Presidential Decree no. 2151 

In accordance with Presidential Decree no. 2151, which was announced on 25 February 2020 and became effective the same day, CbCR regulations in Turkey were implemented within the scope of transfer pricing documentation requirements. These CbCR regulations in Turkey include, among others:

• applicability of the CbCR preparation requirement for the Turkish-resident ultimate parent company of a Multinational Corporation (MNC) that has total consolidated annual revenue of EUR 750 million or above in the previous fiscal year;
• information regarding the method and deadline of the CbCR submission;
• the necessary information the CbCR should include;
• information regarding the necessary conditions, deadline and method of the CbCR submission by the Turkish-resident MNC group member company (or one of the Turkish-resident MNC group member companies on behalf of the others, if there is more than one);
• information regarding the CbCR submission notification liability of Turkish-resident members of MNC that meet the CbCR requirements;
• detailed information regarding the calculation of the EUR 750 million threshold.

Transfer Pricing General Communique no. 4

Following this Presidential Decree, Transfer Pricing General Communique no. 4 was also published the same day in Turkey and took effect as of 1 September 2020. Communique no. 4 includes amendments and additional explanations with respect to the above-mentioned CbCR regulations in Turkey. The most important amendments are as follows:

• The EUR 750 million threshold should be calculated by adding up the total income, revenue and profit amounts that are shown separately in the consolidated financial tables of the MNC.
• If the consolidated financials of an MNC are prepared using a currency other than the EUR, this should be indicated in the corresponding CbCR.
• If the ultimate parent company or the surrogate parent company of an MNC does not have tax residency in Turkey, and the EUR 750 million threshold definition is in their local currency, the local currency equivalent of EUR 750 million should be taken into consideration during the calculation of the threshold.
• If the ultimate parent company of an MNC is tax resident in Turkey, even though the CbCR is submitted in a different jurisdiction by the surrogate parent company of the MNC in accordance with the legislation of the corresponding jurisdiction, it is still mandatory to submit the CbCR in Turkey as well.
• One important step towards digitalisation in CbCR regulations in Turkey is that the CbCR should be submitted via BTRANS (Information Transfer Platform of the Revenue Administration in Turkey) in xml format. Taxpayers should request a user code and password from the registered tax offices. Necessary information and instructions regarding the file formats that can be used are given in BTRANS. BTRANS applications are available on the website of the Turkish Revenue Administration and this application should be completed by the taxpayers, uploading their files to BTRANS in order to be able to start uploading.
• Another new element of the CbCR regulations in Turkey is that an independent accountant financial advisor or a sworn financial advisor (if a service agreement is signed with the taxpayer) can also submit Annex-5 “Notification Form for Country-by-Country Reporting” and Annex-6 “Country-by-Country Report” on behalf of the taxpayer.
• The deadline for the annual notification forms of the years after FY2019 (FY2020 and the special accounting years that begin after 1 January 2020) is 30 June of the following year.
• The CbCR notifications should be submitted electronically every year via the Internet Tax Office. Taxpayers need to request a user code and password from the relevant tax office where they are registered.
• There is an update to the format of the notification form, and so this updated, new notification form should be submitted.
• MNC groups are allowed to make a deadline extension request to the Turkish Tax Authority if their financials for the previous fiscal year have not been consolidated in time. This notification should also include a petition including an explanation in this respect.
• A one-month extension of the notification submission deadline can be granted to make corrections and resubmit the notification if any information is missing or incorrect. If the resubmission is not made after this one-month extension, a tax penalty in line with the Turkish Tax Procedural Law will be imposed.

Circular on Implicit Profit Distribution Through Transfer Pricing / 2

In accordance with the “Circular on Implicit Profit Distribution Through Transfer Pricing / 2” dated 17 December 2020, some elements of the CbCR regulations in Turkey have been amended. Thus the deadline of the

• first CbCR submission for the accounting period 2019 and the
• first CbCR submission for the special accounting period expiring in January 2020, which must be filed via BTRANS by the end of January 2021,

has been extended until 26 February 2021.

If you would like to know more about transfer pricing issues and CbCR regulations in Turkey, please visit the homepage of WTS Turkey!

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Who must prepare a transfer pricing report? 

A Serbian entity that enters into transactions with related parties is obliged to prepare a transfer pricing report. Two parties are related if:

• one party controls more than 25% of the shares in the other party;
• one party controls more than 25% of the voting rights in the other party’s management bodies;
• both parties are controlled by the same individual/company (more than 25% of the shares/voting rights).

In addition, if a Serbian entity enters into transactions with companies from tax havens (such as Hong Kong, Panama, Liechtenstein, Monaco, British Virgin Islands, US Virgin Islands, etc.), it is also obliged to prepare a transfer pricing report and provide evidence that these transactions are in line with the arm’s length principle.

A full transfer pricing file is needed for the following types of transactions:

• Financial transactions (such as loans and credits), regardless of their value. (However, if a Serbian entity receives an interest-free loan from a related party, a transfer pricing analysis is not mandatory.)
• Commercial transactions (sale/purchase of goods, services, property, etc.) with a related party, provided that the total annual value of transactions with that party is higher than RSD 8 million (roughly EUR 68,000).

