euros). The penalty in such cases is up to 7 years of imprisonment in addition to confiscation of property.
In order to know exactly to what extent TP penalties can be enforced, please refer to Chapter 5, Article 52 (Penalty interest) of the Belarusian Tax Code and Chapter 13 (Administrative offences against taxation) of the Code of Administrative Offences of the Republic of Belarus.
What does this mean for you?
We consider that with the enforcement of the (new) TP regulations in Russia, Ukraine, Poland, Kazakhstan and Belarus, the matter of TP in the different countries will attract the increased attention of the relevant tax authorities. Therefore, the management of the
company’s pricing policy and documentation of transactions will require additional consideration by taxpayers.
The following steps should be undertaken in order to be prepared for a TP audit:
1. Examine intercompany transactions in order to prepare a list of transactions which are subject to TP control and verify whether or not you are above the relevant thresholds and need to prepare TP notifications and TP documentation.
2. Select the appropriate TP method under the local law.
3. Analyze the performed functions, involved risks and used assets in order to prepare a functional analysis.
4. Carry-out a benchmark analysis.
5. Prepare the TP notification / report and TP documentation.
It should be taken into consideration that the preparation of the TP documentation is a time-consuming procedure. Therefore, it is important to calculate what additional personnel should be hired or to outsource the process to external consultants. However, preparation for the TP policies implementation should start as soon as possible in order to meet legislative requirements.
Please note: Due to country-specific differences in TP law, the TP methods used in the abovementioned countries might differ significantly.
How we can help you
SCHNEIDER GROUP has a team of accountants and tax experts with extensive experience in accounting and taxation in our offices in Russia, Ukraine, Poland, Kazakhstan and Belarus, who will be pleased to provide you with:
- An analysis of your transactions which may be subject to TP control;
- A benchmark study to check if your intercompany prices comply with the “arm’s length” principle
- Preparation of the TP documentation for your controlled transactions;
- Preparation of the notifications/reports to the tax authorities about controlled transactions;
- Support to your in-house team in preparing TP documentation and notifications.