Worldwide transfer pricing reference guide 2014

Bulgaria (continued)
Transfer pricing penalties
If the taxpayer fails to provide documentation when requested by the tax authorities, a fine for not cooperating could be imposed.
However, this fine is insignificant (i.e., in the range of BGN250 to BGN500, or approximately EUR128 to EUR256). Therefore, the main
consequence for the entity would be the adjustment of its taxable profit if the tax auditors conclude that the price applied in controlled
transactions is not at arm’s length.
Furthermore, a taxable person involved in a “hidden profit distribution” would be subject to an administrative sanction, amounting to
20% of the expense classified as a “hidden profit distribution.” Both the expense classified as “hidden profit distribution” and the sanction
would be non-deductible for corporate income tax purposes. In addition, the expense would be considered as deemed dividend and thus
be subject to a withholding tax of 5%, without the possibility of relief.
Business expenses may be classified as a “hidden profit distribution” if an entity has:
• Accrued, paid or distributed to the benefit of the entity’s shareholders or their related parties amounts which are:
• Non-business related, or
• In excess of market price levels
• Accrued interest costs on debt financing if at least three of the following criteria are met:
• The loan principal exceeds the equity of the borrower as at 31 December of the preceding year
• The repayment of the principal or the interest on the loan which is not limited by a fixed time period
• The loan repayment or interest payments depend on whether the borrower ended on a profit position
• The repayment of the loan depends on the satisfaction of other creditors’ claims or on the payment of dividends
Penalty relief
Currently, no penalty relief is available.
Effective from 1 January 2014, a voluntary disclosure of “hidden profit distribution” will relieve taxpayers of the administrative penalty
which is 20% of the hidden profit. This would allow taxpayers to self-adjust any overpriced group transactions with no threat of penalties.
Documentation requirements
Taxpayers bear the burden of proof regarding the arm’s length nature of the controlled price, and must present all relevant evidence.
If the taxpayer provides a transfer pricing documentation file, the tax authorities will be obliged to follow the approach/method used to
establish the transfer price. If they disagree with the transfer price applied, they should come up with evidence of the market price they
consider appropriate, based on any readily available public information.
Based on the Manual, the documentation should contain information on the following topics:
• Presentation of the group:
• Legal, functional, finance and management organization of the group (legal, functional, finance and management organizational
charts of the group)
• Economic role of the divisions within the group
• Allocation and financing of intellectual property
• Knowledge of the controlled company and its activity:
• Object of activity and market of the company (an economic analysis of the market: structure, size, competitors, development, success
factors and risks)
• Functional analysis of the company
• Use of intellectual property
• Financing of the enterprise
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