If the total annual value of commercial transactions with a related party is lower than RSD 8 million (roughly EUR 68,000), the taxpayer is obliged to present these transactions, but there is no obligation to further analyse them from a transfer pricing perspective.

The transfer pricing report is submitted to the tax authorities for each fiscal year.

Is the transfer pricing regulation in Serbia aligned with the OECD Guidelines and BEPS?

The Serbian Ministry of Finance regulates transfer pricing on the basis of documentation published by the OECD and other international organisations, so we can say that transfer pricing regulation in Serbia is mostly aligned with the OECD Guidelines. However, in the Serbian Rulebook on transfer pricing there are some significant differences:

• In Serbia, a benchmarking analysis must be prepared for each fiscal year. Comparable independent companies from Serbia have priority over foreign comparable entities. If there are no comparable companies in Serbia, the geographic search may be extended to similar markets (Balkan states, Eastern Europe, European Union, etc.).

• It is not mandatory to prepare a master file. However, the information from the master file may be used in analysing transactions with related parties.

• The last version of the OECD Guidelines, published in July 2017, proposes the simplified approach in the analysis of low-value – adding intra-group – services (implementation of 5% cost plus margin without the need for benchmarking analysis). However, such approach is not regulated in the Serbian Rulebook on transfer pricing. Therefore, for intercompany services it is necessary to perform a functional analysis, a comparability analysis, as well as a benchmarking analysis (if there is no internal comparable transaction).

Although Serbia is not an OECD member state, it has started implementing BEPS measures. The National Assembly ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. In addition, Serbia is a member of the OECD/G20 Inclusive Framework on BEPS and is expected to propose new taxation rules for the digital economy. Therefore, transfer pricing regulation in Serbia will follow presented BEPS measures and initiatives.

What transfer pricing methods are applicable in Serbia? 

List of applicable transfer pricing methods in Serbia:

• comparable uncontrolled price (CUP) method
• cost plus (C+) method
• resale (RS) method
• transactional net margin (TNM) method
• profit split (PS) method

Combining two or more presented transfer pricing methods is also possible.

If none of these five methods is applicable in a certain case, a taxpayer may decide to use any other method for drawing a conclusion on price in accordance with the arm’s length principle. For example, in the case of a purchase/sale of property, an independent appraiser may be engaged to value the subject of the transaction. The estimated property value may then be used as an arm’s length price.

Are Advanced Pricing Arrangements (APAs) applicable in Serbia?

APAs do not exist in Serbian transfer pricing regulation. Therefore, it is not possible to obtain approval from the tax authorities on group transfer pricing policy.

Are there any safe harbour rules in Serbia?

Safe harbour rules do not exist in Serbian transfer pricing regulation. Thus, each transaction with the related party must be analysed in detail (e.g. functional analysis, comparability analysis, benchmarking analysis, etc.).

What are the penalties in the case of non-compliance with the transfer pricing regulation in Serbia?

If a taxpayer does not prepare and file a transfer pricing report for the tax authorities, the following expenses may be expected:

• penalty for a company not filing a transfer pricing report for the tax authorities: from RSD 100,000 (roughly EUR 850) to RSD 2 million (roughly EUR 17,000)
• penalty for a responsible individual not filing a transfer pricing report for the tax authorities: from RSD 10,000 (roughly EUR 85) to RSD 100,000 (roughly EUR 850)

• additional corporate income tax based on adjustment of tax base (if the transfer pricing analysis proves that the taxpayer’s tax base is lower than the tax base in accordance with the arm’s length principle)

• interest for not paying corporate income tax until the deadline

If additional corporate income tax is higher than RSD 1 million (roughly EUR 8,500), the offence may be considered tax evasion and may lead to imprisonment for the individuals responsible.

If you would like to know more about transfer pricing regulation in Serbia, you need help to prepare a transfer pricing report or you require transfer pricing consulting services in Serbia, please contact the consulting team of WTS Serbia, the exclusive representative of WTS Global in Serbia.

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Earlier, the Cabinet of Ministers of Ukraine also changed the list of legal forms of non-residents that do not pay profit tax and/or are not tax residents in the countries of their registration. In our article, we take a detailed look at all the TP-related changes in Ukraine.

Implementation of BEPS actions

A large portion of the TP-related changes in Ukraine concerns the long-awaited implementation of the BEPS Plan actions into the country’s tax law. Thus, the new legislation adopts the three-level structure of TP documentation according to Action 13 of BEPS. Hence, TP documentation shall consist of a master file, local file and a Country-by-Country Report (CbCR). In addition, Ukrainian entities of multinational companies (MNCs) will have to file notification about their participation in international groups of companies.

The suggested TP-related changes in Ukraine are generally in line with BEPS recommendations. Yet there are also some differences. For instance, although it envisages a general threshold of EUR 750 million and the presence of one circumstance, listed in the corresponding article, for submitting a CbCR, the master file may be requested by Ukrainian tax authorities if the annual consolidated group revenue is equal to or exceeds EUR 50 million.

The Draft Law introduces new penalties for failure to comply with the added reporting requirements, which may be quite significant. They are linked to subsistence wage amounts, which are gradually revisited. For example, the penalty for failure to submit a CbCR equals 1,000 times the subsistence wage, which would currently amount to UAH 2 million (roughly EUR 74,000 under the current exchange rate).

