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Bulgaria Publishes Law for Transfer Pricing Documentation Requirements and Implementation of EU Tax Dispute Directive

On 13 August 2019, Bulgaria published the Law on Amendment and Supplementation of the Tax and Social Insurance Procedure Code. One of the main aspects of the Law is the introduction of new Local and Master file documentation requirements that are in line with BEPS Action 13. Key points include:

  • Both local and foreign legal entities carrying out business activities through a place of business in Bulgaria are required to prepare a Local file if performing controlled transactions, with certain exemptions including where the following thresholds are not exceeded as of 31 December of the previous year:
    • Book value of assets – BGN 38 million; and
    • Net income from sales – BGN 76 million; or
    • Average number of staff for the reporting period - 250
  • The following controlled transaction amount thresholds also apply in relation to preparing the Local file documentation;
    • Sales of goods – BGN 400,000;
    • All other transactions – BGN 200,000;
  • Regardless of meeting the above thresholds, Local file documentation must be prepared if the total amount of a loan received or granted exceeds BGN 1 million or the total amount of accrued interest and other related receipts and expenses exceeds BGN 50,000;
  • In general, the transaction thresholds are calculated separately for each controlled transaction, although they may be calculated on an aggregate basis:
    • in cases where the type and conditions under which multiple transactions are carried out are comparable to the extent that they may be merged, and a single method may be applied to determine the arm's length price; and
    • in cases where multiple transactions with a single related party are connected in such a way that they cannot be separated and reliably evaluated independently;
  • Where a legal entity subject to the Local file requirement is a member of an MNE group, a Master file must also be prepared/obtained;
  • For the purpose of documentation requirements, the related party holding percentage is set at 25% of the voting rights or shares instead of the standard 5%;
  • The deadline to prepare the Local file is 31 March of the year following the year to which it relates, and if a corrected return for a year is submitted that leads to any changes in the Local file, the Local file must be updated within 14 days of the submission of the corrected return, but no later than 30 September of the current year;
  • The deadline to prepare/obtain the Master file is 12 months after the deadline for the Local file;
  • The transfer pricing documentation must be submitted upon request within the framework of tax control (audit/inspection);
  • The Local and Master file must be prepared annually, although if there are no significant changes, the comparability study must be updated at least every three years (financial data must still be updated annually);
  • The penalties in relation to the documentation requirements include the following:
    • if a Local file is not prepared (i.e. not submitted upon request), a penalty equal to 0.5% of the total value of controlled transactions will be imposed;
    • if a Master file is not available, a fine of BGN 5,000 to BGN 10,000 will be imposed; and
    • if the transfer pricing documentation contains incorrect or incomplete information, a fine of BGN 1,500 to BGN 5,000 will be imposed;
  • The first year for which transfer pricing documentation must be prepared is 2020.

The Law also amends the Country-by-Country (CbC) reporting thresholds. Under the original requirements, the threshold for Bulgarian ultimate parents to submit a CbC report was set at just BGN 100 million (~EUR 51 million), while the threshold for groups with a non-resident ultimate parent was set at BGN 1,466,872,500 (near equivalent of EUR 750 million). The Law repeals the threshold provision for resident ultimate parents and amends the wording of the non-resident threshold provision so that it applies for all MNE groups. It also includes a transitional provision, which provides that group's meeting the BGN 100 million threshold for resident ultimate parents prior to the Law's entry into force are not required to submit a CbC report for 2019.

Lastly, the Law provides for the implementation of Council Directive (EU) 2017/1852 of 10 October 2017. This includes measures to ensure effective resolution of disputes concerning the interpretation and application of bilateral tax treaties and the Union Arbitration Convention, and in particular, disputes leading to double taxation. The measures apply to disputes filed from 1 July 2019 in relation to tax years beginning on or after 1 January 2018.

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