Business purpose

An important new feature is the introduction of the principle of business purpose for transactions. It means that taxpayers will be obliged to prove in TP documentation that controlled transactions on acquiring works (services), intangible assets, and items other than goods have a clear business purpose. The tax authorities may disregard transactions without a reasonable business purpose when calculating the base for profit tax.

Deemed dividends

According to the adopted TP-related changes in Ukraine, the amount of TP adjustment that increases the tax base in Ukraine may be treated as a deemed dividend distribution. Such dividend distribution would be subject to withholding tax (WHT) in Ukraine at the regular WHT rate of 15%, unless otherwise provided for by applicable double tax treaties.

Independence threshold

The threshold for recognising parties as related parties would be raised to 25% as compared to the current threshold of 20%. This change would bring Ukrainian legislation closer to dominant international practice.

List of business transactions that fall under TP control

It is specified that taxpayers should also report on transactions that reduce their income and/or financial result as a result of the full/partial, irrevocable/temporary transfer of functions together with (or without) tangible and/or intangible assets, benefits, risks and opportunities to another taxpayer (to another person), regardless of whether such transactions are reflected in accounting or not.

Special TP-related changes in Ukraine for commodities

The Draft Law introduces new rules for transactions with commodities. Namely, taxpayers would need to apply “quoted prices” for the TP analysis of some transactions with commodities. Quoted prices are defined as pricing data, which includes exchange quotations and price indices published by recognised agencies, statistical and government agencies. Also, taxpayers carrying out such transactions with commodities should notify the tax authorities upon the conclusion of the relevant contract.

The list of commodities subject to these rules as well as the procedure for applying the quoted prices would be adopted by the Cabinet of Ministers of Ukraine.

Introduction of rules for controlled foreign corporations

There are also some other changes, including the introduction of rules for controlled foreign corporations (CfC), which are new to Ukrainian legislation. In particular, along with the general provisions and explanations, it is stated that the tax authority may oblige the controlling entity to provide TP documentation on the transactions of CfC with related non-residents or with non-residents that fall under the Ukrainian list of low-tax states or the list of legal forms (covering fiscally transparent entities), if the total volume of transactions with such entity exceeds UAH 10 million (roughly EUR 345,000) per calendar year and the annual income of the CfC exceeds UAH 150 million (roughly EUR 5.2 million) per calendar year. If the TP documentation and/or copies of primary documents are not submitted, the tax authority increases the pre-tax profit of the CfC by 30% of the income/expenses for which the TP documentation/copies of primary documents were not submitted.

Also, the controlling entities are obliged to submit a report on the CfC and reports on the acquisition or termination of participation in the CfC.

Adjustment of financial result for tax (reporting) period

The Draft Law provides for the 30% adjustment of the financial result of the taxpayer, not only when purchasing but also when selling goods (including fixed assets), works and services (transactions that are not deemed controlled) to non-residents that fall under the Ukrainian list of low-tax states or the list of legal forms (covering fiscally transparent entities). However, such requirements would not be applicable if the transactions are controlled for TP purposes, or even for uncontrolled transactions, if the taxpayer still opts to confirm that the pricing is at “arm’s length”.

Also, the financial result of the tax (reporting) period should be increased by the amount of expenses incurred by the taxpayer in transactions with non-residents if such transactions do not have a business purpose.

Introduction of all the changes specified above

If enacted, such changes will come into effect from 1 January 2021. Even if the President of Ukraine vetoes the Draft Law, we expect that the BEPS-related amendments will still be introduced soon as a separate law comprising most of the rules outlined above.

Important changes to the list of legal forms of non-residents

The list of legal forms of non-residents that do not pay profit tax and/or are not tax residents in the countries of their registration has been changed as well.

Starting from 1 January 2020, the list of such legal forms of non-residents registered in Austria, Germany and Poland is as follows (additions to the list marked with italics):

The Republic of Austria

The Federal Republic of Germany

The Republic of Poland

For now, such new lists of legal forms of non-residents should be considered by the taxpayers when preparing TP documentation and reports on TP, as well as for the purpose of the 30% adjustment of the financial result. But, as we can see from Draft Law No. 1210, the amendments to such lists could affect TP rules significantly from 2021.

If you would like to know more about the latest TP-related changes in Ukraine, please visit the homepage of WTS Tax Legal Consulting, LLC, the exclusive representative of WTS Global in Ukraine.

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What does the new transfer pricing regulation mean, and why was it necessary?

Decree No. 32/2017 of the Hungarian Ministry of National Economy was promulgated on 18 October 2017. It is referred to as the new transfer pricing documentation decree, and it replaced Decree No. 22/2009 of the Ministry of Finance. The new regulation was necessary to achieve the goals included in the BEPS action plan, namely, to curb the aggressive tax planning and tax evasion efforts of multinational enterprises. Bearing these goals in mind, after implementing the rules on country-by-country reporting, Hungary incorporated the requirements of the master and local files into its rules as part of the new transfer pricing documentation decree.

From when should the rules of the new transfer pricing documentation decree be applied?

The requirements of the new transfer pricing documentation decree must be applied for the first time in relation to documentation for tax liabilities for fiscal years beginning in 2018. Essentially, this means that companies that are obliged to prepare transfer pricing documentation and whose financial year tallies with the calendar year have to prepare their documentation with the expanded content as per the new decree by the end of May 2019.

What are the most important changes?

One of the most important changes is that from 2018 the new transfer pricing documentation decree terminated the option to prepare independent documentation, and made it mandatory to prepare two separate documents, the master file and the local file.

What is the master file, what does it have to contain, and what should we pay attention to when preparing it?

The master file basically contains detailed information for the entire company group. So among other things, this document must present the supply chain for the group’s five largest products and services and the products and services with a turnover exceeding 5% of the group’s turnover, broken down by sales revenue, a brief description of intragroup services that qualify as significant, and a description of intragroup financing, to mention but a few of the many mandatory elements.

It is also important to mention for the master file that the Hungarian legislation follows the requirements of the OECD guidelines on the mandatory elements of the master file. This means that, given compliance with the OECD rules, the master files prepared at the group’s headquarters most often contain all the information required by Hungarian legislation. However, caution is advised and you are better to check the documentation prepared by your parent company, since even one missing element can provide an excellent reason for the tax authority to levy a default penalty.

 Have the contents of the local file changed?

The new transfer pricing documentation decree requires more data in the local file too. In addition to the current content, when presenting the taxpayer you need to show the management structure, an organisational diagram, and the names of the individuals who report to the management. Additionally, the most important competitors of the enterprise have to be listed and the local file has to include a concise description of how the financial data used when applying the method to establish arm’s length prices can be linked to the data included in the taxpayer’s annual financial statements.

When should the transfer pricing documentation be prepared by?

Similar to the previous rule, the local file must be compiled by the submission date of the corporate tax return, but it does not have to be submitted to the tax authority. The new transfer pricing documentation decree enables the local file to be considered the documentation for a period of 12 months from the last day of the taxpayer’s fiscal year (also bearing the parent company’s deadlines in mind), until the master file is available. However, it is important that this rule does not apply to cases where the parent company is Hungarian and it prepares the master file, or when the foreign parent company does not prepare a master file, for whatever reason, and thus the Hungarian related company has to prepare it instead. In this case, the master file has to be completed by the submission date of the Hungarian corporate tax return.

What should you look out for in respect of intragroup services of low added value?

The new transfer pricing documentation decree retained the option for related companies to prepare simplified transfer pricing documentation for certain intragroup services. Both the range of services and the value and percentage limits defined under the conditions remained unchanged. However, the upper limit of the applicable mark-up changed from 10% to 7%, while the lower limit remained at 3%.

Ability to make modifications

One important and favourable change in the new transfer pricing regulation is that within the limitation period and until the start of any tax authority inspection, taxpayers can modify their transfer pricing documentation if they discover that they did not prepare the documentation according to the legal regulations, or if they detected an error affecting the tax base, the tax, the arm’s length price and the arm’s length price range (profitability) in the documentation. The modifying document must designate the documentation affected by the modification along with the modification and its date. The modification has to be performed according to the rules valid as of the original due date of the documentation, but no modification may be made if the taxpayer lawfully opted for one of the possibilities in the decree, and would change this with the modification. In practice this means, for example, that the selected method to define the arm’s length price cannot be changed with a self-revision.

What did not change

The size of the penalty for incomplete documentation will not change in the case of transfer pricing documentation prepared for 2018. It is still very high, i.e. it can amount to HUF 2 million (roughly EUR 6,160) per incomplete document, and as much as HUF 4 million (roughly EUR 12,320) in the case of a repeated failure to comply with the laws.

You do not have to prepare documentation on product and service sales recharged without a mark-up, provided that you transacted with an independent party. However, it is important that if the re-charging is carried out for several related parties, the taxpayer will only be exempted from the documentation obligation as per the new transfer pricing documentation decree if it is substantiated that the distribution method applied – with due consideration of the facts and conditions characteristic of the particular transaction – complies with the arm’s length price principle.

The transfer pricing consultants of WTS Klient Hungary have considerable experience in preparing these documents and in successfully supporting tax authority inspections, including, among others, industry knowledge on how to manage and support transactions of suppliers in the automobile sector and their tax inspections. As a member of WTS Global’s transfer pricing advisory team, we offer solutions for all kinds of transfer pricing problems at international level. Please do not hesitate to get in touch.

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Significant changes to the transfer pricing regulations in Poland came into force from 1 January 2019. The amendments align Polish regulations with the latest OECD Guidelines following the BEPS projects.

On 14 November 2018, the country’s president signed an amendment to the Polish Tax Law that includes transfer pricing regulations in Poland. The new law effective from 1 January 2019 repeals the former rules included in Article 9a of the Polish CIT law and replaces them with the rules of Chapter 1a. This is the most complex revision of transfer pricing regulations in Poland since their introduction.

As we wrote in an earlier article about the proposed changes, the most important amendments include, among others, the possibility of using new transfer pricing methods and valuation techniques as well as the introduction of safe harbours.

Transfer pricing methods

Apart from the standard transfer pricing methods (CUP, C+, resell minus, TNMM and Profit Split) taxpayers are allowed to use other valuation techniques and methods in justified cases.

Recharacterisation or non-recognition of transactions

According to the new transfer pricing regulations in Poland, tax authorities have the power to disregard or delineate transactions that apply the principle of substance over form.

Safe harbour for low value-adding services

The OECD cost plus 5% for low value-added services has been implemented. Taxpayers are required to keep detailed calculations of the fees paid. A safe harbour for IC loans is applicable for loans up to five years if:

• total loans from the related entities do not exceed PLN 20 million (roughly EUR 4.6 million) and
• there are no warranty fees or other charges for granting a loan, and
• the interest rate is set based on the official announcements published by the Polish Ministry of Finance.

Transfer pricing adjustments

These regulations will eliminate divergent tax rulings issued by the National Fiscal Information on the tax treatment of transfer pricing adjustments. The transfer pricing adjustment should be reported as an income or cost for tax purposes in the period to which it relates, provided that the taxpayer has a statement from the related party confirming recognition for tax purposes.

Local file documentation

New materiality thresholds apply for local files to limit the documentation burden: PLN 10 million (roughly EUR 2.3 million) for transactions concerning tangible assets and financing, and PLN 2 million (roughly EUR 460,000) for services and other transactions. Domestic transactions are excluded from the local file requirement unless the counterparties are located in a special economic zone, receive tax relief or have incurred losses in a tax year. A benchmark analysis has become an obligatory element of the documentation for each transaction in a local file. The deadline for preparing the local file is nine months after the end of the tax year.

Master file documentation

Related entities consolidated using the full or proportional method are required to have a master file if the group generated consolidated revenues of more than PLN 200 million (roughly EUR 46.5 million) in the preceding financial year. The deadline for preparing the master file is 12 months after the end of the tax year. Master files will be accepted in English, however, the tax authorities may request the submission of a Polish version within 30 days.

Taxpayers can choose to prepare their local file and master file documentation for 2018 under the new system.

Formal statement on documentation

All members of the taxpayer’s management board have to submit a statement that the local file was prepared and the intercompany pricing is at arm’s length. The lack of such a statement or making a false statement will trigger a potential fiscal penal liability of a fine up to roughly PLN 21.5 million (EUR 5 million). The first submission deadline is September 2020.

Penalties for the transfer pricing assessment according to the new transfer pricing regulations in Poland

A new penalty system will replace the famous 50% tax rate (applied where there is no transfer pricing documentation). The additional tax (over 19%) can range from 10% to 30% – the latter where the transfer pricing assessment is over PLN 15 million (roughly EUR 3.5 million) and there is no documentation.

If you would like to know more about the new transfer pricing regulations in Poland, please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland. 

WTS Klient Hungary is a member of the WTS Global transfer pricing consulting team. As a member of this team we endeavour to find solutions to seemingly impossible problems with the help of personal contacts, regular training and consultations, and relying on the WTS Global central TP team. Should you have questions we are happy to assist you.

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Another year has passed, yet 31 December 2017 does not seem that long ago: it was the first deadline for businesses to prepare their country-by-country reports based on Point 13 of the BEPS (base erosion and profit shifting) action plan, and to fulfil their reporting obligations. With 2018 drawing to a close this topic is becoming relevant again, so it is useful to freshen our memories and prepare for the tasks ahead.

CbCR – who has to prepare the reports?

Nothing has changed since last year in that it is essentially the members of multinational groups qualifying as the ultimate parent company that are responsible for CbCR, i.e. country-by-country reporting (data reporting). However, a multinational group is exempted from the country-by-country reporting obligation if its consolidated annual revenues fall short of EUR 750 million in the financial year preceding the financial year for which the data is reported.

In which cases should Hungarian group members submit their country-by-country reports?

As a general rule, Hungarian companies have to submit a CbCR if they qualify as the ultimate parent company of a multinational group. In certain cases, even if the Hungarian-resident group member does not qualify as an ultimate parent company, it may still be the one subject to CbCR. For example, if a company qualifying as the ultimate parent company is not obliged to submit a CbCR in their country of tax residency, or if they are obliged but Hungary does not have an effective agreement on the exchange of information with the given county, and the multinational group does not have a member meeting all the group’s CbCR obligations for the financial year for which data needs to be reported in respect of all group members with European Union tax residency; or more than one group member has tax residency in the European Union, but the multinational group designated the Hungarian member to fulfil the country-by-country reporting obligation.

When should the country-by-country report be submitted by?

An entity required to report data must fulfil its CbCR obligation vis-à-vis the state tax authority within 12 months of the last day of the group’s financial year for which data is reported. This rule applies in the same way to ultimate parent companies and to the Hungarian members designated for CbCR reporting. In this latter case, a transitional rule means that data must be first reported on financial years starting on or after 1 January 2017 for which data is provided. At companies whose financial year is the calendar year, this means that the Hungarian group member – as an entity obliged to report data – must first submit a CbCR by 31 December 2018.

Reporting obligation

Apart from the ultimate parent company of the multinational group fulfilling its country-by-country reporting obligation, Hungarian-resident group members have data reporting obligations too. This is necessary to ensure that the tax authority is notified of the ultimate parent company, designated parent company or group member status of the Hungarian-resident group member in the multinational group, or the lack thereof, and the identity of the organisation obliged to provide data in respect of the country-by-country report (besides reporting the affected companies’ names, registered offices, tax numbers and financial years).

Hungarian group members affected first had to meet their reporting obligation by 31 December 2017 for the 2016 and 2017 financial years on which the data was reported. If the data reporting obligation is unchanged for the 2018 financial year, the question arises whether it is necessary for the Hungarian group member to submit another report by 31 December 2018 if nothing has changed. The current positions of the Ministry of Finance and the tax authority seem to confirm that the reports must be submitted by the end of the year nonetheless, as this is a new report regarding the 2018 financial year. It is also important to note that changes in the submitted data should be reported to the state tax authority within 30 days of the change.

Exchange of information between Hungary and the USA

On 25 October 2018 Hungary and the USA concluded an agreement on exchanging information, which is a very significant step for all Hungarian members of multinational groups where the ultimate parent company has US tax residency. Without the agreement on information exchange there is a good chance that Hungarian group members would have to submit country-by-country reports to the tax authority by 31 December 2018 for the first time. The conclusion of the agreement in itself is not enough for Hungarian group members to be exempted from the CbCR obligation. It is also important that the agreement must take effect by 31 December 2018 and the competent Hungarian and American authorities need to conclude a separate agreement as well. This will also have to enter into force by 31 December 2018.

If the agreement on the exchange of information and the agreement between the tax authorities become effective by 31 December 2018, Hungarian members of a group with an US ultimate parent company, who previously stated that they would submit the country-by-country report due to there being no agreement on information exchange, will have to change their earlier statement using a designated form by the end of the year, provided their financial year is identical to the calendar year.

Penalties

It is really important to comply with the above obligations on time and with the right data, since failing to meet the CbCR obligation, provide the data or report any changes, and the delayed or incorrect execution thereof, may result in the tax authority levying a default penalty of up to HUF 20 million (roughly EUR 62,000) on the obliged party.

If you take part in tax planning among international subsidiaries, and have further questions about CbCR or reporting obligations, please feel free to contact our colleagues.

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On 16 July 2018, the Polish Government Legislation Centre (GLC) published a draft bill to amend the PIT and CIT law in Poland. Put up on GLC’s website, the bill proposes a significant overhaul of transfer pricing regulations and its aim is to transpose into Polish law a number of measures developed by OECD as part of its BEPS project, including some simplifications to transfer pricing documentation rules.

Transfer pricing according to the new PIT and CIT law in Poland

The bill’s major proposed amendments related to transfer pricing are as follows

• In addition to those specified in the current Polish law, other transfer pricing methods and valuation techniques will be allowed in justified cases.
• Safe harbours will be introduced for transactions involving low value-adding services and loans.
• The current list of low value-adding services will be amended (shortened) to bring it in line with relevant OECD Guidelines.
• Regulations will be introduced allowing tax authorities to re-characterise controlled transactions, including their non-recognition for transfer pricing purposes.
• A clear rule will be introduced whereby a transfer pricing adjustment should be reported as income or cost for tax purposes in the period to which it relates (subject to certain conditions being met). The purpose is to eliminate divergent tax rulings from the Polish National Revenue Information Service (KIS) on the tax treatment of transfer pricing adjustments.
• Higher materiality thresholds will be introduced for transfer pricing documentation (local file) and documentation requirements will be harmonised with OECD standards.
• Taxpayers will be able to use master files prepared by other group members, including in English.
• Current reporting requirements will be modified (with PIT-TP and CIT-TP forms to be replaced by the TP-R form).

Other changes of the CIT law in Poland

In addition to the important changes to the transfer pricing regulation mentioned above, the bill proposes also a number of other significant changes to CIT law in Poland.

Among the most important of those changes are:

• Elaborated regulations disallowing adjustments to revenue/costs associated with time-barred liabilities (regardless of reason for adjustment);
• Reduced threshold for tax-deductible borrowing costs (from 30% to 20%);
• Repeal of regulations on arm’s-length creditworthiness assessment (applicable in place of general regulations authorising verification of arm’s-length terms and recharacterization or non-recognition of controlled transactions);
• Increased limit for tax-deductible purchases of intercompany intangible services (from 5% to 10%).

While the draft law provides for the amended regulations to apply to profits earned in tax years starting after 31 December 2018 (with certain exceptions), the taxpayers are allowed to use the new rules to prepare their transfer pricing documentation for 2018. The draft is currently at the public consultation stage.

If you would like to know more about the amendments to the PIT and the CIT law in Poland or about the Polish TP-regulations, please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative for Poland of WTS Global.

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In autumn 2017 Latvian government started working on amendments in the Latvian Taxes and Duties Act with the aim of introducing the recommendations with respect to TP documentation in Latvia stemming from the BEPS project outcomes. Currently the draft law amendments are approved by the Latvian parliament in the first round.

It is planned to review the draft law amendments in the second round on 4 September 2018, and after the third round the draft law will come into force. Taxpayers will be obliged to prepare master and local files as from financial year starting in 2018.

In addition, the tax law amendments should also introduce other changes, e.g. the definition of related party, deadlines for the submission of TP documentation, penalties for inaccurate TP documentation in Latvia, etc. The country-by-country reporting requirements in Latvian tax law were introduced on 4 July 2017.

Content of the TP documentation in Latvia

Currently Latvian tax law defines the content of the TP documentation. After amendments are introduced, qualifying taxpayers will be obliged to prepare master file and/or local file in line with the content set by the OECD Guidelines. This change will bring clarity and will result in a less administrative burden for multinational enterprises.

Although the Latvian State Revenue Service (SRS) generally request taxpayers to submit any tax related information in Latvian, the master file may be submitted in English. However, the SRS has rights to ask for the translation that has to be submitted within 1 month after the request from the SRS. The local file should be prepared in Latvian.

The obligation to prepare and submit master and local file

Essential novelty is the new thresholds set to determine the TP documentation preparation and submission obligations. Currently article 15.2 paragraph 2 in the Taxes and Duties Act states that TP documentation in Latvia must be prepared by the taxpayer if its annual turnover exceeds EUR 1.43 million, and related-party transactions exceed EUR 14,300 annually.

In accordance with the new amendments, the thresholds will be increased materially, as depicted in the table below:

The TP documentation in Latvia must be revised and updated every year. However, if the situation of the company does not change significantly it is allowed to update only certain sections of the documentation and financial data used in the analysis. The whole TP documentation must be revised once in 3 years. Additionally, the analysis is not required for transactions below EUR 20,000.

The SRS will be allowed to request TP documentation in Latvia to analyse risks and to provide consultations

Interesting novelty in the draft law is an article that allows the SRS to request from the taxpayer TP documentation with the aim to „verify the risks of TP adjustments, to advise on possible TP adjustment risks, to offer voluntary adjustment of the corporate income tax (CIT) return or to invite taxpayer to initiate the advance agreement procedure (APA)“. In this case the TP documentation in Latvia should be submitted to the SRS within 90 days from the day of the request (with a possibility to extended the deadline by 30 days).

New penalties regarding TP documentation in Latvia

In case a taxpayer does not comply with the TP documentation submission and if it significantly violates the TP documentation preparation rules, the SRS will be allowed to apply penalty up to 1% form the related party transaction value (for which the taxpayer is obligated to prepare the TP documentation), but no more than EUR 100,000. As a significant violation qualifies incomplete TP documentation (requested information is not included in the TP documentation) meaning that it is not possible to make a conclusion whether the agreed price is arm’s length.

Adjusting CIT returns and APA

The draft law provides that taxpayers will be allowed to make adjustments in the CIT declaration for 5 years (currently 3 years), if adjustments results from the TP adjustments. Such amendment is introduced to align it with the TP audit period, namely, TP may be audited for 5 years.

Starting from 1 January 2019 it will be possible to conclude the APA not only for the planned related-party transactions, but also for transactions already carried out during 5 previous years.

Considering that TP audits can be quite complicated, the amendments eliminate any deadlines for making decision in TP audits. After the changes enter into force, TP audits would continue for indefinite period.

Transactions with Latvian related parties

Before analysing whether the company has to prepare the TP documentation in Latvia it is necessary to understand whether the transaction partner qualifies as a related party. Related party definition is included in article 1 paragraph 18 of the Taxes and Duties Act. The main change is that local companies which are associated with participation of less than 50% (currently 90% and certain companies using specific tax reliefs qualify as related parties) will not be considered as related parties.

Summary

The new tax law amendments bring major changes for taxpayers having transactions with related parties. The content of the TP documentation and the obligations to prepare and submit the TP documentation in Latvia will change significantly. Thereby many taxpayers will have to reconsider their TP documentation practices and plan regular TP documentation updates.

If you would like to know more about the TP documentation in Latvia, please visit the homepage of Sorainen, the Latvian partner firm of WTS Global.

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Although Ukraine updated transfer pricing rules for 2018 in January, these changes were rather technical character. Hence, the draft law on BEPS implementation from September last year is still on the agenda in Ukraine without any changes. 

Due to the Ukrainian law “on the amendment of the Tax Code and some other legislative acts to balance budget revenues for the year 2018” transfer pricing control applies to permanent establishments in Ukraine from 1 January 2018. Other issues about transfer pricing, such as TP documentation were however unchanged.

In September 2017, the working group, led by the Ministry of Finance of Ukraine and the State Fiscal Services, prepared a draft law aimed at the implementation of transfer pricing-related actions of BEPS into Ukrainian tax law. In this article we highlight the most important changes of the draft law.

Three-tier approach to TP documentation 

The draft law on BEPS implementation adopts a three-tier approach to transfer pricing (TP) documentation according to Action 13 of BEPS. Namely, TP documentation shall consist of

• master file,
• local file and
• Country-by-Country (CbC) report.

Suggested amendments are generally in line with basic BEPS recommendations. Yet, there are also some differences. For instance, although it envisages, in general, the BEPS compliant threshold of EUR 750 million for submitting of CbC Report, there are also specific rules designed for multinational corporations (MNCs) of Ukrainian origin.

Namely, MNCs with the annual consolidated group revenue equal or exceeding EUR 50 million would be obliged to file a CbC Report in Ukraine if one of the following conditions is met:

• the beneficial owner of the parent company of the international group of companies is a resident or citizen of Ukraine;
• at least 50% of shares in international group of companies belong to residents or citizens of Ukraine;
• at least 50% of the total number of employees of all companies of the group at the end of the reporting period are employed in Ukraine;
• at least 50% of the total balance sheet value of fixed assets of all group companies at the end of the reporting period are actually located in Ukraine;
• at least 50% of consolidated income of the international group of companies is income from sales of goods (works, services), the country of origin of which is Ukraine;
• if the parent company of international group of companies is registered in an offshore zone, included in the list, which is approved by the Cabinet of Ministers of Ukraine, and such company did not submit a CbC Report, or this report was submitted in the country which has not concluded an agreement on the exchange of information with Ukraine.

Special provisions in the draft law on BEPS implementation

The draft law on BEPS implementation also provides special provisions on the possibility to submit simplified TP documentation for low value-added intra-group services. This is the new provision not currently established in the Tax Code of Ukraine. Action 10 of the BEPS is the basis for provisions of the draft law regarding such services.

An important novelty is the introduction of the principle of the business purpose of transactions. Namely, taxpayers will be obliged to prove in TP documentation that controlled transactions have a clear business purpose, which is actually the benefit-test.

According to the draft law on BEPS implementation, controlled transactions are deemed to have a reasonable business purpose if, under comparable circumstances, an independent person is ready to buy the same services or goods from another independent person in order to obtain the same benefits, or is ready to pay the same value of the services or goods. Otherwise (i.e. in the absence of a business purpose of a controlled transaction), the value of such controlled transaction shall be considered to be zero.

The abovementioned changes are going to make taxpayers feel themselves to be in a vulnerable position. Thus, the draft law on BEPS implementation does not provide for the definite list of possible evidence of a business purpose of transactions. At the same time, the controlling authority is entitled to disregard, for tax purposes, the results of controlled transactions, which they believe not to have a “business purpose”. 

If you would like to know more about the draft law on BEPS implementation and other issues in Ukraine, please visit the homepage of WTS Tax Legal Consulting, LLC, the exclusive representative of WTS Global in Ukraine.

WTS Klient Hungary is a member of the WTS Global transfer pricing consulting team. As a member of this team we endeavour to find solutions to seemingly impossible problems with the help of personal contacts, regular training and consultations, and relying on the WTS Global central TP team. Should you have questions we are happy to assist you.

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The 2018 spring issue of WTS CEE Tax Bridge has been published. It summarizes the latest developments in permanent establishments in 10 countries of the Central and Eastern Europe Region.

We are happy to introduce our first Tax Bridge this year. In order to place stronger emphasis on regional tax problems in Central and Eastern Europe and to rise to the challenges of our era, we have renewed and refreshed not only the content but also the format of our publication.

From 2018 our Tax Bridge doubles up as our Central and Eastern European Newsletter. We still address a specific issue every quarter, just like before, but now the selected issue will also be examined from the viewpoint of different countries in the CEE region. We are proud to say that we were able to collect expertise from 10 different countries for our first regional Tax Bridge, focusing on the latest developments in permanent establishments in our region. This means you can read about the regulations in Austria, Belarus, the Czech Republic, Hungary, Poland, Russia, Serbia, Slovakia, Slovenia and in Ukraine. 

Permanent establishments will become a very hot topic

BEPS Action 7 (Preventing the Artificial Avoidance of Establishment Status) on permanent establishments (PE) and the profit attributable to permanent establishments will sooner or later become a very hot topic in all CEE countries too, as it is now in Poland for example (where not only the corporate income tax but also the VAT aspects can be challenging). Keeping the tax base in the countries where the actual work or service is performed will be more and more important. At this stage we see that CEE tax authorities do not follow a uniform approach with respect to permanent establishments. Some countries apply only the minimum standards in the Multilateral Instrument (MLI), while others focus more closely on the topic and have strict rules to conclude that permanent establishments actually exist, and thus to tax the profit created in the given country.

If you are contemplating cross-border activities, it is good to know at least the basic tax rules in the country where the service or work will be performed. Nevertheless, we recommend contacting our colleagues directly before starting activities in these countries to avoid tax exposure and excess tax administration related to retrospective tax compliance for permanent establishments.

You can download WTS CEE Tax Bridge #1/2018 in PDF format here:

[/et_pb_text][et_pb_image _builder_version=”3.0.106″ src=”https://wtsklient.klient.hu/wp-content/uploads/2018/05/wts-CEE-taxbridge.png” show_in_lightbox=”off” url_new_window=”on” use_overlay=”off” always_center_on_mobile=”on” force_fullwidth=”off” show_bottom_space=”on” max_width=”50%” url=”https://wtsklient.klient.hu/wp-content/uploads/2018/05/wts-cee-tax-bridge-201801.pdf” /][et_pb_text _builder_version=”3.15″]

WTS CEE Tax Bridge #1/2018 (PDF)

If you are interested in more news about taxation and legislative amendments in the Central and Eastern Europe Region, please feel free to sign up for our newsletter!

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